WAEC SSCE - Financial Accounting - 2021 (Essay)

Maelezo ya Majibu

(a) What is a Bank Reconciliation Statement?

A Bank Reconciliation Statement is a statement prepared periodically (usually monthly) to reconcile, or agree, the balance shown by the depositor's cash book (bank column) with the balance shown on the bank statement supplied by the bank. Because certain entries appear in one record before the other, the two balances often differ. The statement explains the causes of the difference and proves that both records are correct.

(b) Explanation of the terms

(i) Bank charges: Fees deducted by the bank from the customer's account for services rendered, such as account maintenance, ledger fees or commission. They appear on the bank statement first and must later be entered on the credit side of the cash book.

(ii) Standing order: A written instruction by the customer to the bank to pay a fixed amount to a named party at regular intervals (for example, monthly rent or insurance premium). The bank pays it automatically and records it before the customer enters it in the cash book.

(iii) Credit transfer: An amount paid directly into the customer's bank account by a third party (for example, a debtor settling a debt or dividends received). It increases the bank balance and appears on the bank statement before it is entered on the debit side of the cash book.

(iv) Dishonoured cheque: A cheque that the bank refuses to pay, usually because of insufficient funds, a technical error, or the drawer's account being closed. Where a customer's cheque earlier recorded as a receipt is returned unpaid, the bank reverses it, reducing the balance.

(v) Unpresented cheque: A cheque drawn and issued by the trader and already entered (credited) in the cash book, but which the payee has not yet presented to the bank for payment. It therefore reduces the cash book balance before it reduces the bank statement balance.

(vi) Uncredited cheque: A cheque received and paid into the bank, already entered (debited) in the cash book, but which the bank has not yet cleared and credited to the account. It therefore raises the cash book balance before it raises the bank statement balance.

Maelezo ya Majibu

(a) Operation of the Petty Cash Book under the imprest system

The petty cash book is a subsidiary book used to record small, routine cash payments (for example, stamps, taxi fares, tea, cleaning materials) that are too trivial to pass through the main cash book. Under the imprest system, the petty cashier is given a fixed sum of money in advance, called the imprest or float, for a definite period (usually a week or a month).

1. At the start of the period the petty cashier receives the float, say N5,000, from the chief cashier.
2. During the period the petty cashier makes the small approved payments and records each one, supported by a petty cash voucher, on the credit (analysis) side of the petty cash book.
3. The payments are further classified under analysis columns (postage, travelling, stationery, sundry, etc.) so that expenditure can be posted in total to the ledger.
4. At the end of the period the petty cashier totals the payments made. The chief cashier then reimburses exactly the amount spent, so that the float is restored to its original fixed figure at the beginning of the next period.

Thus at the beginning of every period the petty cashier always holds the same fixed amount. In effect: Cash in hand + amount reimbursed = original imprest.

(b) Two disadvantages of the imprest system

• If the fixed float is too small, the petty cashier may run out of money before the period ends and be unable to meet legitimate small payments.
• It ties up cash idly in the hands of the petty cashier and can encourage fraud or misuse if vouchers are not properly checked and authorised.

(c) Five uses of a petty cash voucher

1. It serves as documentary evidence that a petty cash payment was actually made.
2. It authorises the petty cashier to release cash for the stated expense (it is signed by an approving officer).
3. It shows the details of the transaction: date, amount, purpose and person paid.
4. It acts as the source document from which entries are made in the petty cash book.
5. It provides an audit trail and helps in checking and controlling petty expenditure against fraud.

Maelezo ya Majibu

(a) What is an accounting concept?

An accounting concept is a basic assumption, rule or principle that underlies the recording and reporting of business transactions. Accounting concepts guide accountants so that financial statements are prepared on a uniform, consistent and acceptable basis.

(b) Explanation of the concepts

• (i) Business entity concept: the business is treated as separate and distinct from its owner. Only the transactions of the business, and not the private affairs of the owner, are recorded in its books.
• (ii) Accrual concept: revenues and expenses are recognised in the period in which they are earned or incurred, not necessarily when cash is received or paid. Adjustments are made for accruals and prepayments.
• (iii) Going concern concept: the business is assumed to continue in operation for the foreseeable future, and is not about to be wound up or drastically reduced in scale. Assets are therefore not valued at break-up prices.
• (iv) Consistency concept: the same accounting methods and policies are applied from one period to the next, so that results can be meaningfully compared; any change should be disclosed.
• (v) Periodicity (time interval) concept: the continuous life of the business is divided into definite, equal periods (usually one year) for which accounts are prepared and reported.
• (vi) Historical cost concept: assets and transactions are recorded at their original acquisition cost, rather than at current or market value.

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(a) Explanation of terms used in the accounts of a not-for-profit making organisation

(i) Entrance fees: This is a one-off amount paid by a new member on first joining the club or society, in addition to the ordinary subscription. It is a form of admission fee that entitles the person to become a member. It is normally treated as revenue income and credited to the Income and Expenditure Account in the year it is received, although some clubs, by their rules, capitalise it and add it to the Accumulated Fund.

(ii) Subscription: This is the periodic amount (usually annual) paid by members to enjoy the benefits and facilities of the organisation. It is the main source of revenue for most clubs and societies. In the Income and Expenditure Account only the subscription relating to the current year is taken, after adjusting for subscriptions owing (accrued) and subscriptions paid in advance.

(b) Five features of an Income and Expenditure Account

1. It is prepared by not-for-profit making organisations (clubs, societies, associations) rather than by trading firms.
2. It is drawn up on the accruals (matching) basis, so only incomes and expenses relating to the current period are included, whether paid or not.
3. It records only revenue incomes and expenses; capital items (purchase of assets, capital receipts) are excluded.
4. Its final balance is described as a surplus (excess of income over expenditure) or a deficit (excess of expenditure over income), not net profit or net loss.
5. It is the equivalent of the Profit and Loss Account and the surplus or deficit is transferred to the Accumulated Fund in the Balance Sheet.