Acc 101 Basic Accounting I
Acc 101 Basic Accounting I
Maiduguri, Nigeria
CENTRE FOR DISTANCE LEARNING
MANAGEMENT SCIENCES
STUDY GUIDE
GENERAL INFORMATION
Course Code and Title: ACC 101: Basic Accounting I
Credit Unit: 2
Year: 2015
Total Hours - 28 hours @ two per Week of Study.
For any queries or Questions contact the Course Lecturer Using your email through the Centre for
Distance Learning Portal.
You are welcome to this study Unit. Each Unit is arranged to simplify your study. In each topic of
the Unit we have introduction, learning outcome, in-text information, in-text questions and
answers, summary and self assessment exercises. In-text questions and answers serve as
motivation for your reading and to encourage to pay attention to major points in the text. Tutors
will be available at designated contact Centre for Tutorial. Meet them to resolve your questions
and other guide. The Centre expects you to plan your work well. Should you wish to read further
you could supplement the study with more information from the list of references and suggested
reading available in each study Unit.
PRACTICE EXERCISES
SELF ASSESSMENT EXERCISES (SAES)
This is provided at the end of each topic or Study Session. The exercises can help you to assess
whether or not you have actually studied and understood the topic/study session. Solutions to the
exercises are provided at the end of the Study Unit for you to assess yourself.
HOW TO PREPARE FOR EXAMINATION
To prepare for the examination you should read and understand the Study Materials provided for
you on C.D.ROM, prints or downloads from the Portal.
Other things you need to prepare for examination include understanding all sample questions at the
end of every Study Session/topic Reading the suggested/recommended reading texts.
ASSESSMENTS
-The continuous assessment for all courses consist of 30%.
-The Examination shall make up 70% of the total Marks.
-Feedback and advice is a component of the continuous assessment
The Examination shall be conducted at the Centre for Distance learning (Centre). Students are to
come to the Centre on the Examination date with all the necessary requirements. The Examination
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ACC 101 BASIC ACCOUNTING I UNITS : 2
The need for accounting is more pronounced in a business where a lot of finance, risk and
energy are involved. Financial information is needed to plan and control the finance and
operation of a business. Accounting helps stewards to give proper records on the assets put
under their care.
In this Study Session, you will be learn about the origin and history of accounting, definition of
booking, definition of accounting, branches of accounting and accounting activities, the
various stakeholders (i.e. users) interested in the accounting information and the regulatory
frame-work, and rules that guides the practice of accounting.
Definition 2
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Definition 3
Accounting is defined as the act of gathering financial information, classification of this
information, as well as summarizing and communicating these it to users for decision
making.
From these three definitions you can see that, this process starts from sorting relevant
transactions and posting them into their ledger accounts by considering the date, particulars,
the page or ledger folio and the amount. After posting, balancing the accounts is the next
exercise which is the bookkeeping activities. When individual ledger accounts are balanced,
then trial balance is drawn up. The act of keeping and preparing this record from the source
document to the trial balance is referred to as (Book keeping)
Meaning of Bookkeeping;
Scope of Accounting
Though the main study is financial accounting; others relevant and supporting branches are
cost Accounting, Management Accounting, Auditing, Government Accounting and Tax
Management.
-Cost Accounting
Cost accounting is the process of accumulating financial data to provide information for
managerial decision
-
ManagementAccountin
g
Management accounting provides information to management of a business to help
them take better decision and to improve upon the efficiency and effectiveness
of existing operations.
-Auditing
Auditing is the independent examination of the books of accounts and records of the
company. The professional accountant will gather various forms of audit evidence before he
can form an opinion on the financial statementsto give it a “true and fair view”.
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Career in accounting
The demand for accountants appears to be growing and outstripping supply. Job opportunities in
today’s business climate are better than ever for accountants. Accounting has many areas of
opportunities which can serve as career path. These are financial, managerial, taxation, and
other accounting related jobs and can be further broken into careers like;
i. Financial accountants
ii. Financial analyst
iii. Banking and financial services
iv. Educational services
v. Liquidation and litigation services
vi. Taxation and consultancy services
vii. Employment - private and government. etc
1) Financial accounting is basically aimed at providing financial information about the business to
users both internal and external for decision making. You learnt that this information is usually in
the form financial statement.
2) You also learnt about the history of financial accounting and the Italian method now known as the
double entry system, upon which the double entry principle is developed.
3) Financial accounting is ruled based and principled based; you also learnt about the Generally
Accepted Accounting Principle (GAAP), which is the basic foundations upon which all accounting
principles and regulations are developed. You learnt that GAAP helps accountants to prepare
financial report that is reliable, relevant understandable, comparable and timely to users of these
information.
4) That financial accounting provides a wide range of careers virtually in all sectors of the economy.
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GAAP are the foundations upon which the four (4) basic accounting principles, four (4)
assumptions, two (2) constraints, and other given conventions and concept rest.
Learning Outcomes
At the end of this session, you should be able to:
2.1 Explain the four (4) basic accounting principles, the four (4) basic assumptions, the two (2)
constraints, and other given conventions and concepts.
2.2 Explain the various terminologies used in the statement of financial position.
2.3 Explain and demonstrate the Accounting Equation by application
2.1.2 Assumptions: Just like the four (4) basic principles, there are four (4) assumptions which must hold
for a valid transaction to be recorded;
1. The Going-concern assumption is a presumption that the business will continue to operate for
an unforeseeable future without being closed.
2. The Monetary unit assumption simply means that financial transactions are expressed in
monetary terms i.e. money unit such as the Naira in Nigeria, dollar in the United States etc.
3. The Time period assumption is the assumption that the business operations will be accounted
and reported for a period of 12 months. This concept is also known as periodicity concept.
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4. The Business entity assumption holds that all business be accounted for separately from the
owners and from other businesses eg. First bank is different form GT bank and both companies are
different from their owners, meaning they can sue and be sued.
2.1.3 Constraints: this places a limitation bound and guide to financial transactions to be recorded for in
the financial statement.
1. The materiality constraint prescribes that only information that would influence the decisions
of a reasonable person need be disclosed. Materiality concept is a relative term in size and
importance since what is material and important for one organization will not be for another.
2. The cost-benefit constraint holds that only information whose benefits of disclosure is greater
than the costs of providing it to users need be disclosed in the financial statement.
2.1.3 Convention and concept: these are generally agreed ways to present a fact which will guide in the
way financial transactions can be presented and recorded.
1. Prudence concept requires fairness with sound judgment in reporting financial transaction
details, taking decision without favour to any specific shareholder.
2. Substance over Form Business transactions should be accounted for and presented in
accordance with their financial substance and reality and not merely by their legal form. Examples
are found in; lease contracts the reality is taken above the legal term
3. The Consistency concept requires that the adoption of a method and a policy in treating an item
should be maintained for a long time and should not be changed but used consistently from period
to period e.g depreciation or bad debt provision.
4. Accrual concept states that revenues should be recognized in the period they are earned and not
in the period they are received and expenses should be recorded in the period they are incurred and
not in the period they are paid for.
5. Historical Cost Concept holds that the cost values of assets are retained throughout the
accounting books and the assets expire by writing off yearly depreciation to get the current value.
6. Objectivity Concept holds that financial statements should not be influenced by personal
biasand that no group of stakeholder/user should be favoured over others.
7. Fairness principle requires that accounting reports should be prepared not to favour any group or
segment of society.
8. Realization Concept, unlike the accrual concept, is concerned with determining when revenue
is earned. It holds that revenue should be recognized at the time goods are sold and services are
rendered; that is the point at which the customer has incurred liability.
9. Double entry principle this is the oldest known and indisputable principle of accounting. It is
the principle upon which modern accounting is based. It explained that every transaction must be
recorded in the books at least two times- This also means that for every receiver there must be a
giver.
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The double entry is the beginning point of the accounting equations, with every transaction having
an effect on at least two accounts. As far as double entry principle is concerned, there must always
be two parties to a transaction. Two recordings of any transaction, two accounting records to a
transaction. Put in accounting terms there must be a debit and a credit to every transaction.
-Liabilities
These are obligation of the business to outsiders and to the owners and usually will become claims
against the assets of the business in the event of a liquidation. They are divided into current
liabilities and non-current liabilities.
i. Current Liabilities
These are the liabilities of the business that are meant to be paid within twelve months. e.g.
payables and all outstanding expenses.
ii. Non-current liabilities: These are liabilities that will take more than one year before
repayment is due. e.g. long-term loans.
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Accounting Equation
The accounting equation is a mathematical representation of the statement of financial position of
a business at all-time showing its assets and the claims upon them in form of liabilities and equity,
all accounting entries and posting are demonstrated following the accounting equation based on the
double entry principles. The accounting equation is stated as
ASSETS=LIABILITIES + OWNERS (EQUITY)
Assuming that in addition to the cash invested, Yagana introduced N25, 000, loan from the bank
into the business. The cash position is now N175, 000, made up of owner’s capital of N150, 000
and liability to an outsider N25, 000
Yagana Enterprises spent N120,000 to buy a building to be used as office and bought chairs and
tables for N10,000. It also purchased for cash some inventory for resale at the cost of N30,000. The
accounting equation will remain as in (b) above but the composition of the assets has changed.
Given different combinations of assets, liabilities and capital the equation continues to be the same
at each side and representing the equality of both side.
Summary
In Study Session 2, you have learned about:
i. Financial accounting is rule and principle based, and also about the basic principles,
assumptions, constraints, conventions and concepts of accounting.
ii. The various terms used in the Accounting Equation, such as assets, liabilities and
capital.
iii. The applications of the Accounting Equation showing its effects on the statement of
financial position.
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1. Assets
2. Assets = Capital + Liabilities
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Source documents
Journal
Ledgers
Trial Balance
Final Accounts
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Learning Outcomes
After studying this session, you should be able to:
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Sales Invoices
A sales invoice serves as the source document to record in the sales day book. All credit sales are
recorded in the sales day book. The sales invoice is a document sent by the seller to the buyer
(usually for credit sales) and it is used as evidence for credit sales
Purchases Invoice
A purchase invoice serves as the source document to record in the purchases day book. The
purchases invoice is the opposite of the sales invoice sent by the supplier to the customer usually
for credit purchases transactions.
Credit note
A credit note is a document given to refunds cash to the buyer for either being overcharged or for
goods returned by a customer for any of the following reasons: - damage to the goods before
delivery- wrong specification etc.
Debit note
A debit note to a supplier will be used to request for a credit note by the buyer. While at the same
time the seller may issue a buyer a debit showing that his account will be charged.
Payment Vouchers
In an organization every payment must be supported by a payment voucher. Examples are payment
vouchers for salaries and wages, petty cash vouchers etc, usually prepared as evidence for the
expenses.
Bank Pay-in-slips
This serves as evidence of cheque and cash paid into the bank by an organization and individuals. It
is evidence for money deposited in the bank.
Cheque Counterfoils
Cheque counterfoils serve as evidence of payment to creditors through the bank and withdrawals
using the cheque book.
Receipts
Receipts are issued for cash and cheques received from a customer for goods sold or services
rendered to him. It is evidence for cash paid by the customer.
Purchase Order
A purchase order is issued by a customer requesting the seller to supply certain quantities of goods
of specified description. The purchase order will also state the agreed price and the delivery point
and date. An example of a purchase order is the Local Purchase Order (LPO).
Delivery Note
Delivery note accompanies the goods dispatched to the customer, showing what is receipt by the
customer.
Goods Received Note
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The good received note shows the evidence that the goods dispatched to an organization are
received in good condition and meet the specifications. It is used as source document in the bin
stock card.
Bin Card
Bin card records movement of inventories. When inventories are added to the store or warehouse
bin card is debited and when inventories are issued to production, the bin card is credited.
v. Cash book; The cash book records all cash and bank transactions from the source document both
receipt and payment. The cash book is divided into single, two and three colum cash book and the
petty cash book used to record minor expenses which are many and when recorded in the cash book
will make the transaction cumbersome. The cash book is divided into two equal parts debit (Dr)
and credit (Cr) side, usually shown in T format.
- General journal
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General journal, also known as journal proper, is used to record all transactions that cannot be
recorded into the subsidiary journal. The following transactions that cannot be recorded in the
five subsidiary journals are;
1. Opening and closing entries
2. Transfer from one account to another
3. The purchases or the sales of fixed asset on credit
4. Adjustments in account
5. Correction of errors.
3.1.3 Ledger
The ledger which is the third stage of the accounting recording cycle contains information from the
journal the second time. The type of account maintained in a ledger is what makes it a debit balance
or a credit balance and determines whether the account will be increasing or decreasing i.e. positive
or negative.
DR CR
N N
Accounts
Accounts are the financial transactions posted or recorded from the Journals into the ledgers, this
information determines the type of ledger, the financial effect on the ledger and whether the ledger
is increasing or reducing.
Asset account
(Debit) Increase Decrease (Credit)
Liability account
(Debit) Decrease Increase (Credit)
Capital account
(Debit) Decrease Increase (Credit)
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Revenue account
(Debit) Decrease Increase (Credit)
Expenses account
(Debit) Increase Decrease (Credit)
Students should note that a ledger contains accounting information, sometimes used
interchangeably with accounts; this does not imply that they mean the same thing.
Chat of Accounts
Accounts can be grouped under three main headings; these headings are called chats of accounts
1 Real Account
2 Personal Accounts
2 Nominal Accounts
v) To detect such errors of posting that can easily be identified by the trial balance.
Trial balance
DR CR
N N
All assets xx
All expenses xx
Gains/incomes Xx
All liabilities Xx
Capital/Equity Xx
Sales Xx
Purchase xx
xxx Xxx
xxx
Less: Returns Outward (xx)
Cost of good available for sales xxx
Less Closing inventory (xx)
xxx
Add wages xx
Cost of good of sales/cost of sales (xxx)
Gross profit xxx
Other incomes:
Discount received xx
All received (e.g. rent received) xx
Reduction in liabilities xx
xxx
Less Expenses:
All expense (rent paid, bills etc.) xx
Increases in liabilities xx
All losses (e.g. Bad debt) xx
Salaries xx
Discount allowed xx
Depreciation xx xxx
Net profit xxx
ASSETS: N
Current Assets:
Inventory (Stock) Xx
Trade Receivables (Debtors) Xx
NBV
Less Provision for Bad debt Xx
Cash and Cash equivalent Xx
Cash at Bank Xx
tBill Receivables Xx
Prepayment expenses Xx
Accrued Income Xx
xx(a)
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Investment Xx
xx(b)
Total assets xxx (a+b)
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You are required to write up the cash book for the month of January 2004 and post the transactions to their
corresponding ledger entries.
Suggested Solution
Makama Bala
Johnson Enterprises maintains an imprest of N40,000. The reimbursement is made as soon as substantial
portion of the float is exhausted. During January 2014, the following petty transactions took place:
DATE DETAILS N
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You are required to prepare showing balance and reimbursement, at 31st January 2011 a petty cash
book with analysis column for all the payments made by the petty cashier on 31st January
Solution:
Maxwell Enterprises
Analysis of Petty Cash Book for January, 2014
N N N N N N
Date Particulars Amount Date Particulars Total Stat/Pos Transp Repairs Entert Medical
1-Jan Cash float 40,000 2-Jan Postage stamp 1,250 1,250
3-Jan Entertainment 750 750
4-Jan Stationary 1,500 1,500
5-Jan Travelling 500 500
6-Jan Repairs 1,810 1,810
7-Jan Notebook 300 300
8-Jan Courier Ser 1,725 1,725
11-Jan Security Lights 1,575 1,575
14-Jan Medical exp. 1,300 1,300
18-Jan Repairs 1,925 1,925
21-Jan Travelling 1,750 1,750
24-Jan Stationary 6,325 6,325
27-Jan Entertainment 5,125 5,125
28-Jan Medical exp. 1,060 1,060
30-Jan Stationary 3,750 3,750
30,645 14,850 2,250 5,310 5,875 2,360
Balance c/d 9,355
40,000 40,000
1-Feb Bal B/d 9,355
1-Feb Reimbursement 30,645
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debit the receiving account and credit the giving account. The double entry system of book
keeping will be used for recording transactions in the ledgers.
Summary: Debit= Receiving account
Credit=Giving account
Procedures to be followed:
i. Every transaction must affect two accounts
ii. Give names to the two accounts
iii. Debit – Receiving account (Receiver)
iv. Credit – giving account (Giver)
ILLUSTRATION
Jan. 1 Miss Faith starts a business with N800.00 in bank
Miss Faith is the owner of the business; therefore her name must not appear in the books Entries
in the ledger
DR CAPITAL ACCOUNT CR
N
N
Bank 800.00
DR BANK ACCOUNT CR
N N
Capital 800.00
DR PURCHASES ACCOUNT CR
N N
Bank 300.00
N N
PURCHASES 300.00
N N
Cash 700.00
DR CASH ACCOUNT CR
N N
Sales 700.00
DR WAGES ACCOUNT CR
N N
Cash 50.00
DR CASH ACCOUNT CR
N N
Wages 50.00
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N N
Bank 500.00
N N
Machinery 500.00
DR CASH ACCOUNT CR
N N
Drawings 80.00
DR DRAWINGS ACCOUNT CR
N N
Cash 80.00
N N
Jan. 12 Baba 200.00
DR BABA ACCOUNT CR
N N
Jan. 12 Returned inward 200.00
Jan.17 Took cash N2, 400.00 from the bank and put it into cash till.
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DR BANK ACCOUNT CR
N N
Jan. 17 cash 2,400.00
DR CASH ACCOUNT CR
N N
Jan. 17 Bank 2,400.00
DR JASPER ACCOUNT CR
N N
Jan. 20 Returned outward 100.00
DR COMMISSION ACCOUNT CR
N N
Jan. 22 Cash 350.00
DR CASH ACCOUNT CR
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N N
Jan. 22 commission 350.00
N N
Jan. 23 Bank 750.00
DR BANK ACCOUNT CR
N N
Jan. 23 loan 750.00
DR CAR ACCOUNT CR
N N
Jan. 25 Ojo 220.00
DR OJO ACCOUNT CR
N N
Jan. 25 car 220.00
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N N
Jan 27 Cash 1,500.00
DR CASH ACCOUNT CR
N N
Jan. 27 Motor Vehicle 1,500.00
DR DRAWINGS ACCOUNT CR
N N
Jan. 30 Cash 1,00.00
DR CASH ACCOUNT CR
N N
Jan. 30 Drawings 1,000.00
Despite the fact that the trial balance may balance, it may contain some errors not disclosed, these
errors are referred to as those that do not affect the trial balance, namely:
i. Error of omission
ii. Error of commission
iii. Error of original entry
iv. Error of principle
v. Compensating errors
vi. Complete reversal of entry
- Error of Omission: This is an error whereby a transaction is completely omitted from the books
of account i.e. from both the debit and credit sides of the account related. This error is corrected by
entering the omitted amount in the journal and posting in the right way.
- Error of Commission: This is a situation whereby an item of transaction with an individual is
recorded correctly observing double entry but in the wrong person’s account. Usually a Trade
receivables or a Trade payables with similar names can be erroneously taken for the other - for
example Mohammed account mistaken as Muhammad account where both persons trade with the
business. This will only affect the names of individuals and not the figure in the trial balance or the
double entry process. Example: Goods worth N5, 000 sold to Ajaka on credit has been entered in
Ajala’s account in error.
- Error of Original Entry: This is where a wrong amount is entered on the debit and credit sides
of different accounts at the same time i.e. observing the double entry with the wrong figure in the
correct account. Therefore, the difference between the original amount and the wrong figure is
passed through the double entry system to correct the error. Example: Purchase of goods for N5,
290 has been entered in the accounts as N5, 920.
The error will be corrected by crediting the difference between the two figures i.e. N630 to the
purchase account, at the same time debiting the cash account by the same N630. And reverse the
case where the figure has been reduced by still debiting the difference to purchase account and
credit the cash account.
- Error of Principle: Here wrong classes of accounts are involved. It occurs where a transaction
belonging to a class of account is posted to another class of account observing correct double entry
but in the wrong account. For example, a real account item is entered in a nominal account or vice-
versa. Example: purchase of furniture N10, 000 is posted in the purchase account.
- Compensating Errors: This occurs when errors of the same amount occurred in different sides
of different ledgers thereby, cancelleing out each other. The two sides may be overcast or under
cast by the same amount. Example: an error of N2, 000 in the Sales account is cancelled by an error
of N2, 000 in motor expenses. Since the error occurred in both debit and credit sides of different
accounts the trial balance stills balanced. This can be corrected by correcting the two ledgers
separately at the same time in order not to create another error
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- Complete Reversal of Entry: This type of error occurs when an item is posted to the correct
account but in the wrong side of the account. To correct the error in the account, the figure is
doubled to cancel the error in the reversal side first then the double entry is made in the correct
side. Example: Cash payment for wages N5, 500 was credited in wages account instead of a debit
entry.
The error above can be corrected by posting the figure N11,000 on the debit side of the wages
account to first cancel the error on the credit side and then maintain the correct figure on the debit
side.
Don Bell opens a computer business called Technology Consultants and completes the following
transactions in the months of April.
April 1: Bell invested N150, 000 and N24, 000 in office equipment in the company
April 2: The Company paid N7, 200 cash for twelve months rent for an office.
April 3: The Company made purchases of goods for N12, 000 from Rose ltd and bought office
equipment for N2, 400 from Mohammed, Both transactions on credit.
April 6: The Company sold goods to a client immediately receiving cash N2, 000
April 9: The Company made an N8, 000 sales for a client Ali, who will pay within 30 days.
April 13: the company paid N14, 400 cash to settle the account payable on created on April 3. To
Rose and Mohammed ltd respectively (amount paid separately)
April 19: The Company paid N6, 000 cash for insurance premium on a 12-month insurance policy
April 22: The Company received N6, 400 cash as Partial payment for the sales on April 9.
April 25: Sales made to another client named People for N2, 640 on credit.
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April 28: Bell withdrew N6, 200 cash from the company for personnel use.
April 29: The Company bought additional office equipment for N800 on credit from Mohammed
ltd
April 30: Paid utility bills for N700
Suggested Solution
In the books of Technology Consultants
Cash Book
Date Details fl Cash Date Details fl Cash
N N
Jan 1 Capital 150,000 Jan 2 Rent 86,400
6 Sales 2,000 13 Rose 12,000
22 Ali 6,400 13 Mohammed 2,400
19 Insurance 6,000
28 Drawing 6,200
30 Utility bill 700
30 Balance c/d 44,700
158,000 158,400
Feb 1 Balance b/d 44,700
Journal proper
Date Details DR CR
N N
Jan 1 Office equipment 24,000
Capital 24,000
Being personal equipment introduced into the business.
Purchase Journal
Date Details fl Amount Total
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N N
Jan 3 Rose 12,000
DR. Purchase account (credit purchase) 12,000
Sale Journal
Date Details fl Amount Total
N N
Jan 9 Ali 8,000
Jan 25 People 2,640
CR. sales account (credit sales) 10,640
Capital account
N N
Cash 150,000
Balance c/d 174,000 Office equipment 24,000
174,000 174,000
Balance c/d 174,000
Sales account
N N
Cash 2,000
Balance c/d 12,640 Credit sales (SJ) 10,640
12,640 2,640
Balance b/d 12,640
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Rent account
N N
Cash 86,400 Balance c/d 86,400
86,400 86,400
Balance b/d 86,400
Rose account
N N
Cash 12,000 Purchas (PJ) 12,000
12,000 12,000
Mohammed account
N N
Cash 2,400 Office equipment 2,400
Balance c/d 800 Credit sales (SJ) 800
12,640 3,200
Balance b/d 800
Insurance account
N N
Cash 6,000 Balance c/d 6,000
6,000 6,000
Balance b/d 6,000
Drawings account
N N
Cash 6,200 Balance c/d 700
6,200 700
Balance b/d 6,200
Purchase account
N N
Rose (PJ) 12,000 Balance c/d 12,000
12,000 12,000
Balance b/d 12,000
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People account
N N
Rose (SJ) 2,640 Balance c/d 2,640
2,640 2,640
Balance b/d 2,640
Trial Balance
DR CR
N N
Capital 174,000
Sales 12,640
Debtor (Ali & People) 4,240
Mohammed (non-stock creditor) 800
Insurance 6,000
Drawings 6,200
Rent 86,400
Utility bill 700
Office equipment 27,200
Purchase 12,000
Cash 44,700
187,440 187,440
Mekiniya Enterprise runs business in general merchandise and has the following trial balance for
the year ended December 2011.
Trial Balance
Dr Cr
N N
Capital 92,000
Bank 7,500
Drawings 6,460
Cash in hand 2,880
Inventory (1st Jan. 2014.) 8,700
Loan 20,500
Building 80,000
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Given the Closing inventory at N7, 600, you are required to prepare;
1. The Income Statement
2. The Statement of Financial Position as at 31st December 2011.
Suggested solution in
Mekiniya Enterprise
Income Statement for the Year Ended 31st December 2011
N N N
Sales 124,700
Less Returns inward (5,000)
119,000
Less Cost of Sales:
Opening inventory 8,700
Add: Purchases 68,700
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Other Incomes:
Commissioned Received 6,000
Discount received 4,000
Rent received 13,700
Receipt from disposal of motor vehicle 2,000
72,680
Less Expenses:
Electricity 6,400
Motor repairs 12,500
Bad debt 300
Advertisement 5,840
Salaries 1,220
Entertainment 2,500
Discount allowed 800
Insurance 2,000 (31,560)
Net profit 41,120
Assets: N N
Non Current
Current assets:
Assets:
Stock 7,
NBV600
Trade Receivables 16,400
Less Provision for Bad debt (560) 15,840
Cash and cash equivalent 2,880
Cash at Bank 7,500
Bill Receivables 2,300
36,120
Non-Current assets:
Building 80,000
Motor van 28,000
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Financed by:
Capital 92,000
Add: Net Profit 41,120
133,120
Less Drawings (6,460)
Total equity 126,660
Total equity and liabilities 163,320
Workings;
Assets Schedule
Cost Accu- Dep NBV
N N N
Non Current assets:
Non-Current assets:
Building 80,000 - 80,000
NBV
Motor van 40,000 (12,000) 28,000
COST DEP
Furniture and Fittings 24,000 (4,800) 19,200
144,000 (16,800) 127,200
Note; from the above question the item provision for bad debt and provision for depreciation were
not carried to the trial balance because they have no balance as at the end of the period
Summary
In Study Session 3, you have learned about:
i. The accounting process starting from the source document to the journal to the ledger to the trial
balance and to the final accounting.
ii. About the meaning and the terms used in all accounting processes i.e. accounting cycle.
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ACC 101 BASIC ACCOUNTING I UNITS : 2
iii. Practical demonstrations of the process i.e. cash book. sales journal, purchases journal, returns
inward and returns outward journals, ledger entries, trial balance and the final accounts
ITQ Question Study Session three
1. State the accounting process
2. ……….is considered a journal and at the same time a ledger
ITA Answer Study Session three
1. Source documents →Journal→ Ledgers→ Trial Balance → Final Accounts
2. Cashbook
Self-Assessment Questions (SAQs) for Study Session 3
Now that you are true with this Study Session, to assess how well you have achieved its Learning
objectives, you may answer the following questions. Write your answers in your study notes and
discuss them with your Tutor at the next contact.
SAQ 3.1 (Testing Learning outcomes 3.1)
i. Explain the accounting process, diagrammatically showing from the first to the final step.
ii. Differentiate between a ledger and an account
iii. What is an error and differentiate between Commented [BM3]: incomplete
iv. Write up a two column cash book of EL-Toda venture for the month of February, 2014
February 1: Cash balance b/d 3,000
February 2: Paid rent 2,300
February 3: G. Broad lend us by cheque 2,000
February 4: Paid J fine by cheque 9,600
February 5: Cash sales 10,900
February 7: F.love paid us by cheque 3,400
February 9: Paid D. Moore 920
February 11: Cash paid into bank 15,100
February 15: P. Hoot paid us in cash 9,600
February 16: Withdrew from bank account and paid it into cash till 1,000
February 19: Paid R. Evans by cheque 5,500
February 22: Cash sales and paid into bank 1,220
February 26: Paid motor expenses by cheque 750
February 30: Took cash for personal use 200
February 30: paid wages for office worker 4,000
February 31: Paid insurance by cheque 320
You are required to write up the cash book for the month of February 2014 and post the
transactions to their corresponding ledger entries assuming all figures are in Naira.
v. Record the following transaction in the relevant columns of the petty cash book of ICAN , a sole
proprietor for the month of November 2011
N
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Illustration:
Below is a trial balance as at close 31/09/2005 Brown enterprises a sole trader in Benin city.
N N
Inventory as at Jan 1st 2005 6000
Furniture and Fittings 9400
Rent Received 7000
Motor Van at Cost (N20,000) 16000
Rent Receivable 7500
Wages 3000
Provision for Depreciation Furniture & Fittings 1200
Motor Repairs 2800
Provision for Bad and Doubtful Debts 600
Electricity Bills 1600
Salaries 5000
Insurance 1200
Discount 2400 2800
Bank Balance 14000
Bad Debt 200
Returns 2900 2400
Rent Paid 8400
Cash Balance 14000
Trade payables & Trade receivables 36000 25000
Long Term Loan 16000
Drawings 6000
Capitals 4000 120000
Revenue & Purchases 52200 100000
Carriage Outward 6000
Mortgage Loan 6000
Land & Building 108000
293800 293800
Additional information;
1. Inventory at 31/9/2005 was valued at N8,500
2. Insurance paid covered the period to 31/12/2005
3. Of the carriage paid N1,200 is for carriage inward
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You are required to prepare in accordance with IFRS terms the trading, profit and loss account
for the year ended 30th September, 2005 and a balance sheet as at that date.
Reference
Basic Accounting theory and practice 1 (2014) Dr. A. A. Malgwi, Mr. Victor O. Atabo
Financial Accounting Made Simple Robert Igben
Learning Outcomes
At the end of this session, you should be able to:
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ACC 101 BASIC ACCOUNTING I UNITS : 2
entry). But the customers will not be aware usually so such amount will be absent on the cash book at the
company.
iii. Notes receivable are assets of a company. When notes come due, the company might ask its bank to collect
the notes receivable. For this service the bank will charge a fee. The bank will increase the company's
checking account for the amount it collected (principal and interest) and will decrease the account by the
collection fee it charges. Since these amounts are already on the bank statement, the company must be
certain that the amounts appear on the company's books in its cash account (debit entry).
iv. Errors in the company's Cash account result from the company entering an incorrect amount, entering a
transaction that does not belong in the account, or omitting a transaction that should be in the account. Since
the company made these errors, the correction of the error will be either an increase or a decrease (overcast
and under cast) to the balance in the Cash account on the company's books.
v. Standing order: this is an instruction given by the owner of the account to the bank to make periodic
payment on his behalf. The bank will make the payment and debit the bank statement but no entry in the
cash book. Examples: Insurance and bills etc.
vi. Dishonoured Cheques: these are cheques presented for payment or deposited into a bank but were rejected
by the bank due to certain irregularities. The possible reasons why bank dishonours cheques are:
a. Irregular and consistence in signature
b. Insufficient fund in the account
c. Alteration of the cheque and its writing
d. Disparity between amount in words and figure
e. Post-dated cheque i.e. must be within 6 months after its signature dated Commented [BM4]: Not accurate/clear
f. Stale cheque are expired cheques i.e. beyond six (6) months after its signature dated Credit
vii. Transfer: These are cheques or cash received by the bank on behalf of the company, without notifying the
company until they receive the bank statement seeing it as a credit entry implying that it is a payment on
behalf of the owners.
viii. Direct Debit: This is an arrangement whereby a person’s account is debited with a sum of money at the
instance of a supplier with the account owner’s prior permission. Example - buying recharge card using
Automated Teller Machines to pay.
ix. Dividend: This is part of profit distributed to shareholders of an organization. This will be paid into the
account of the owner directly as a credit entry and will be absent on the debit side of the cashbook thus
debiting the company’s account.
x. Uncredited cheque: these are cheques received and entered on the debit side of the cash book but have not
been entered in the credit in the customer’s bank account as at the date of preparing the bank statement. They
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ACC 101 BASIC ACCOUNTING I UNITS : 2
are amounts already received and recorded by the company’s cash book, but are yet to be recorded in the bank
account by the bank. For example, a retail store deposits its cash receipts on 31st September by 3:00 pm while
the bank has already printed the bank statement by 10am same day. This is a deposit in transit since the bank
has not yet received the amount when it produced the bank statement. Because deposits in transit are already
included in the company's Cash account, there is no need to adjust the company's records. However, deposits
in transit (Uncredited cheque) are not yet on the bank statement. Therefore, they need to be listed on the bank
reconciliation as an increase to the balance as per bank in order to report the true amount of cash.
xi. Unpresented Cheques: are cheques outstanding, cheques drawn or issued out in favour of somebody but
have not been drawn from the bank at the time of preparation of the bank statement though they have been
written and recorded (credited) in the company's Cash account, but not yet presented at the bank for payment.
Cheques written during the last few days of the month plus a few older cheques are likely to be among the
outstanding cheques. Because all cheques that have been written are immediately recorded in the company's
Cash account, there is no need to adjust the company's records for the outstanding cheques. However, the
outstanding cheques have not yet reached the bank and the bank statement. Therefore, outstanding cheques are
listed on the bank reconciliation as a decrease in the balance as per bank.
xii. Bank errors are mistakes made by the bank. Bank errors could include the bank recording an incorrect
amount, entering an amount that does not belong on a company's bank statement, or omitting an amount from
a company's bank statement. The company should notify the bank of its errors. Depending on the error, the
correction could increase or decrease the balance shown on the bank statement. (Since the company did not
make the error, the company's records are not changed.)
xiii. The bank statement: this is a statement prepared at the bank to show all the customers transactions
for the month, showing how much was deposited at the bank by the customer, what amount was
withdrawn at the same time and the balance at each withdrawal and at each deposit. The bank
statement shows a column for what comes in, a column for what goes out and a column for the
balance remaining in the bank account.
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You should note that the bank statement is the reversal of the cash book where you debit (Dr) when
you receive cash and credit (Cr) when you give out cash, but for the bank statement you will be
Debited (Dr) by the bank when you withdraw cash at the bank and Credited (Cr) when you deposit
in the bank.
xiv. The cashbook: this is a record of all cash transactions at the business and the bank. The cash book
serves as a journal to record since all cash transactions are first recorded and at the same time it is a
ledger because it is divided into two equal side the Dr side and the Credit side, also it is the first leg
entry of all cash transactions.
Using fictitious figures
Cash book
Date Particulars Fol Bank Date Particulars Fol Bank
N N
Jun 1 Balance .b/f 10,000 Jun.2 Brush B. 8,000
7 Uche 6,200 9 Ojochide 7,500
18 Baba 5,900 15 Bala 5,500
24 Okpanachi 6,200 21 Dan. 7,000
29 Ufedo 8,200 30 Abuja 7,200
31 Balance c/d 5,700 31 John 7,000
42,200 42,200
Balance b/d 5,700
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i) It enables the business to satisfy that there is no fraud or error in its account with the bank.
ii) It enables the business to update its cash book with new information reflected in the bank
statement.
iii) It enables the business to confirm that the cash book was recorded correctly.
v) It is a deterrent to fraud as cashiers and accountants are aware that any fraudulent activity shall
be exposed during the bank reconciliation.
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ACC 101 BASIC ACCOUNTING I UNITS : 2
Adjusted cashbook
N N
Balance b/d (DR) xxx Balance b/d (CR) xxx
Interest earned xxx Bank charges xxx
Add/less errors in cash book xxx Sms charges xxx
Dividend xxx Add /less error in cash book xxx
Standing orders xxx
Dishonoured cheque xxx
Balance c/d xxx
xxx xxx
Balance b/d xxx
The items necessary for the bank reconciliation statement are listed in the following format:
OR
Illustration
Using fictitious figures provided in the format for both cash book and statement of bank account
presented above we will the adjusted cash book and the bank reconciliation statement for Goodness Commented [BM5]: Not clear
Suggested Solution:
In the books of Goodness ltd
Adjusted Cash Book (Bank Column only) 31st June, 2013
N N
Balance b/f 5,700
Bank charges 5,050
Balance c/d 16,950 Ali (Dishonoured Cheques) 6,200
16,950 16,950
Balance b/d 16,950
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Note: the reconciliation can be represented below using the second format.
Illustrations 2
On 31st December 2008, Jerry‘s cash book showed a debit balance of N29, 520. His bank
statement
showed a credited balance of N26, 500. The reason for the difference were as follows
a) A cheque for N1960 was received and entered in the cash book but was not recorded in the
bank statement
b) Un-presented cheques total N3740
c) The payments side of the cashbook had been under cast by N2000
d) Standing order for N1260 appearing in the bank statement yet to be posted in the cash book
e) A bill of exchange of N1340 had matured and the bank had paid on Jerry‘s behalf but it
had not been recorded in the cashbook.
f) Dividends credited to his account of N1240 had not been recorded in the cash book
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ACC 101 BASIC ACCOUNTING I UNITS : 2
g) A withdrawal of N1440 by Jeremiah and other customer of the bank had been charged in error
to Jerry‘s account
You are required to:-
1. Identify and label the causes of these differences.
2. Prepare an updated cash book
3. Prepare the bank reconciliation statement as at 31st December 2008.
Suggested Solution:
1. The following are the causes of the differences
i Uncredited cheques
ii. Unpresented cheques
iii. Error by the account holder in his cash book
iv. Standing order
v. Direct credit
vi. Dividend received
vii Error by the bank.
2.
Jerry‘s book
Adjusted Cash Book
N N
Balance B/d 29,520 Correction of under cast 2,000
Dividend 1,240 Standing order 1,260
Bill of exchange 1,340
Balance c/d 26,160
30,760 30,760
Bal b/d 26,160
Note: when preparing the bank reconciliation statement and you are using balance as per adjusted
cash book first, you are trying to find the same balance as the bank statement has and vice –versa.
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N
Balance as per Bank Statement 26,500
less: Un-presented cheque (3,740)
22,760
Add: Un-credited cheque 1,960
24,720
Add: Bank Error 1,440
Balance as per Adjusted cash book 26,160
Summary
In Study Session 4, you have learned about:
i. The concept of bank statement, the cashbook and associated terminology
ii. Explaining the importance of bank reconciliation.
iii. Demonstrating the bank reconciliation statement by application to real life situation
ITQ Question Study Session 4
1. …………….. Is prepared to reconcile the difference between the cashbook and the
bank statement.
2. …………is the amount paid to suppliers but yet to be presented at the bank for
payment?
ITA Answer Study Session 4
3. Bank reconciliation
4. Unpresented cheque
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ii. Explain briefly the reasons why the bank statement and the cash book will always not agree
iii. What are the steps to the preparations of a bank reconciliation statement?
SAQ 1.2 (Testing Learning outcomes 2.2)
1. On 30th June 2011 the bank reconciliation of Benue stores & co showed that firms account
with one of its bankers has an overdrawn balance of N17,650. But the cash book balance
showed a much better position. Investigation revealed that the discrepancy was due to the
following items of transactions;
a. Cash lodgement on 30/6/2011 amounting to N14200 was not credited by the bank until
1/7/2011.
b. A half year payment of N500 to the Nigerian institute of managers was made under a
bank order. This amount had not entered in the cash book.
c. Unknown to Benue stores & Co, a debtor whose debt had been written off as
irrecoverable, had paid the sum of N1550 direct to the company‘s bank account and the
cash book is yet to reflect this.
d. A cheque of N850 paid into the bank had been dishonoured but no entry of dishonour has
been made in the cash book.
e. Also, Benue stores cheque settlement of one of its customers amounting to N2500 ‘was
returned for irregular signature. The cashbook is yet to show this.
f. A n o t h e r of the bank’s customers issued a cheque for N2500 on the bank but this was
erroneously debited to the firms account.
g. Commission and C.O.T charged by the bank to 30 June 2011 amount to N600 and
N400 respectively, but not been entered in the cash book.
h. Cheques drawn before 3/6/2011 and not yet cleared by the bank were as follows; Bama &
Co, Bauchi Brokers and Yobe Ass for N800, N2900 and N8100 respectively.
i. C h e q u e s lodged on 29/6/2011 which has not been credited by the bank are N5000 from
Adamu and N2500 from Okafor and sons.
You are required to
(iii) Explain to the management of Benue Stores & co. the usefulness of the statement you
prepared in (2) above.
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2. The following is the cash book (bank column) of Fayemi for December 2011
N N
6-Dec J. Hall 155 1-Dec Bal b/d 3,726
20-Dec C. Walter 189 10-Dec D. Wood 234
31-Dec P. Miller 211 19-Dec M. Roberts 312
31-Dec Bal c/f 3,922 29-Dec P. Philips 200
4,472 4,472
Reference
A. A. Malgwi and V. O. Atabo (2014) Basic Accounting theory and practice 1 Comput Ray Publishers
Kaduna
R.O. Igben(2004) Financial Accounting Made Simple, 1st edition, ROI publishers, Lagos.
E. Ene and U Enjiwa Accounting Foundation volume 1 (2014).
GENERAL STUDY QUESTIONS
6. Every transaction has an effect on assets and/or liabilities. Which of the following such
effects is correct?
Transaction Effect(s) upon Effect upon
Assets Liabilities
A Pay a creditor by cheque Reduced Bank Reduce creditors
B Receive cash from a debtor Increase cash -
C Receive a loan in cash Increase cash Decrease loan
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Debt Credit
A Bank Bank
B Vehicles Bank
C Both of the above
D None of the above
9. If there is separate ledger account for ach debtor and creditor, which of the following
double-entries is correct?
Transaction Debt Credit
Asset of Stock
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15. What is the balance carried down on the following account on May 31?
May 1 sales $205 May 17 cash $300
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A $395 credit
B $380 debt
C $395 debt
D None of the above
16. What would the balance brought down have been if P. Kelly’s account had been balanced
on May 19?
A $265 debt
B $265 credit
C $445 credit
D None of the above
18. Which of the following, on its own, could explain an increase in the debit balance
brought down on the bank account in a firm’s ledger?
A The firm receiving money from its debtors
B The purchase of asset by the firm
C The firm repaying a bank loan
D The payment of money to the firm’s creditors
Trail Balance
19. A trial balance…..
A Shows the financial position of a firm
B proves whether the underlying accounting records are correct
C lists all of the entries in the double-entry accounting records.
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D is a list of all of the balances brought down in the double entry accounting records
20. A trial balance is prepared in order to establish whether….
A the total of the debit balances brought down in the ledger equals that of the credit
balances brought down.
B the double-entry record for all transactions is correct
C the bank balance is correct
D the firm has earned a profit or incurred a loss.
21. The totals of a trial balance ….
A need not always agree, as there are sometimes legitimate reasons why they should
differ.
B should agree in all cases except when the trial balances is prepared at the end of an
accounting period
C should always agree.
D need not always agree, because the trial balance is not the same as a balance sheet.
22. An error of omission arises when…
A either the debt or the credit entry for a particular transaction is recorded in the wrong
class of account.
B a transaction is not entered al all in the double-entry accounting records.
C the correct figure is entered in the double-entry accounting records, but in the wrong
perons’ account.
D two errors are made and one cancels out the other.
23. An error of commission arises when…
A either the debit or credit entry for a particular transaction is recorded in the wrong
class of account.
B a transaction is omitted from the double-entry accounting record
C the correct figure is entered in the double-entry accounting records but in the wrong
person’s account
D None of the above
24. In the case of a newsagent’s shop, which of the following is an error of principle?
A The cost of purchasing a photocopier is entered in the purchase account
B a sale is not recorded in the double-entry accounting records
C a credit sale to A. Baker’s is inadvertently entered on the debit side of A. Baker’s
account.
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29. If a sole trader’s capital at the beginning of a year was $100,000 and his net profit for the
year was $20,000, his capital at the end of the year…
A cannot be determined from the information given
B will be $80,000
C will be $100,000
D will be $120,000
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Balance Sheets
30. A balance sheet is …
A a ledger account, proving that the accounting records ‘balance”.
B a statement showing the marketer value of a firm
C a listing, in a particular format, of the balances brought down remaining in the
double-entry accounts after the profit and loss account has been prepared.
D a statement showing the marker value of assets and liabilities
32. The correct heading for the balance sheet f J. Burton at the end of December 1995 is
“Balance Sheet of J. Burton ….
A for the period ended 31st December, 1995’
B for the ended 31st December, 1995’
C as at 31st December, 1995’
D as at December, 1995’
A an amount payable within six months of the date of the balance sheet.
B an amount payable within nine months of the date of the balance sheet
C an mount payable after more than one year from the balance sheet date
D None of the above.
The sole trader’s capital at the end of the accounting period is:
A $5,300
B $5,100
C $5,500
D $5,600
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A Firm 1
B Firm 2
C Firm 3
D None of the above
40. A sole trader’s capital is equal to ….
A the total of his fixed assets plus current assets.
B his fixed assets
C the total of his net assets plus the capital he has introduced
D his net assets.
41. In the case of a firm selling exclusively on credit, which of the following shows its various
current assets listed in decreasing order of liquidity i.e. starting on the left with the most
liquid current asset and ending on the right with the least liquid one?
A Cash Stock Debtors Bank balance
B Bank balance Cash Debtors Stock
C Cash Bank balance Stock Debtors
D Cash Bank Balance Debtors Stock
42. ON January 1st a sole trader had capital of $25,000. During the year his drawings were
$23,000 and at 31st December he had capital of $31,000. If he did not introduce any new
capital during the year, his net profit for the year was:
A $29,000
B $17,000
C $32,000
D $23,000
Aspects of trading and profit and loss accounts and balance sheet
A $6,200
B $6,800
C $7,000
D None of the above
46. The cost of bringing goods to a merchantable condition should be included in …
A the trading account
B the profit and loss account
C the balance sheet
D None of the above.
47. The following data relates to a firm which as been trading for several years.
1995 1994
Sales $1,000,000 $900,000
Cost of sales $500,000 $480,000
Closing stock $550,000 $150,000
Assuming that the firm’s cost of sales is calculated by reference to its purchases and stock
figures only, its purchases during 1995 were:
A $70,000
B $170,000
C $450,000
D $550,000
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48. A sole trader incurred a loss of $10,000 during his most recent accounting period, yet had
more cash at the end of the period than he had at the beginning of it. Which of the
following, on its own, could explain this?
A An increase in his stock over the course of the period.
B $15,000 new capital introduced during the period
C The trader’s customers taking longer than normal to pay to him the amount they
owe.
D The purchase of fixed assets during the period
49. The correct way to record stock taken by the proprietor of a firm for his own personal use,
without him paying for it, is …
Account to Debit Account to Credit
A Drawing Sales
B Drawings Stock
C Sales Drawings
D Drawings Purchases
50. If stock withdrawn from a firm by its proprietor without him paying for it is not recorded….
A bother net profit and closing stock will be overstated
B net profit will be understated and closing stock will be unaffected
C both net profit and closing stock will be understated
D
51. If, in the accounts of sole trader, $2,500 was debited to the purchases account, instead of
being debited to the drawings account …..
A gross profit would be overstated
B the total of expenses would be understated
C net profit would be understated
D capital would be understated
52. Tom started business on January 1st, He bought fixed assets costing $53,000 and stocks
costing $6,600. He financed theses with a personal loan of $25,000 from his brother and a
business loan from a bank. On December 31st of the same year his net assets were $37,200.
His net profit for the year was $21,100. Tom’s drawings during the year were:
A $1,300
B $8,900
C $16,100
D $18,500
Accounting Concepts
54. When preparing financial statements the going concern concept should be applied only if
the entity concerned …
A is not anticipated to incur losses in the foreseeable future
B will never be wound up
C is expected to continue in operational existence for the foreseeable future at a level
of activity not significantly less than the current level of activity
D is not expected to be able to continue operating
55. The going concern concept mean that, when preparing accounts ..
A profits should not be anticipated and losses should be provided for as soon as
foreseen
B like items should be treated in a consistent way
C unless there is specific information to the contrary, the firm for which the accounts
are being prepared should be assumed to continue in operational existence for the
foreseeable future at a level of activity not significantly less than the current level of
activity
D revenues and costs are recognized as they are earned or incurred, not as money is
received or paid.
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62. Which of the following is one of the ‘fundamental accounting concept’ referred to in SSAP
2?
A The materiality concept
B The business entity concept
C The going concern concept
D The money measurement concept
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70. Cash lodged in a bank should be recorded in the Cash book as:
Column to Debit Column to Credit
A Cash Bank
B Bank Cash
C Cash Cash
D Bank Bank
ANSWERS TO GENRAL STUDY QUESTIONS Commented [BM6]: Some answers are missing
7. A 47. D
8. B 48. B
9. B 49. D
10. C 50. B
11. D 51. C
12. B 52. B
13. D 53. A
14. B 54. C
15. A 55. C
16. A 56. C
17. C 57. C
18. A 58. C
19. D 59. A
20. A 60. B
21. - 61. A
22. B 62. -
23. C 63. C
24. A 64. -
25. C 65. B
26. B 66. C
27. D 67 C
28. C 68. A
29. A 69. C
30. C 70. -
31. C
32. C
33. B
34. B
35. C
36. B
37. D
38. B
39. B
40. D
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