WAEC Accounting 2006 Past Questions & Answers

The question provides the standard definition of financial accounting. This branch of accounting involves the entire process of gathering financial data (collecting), entering it into the books (recording), summarizing it into financial statements (presenting), and analysing these statements to make sense of the business's performance (interpreting). This is done primarily for external users like investors, banks, and the government.

Common mistake: Students might mistakenly choose management accounting because it also involves interpreting data, but its main purpose is for internal decision-making by managers, whereas financial accounting is for external users.

The sum of the years' digits method calculates depreciation by first adding up the digits of the asset's useful life; for an asset lasting 4 years, the sum is $4+3+2+1$ = 10. Depreciation is then charged using a fraction where the numerator is the remaining years of life in reverse order (e.g., 4 in year 1, 3 in year 2) and the denominator is the sum (10). This process directly matches the description of allocating the years in reverse order.

Common mistake: Students often confuse this with the reducing balance method because both charge more depreciation in the early years, but the reducing balance method applies a fixed percentage to the asset's net book value each year.

The imprest system is the specific accounting method for controlling small cash expenses. In this system, a fixed amount of cash, called a 'float', is given to a petty cashier who uses it for small payments and records them in a separate petty cash book. The cashier is then reimbursed for the exact amount spent to bring the cash back to the original float amount.

Common mistake: Students often mistakenly choose 'float' because the float is the actual cash used in the imprest system, but 'imprest' refers to the entire system or method itself.

Public sector accounting is the specific accounting system used for government and its various agencies, like ministries and parastatals. The main goal is to ensure accountability and proper use of public funds, not to make a profit. Therefore, it is practiced in government organizations.

Common mistake: Students often mistakenly choose 'public limited companies' because they confuse the term 'public sector' (which means government) with 'public company' (a business whose shares are sold to the public).

The ledger is the correct answer because it is the principal book of accounts where all the financial transactions of a business are summarized. After transactions are first recorded in the books of original entry like the journal, they are then posted to their specific accounts in the ledger. This allows the business to see the total activity for each type of account, such as cash, sales, or purchases, in one place.

Common mistake: Students often mistakenly choose 'journal' because it is where transactions are first recorded, but the journal is a book of original entry, while the ledger is the principal book that contains the actual accounts.

The sales ledger, which is also called the debtors' ledger, is a subsidiary book used to keep the individual accounts of all customers who buy goods on credit. Since these customers owe the business money, they are known as debtors. Therefore, the sales ledger is the book that contains all the debtors' accounts.

Common mistake: Students often confuse the sales ledger with the purchases ledger; the purchases ledger is where creditors' accounts are kept, not the sales ledger.

The books of account are the complete set of records where a business's financial transactions are recorded. They are broadly divided into two main categories: the subsidiary books (also known as books of original entry or day books) where transactions are first entered, and the ledger, which is the principal book that summarizes these transactions into individual accounts. Therefore, the books of account consist of both ledgers and subsidiary books.

Common mistake: Students might choose option D because the cash book is very important, but they forget that it is just one of several subsidiary books, not the entire category.

Reserves are profits that a company has earned and decided to keep for strengthening its financial position or for future expansion, instead of distributing them to shareholders. Unlike provisions, which are set aside to cover a known future liability or a probable loss, reserves are not meant for any specific liability. Therefore, an amount set aside from profit that is not for a liability or contingency is correctly called a reserve.

Common mistake: Students often confuse reserves with provisions (B), but provisions are amounts set aside for a specific known liability, whereas reserves are simply an appropriation of profit.

Cash basis accounting is a method where income is recorded only when cash is received, and expenses are recorded only when cash is paid out. Because this method only tracks the actual movement of cash, it does not recognise sales made on credit (which create debtors) or purchases made on credit (which create creditors). Therefore, under the cash basis, the accounts for debtors and creditors are eliminated from the books.

Common mistake: Students often mistakenly choose 'accrual basis' because it is the system that prominently features debtors and creditors, but they misread the question which asks which basis *eliminates* them.

Revenue accounts are used to record the income a business earns from its activities. Sales, discount received, and interest received are all examples of income. Purchases, on the other hand, is an expense account because it records the cost of goods bought for the purpose of reselling them. Since purchases represent money the business spends, it is an expense, not revenue.

Common mistake: Students may mistakenly choose 'Discount received' because they associate it with paying for purchases (an expense), not realizing it is classified as 'other income' or revenue for the business.