JAMB UTME - Principles of Accounts - 2025

Akọwa Nkọwa

A provision for doubtful debts is an estimate, deducted from total debtors, of the amount of debt that the business expects it will not be able to collect. Because it is only an estimate, the provision is reviewed and adjusted at the end of each accounting period to match current expectations about which debts might go bad.

When the provision needed at the end of a period is smaller than the provision already carried forward from the previous period, the excess is no longer required. This excess is written back, and because it reverses an expense that had previously reduced profit, it increases the profit of the current period. In the profit and loss account, this decrease in the provision is therefore added to gross profit, in the same way as any other item of income, rather than being deducted as an expense.

An increase in the provision for doubtful debts, by comparison, would be treated as an expense and deducted from profit, since it represents a fresh charge against expected bad debts for the period.

Examination tip: treat a rising provision as an expense and a falling provision as income; only the change in the provision, not its full balance, passes through the profit and loss account each period.

Akọwa Nkọwa

Depreciation is the systematic allocation of the cost of a fixed asset over its useful life, reflecting the wearing out, obsolescence, or reduction in value of the asset as it is used in the business.

A delivery van is used to distribute goods to customers, so the cost of running and maintaining it, including depreciation, is a distribution or selling expense rather than a cost of manufacturing goods. The manufacturing account gathers only the costs of getting goods into a finished state, such as raw materials, direct labour, and factory overheads like depreciation on production machinery. The trading account is used to calculate gross profit from sales revenue and the cost of goods sold, so it does not carry expense items such as depreciation. The appropriation account deals with how net profit is shared, for example between partners or as tax and dividends, not with operating expenses.

Because depreciation on the delivery van is an operating expense connected with distributing goods rather than producing them or sharing profit, it is deducted in arriving at net profit, which is calculated in the profit and loss account.

Examination tip: to place depreciation correctly, identify what the asset is used for. Assets used in production belong in the manufacturing account; assets used in selling, distribution, or administration belong in the profit and loss account.

Akọwa Nkọwa

When a company issues new shares to the public, the process moves through several distinct stages, each with its own name.

Application is the stage at which members of the public who wish to buy shares submit their application forms together with the application money to the company. Allotment is the next stage, in which the company's directors decide how many shares each successful applicant will actually receive and formally distributes those shares to them; it is at this point that the applicant legally becomes a shareholder. Allocation and apportionment are general terms for sharing something out, such as apportioning costs or allocating resources, but neither is the specific technical term used in company law for distributing shares to successful applicants.

Because it names the precise stage at which shares are formally given to those whose applications succeed, the correct term is allotment.

Examination tip: keep application (requesting shares) and allotment (receiving shares) in the correct order; allotment always follows application and is the point at which shareholder status begins.

Akọwa Nkọwa

Prime cost is the total of all direct costs that can be traced straight to the units of a product: direct materials, direct labour, and direct expenses. It excludes indirect costs (overheads), which are costs that support production generally but cannot be linked to a specific unit.

Direct expenses, the cost of raw materials, and carriage on raw materials are all direct costs that go straight into making the product, so each of these forms part of prime cost. Depreciation of factory equipment, however, is a factory (production) overhead: it is the gradual wearing out of machinery used across many units of output over time, and it cannot be traced to any single unit produced. It is added to prime cost only later, when calculating the total factory (production) cost.

A useful way to remember the distinction: prime cost answers "what did it directly cost to make this specific unit?", while overheads, including depreciation, answer "what did it cost to run the factory in general?".

In examination questions, treat any depreciation charge as a factory overhead, not a prime cost item, unless the question specifically asks for total production cost.

Akọwa Nkọwa

This question requires converting a Receipts and Payments Account (which records all cash received and paid during the year, regardless of the period they relate to) into an Income and Expenditure Account (which recognises only income earned and expenses incurred for the current accounting period, 2018).

The critical adjustment here involves subscriptions. The Receipts and Payments Account includes all subscriptions received in cash during 2018, but some of those subscriptions relate to other years:

• Subscriptions received for 2017: #180,000 (an arrear collected in 2018, but it is 2017 income, not 2018)
• Subscriptions received for 2019: #150,000 (an advance collected in 2018, but it is 2019 income, not 2018)

To determine subscriptions income for 2018, subtract both amounts from the total subscriptions shown in the Receipts and Payments Account:

\[ \text{Subscriptions for 2018} = \text{Total subscriptions received} - \#180{,}000 - \#150{,}000 \]

Next, to compute the surplus (excess of income over expenditure) for 2018:

1. Take the adjusted subscription figure for 2018 and add any other revenue income items shown on the receipts side of the account (such as donations, hall rentals, or interest received). Exclude the opening cash balance, since that is an asset, not income.
2. Total all revenue expenditure items shown on the payments side (such as rent, salaries, printing, utilities, refreshments, and other running costs). Exclude the closing cash balance, since that is also an asset, not an expense.
3. Surplus = Total income for 2018 minus Total expenditure for 2018.

Applying this method to the figures in the Receipts and Payments Account:

\[ \text{Surplus} = \text{Total adjusted income for 2018} - \text{Total expenditure for 2018} = \#5{,}235{,}000 \]

The surplus for the year 2018 is therefore #5,235,000.

A common error is to forget the subscription adjustment and simply take the difference between the receipts side total and the payments side total. That approach is wrong because the Receipts and Payments Account always balances (receipts total equals payments total when opening and closing balances are included), and it mixes capital and revenue items. Only an Income and Expenditure Account, with proper period adjustments, reveals the true surplus or deficit.

Akọwa Nkọwa

The memorandum of association is a company's founding document, and one of its clauses states the total amount of share capital that the company is permitted to raise, as approved by the Registrar of Companies. This total figure is known by several interchangeable names in company accounting: registered capital, authorised capital, and nominal capital all refer to the same amount stated in that clause of the memorandum.

Issued capital is a different figure altogether. It refers only to the portion of the authorised capital that the company has actually offered and allotted to shareholders at a given time, which is often less than the full amount stated in the memorandum. Because issued capital describes shares actually given out to shareholders rather than the ceiling figure approved by the Registrar, it is not one of the terms used to describe the amount stated in the memorandum of association.

Examination reminder: registered, authorised, and nominal capital are synonyms for the memorandum's stated capital ceiling; issued capital is a separate, usually smaller, figure representing what has actually been allotted.

Akọwa Nkọwa

The going concern concept assumes that a business will continue operating for the foreseeable future and will not be forced to sell off its assets or cease trading in the near term. This assumption is what allows fixed assets to be recorded at cost less accumulated depreciation, on the basis that they will be used over their full working life rather than sold immediately.

When the going concern assumption no longer holds, for example because the business is being wound up or liquidated, this basis of valuation is no longer appropriate. The relevant question is no longer how much value the asset will contribute through years of use, but how much money the asset could actually be sold for now. This amount is the realizable value, the price the asset would fetch if sold in its current condition, often less than its book value because a forced or urgent sale rarely achieves full market price.

Net book value (cost less accumulated depreciation) and gross value (original cost) both assume the business will keep using the asset, which is no longer valid once going concern fails. A revalued amount reflects a fresh estimate of an asset's worth to a continuing business, which again depends on the business carrying on, not winding up.

Examination tip: once going concern no longer applies, valuation shifts from "value in continued use" to "value on immediate sale," which is the realizable value.

Akọwa Nkọwa

The factory cost of production (also called the cost of goods manufactured) represents the total cost incurred in converting raw materials into finished goods within the factory. It is computed by combining all direct and indirect manufacturing costs and adjusting for any changes in work-in-progress.

The standard computation follows this structure:

1. Raw materials consumed = Opening stock of raw materials + Purchases of raw materials - Closing stock of raw materials
2. Prime cost = Raw materials consumed + Direct wages (direct labour)
3. Total factory cost = Prime cost + Factory overheads (indirect materials, indirect wages, factory rent, depreciation of factory machinery, etc.)
4. Factory cost of production = Total factory cost + Opening work-in-progress - Closing work-in-progress

Each step builds on the previous one. Raw materials consumed captures only the materials actually used in production, not the full amount purchased. Prime cost isolates the direct costs. Factory overheads add the indirect costs that support production but cannot be traced to a single product. Finally, the work-in-progress adjustment accounts for partially completed goods: opening WIP adds costs brought forward from the previous period, while closing WIP removes costs that relate to goods not yet finished.

Applying these steps to the figures in the manufacturing account provided, the factory cost of production is #56,300.

Common errors on this type of question include forgetting to adjust for work-in-progress (which would give an incorrect total factory cost figure), or subtracting opening WIP instead of adding it. Remember: opening WIP is added because those partially completed goods from last period are now being finished, adding to this period's output. Closing WIP is subtracted because those goods are not yet complete and their cost should not be included in the cost of finished production.

Akọwa Nkọwa

A Receipts and Payments Account records every cash inflow and outflow during the year, regardless of which accounting period the transaction belongs to. It also includes the opening and closing cash balances, which are assets, not income or expenses. To prepare an Income and Expenditure Account, only items that are revenue in nature and that relate to the current year are recognised.

On the payments side of the Receipts and Payments Account, two categories of items must be separated:

• Revenue expenditure (day-to-day running costs such as rent, salaries, stationery, printing, postage, refreshments, repairs, utilities, and similar recurring expenses). These are debited to the Income and Expenditure Account.
• Capital expenditure (purchases of fixed assets such as equipment, furniture, or investments) and the closing cash balance. These go to the Balance Sheet, not to the Income and Expenditure Account.

Unlike the income side, the payments side does not require an adjustment for the subscription timing difference. The subscription adjustment (removing the #180,000 received for 2017 arrears and the #150,000 received for 2019 in advance) affects only the income figure in the Income and Expenditure Account, not the expenses.

Adding up all the revenue expenditure items on the payments side of the Receipts and Payments Account gives the total expenses debited to the Income and Expenditure Account for 2018. That total is #8,095,000.

This can be cross-checked against the surplus. The surplus for 2018 from the same data is #5,235,000. Since:

\[ \text{Surplus} = \text{Total Income} - \text{Total Expenses} \]

\[ \text{Total Income} = \#5{,}235{,}000 + \#8{,}095{,}000 = \#13{,}330{,}000 \]

This confirms that the total expenses figure and the surplus are consistent with the underlying data.

A common mistake is to include the closing cash balance or a capital asset purchase as an expense. Neither belongs in the Income and Expenditure Account. Similarly, confusing the subscription adjustment (which reduces income) with an expense adjustment would lead to a wrong answer. Expenses on the payments side are taken at face value because they were all paid in cash during the year and relate to the club's operations for 2018.

Akọwa Nkọwa

A dividend declared as a percentage is calculated on the nominal (face) value of the total share capital, not on the number of shares alone. The nominal value of the total ordinary share capital must first be found before the percentage can be applied.

1. Find the total nominal value of the share capital: \[ 1{,}000{,}000 \text{ shares} \times \text{GH¢}2.00 = \text{GH¢}2{,}000{,}000 \]
2. Apply the declared dividend rate of 10% to this total nominal value: \[ 10\% \times \text{GH¢}2{,}000{,}000 = \text{GH¢}200{,}000 \]

The amount of dividend declared is therefore GH¢200,000. A common error is to apply the 10% directly to the number of shares (1,000,000) instead of to their total nominal value, which produces the smaller, incorrect figure of GH¢100,000; the percentage must always be applied to the monetary value of the capital, not the share count.

Examination reminder: always convert the number of shares into their total nominal value first, then apply the declared dividend percentage to that monetary total.

Akọwa Nkọwa

Where partners have not drawn up a formal partnership agreement, the default rules that apply are those laid down by partnership law. Under these default rules, partners are not entitled to interest on the capital they have contributed to the business.

However, if a partner contributes money to the business beyond the capital they agreed to bring in, that additional contribution is treated in the same way as a loan made to the firm rather than as ordinary capital. Loans (or advances) made by a partner in excess of agreed capital attract interest at the default statutory rate of 5% per annum, charged as an expense in the Profit and Loss Account before the residual profit is shared among the partners.

This distinction matters because it separates two very different defaults: no interest at all on agreed capital contributions, but a fixed 5% on anything advanced beyond that agreed capital, since the excess behaves economically like a loan rather than an equity stake.

When a partnership question has no partnership agreement and mentions "additional" contributions beyond the agreed capital, apply the 5% default interest rate rather than assuming no interest is payable at all.

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The imprest system is a method of controlling petty cash: a cashier is given a fixed float (the imprest amount) and reimbursed at the end of each period for exactly what was spent, restoring the float to its original level.

Its main advantage is that it provides a convenient, controlled way of meeting small, routine items of expenditure, such as stationery, postage, or minor travel costs, without going through the full cheque or bank payment process for every tiny transaction, while still keeping records tight because reimbursement is only made against vouchers for actual spending.

The imprest system has nothing to do with making high profits, since it is a cash-control mechanism rather than a source of income; it is not designed to reward the person holding the float, since any cash held is business money, not personal remuneration; and it does not, by itself, make the preparation of final accounts easier, since petty cash is only one small part of the overall accounting records.

When a question asks about the purpose or advantage of the imprest system, think "control over small cash expenses," since that is the concept being tested.

Akọwa Nkọwa

In government (public sector) accounting, spending from the treasury cannot begin until the relevant authority has been formally granted. The appropriation bill, once passed, becomes the Appropriation Act, which provides the main legal authority for government ministries and departments to spend money on approved programmes for the year.

Because the legislative process of passing the appropriation bill can take time, government business often needs to continue before it is finally approved. A provisional general warrant is the instrument used to authorise limited, temporary spending during this gap, so that essential government activities are not brought to a halt while the bill is still going through the legislature. Once the appropriation bill is passed, it is superseded by the substantive authority to spend under the Act.

The other warrants operate at different stages: a supplementary general warrant authorises additional spending after the main budget has already been approved and found insufficient; a warrant transfer permits moving an already-approved allocation from one budget head to another; and a reserved expenditure warrant relates to spending set aside for specific reserved purposes. None of these apply before the appropriation bill itself has been approved.

Examination reminder: the word "provisional" is the key clue; it signals temporary authority granted in advance of the appropriation bill's approval, distinguishing it from the other warrants, which all assume the main budget is already in force.

Akọwa Nkọwa

Departmental accounts split a business's trading results into separate sections for each department, so that the sales, cost of sales, and expenses of each department are recorded and reported individually rather than being merged into a single overall figure.

The main reason for doing this is to find out how well each department is actually doing, that is, to ascertain departmental performance: which departments are generating strong profit margins, which ones are barely breaking even, and which ones may need corrective action such as better pricing, cost control, or even closure. Management can only make these decisions if the results are broken down by department rather than lumped together.

Labour turnover, stock levels, and staff numbers may all be tracked as part of running a department, but none of them is the core purpose of preparing departmental accounts. Those figures belong to human resource or stock-control records; departmental accounts exist specifically to measure and compare financial performance across departments.

Examination reminder: whenever a question asks about the objective of segmenting accounts (by department, by branch, or by product line), the underlying reason is almost always to evaluate performance and support internal decision-making, not to track operational statistics.

Akọwa Nkọwa

The asset cost \( \text{#}60{,}000 \) and is depreciated at \( 10\% \) of cost per year (straight-line method), so the annual depreciation charge is:

The asset was bought on 1 January 1997 and sold on 30 June 2001. Counting the full years 1997, 1998, 1999 and 2000, plus the half year from January to June 2001, gives a total useful life to the point of sale of \( 4.5 \) years.

The net book value (also called carrying amount) of a fixed asset is its cost less the depreciation accumulated up to the date of disposal:

This is the figure that would have appeared in the asset account (or the balance sheet) immediately before the sale was recorded. It is distinct from the sale proceeds of \( \text{#}16{,}000 \), and from the resulting loss on disposal of \( \text{#}17{,}000 \), which is simply the difference between the net book value and the proceeds.

Examination reminder: net book value depends only on cost and accumulated depreciation up to the disposal date; it has nothing to do with what the asset is eventually sold for.

Akọwa Nkọwa

Every share has a nominal (or par) value, which is the fixed face value stated on the share certificate and in the company's memorandum of association. Shares can be issued at exactly this nominal value, above it, or below it, and each situation has its own accounting term.

When shares are sold for less than their nominal value, they are said to be issued at a discount, and the shortfall between the nominal value and the (lower) issue price is recorded as a discount on issue of shares. If shares are sold for exactly their nominal value, they are issued at par; if sold for more than their nominal value, they are issued at a premium, with the excess credited to a share premium account. "At a loss" is not the correct technical term used in share issue accounting for this situation, even though the company receives less cash than the shares' face value.

Examination reminder: keep the three issue-price terms distinct: at par (equal to nominal value), at a premium (above nominal value), and at a discount (below nominal value); each has its own specific accounting treatment.

Akọwa Nkọwa

A trial balance is prepared by extracting the closing balance of every account in the general ledger and arranging these balances in two columns, one for debit balances and one for credit balances, as at a specific date.

This makes it, in essence, a list of accounting balances taken from the books, drawn up mainly to confirm that total debits equal total credits before the final accounts are prepared. It is not itself an account (it has no debit and credit sides recording individual transactions the way a ledger account does), so calling it "a special account" mischaracterises what it is. It also does not reveal the financial position of a business; that is the role of the balance sheet, which is prepared afterwards using the trial balance as raw material. Finally, it does not show every entry made in the books, only the net closing balance of each account, so individual transactions cannot be traced from it.

Examination reminder: distinguish a trial balance (a list of net balances used as a checking and preparation tool) from an account (which records individual debit and credit entries) and from a balance sheet (which presents the financial position after the trial balance has been used to draw up the final accounts).

Akọwa Nkọwa

The accounting equation, capital plus liabilities equals assets, defines how the resources of a business and the claims on those resources relate to one another.

Assets are the resources that a business owns and controls, and from which it expects to derive future economic benefit, examples include cash, inventory, buildings, and equipment. Capital represents the owner's claim on the business, the amount the owner has invested and is owed by the business. Liabilities represent outside parties' claims, amounts the business owes to lenders, suppliers, or other creditors. Drawings are amounts of cash or goods the owner withdraws from the business for personal use, and are deducted from capital rather than being a resource the business owns.

Because assets are defined precisely as the resources a business owns and controls, this is the correct classification for such resources.

Examination tip: keep the accounting equation in mind, resources the business owns are assets, while capital and liabilities describe who has a claim on those resources.

Akọwa Nkọwa

The Chief Accounting Officer of the federation is the Accountant General. This officer is the senior public accountant responsible for the overall custody, control, and stewardship of the federation's public funds, and for ensuring that accounting records and financial statements of the government are properly maintained and reported.

The Accountant General's duties include maintaining the central accounting records of government receipts and payments, preparing the consolidated financial statements of the federation, advising on accounting policy and procedures across ministries and departments, and ensuring that public funds are accounted for accurately and in line with financial regulations.

This role is distinct from the Auditor General, whose function is to independently examine and audit government accounts after they have been prepared, rather than to prepare or take custody of them; it is also distinct from the Minister of Finance, who is a political office holder responsible for fiscal policy rather than the technical maintenance of accounting records; and it is distinct from a general "Chief Accountant" title, which is not the specific constitutional or statutory office referred to here.

When a question asks who is responsible for the accounting records of the whole federation, as opposed to who audits them or who sets fiscal policy, the answer being tested is the Accountant General.

Akọwa Nkọwa

A spreadsheet application is software designed to organise data into rows and columns of cells, allowing calculations, formulas, and data analysis to be performed automatically. Microsoft Excel is the most widely used example of this category of software, built specifically for entering figures, applying formulas, and generating charts or summaries from tabular data, which is exactly what accounting and business record-keeping requires.

The other items serve entirely different purposes. The Internet is a global network for accessing and sharing information, not an application for organising figures. Windows is an operating system that manages the computer's hardware and runs other programs, including spreadsheet software, rather than being a spreadsheet itself. Word is a word-processing application, used to create and format text documents such as letters and reports, not to perform tabular calculations.

Examination reminder: when identifying software categories, focus on the primary function: word processors handle text, spreadsheets handle numerical/tabular data and calculations, and operating systems manage the computer as a whole.

Akọwa Nkọwa

A source document is the original piece of paper or electronic record that provides evidence that a transaction has taken place and supplies the details (date, amount, parties involved) needed to make an entry in the books of account. Examples used in bookkeeping include invoices, credit notes, debit notes, receipts, cheques, and petty cash vouchers.

An invoice is issued when goods or services are sold on credit and shows what is owed. A credit note is issued to reduce an amount owed, typically when goods are returned by a customer. A debit note is issued to increase an amount owed or to request that a supplier's invoice be corrected. Each of these is created specifically to record and support a business transaction, so each qualifies as a source document.

A bank note, however, is simply a unit of currency, a piece of paper money used as a medium of exchange. It does not record the details of a transaction and is not raised to provide evidence for a bookkeeping entry, so it cannot be classified alongside invoices, credit notes, and debit notes as a source document.

Examination tip: when a question lists "source documents," check whether the item records transaction details (who, what, how much) or is simply a form of money; only the former qualifies.

Akọwa Nkọwa

The imprest system fixes petty cash at a set amount, here \( \text{#}4{,}000 \). At the start of December, \( \text{#}517 \) remained in hand, and the cashier was reimbursed \( \text{#}3{,}483 \) to restore the float back to the full imprest amount: \( \text{#}517 + \text{#}3{,}483 = \text{#}4{,}000 \).

During the month, the following payments were made out of petty cash:

The personal (ledger) column in an analysed petty cash book is reserved for payments made to, or received from, a named individual or business whose account is kept in the sales or purchases ledger, rather than for a general expense heading such as stationery, postage, or wages.

Of the seven transactions listed, only the payment to J. Thomas, a creditor, involves a personal account. This \( \text{#}536 \) payment reduces the amount owed to J. Thomas and must be posted to his individual account in the purchases ledger, in addition to being recorded in the petty cash book itself. Notebooks, wages, postage stamps, and envelopes are all impersonal expense items posted to their respective nominal ledger expense accounts, not to a personal account.

Examination reminder: the giveaway for a personal-ledger posting is a named individual or trader in the transaction description; expense words like "wages," "postage," or "stationery" signal a nominal account instead.

Akọwa Nkọwa

Public service (government) accounting is traditionally based on the cash basis: transactions are recorded only when cash is actually received or paid, not when the underlying obligation or entitlement arises.

This basis supports the primary purpose of public sector accounting, which is to demonstrate that government spending stayed within the cash actually released against budgeted appropriations, giving legislators and the public a clear, verifiable record of cash movements in and out of public funds.

Expenditure and profit describe categories or outcomes within accounting, not a basis of recognising transactions, so they do not answer the question of when a transaction is recorded. Accrual accounting, which recognises transactions when they are earned or incurred rather than when cash moves, is the alternative basis used in private-sector financial accounting and, increasingly, in some modern public financial management reforms, but it is not the traditional basis of public service accounting being described here.

Whenever a question asks about the timing basis used in traditional government accounting, cash basis is the concept being tested, in contrast with the accrual basis used by most businesses.

Akọwa Nkọwa

Recording the financial transactions of government, that is, the receipts and payments of ministries, departments, and other public bodies funded from the public purse, is the specific branch of accounting called public sector accounting.

Public sector accounting has its own conventions suited to government activity, such as cash-basis recording, fund accounting, and control against budgeted appropriations, because the goal is accountability for public money rather than measuring business profit.

Cost accounting focuses on determining the cost of producing goods or services within a business for internal decision-making; management accounting focuses on providing information to managers for planning, control, and decision-making generally; financial accounting is the broader discipline of recording and reporting a private entity's financial transactions for external users. None of these three is specifically concerned with recording the transactions of government bodies, which is the defining feature of public sector accounting.

When a question refers to recording transactions of central or local government specifically, public sector accounting is the term being tested, not the more general financial or management accounting labels.

Akọwa Nkọwa

Ordinary shares (also called equity shares) do not carry a fixed rate of dividend. Instead, ordinary shareholders receive whatever the directors decide to distribute after all other prior claims, including preference dividends, have been met, and after profits available for distribution have been determined for the year.

This means the dividend an ordinary shareholder receives rises and falls directly with how profitable the business has been: a strong profit year can bring a generous dividend, while a poor year, or a loss, can mean no dividend at all. Preference shares, by contrast, carry a fixed percentage rate that is set in advance and paid ahead of ordinary dividends whenever sufficient profit exists; bonus shares are additional shares issued to existing shareholders out of reserves rather than shares that carry a dividend right of their own, and forfeited shares are shares taken back by the company from a shareholder who failed to pay calls due on them.

Examination reminder: the defining feature of ordinary shares is variability: the size of the dividend depends entirely on profit performance and the directors' decision each year, unlike the fixed, prior-ranking rate attached to preference shares.

Akọwa Nkọwa

Prime cost is the total of all direct costs incurred in manufacturing a product. It includes only those costs that can be traced directly to production units - specifically direct materials consumed and direct wages (direct labour). Factory overheads, indirect wages, depreciation of plant, and other indirect manufacturing expenses are excluded from prime cost because they are indirect costs.

The formula is:

\[ \text{Prime Cost} = \text{Direct Materials Consumed} + \text{Direct Wages} \]

where:

\[ \text{Direct Materials Consumed} = \text{Opening Stock of Raw Materials} + \text{Purchases of Raw Materials} + \text{Carriage Inwards (if any)} - \text{Closing Stock of Raw Materials} \]

Applying this formula to the data provided in the table, the prime cost works out to #49,950.

A common mistake is to include factory overheads (such as factory rent, power, depreciation of machinery, or indirect wages) in the prime cost. These items are part of factory cost (also called production cost or works cost), not prime cost. Factory cost = Prime cost + Factory overheads. Including any overhead figure would overstate the prime cost and lead to an incorrect, higher total such as #53,000 or #52,750.

Another error is miscalculating direct materials consumed by omitting the stock adjustment. If opening or closing stock of raw materials is ignored, the materials figure will be wrong, producing a distorted prime cost.

Exam tip: When a question asks for prime cost, include only direct materials consumed and direct wages. Stop there. Do not add any item described as "overhead", "indirect", "factory rent", "depreciation", or "factory expenses".

Akọwa Nkọwa

This question tests the accrual (matching) principle: the profit and loss account must reflect the rent expense that belongs to the accounting period, not merely the cash paid during that period. Two adjustments are needed when prepaid rent exists at both the start and end of the year.

Rent prepaid at the start of the year (1 January 2014) is an amount that was paid in the previous year but relates to 2014. Because it covers part of 2014, it must be added to the rent paid during 2014 to capture the full expense for the period.

Rent prepaid at the end of the year (31 December 2014) is an amount paid during 2014 but relates to 2015. Because it does not belong to 2014, it must be subtracted from the total.

Applying the formula:

\[ \text{Rent chargeable to P\&L} = \text{Rent paid} + \text{Opening prepaid} - \text{Closing prepaid} \]

\[ = \text{₦}3{,}200 + \text{₦}600 - \text{₦}400 = \text{₦}3{,}400 \]

The rent chargeable to the profit and loss account for 2014 is therefore \(\text{₦}3{,}400\).

A common mistake is to reverse the adjustments, subtracting the opening prepaid and adding the closing prepaid, which would give \(\text{₦}3{,}200 - \text{₦}600 + \text{₦}400 = \text{₦}3{,}000\). Another error is to ignore the opening prepaid entirely and subtract only the closing prepaid, yielding \(\text{₦}3{,}200 - \text{₦}400 = \text{₦}2{,}800\). Both results understate the true expense for the year.

When adjusting for prepayments, remember: opening prepaid is a benefit consumed this year (add it), while closing prepaid is a benefit to be consumed next year (subtract it).

Akọwa Nkọwa

Capital is what the owner of a sole-trader business has invested in it, and it changes only when transactions directly affect the owner's stake, principally through profits earned, losses incurred, additional capital introduced, or drawings taken out for personal use.

Drawings occur when the owner withdraws cash, goods, or other assets from the business for personal purposes. Paying for something by cheque drawn from the business bank account for the owner's own use reduces what the business owns without the owner supplying anything in return, so it directly reduces the capital account.

The other transactions do not change capital at all: buying equipment by cheque, or buying goods by cheque, simply exchanges one business asset (cash at bank) for another (equipment or stock), leaving total assets, and therefore capital, unchanged. Paying wages by cash is a business expense, which affects net profit for the period and only impacts capital indirectly once that period's profit or loss is eventually transferred to the capital account at year end; it is not the direct, immediate capital movement that drawings represents.

Examination reminder: capital only moves directly when the owner puts something in or takes something out; ordinary asset-for-asset exchanges within the business leave it untouched.

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This question tests the treatment of subscriptions on the balance sheet of a club or society. In non-profit accounting, subscriptions are the periodic fees members pay to belong to the organisation. At the end of a financial year, any subscriptions that members still owe (subscriptions in arrears) represent money the club expects to collect, while any subscriptions members have paid ahead of time (subscriptions in advance) represent an obligation the club owes back in the form of future membership services.

Subscriptions in arrears are classified as a current asset on the balance sheet because they are amounts receivable from members - effectively debtors. Subscriptions received in advance are classified as a current liability because the club has received payment for a service period it has not yet provided.

From the data provided, the subscriptions in arrears as at 31st December, 2014 amount to \(\naira 400\). Since these are amounts owed to the club by its members, they appear on the balance sheet as a current asset of \(\naira 400\).

Examination tip: When a question asks how subscriptions appear on the balance sheet, always determine whether they are in arrears (current asset/debtor) or in advance (current liability/creditor). Do not confuse the two - arrears benefit the club (an asset it expects to collect), while advance payments obligate the club (a liability it must honour).

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Revenue expenditure is spending incurred to keep a business running on a day-to-day basis, benefiting only the current accounting period, and is charged in full to the profit and loss account as an expense. Capital expenditure, by contrast, is spending that acquires or improves a long-term (fixed) asset, providing benefit over several years, and is added to the cost of the asset in the balance sheet rather than expensed immediately.

Buying fuel for a vehicle is a routine running cost: the fuel is consumed almost immediately in the ordinary course of using the vehicle, and it does not add any lasting value to the vehicle itself. This makes it revenue expenditure.

The remaining items all involve acquiring or upgrading a long-term asset. Purchasing a new engine improves and extends the useful life of the existing vehicle rather than merely maintaining it, so it is capital expenditure. Constructing an office wall creates a lasting structural improvement, and purchasing a plant acquires a fixed asset outright; both are capital expenditure.

Examination reminder: ask whether the spending merely keeps an existing asset running for now (revenue expenditure) or adds a new asset, or lasting improvement to one, that will benefit future periods (capital expenditure).

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When an owner takes goods, cash, or other business assets for personal or family use, this is treated as drawings, not as any of the alternative transactions listed.

Drawings reduce the owner's capital in the business, because the resources withdrawn are no longer available to the business even though the owner has not paid for them. The double-entry effect is to debit the Drawings account and credit the Purchases (or Stock) account for the cost value of the goods taken, and at the end of the period the drawings balance is deducted from capital in the capital account.

This differs from a loan, which would require the business to record a formal borrowing arrangement with an external party; it differs from stock, because stock refers to unsold goods still held for resale; and it differs from sales, because no sale has taken place, since the owner has not paid for the materials and no revenue has been earned on them.

Whenever an owner removes goods or cash from the business for private use, always record it as drawings so that the capital account, and ultimately the balance sheet, reflects the true amount the owner still has invested in the business.

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The document that sets out the internal rules for running and managing a company, such as the rights of shareholders, the powers and duties of directors, and procedures for meetings and voting, is the Articles of Association.

The Articles govern the company's internal affairs and how it is administered day to day, which distinguishes them from the other documents listed. The Memorandum of Association instead defines the company's relationship with the outside world, stating its name, objectives, and the scope of activities it is legally permitted to undertake. A prospectus is an invitation to the public to subscribe for shares or debentures, used when raising capital, not a rulebook for internal management. A certificate of incorporation is the legal document issued by the registrar confirming that the company has been formed and now exists as a separate legal entity; it does not contain rules of internal management either.

A helpful way to separate the two founding documents: the Memorandum defines what the company can do and its relationship with outsiders, while the Articles define how the company runs itself internally.

Akọwa Nkọwa

In manufacturing accounts, the cost of raw materials consumed represents the total value of raw materials actually used in production during a period. It is calculated using the formula:

\[ \text{Cost of Raw Materials Consumed} = \text{Opening Stock of Raw Materials} + \text{Net Purchases} - \text{Closing Stock of Raw Materials} \]

where Net Purchases equals Purchases of Raw Materials plus any Carriage Inward, minus any Returns Outward on raw materials.

To solve the question:

1. Identify the opening stock of raw materials from the data provided.
2. Add the purchases of raw materials (and carriage inward, if given) to get the total raw materials available for use.
3. Subtract any returns outward on raw materials to arrive at net purchases.
4. Subtract the closing stock of raw materials from the total raw materials available.

Applying this formula to the figures provided in the table yields a cost of raw materials consumed of #43,500.

A common error is to confuse the cost of raw materials consumed with the total purchases figure (ignoring opening and closing stocks), or to add the closing stock instead of subtracting it. Another frequent mistake is to include factory overheads or direct wages in the raw materials figure, which belong to later stages of the manufacturing account.

Exam tip: Always distinguish between raw materials purchased and raw materials consumed. The consumed figure adjusts purchases for changes in raw material inventory (opening and closing stocks) and is the figure that enters the manufacturing cost calculation.

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The imprest system fixes petty cash at a set amount, here \( \text{#}4{,}000 \). At the start of December, \( \text{#}517 \) remained in hand, and the cashier was reimbursed \( \text{#}3{,}483 \) to restore the float back to the full imprest amount: \( \text{#}517 + \text{#}3{,}483 = \text{#}4{,}000 \).

During the month, the following payments were made out of petty cash:

In an analysed petty cash book, each payment is recorded once in the total column and again in the analysis column that matches its nature. Stationery covers items used for writing and correspondence, which here means the notebooks and the envelopes:

The postage stamps ( \( \text{#}375 + \text{#}210 = \text{#}585 \) ) belong under a separate postage heading rather than stationery, since they are used to send items rather than to write on or contain them. Wages and the payment to the creditor are unrelated categories entirely.

Examination reminder: when a petty cash book asks for spending "on stationery," only include items genuinely used for writing, filing, or packaging correspondence; postage stamps, though often listed nearby, belong to their own analysis column.

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A capital receipt is money that comes into a business from a source other than its normal day-to-day trading activities, typically from selling or disposing of long-term (fixed) assets, or from raising long-term finance such as loans or additional capital.

Selling a motor vehicle that the business owns and uses (a fixed asset) generates a capital receipt, because the vehicle is not an item held for resale in the ordinary course of business; the receipt arises from disposing of a long-term asset, not from trading.

By contrast, money collected from trade debtors, receipts from selling stock in trade, and receipts from trading activities generally are all revenue receipts: they arise from the business's normal, recurring trading operations of buying and selling goods, and they are the kind of receipts that appear in the Trading and Profit and Loss Account.

To tell capital and revenue receipts apart quickly, ask whether the receipt arose from an asset the business uses to run the business (capital) or from goods and services the business sells as part of its trade (revenue).

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When a business is overdrawn at the bank, its cash book bank column shows a credit balance, because the bank column is being treated as a liability rather than an asset. Bank reconciliation then explains the difference between this cash book overdraft figure and the overdraft shown on the bank statement.

An uncredited cheque is a cheque the business has already paid into the bank and recorded in its own cash book (which reduces the recorded overdraft), but which the bank has not yet processed and added to the account. Because the bank has not yet acted on it, the bank statement still shows a larger overdraft than the cash book does, by exactly the value of that cheque.

To move from the cash book (credit/overdraft) balance to the bank statement balance, this timing gap has to be added back: the cash book overdraft understates what the bank statement currently shows, so the amount of the uncredited cheque is added to the cash book balance to arrive at the bank statement figure.

Deducting the uncredited cheques from the cash book, or adding them straight to the bank statement figure without first starting from the cash book, would give the wrong reconciled amount, because it reverses the direction of the timing difference.

Examination reminder: when the cash book shows an overdraft, work out whether an item makes the bank statement's overdraft larger or smaller than the cash book's, and adjust in that direction rather than relying on the rule memorised for a favourable (debit) cash book balance.

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A receipts and payments account is prepared by non-trading organisations (clubs, societies, associations) as a summary of the actual cash and bank transactions recorded in the cash book for the year. It opens with the cash/bank balance at the start of the period, lists every amount actually received on one side and every amount actually paid out on the other, and closes with the balance carried forward.

Because it is a pure summary of cash movements, it records every receipt and payment exactly as cash changed hands, regardless of whether that item relates to running the organisation day to day (revenue in nature) or to buying or selling a long-term asset (capital in nature). A payment for a new building, furniture, or equipment therefore appears in the receipts and payments account on the payments side just like a payment for stationery or refreshments, because both involved cash actually moving. This is what distinguishes it from the income and expenditure account, which excludes capital items and only reports revenue income and expenditure matched to the period they relate to.

Debtors, creditors, and prepayments, by contrast, are accrual-accounting concepts: they represent amounts owed or paid in advance that have not yet resulted in a cash movement. A receipts and payments account, being cash-based, does not disclose any of these because it only records money that has actually been received or paid.

Examination reminder: the receipts and payments account is a cash-basis summary, so it captures capital items but never debtors, creditors, or prepayments, which only appear once accrual adjustments are made in the income and expenditure account and balance sheet.

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The debtors ledger (also called the sales ledger) contains the individual accounts of customers who owe the business money for goods bought on credit. Entries in this ledger must originate from documents that record credit sales transactions.

A sales invoice is issued by the business to a customer at the point a credit sale is made, and it states what the customer owes; this is the primary source document used to post amounts owed into the customer's individual account in the debtors ledger. Suppliers' invoices, by contrast, are received from suppliers when the business itself buys on credit, and they are posted to the creditors (purchases) ledger, not the debtors ledger. Payment vouchers evidence cash payments made by the business, and returns outward notes record goods the business sends back to its own suppliers, both of these relate to purchases and payments, not to sales made to customers.

Because it is the document that evidences the credit sale creating the debt in the first place, the sales invoice is the primary source of entry into the debtors ledger.

Examination tip: match each source document to the ledger it feeds; sales invoices and credit notes to customers feed the debtors ledger, while suppliers' invoices and returns outward notes feed the creditors ledger.

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The rule that a business should not anticipate profit before it is actually earned is the prudence concept (also called the concept of conservatism). It requires that revenues and profits are recognised only when they are reasonably certain, while potential losses and liabilities are provided for as soon as they are foreseen, even if not yet certain.

Applying prudence prevents a business from overstating its financial position by recording profit on a transaction that has not yet been completed or confirmed, which would mislead anyone relying on the accounts, such as creditors, investors, or tax authorities.

This is different from the going concern concept, which assumes the business will continue operating for the foreseeable future; the consistency concept, which requires the same accounting methods to be used from one period to the next so that results can be compared; and the dual aspect concept, which underpins double-entry bookkeeping by recognising that every transaction has two effects. None of these three concepts is about withholding recognition of unearned profit.

Whenever a question describes caution in recognising gains but full recognition of foreseeable losses, that combination is the hallmark of prudence.

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A gross profit markup is always calculated as a percentage of cost, not of selling price. This means selling price equals cost plus the markup percentage applied to cost.

Letting the cost of sales be \( C \), the relationship is:

Substituting the given sales figure:

So the cost of sales is D 9,600, and the gross profit on this sale is \( 12{,}000 - 9{,}600 = 2{,}400 \), which checks out as 25% of the D 9,600 cost, confirming the markup was applied correctly.

A common mistake is to calculate 25% of the sales figure directly (giving D 3,000 or D 9,000) as if markup were a margin on selling price. Remember: markup is a percentage of cost, while margin (gross profit percentage on sales) is a percentage of selling price; always check which one a question specifies before dividing or multiplying.