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Financial Accounting
Study Notes
All notes follow the official WAEC and JAMB approved syllabus. Study a topic first, then take the practice quiz — after the test, come back here to see which topics you need to improve.
Double Entry & Source Documents
The foundation of all accounting — debit, credit, invoices
Books of Original Entry
Sales day book, purchases day book, cash book, journal
The Ledger & Trial Balance
Posting to ledger, extracting a trial balance, error types
Trading & P/L Account
Gross profit, net profit, cost of goods sold
Balance Sheet
Assets, liabilities, capital — structure and layout
Adjustments to Accounts
Accruals, prepayments, bad debts, provision for bad debts
Bank Reconciliation
Unpresented cheques, outstanding lodgements, bank errors
Depreciation
Straight-line, reducing balance, disposal of assets
Partnership Accounts
Capital, current accounts, goodwill, appropriation
Company Accounts
Shares, debentures, dividends, reserves
Ratio Analysis
Liquidity, profitability, efficiency ratios
Budgeting & Control
Types of budgets, variances, budgetary control
Non-Profit Organisations
Receipts & payments, income & expenditure accounts
Double Entry & Source Documents
Every financial transaction has two equal and opposite effects — one debit and one credit of the same amount. This is the foundation of all accounting.
- Debit (Dr) — Left side of an account. Records an increase in assets or expenses, or a decrease in liabilities, capital, or income.
- Credit (Cr) — Right side of an account. Records an increase in liabilities, capital, or income, or a decrease in assets or expenses.
Debit: Expenses · Assets · Drawings
Credit: Liabilities · Income · Capital
When these items INCREASE → use the side shown. When they DECREASE → use the opposite side.
| Document | What it records | Entered in |
|---|---|---|
| Invoice | Request for payment on credit purchases/sales | Sales/Purchases day book |
| Credit note | Reduction of amount owed — goods returned to supplier | Purchases returns book |
| Debit note | Increase in amount owed — charge for additional goods | Journal |
| Receipt | Proof of cash payment received | Cash book |
| Cheque counterfoil | Record of cheque issued | Cash book (bank column) |
| Bank statement | Bank's record of transactions | Bank reconciliation |
| Petty cash voucher | Authorisation and record of small cash payments | Petty cash book |
WAEC asks: "Which source document is used when goods are returned to a supplier?" Answer: Credit note (issued by the supplier to the buyer). "Which document is the book of original entry for credit purchases?" Answer: Purchases day book.
| Transaction | Debit | Credit |
|---|---|---|
| Goods purchased on credit from Ade | Purchases account | Ade's account (creditor) |
| Goods sold on credit to Bola | Bola's account (debtor) | Sales account |
| Cash received from debtor | Cash account | Debtor's account |
| Paid rent by cash | Rent account | Cash account |
| Owner introduces capital | Bank/Cash account | Capital account |
| Owner takes drawings | Drawings account | Cash/Bank account |
Books of Original Entry (Day Books)
These are books where transactions are first recorded before being posted to the ledger. They are also called books of prime entry or subsidiary books.
| Book | Records | Total posted to |
|---|---|---|
| Sales day book | All credit sales | Credit side of Sales account |
| Purchases day book | All credit purchases | Debit side of Purchases account |
| Sales returns book | Goods returned by customers | Debit side of Sales returns account |
| Purchases returns book | Goods returned to suppliers | Credit side of Purchases returns account |
| Cash book | All cash and bank receipts & payments | Is itself part of the ledger |
| Petty cash book | Small cash payments (postage, bus fare, etc.) | Various expense accounts |
| Journal (general) | Transactions that don't fit other books — opening entries, corrections, depreciation | Specific accounts as narrated |
Important: The cash book is BOTH a book of original entry AND part of the ledger. It contains a cash column and a bank column. The discount columns (allowed and received) are memoranda columns — they are NOT part of the double entry but are totalled and posted to the discount accounts.
The general journal is used for transactions not recorded in any other book:
- Opening entries when a business starts
- Correction of errors
- Depreciation entries
- Purchase or sale of fixed assets on credit
- Writing off bad debts
- Closing entries at year-end
Date Particulars Folio Dr ₦ Cr ₦
01/01 Machinery account — 500,000
Creditor (ABC Ltd) account — 500,000
Being purchase of machinery on credit
Every journal entry must have a narration (explanation starting with "Being..."). WAEC tests journal entries for opening entries, corrections and depreciation almost every year.
The Ledger & Trial Balance
The ledger is a book containing all accounts of a business. Every transaction from the books of original entry is posted to the ledger.
| Account Type | Definition | Examples |
|---|---|---|
| Personal account | Accounts of individuals or organisations | Debtors, creditors, capital account |
| Real account | Accounts for tangible assets | Land, machinery, cash, stock |
| Nominal account | Accounts for income, expenses, gains and losses | Rent, wages, sales, purchases |
CASH ACCOUNT
Dr Cr
Date Details ₦ | Date Details ₦
01/01 Capital 50,000 | 05/01 Rent 5,000
50,000 | 5,000
A trial balance is a list of all ledger account balances extracted at a point in time. Its purpose is to check the arithmetic accuracy of posting — if total debits = total credits, the trial balance agrees.
A trial balance that agrees does NOT mean there are no errors. Six errors are not revealed by a trial balance:
- Error of omission — a transaction completely left out
- Error of commission — posted to the wrong account of the same type (e.g. wrong debtor)
- Error of principle — wrong class of account used (e.g. capital treated as revenue)
- Error of original entry — wrong amount in both debit and credit
- Compensating errors — two errors that cancel each other out
- Complete reversal of entries — correct accounts, but debit and credit swapped
Errors that DO cause a trial balance to disagree: One-sided entry, posting wrong amount to one side, addition error in a ledger account, omitting a balance from the trial balance list.
Trading Account & Profit/Loss Account
The trading account calculates Gross Profit (or Gross Loss).
TRADING ACCOUNT for the year ended 31/12/2025
Dr Cr
₦ ₦
Opening stock 30,000 Sales 200,000
Purchases 120,000 Less returns (5,000)
Less returns (8,000) Net Sales 195,000
Net Purchases 112,000
Carriage inwards 3,000
145,000
Less: Closing stock (25,000)
Cost of Goods Sold 120,000
GROSS PROFIT 75,000
195,000 195,000
Key formula: Gross Profit = Net Sales − Cost of Goods Sold
Cost of Goods Sold = Opening Stock + Net Purchases + Carriage Inwards − Closing Stock
The profit & loss account takes the Gross Profit from the trading account and deducts all other operating expenses to arrive at Net Profit.
P&L ACCOUNT for the year ended 31/12/2025
Dr Cr
₦ ₦
Wages & salaries 20,000 Gross Profit b/d 75,000
Rent & rates 8,000 Discount received 2,000
Depreciation 5,000
Discount allowed 1,500
Bad debts 1,000
NET PROFIT 41,500
77,000 77,000
Net Profit formula: Net Profit = Gross Profit + Other Income − Expenses. Expenses include wages, rent, depreciation, bad debts, insurance, advertising. Always distinguish between trading items (go in the Trading Account) and non-trading expenses (go in P&L).
Balance Sheet
A balance sheet is a statement of financial position showing what a business owns (assets), what it owes (liabilities), and the owner's stake (capital) at a specific date. It is NOT an account — it does not have debit and credit sides.
| Section | Definition | Examples |
|---|---|---|
| Fixed assets | Long-term assets held for ongoing use — not for resale | Land, building, motor vehicle, machinery, equipment |
| Current assets | Short-term assets convertible to cash within 12 months | Stock, debtors, prepayments, bank, cash |
| Current liabilities | Debts payable within 12 months | Creditors, bank overdraft, accruals, tax payable |
| Long-term liabilities | Debts payable after more than 12 months | Mortgage, bank loan, debentures |
| Capital / Equity | Owner's investment in the business | Opening capital + Net profit − Drawings |
FIXED ASSETS ₦ ₦
Land and building 200,000
Motor vehicle 50,000
Less: Accumulated depreciation (10,000) 40,000
Machinery 30,000
270,000
CURRENT ASSETS
Stock (closing) 25,000
Debtors 18,000
Prepayments 2,000
Bank 10,000
Cash 1,500
56,500
LESS CURRENT LIABILITIES
Creditors 12,000
Accruals 3,000
(15,000)
NET CURRENT ASSETS (WORKING CAPITAL) 41,500
TOTAL NET ASSETS 311,500
FINANCED BY:
Capital (opening) 300,000
Add: Net profit 41,500
Less: Drawings (30,000)
CLOSING CAPITAL 311,500
Working Capital = Current Assets − Current Liabilities. This shows whether the business can meet its short-term obligations. WAEC asks for this calculation regularly. The balance sheet must always balance: Total Net Assets = Capital.
Adjustments to Accounts
| Adjustment | Definition | P&L effect | Balance Sheet |
|---|---|---|---|
| Accrued expense | Expense incurred but not yet paid (e.g. rent owing) | Add to expense in P&L | Current liability |
| Prepaid expense | Expense paid in advance for next period | Deduct from expense in P&L | Current asset |
| Bad debt written off | Debt confirmed as irrecoverable — removed from debtors | Added as expense in P&L | Reduces debtors |
| Provision for bad debts | Estimated % of debtors that may not pay | Increase in provision = expense; decrease = income | Deducted from debtors |
Rent per year = ₦12,000. Only ₦9,000 paid. Accrued rent = ₦3,000.
In P&L: Show rent as ₦12,000 (full year). In Balance Sheet: Show ₦3,000 as current liability (accruals).
Insurance paid = ₦6,000. ₦1,500 relates to next year. Prepaid = ₦1,500.
In P&L: Show insurance as ₦4,500 (₦6,000 − ₦1,500). In Balance Sheet: Show ₦1,500 as current asset (prepayments).
Provision for bad debts: If provision increases → charge difference to P&L as expense. If provision decreases → credit difference to P&L as income. Always show debtors net of provision on the balance sheet.
Bank Reconciliation Statement
The cash book bank balance and the bank statement balance often differ due to timing differences and sometimes errors. A bank reconciliation statement explains these differences.
| Reason | Definition | Effect on reconciliation |
|---|---|---|
| Unpresented cheques | Cheques issued by the business but not yet presented to the bank | Deduct from bank statement balance |
| Outstanding lodgements | Deposits recorded in cash book but not yet shown on bank statement | Add to bank statement balance |
| Bank charges/interest | Bank debits charges not in the cash book | Deduct from cash book balance |
| Standing orders / direct debits | Payments made by bank on customer's behalf — not in cash book | Deduct from cash book balance |
| Dishonoured cheques | Cheque returned unpaid — already added to cash book | Deduct from cash book balance |
| Credit transfers / RTGS | Payments received directly into bank — not in cash book | Add to cash book balance |
Bank balance per statement ₦ 45,000 Add: Outstanding lodgements + 8,000 Less: Unpresented cheques − 12,000 Adjusted bank balance 41,000 Cash book balance (before adj.) 38,000 Add: Credit transfer received + 4,000 Less: Bank charges − 800 Less: Dishonoured cheque − 200 Adjusted cash book balance 41,000 ✓
Depreciation of Fixed Assets
| Feature | Straight-Line Method | Reducing Balance Method |
|---|---|---|
| Formula | (Cost − Residual Value) ÷ Useful Life | Net Book Value × Rate % |
| Annual charge | Equal every year | Decreasing (higher in early years) |
| Best for | Assets that depreciate evenly (e.g. lease, patents) | Assets that lose value faster initially (e.g. vehicles, computers) |
Cost = ₦500,000 · Residual value = ₦50,000 · Useful life = 5 years
Annual depreciation = (500,000 − 50,000) ÷ 5 = ₦90,000 per year
Cost = ₦200,000 · Rate = 20%
Year 1: 200,000 × 20% = ₦40,000 → NBV = ₦160,000
Year 2: 160,000 × 20% = ₦32,000 → NBV = ₦128,000
Year 3: 128,000 × 20% = ₦25,600 → NBV = ₦102,400
- Dr Depreciation expense account (P&L — increases expense)
- Cr Provision for depreciation account (Balance sheet — accumulates)
Net Book Value (NBV) = Cost − Accumulated Depreciation. The NBV is shown on the balance sheet under Fixed Assets.
On disposal of an asset: Remove cost from asset account (Cr), remove accumulated depreciation (Dr provision), and record proceeds received (Dr cash/bank). The difference is a profit or loss on disposal — taken to P&L.
Partnership Accounts
- Formed by 2 to 20 persons (for trading firms — Nigerian Partnership Act)
- Partners share profits and losses according to their Partnership Agreement
- If there is no agreement, profits are shared equally (Partnership Act default)
- Each partner has a capital account (fixed contribution) and a current account (running share of profits, drawings, interest)
The appropriation account shows how the net profit of a partnership is distributed among partners.
APPROPRIATION ACCOUNT for year ended 31/12/2025
₦
Net profit b/d 120,000
Less:
Salary — Partner A 20,000
Interest on capital — A 10,000
Interest on capital — B 8,000
(38,000)
Residual profit to share 82,000
Share of profit (50:50):
Partner A 41,000
Partner B 41,000
82,000
Partner's salary and interest on capital are NOT expenses — they are appropriations of profit and appear in the appropriation account, NOT in the P&L account. Interest on drawings is charged against partners and credited to the appropriation account (increases distributable profit).
Goodwill = the value of a business's reputation, customer base, and earning capacity above the value of its tangible assets. Goodwill is recognised when a new partner is admitted or an existing partner retires.
Agreed goodwill = ₦60,000. Old partners (A and B) shared profits 3:2.
Dr Goodwill account: ₦60,000
Cr A's capital: ₦36,000 (3/5 × 60,000)
Cr B's capital: ₦24,000 (2/5 × 60,000)
(Then goodwill is usually written off in the new profit-sharing ratio)
Company Accounts & Shares
| Term | Definition |
|---|---|
| Ordinary shares | Variable dividends; carry voting rights; receive residual profit after preference shareholders |
| Preference shares | Fixed rate dividend; paid before ordinary shareholders; priority in winding up |
| Debentures | Long-term loan to the company carrying a fixed interest rate — NOT shares; debenture holders are creditors |
| Authorised share capital | Maximum share capital the company is allowed to issue (stated in Memorandum of Association) |
| Issued share capital | The portion of authorised capital actually offered to shareholders |
| Called-up capital | The portion of issued capital called for payment by shareholders |
| Paid-up capital | The portion shareholders have actually paid |
| Share premium | Amount received above the nominal value of shares — a capital reserve |
| Revenue reserves | Retained profits available for dividends — e.g. general reserve, profit and loss reserve |
Debenture interest is an EXPENSE (charged in P&L). Dividends are an appropriation (not an expense — charged after profit is calculated). WAEC and JAMB regularly test this distinction.
Ratio Analysis
| Ratio | Formula | Ideal | What it shows |
|---|---|---|---|
| Current ratio | Current Assets ÷ Current Liabilities | 2:1 | Ability to pay short-term debts |
| Quick (acid test) ratio | (Current Assets − Stock) ÷ Current Liabilities | 1:1 | Immediate liquidity (excludes stock) |
| Gross profit margin | (Gross Profit ÷ Sales) × 100 | Higher = better | % of sales that is gross profit |
| Net profit margin | (Net Profit ÷ Sales) × 100 | Higher = better | % of sales that is net profit |
| ROCE | (Net Profit ÷ Capital Employed) × 100 | Higher = better | Return on capital invested |
| Stock turnover (times) | Cost of Goods Sold ÷ Average Stock | Higher = better | How fast stock is sold and replaced |
| Debtor collection period | (Debtors ÷ Credit Sales) × 365 | Lower = better | Days taken to collect from debtors |
| Creditor payment period | (Creditors ÷ Credit Purchases) × 365 | Longer = better for business | Days taken to pay creditors |
Quick ratio excludes stock because stock is the least liquid current asset. A quick ratio below 1 means the business cannot pay its immediate debts without selling stock — a warning sign of liquidity problems.
Budgeting & Budgetary Control
| Budget Type | Definition |
|---|---|
| Sales budget | Forecasts expected sales revenue — usually the starting point; drives all other budgets |
| Production budget | Plans units to be produced based on sales forecast and stock levels |
| Cash budget | Shows expected cash inflows and outflows — helps predict surplus or overdraft needs |
| Capital expenditure budget | Plans purchase of long-term assets (machinery, vehicles, property) |
| Master budget | Summary of all budgets — includes budgeted P&L and balance sheet |
| Fixed budget | Prepared for one level of activity — does not adjust when actual activity differs |
| Flexible budget | Adjusted to reflect the actual level of activity achieved |
| Zero-based budget | Every item of expenditure must be fully justified from scratch — no automatic carry-forward |
A variance is the difference between the actual figure and the budgeted figure.
| Variance | Meaning | Example |
|---|---|---|
| Favourable (F) | Actual result is BETTER than budgeted — actual revenue higher, or actual cost lower | Budget: ₦50k revenue; Actual: ₦55k revenue → ₦5k Favourable |
| Adverse (A) | Actual result is WORSE than budgeted — actual revenue lower, or actual cost higher | Budget: ₦30k wages; Actual: ₦35k wages → ₦5k Adverse |
WAEC frequently asks: "Distinguish between a fixed budget and a flexible budget." and "What is zero-based budgeting?" Also: "State TWO advantages of budgetary control." Advantages include: forces planning, controls expenditure, motivates managers, coordinates departments.
Non-Profit Organisations (Clubs & Societies)
| Account | Definition | Equivalent in businesses |
|---|---|---|
| Receipts & Payments Account | Summary of ALL cash received and ALL cash paid during the period — both capital and revenue | Cash book summary |
| Income & Expenditure Account | Shows only revenue income and expenditure — calculates surplus (profit) or deficit (loss) | Profit & Loss Account |
| Accumulated Fund | The equivalent of capital in a non-profit organisation | Capital/Owner's equity |
| Surplus | When income exceeds expenditure (the equivalent of profit) | Net Profit |
| Deficit | When expenditure exceeds income (the equivalent of a loss) | Net Loss |
Receipts & Payments vs Income & Expenditure: R&P is CASH BASED — it includes everything received and paid, including capital items. I&E is ACCRUALS BASED — it excludes capital items and includes adjustments for accruals, prepayments and depreciation. WAEC loves this distinction.
Subscriptions (membership fees) must be adjusted for the correct accounting period. Use the T-account approach:
Dr Cr
Subscriptions in advance b/d 500 | Cash received 18,000
I&E Account (income for year) 17,000 | Subscriptions owing b/d 500
Subscriptions owing c/d 500 | Subscriptions in advance c/d 500
18,000 | 18,000
The I&E account shows income for the current year only — regardless of when cash was received. Subscriptions paid in advance (for next year) are a current liability. Subscriptions owing (for this year but unpaid) are a current asset.
You've now covered all major WAEC and JAMB Financial Accounting topics. Take the 60-question timed CBT practice to see your score and get a personalised breakdown by section.