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ORG

UPDATED TO 2020-22 SYLLABUS

CAIE IGCSE
ACCOUNTING
(0452)
SUMMARIZED NOTES ON THE THEORY SYLLABUS
CAIE IGCSE ACCOUNTING (0452)

Capital or Owner’s Equity is the amount the business owes

to its owner. When a business begins operation, the
1. Preface owner of the business invests capital, which can be any
resource such as:
The following are short forms used in the notes. Note that Cash
these
short forms will not be accepted in examinations Bank or cash equivalents o Motor vehicles
and no marks will
be awarded for their usage: Inventory (the stock of goods).
Assets are things/resources the business owns or are
Short Form Full Form owed to the business.
Statement of financial position/ balance At times a business can borrow money from an entity
SOFP/BS
sheet which is not the owner of the business. The business now
BRS Bank reconciliation statement has a liability and is liable to pay for the item borrowed.
PNL Profit and loss a/c An increase in liabilities results in an increase in assets,
for e.g. cash if borrowed increases the cash in hand, but
IS Income statement
also increases the amount the business owes to other
Dep. Depreciation entities. This is the duality concept.
MCB Main cash book Thus, the accounting equation is derived:
PCB Petty cash book ASSETS = CAPITAL + LIABILITIES
TB Trial balance
SPOG Selling price of goods 2.3. Profits and losses
COS Cost of Sales
The aim of business is to make a profit. This is calculated
P Purchases
in the financial statements which are usually prepared at
the end of a financial year.
The only accepted short forms are: Profits = Income - Expenses
A business can also make a loss wherein the expenses
A/C Account
are greater than the income. Loss= negative profit.
b/d Brought down By measuring the profit and loss of a business, one can:
c/d Carried down. Understand the progress of the business
Contra- only for use in ledgers- Not structured Use ratios and compare the profit of a business to
C
answers. other figures in the financial statements to get a more
comprehensive view of the business’ progress.
Ticks refer to (optional, but recommended) markings a Compare the progress of the business to the progress
candidate will
make to ensure the requirements of the of similar businesses.
question have been satisfied. Comparing the business to itself from year to year
Some of the accounts shown do not contain all the Base the business’ future and make decisions based
columns and
details required in an examination. They just of the profit/loss figure.
show relevant details.
All details will be required in the
question unless mentioned.
Date should be written in full (including day, month and
3. Sources and Recording of
year)
unless instructed otherwise.
Data
2. The Purpose of Accounting 3.1. Double Entry bookkeeping:
2.1. Bookkeeping vs. Accounting The double entry system of bookkeeping involves giving
two effects to each business transaction, one which debits
Bookkeeping: A process of detailed recording of all the to the A/C receiving and the other which credits where the
financial transactions of a business. amount is being deducted.
Accounting: Accounting uses the bookkeeping records to The rules of double-entry bookkeeping are:
prepare
financial statements at regular intervals. Debit the receiver, Credit the giver.
Debit what comes in, Credit what goes out.
Debit the expense, Credit the income.
2.2. Assets, Capital and Liabilities
Day-to-day transactions are recorded using the double-
entry bookkeeping system.
Profit is the return received by the owner for their
Ledgers are used to record financial transactions and
investment of capital.
their format is as follows:

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CAIE IGCSE ACCOUNTING (0452)

Ledger (T) Format: Uses: Customer records Cr purchase & Supplier

records Cr sales.
Date Details $ Date Details $ Dr note
xxx Contents: Name & address of supplier & customer,
date, full details & quantities (sometimes prices) of
goods returned or overcharged
Sales, for cash 100 dollars: Dr Cash A/C for 100 (as cash
is the receiving A/C) and Cr Sales A/C for 100 (as sales is Issued when: Goods not satisfactory, Wrong goods etc.
responsible for/giving the cash). Issued by the supplier or customer
Notes: Customer checks goods & invoice for
Purchases of goods 150 dollars (on credit): Dr Purchases
overcharge/ Wrong goods, etc. When the price is
A/C for 100 and Cr Seller’s A/C for 100.
included, it is always less trade discount.
Crediting the seller’s A/C creates a liability as now the
Uses: Communication medium | No entries made,
business has obligation to pay for the goods.
Drawings (assets taken by the owner of a business for however, sometimes they are issued in-place of a
rectified invoice
their personal use, out of the business) of goods 50
Cr Note
dollars. Dr Drawings and Cr Purchases, both with 50. The
Contents: Name & address of the supplier &
drawings increase and the goods decrease.
Payment of 150 dollars (through bank) to Seller for goods customer, date, full details, quantities & prices of
goods returned or overcharged
bought earlier: Credit Bank A/C for 150 and Dr Seller’s A/C
Issued when: Faulty goods/ overcharged goods. Issued
for 150. o Now there is no outstanding balance on the
by the supplier
seller’s A/C, as the debit is equal to the credit.
Notes: Sometimes printed in red/any other color to
When an A/C of a person or another business is
maintained, and has a Dr Balance, the business is owed distinguish between an invoice
money by that entity and vice versa as shown in the Uses: Customer records returns outwards & supplier
record returns inwards.
example.
Statement of A/C
Sales of 60 dollars to B dawg (on credit): Cr Sales A/C
and Dr B Dawg A/C. Contents: Name & address of supplier & customer,
An A/C which is a liability to the business due to date, balance owing at the start of the period, invoices
regular trading is known as a trade creditor/trade & Cr notes issued, payments received, any cash
discounts allowed, balance owing at the end of the
payables/ creditor.
period.
An A/C which is an asset (because the entity owes money
to the business, it’s almost as good as having the money) Issued when: At the end of each month, by a supplier.
due to regular trading is known as a trade debtor/ trade Given to each customer.
receivables/Debtor. Notes: Contains summary of all transactions.
Uses: No one makes any entries. Reminder to the
Balancing a ledger at the end of the month:
customer of Amount Outstanding & can also be used
The debit and credit columns are individually totalled.
The difference is noted. If the debit side is heavier to check for errors for both.
Cheque
than the credit side, then the difference is entered as
Contents: Pre-printed details. Date, amount & payee
a credit entry (Balance c/d) and vice versa.
have to be filled.
Total the debit and credit columns and write them.
Issued when: Payment through bank.
If the balance c/d was Dr, then the balance b/d will be
Cr, and vice versa. Notes: Used to pay pre-stated sum to payee. Comes in
The balance c/d entry is done on the last day of the a book of pre-printed cheques (Issued by the bank)
Uses: Supplier: Counterfoil of paying-in slip used to
month and the balance b/d entry is made on the
make entry in cash book & for discount allowed.
first day of the next month.
Customer: Makes uses of the cheque counterfoil to
make cash book entry & discount received.
3.2. Business Documents Receipt
Issued when: Goods sold by cash, and not when by
Invoice cheque (the cheque acts as one)
Contents: The name & address of the supplier &
Uses: Proof of payment
customer, the date. Full details, quantities & the prices
of goods sold
Issued when: Goods on credit are sold by the supplier. 3.3. Prime books of entry
Can also be issued when goods are sold in for
cheque/cash Prime books of entry are listing devices which help to
Notes: Trade discount is shown as being deducted remove a lot of detail from the ledgers. It also means that
whereas it is mentioned that cash discount is only bookkeeping can be divided between several people.
They are also called books of original entry/subsidiary
allowed if the invoice is paid within a time limit.
books.

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CAIE IGCSE ACCOUNTING (0452)

Transactions are recorded here before being recorded in General

Prime Book Format Notes:
the ledgers. Description
The cash book & the petty cash book are both ledgers & Written up
prime books of entries.
using invoices
Trade discount does not appear in the ledger A/C; it may
from
be shown in the prime books. The value of the goods Date-Name- suppliers.The
bought reduces. A list of the
Invoice no.- supplier’s A/C
There are 7 books of prime entry: names of
Purchases Folio- is
Sales Journal businesses
Journal/ AmountThe simultaneously
Sales returns Journal from which
Purchases book/ invoice credited with
Purchases journal Cr purchases
Purchases day number invoice
Purchases returns Journal have been
book pertains to totals.The total
Cash Book made, value
the invoice is posted into
Petty Cash Book & date.
received the purchase
General Journal
A/C as total Cr
purchases of
Sales and Sales returns Journal
month.

General Written up
Prime Book Format Notes: using Cr notes
Description
from
The Dr entry is
suppliers.The
made in the Date-Name-
Suppliers A/C
debtor’s ledger Purchases Cr Note
A list of is
A/C as the Returns Number-
names of simultaneously
sales are Journal/Purchase Folio-
Date-Name- businesses debited with
recorded in returns AmountThe
Invoice whom goods the total from
A list of A/Cs the journal book/Returns credit note
Number- have been the Cr note.At
Sales to which Cr with the total outwards number
Folio-Amount returned to, the end of the
Journal/Sales sales were of the book/Returns pertains to
($)The invoice value & date month, the
book/sales day made, their invoiceAt the outwards journal the credit
number total (from the
book values & the end of the note received
pertains to journal) is
dates month, the
the invoice posted in the
sales A/C is
issued purchases
credited with
returns A/C.
the total of the
sales journal
as total credit Cash Book
sales of month
In practice, it is common to have the cash A/C & bank A/C
Written up shown side by side in what is called a cash book. This book
using copies of is moved away from the ledger; however, this still follows
Date-Name-
Cr notesThe Cr the double entry system of bookkeeping. Certain
Cr Note
A list of the entries are businesses maintain a 3-column cash book where there is
Number-
Sales names of the simultaneously an added cash discount column on the Dr & the Cr side.
Folio-
Returns/Returns businesses, made into the They are both ledgers as well as prime books of entries
AmountThe
inwards the value of customer’s
credit note
book/returns goods A/C.At the end Two Column Cash Book:
number
inwards journal returned & of the month, Date Details Cash $ Bank $ Date Details Cash $ Bank $
pertains to
date the totals will xxx xxx xxx xxx
the credit
be posted to
note issued
the sales Three Column Cash Book:
returns A/C.
Discount Cash Bank Discount Cash
Date Details Date Details B
Allowed $ $ Received $
Purchases and Purchases returns Journal
xxx xxx xxx

General
Prime Book Format Notes: Credit transactions are not shown in the cash book.
Description

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CAIE IGCSE ACCOUNTING (0452)

Contra Entries: withdrawal of cash/deposition of cash. The The journal or general journal is used whatever is not
Cash column can never have a Cr balance as it is a entered into any other book of prime entry before they
physical quantity, i.e. it can either be nil or it has a Dr are recorded in the ledgers.
Balance. However, the bank column can have a Cr A journal entry shows:
balance; this is known as a bank overdraft wherein the The date of the transaction
bank allows one to pay more than their bank balance is & The A/C name to be debited and credited and the
then charges interest on the sum (most of the times-in respective amounts
practicality). A Cr balance on the bank column of the cash A narrative: a short description of what is being
book represents a liability. recorded and why it is being recorded. E.g. capital of
Discount allowed/Cash Discount: Discount a business $1000 cash invested.
allows to its Cr customers to encourage faster payment When a business begins operation, or begins recording its
(within a set time span). This is an expense incurred by financial transactions, there are opening journal entries
the business in-order to have debts settled promptly. that made made to record the investment of capital, any
However, this is not shown on the receipt. liabilities the business has etc. These items are then
The discount columns are not a part of the double-entry posted into the ledger accounts.
system, they are used for convenience. At the end of the General Guidelines:
trading periods, their totals are taken are carried to their Show the debit entries first.
respective A/C s (Dr Entries for discount allowed & Cr Slightly indent credit entries in the details column.
entries for discount received). This represents the double Draw a line after each separate entry and its narrative
entry for all the individual debits in the creditors & credits if required (only in the details column)
in the debtors. The purchase and sales of non-current assets are not
If a cheque is dishonoured (There is a problem with the recorded in any other book of prime entry, so they are
cheque or there is an insufficient balance in the debtor’s recorded in the general journal and then posted into the
A/C, etc.), the reverse entry of that has to be made when ledger A/C (s).
the cheque was deposited & the debtor or payee will have Any sales made on cash or for a cheque will be recorded
to be informed that the amount is unpaid. in the cash book & then in the purchases A/C.
Credit sales is recorded in the sales journal and debtor’s
Petty Cash Book A/C when the sale was made. The total is transferred to
the sales A/C as total credit sales for month. The total of
Businesses maintain a petty cash book (as to not record the cash sales is also transferred to the sales ledger from
small cash payments in the cash book & ledgers) That the cash book at the end of the month.
records any low value transactions. It lists the Sales Returns if for cash are recorded in the sales A/C
transactions to be transferred to the ledger A/C & also (end of month) and cash book during the transaction.
acts as the ledger A/C for these petty cash transactions. Returns on goods bought for credit is entered in the sales
General working of a petty cash system: A junior cashier returns journal and debtor’s A/C at the date of the
is given a float amount so that the chief cashier focuses transaction and the total is posted to the sales returns A/C
on more important transactions. They (chief cashier) at the end of the month as “total credit sales returns of
regularly checks the work of the junior cashier. When month”
some petty cash is to be obtained, a petty cash voucher is There will be 2 effects in the ledger from all the books of
given to the petty cashier. (this show: purpose, date & prime entry other than the cash book & petty cash book,
signature of receiving person). These are used to check where there will only be one effect (as they are also
against the petty cash spent. ledgers).
The imprest system: Petty cash expenditure is made from
the float/imprest amt. The imprest amount stays constant Date Details Debit Credit
(but can be altered). After the balancing of the petty cash xxx xxx
book, the chief cashier will restore the imprest. This
enables the chief cashier to know exactly how much petty
cash has been spent. 3.4. The Ledger

Petty Cash Book Format Ledgers are divided based on the types of accounts they
contain, this is done so that several people can bookkeep
Total Total simultaneously, i.e. Work can be distributed (the same
Cost 1 Cost 2 Ledger applies for books of prime entries).
Received Date Details Paid
(Stationery) (Transport) A/Cs
$ $
Ledger General Description/Contents
xxx xxx xxx xxx xxx
Sales Ledger Debtors Ledger
Purchases Ledger Creditors Ledger
General Journal

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CAIE IGCSE ACCOUNTING (0452)

Ledger General Description/Contents assets at their cost prices can be misleading and lead to
Real A/C s (assets) & nominal A/C s overstating a businesses’ profit which can lead to more
Nominal Ledger being drawn by the owner than the business can afford.
(income, expenses & capital)
Land does not generally depreciate unless it is a mine or a
Cash book MCB & PCB
well wherein something is drawn from the land (it’s then
called Depletion), buildings do depreciate.
4. Accounting Procedures The purchase of a non-current asset is a part of capital
expenditure, which is why the entire cost of the non-
current asset is not charged as an expense the year it is
4.1. Capital and Revenue Expenditure purchase as it helps the business for several years. The
capital expenditure is thus matched (by estimating)
The purchase of a non-current asset is regarded as against the sales, i.e. the cost of the non-current asset is
capital expenditure; thus, its cost is not recorded in the spread over the years which benefit from the use of that
purchases ledger, but a non-current assets A/C. The asset.
entire cost of the non-current asset is not charged as an The principle of prudence is also applied where the non-
expense the year it is purchased, as it helps the business current asset is shown at its net book value in the
for several years. The capital expenditure is thus matched SOFP/BS, thus overriding the principle of historical cost.
(by estimating) against the sales, i.e. the cost of the non- Depreciation can be caused by Physical deterioration
current asset is spread over the years which benefit from and/or Economic or other reasons and/or the passage of
the use of that asset. This is known as depreciation and is time.
revenue expenditure. There are several methods of depreciation, the most
The capital expenditure includes: The cost of the NCA, appropriate one (which spreads cost fairly) must be used,
legal costs incurred for the purchase of the NCA, carriage but used consistently. Refer to TABLE 4 for the different
on the NCA and installation fees. methods of depreciation.
Because the income statement is made including revenue
expenditure, recording capital expenditure as revenue Method: Formulae/ Additional info. Notes:
expenditure will understate the profit and understate the The formula gives
NCA (thus giving effect to the accounting equation) and us a constant vale
vice versa. that has to be
Revenue expenditure is the cost incurred by running the deducted from the
business on a day-to-day basis. E.g. repairs on any non- Straight line asset per
current asset, general expenses, cost of public transport, method of annum.The
etc. These are matched against the revenue receipt in the depreciation/ Costof asset−Residualvalue depreciation value
‎Numberof expectedyearsof use
income statement. fixed and percentage
​

instalment stays constant.The

Capital and Revenue Receipt method. value of the asset
can fall to nil if
Capital receipt is the income from sales of NCA. This there is no
should not be entered in the IS, but any profit or loss estimated residual
incurred from the sale of an NCA should be included in value.
the Income statement.
The receipt from disposal of non-current assets is
regarded as capital receipt; it is recorded in the disposal
of non-current asset(s) A/C, not the sales A/C.
Revenue receipt: The income from the running of the
business, such as commission received, rent received,
sales, etc.

4.2. Depreciation
Depreciation is a year-end adjustment that reduces the
value of non-current assets with time, i.e. it is an estimate
of the loss in value of a non-current asset over its
expected working life.
Non-current/fixed assets depreciate with time as they are
used, and depreciation is the loss in their value, this is an
application of the principle of prudence as showing these

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CAIE IGCSE ACCOUNTING (0452)

Method: Formulae/ Additional info. Notes: Date Details $ Date Details $

This method is used when Year 1 Balance b/d xxx Year 1 Balance xxx
the greater benefits from Bank A/C xxx
The amount of
the use of the asset have xxx xxx
depreciation
been gained in the earlier
reduces each year, Year 2 Balance b/d xxx Year 2 Balance c/d xxx
years of its life (the
but the percentage xxx xxx
Reducing depreciation amount
stays constant as
Balance reduces).This method is Year 3 Balance b/d xxx Asset disposal A/C xxx
depreciation is
method of used when assets Balance c/d xxx
calculated on the
depreciation/ become obsolete xxx xxx
net book value/
diminishing quickly.Any residual value
written down Year 4 Balance b/d xxx
balance is taken into
value.The value of
method of consideration when the
the asset can Provision for depreciation A/C format:
depreciation depreciation percentage
never fall to nil as
is decided.The
the depreciation is Date Details $ Date Details $
depreciation amounts are
always calculated Year 1 Year 1
expressed in whole
from the NBV
dollars and thus are Dec 31 Balance c/d xxx Dec 31 Income statement xxx
rounded off. Year 2 Year 2
The assets are valued at Dec 31 Balance c/d xxx Jan 1 Balance b/d xxx
the end of each financial This method of Dec 31 Income Statement xxx
year, and the amount is depreciation is
xxx xxx
compared with the NBV of used when it is
Revaluation the previous financial impractical/difficult Year 3 Year 3
method of year (or cost- if first year to keep detailed Dec 31 Balance c/d xxx Jan 1 Balance b/d xxx
depreciation of ownership)The amount records regarding Dec 31 Income Statement xxx
by which the value of the certain non- xxx xxx
asset falls is the current assets, e.g.
Year 4
depreciation for that Loose tools etc.
financial year Jan 1 Balance b/d xxx

Factors to be considered when choosing a method of Asset Disposal A/C format:

depreciation are:
Life expectancy Details $ Details $
Residual value Equipment (cost) xxx Provision for depreciation xxx
Estimated benefit from the use of the asset. Income statement xxx Bank xxx
If the straight-line method of depreciation has been used, Income statement xxx
the dep. Amt. stays constant.
xxx xxx
It is a business’ choice whether to start depreciating the
asset from the date of purchase, for example, only a
Just as entries are made in the ledger A/C s for
proportion of the dep. may be charged (annual dep. /12*
depreciation and the sale of an NCA, the similar entries
months of ownership till financial year end) OR it may be
will be entered in the prime books (specifically the
decided to ignore the date of purchase and record a full
general/nominal journal)
year of depreciation or not depreciate it in the year of
purchase at all. The same applies for the sale of a non-
current asset. 4.3. Other payables and receivables
When the revaluation method of depreciation is used, no
provision for dep. A/C is created, the same (asset) A/C is Often, adjustments are made in the financial statements
used to calculate dep. to present a more accurate view of the profit/loss of a
Depreciation reduces the net profit of the year when it is business, these adjustments are known as year-end
debited into the IS from the provision for dep. adjustments.
In the SOFP the dep. to date (which is the accumulated In practice, it is common to find expenses or income paid
dep. up till this financial year + depreciation for this year) in one financial year, but which relates to other financial
is subtracted from the cost price to become the NBV years.
(which thus reduces year by year). Only items relating to the specified time-period should be
included in the income statement: the timing of the actual
Asset A/C format:

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CAIE IGCSE ACCOUNTING (0452)

receipts and payments is not relevant. This is a practical

Expense Account Format:
application of the accruals principle.
It is necessary to adjust the income statement with
Date Details $ Date Details $
regards to amounts prepaid or accrued. This results in a
more accurate profit/loss figure and therefore more Balance b/d(advance Balance b/d(arrears
xxx xxx
meaningful comparisons can be made between financial previous year) previous year)
statements of different years and businesses Bank A/C(paid during Income
xxx xxx
Accrued: an amount due in an accounting period which the year) Statement(transfer)
remains unpaid till the end of that period Balance c/d
Balance c/d(arrears
When an expense is accrued, it means that some benefit xxx (advance current xxx
current year)
or service has been received during the accounting year
period, but this benefit or service has not been paid for by xxx xxx
the end of the period.
Balance b/d xxx Balance b/d xxx
Prepaid expenses: A prepayment is an amount paid in
advance. When an expense is prepaid, it means that a
payment has been made during the financial year for 4.4. Inventory Valuation
some benefits or services to be received in a future
accounting period. Inventory must be valued at the end of the financial year.
Outstanding amount is add to the respective expense and It is
done at whichever is the lower between cost and net
prepaid is subtracted from that expense realisable
value.
Wherever several expenses are accrued, a collective The cost of inventory includes: Actual price + additional
figure is often showed in-place of posting individual costs
(like Carriage inwards or costs that bring the
figures. inventory to its
current position)
For Expenses to be paid (due)/ Accrued expenses: Total The net realisable value is the estimated receipt from the
expenses incurred in the trading period (including ones sale of
the stock/inventory.
not going to be paid for in this year, but have been Generally, the net realisable value > cost of inventory
incurred)- expenses to be paid for (opening Cr balance) = The examination will require a simple statement to be
Amount To be transferred to IS. made from
basic datalike the one on the next page.
Accrued Income: Where an item of income is accrued it ABC business (Valuation of inventory at DD/MM/YYY)
means a person receiving a benefit or service from the Type X- 50 units at 10 dollars per unit - $500
business during the accounting period has not paid for it Type Y- 30 units at 5 dollars per unit - $150
by the end of the period. = $650
Prepaid income: Where an item of income is prepaid, it
means that a person has paid for a benefit or service 4.5. Irrecoverable Debts and Provision
from the business, but this has not been provided by the
business at the end of the financial year. The principle of for Doubtful Debts
accruals is applied to prepaid income, thus any amount
for which the legal title of the goods or services have not When goods are sold on credit, in real practice 100% of all
been passed on to the buyer has to be deducted from the these debts are not recovered. An amount not paid by the
total income transferred to the IS and shown as a liability debtor is known as a bad debt. There is always a risk of
in the SOFP/BS. this happening; this could be due the debtor being unable
to pay, them dying etc. If all means of recovering the debt
have been tried in vain, then the debt is written off. Their
Income Account Format: A/C is closed by crediting their A/C with the amount owing
and debiting a bad debts A/C. At the end of the year, this
Date Details $ Date Details $ amt. is transferred to the IS as a loss/expense.
Balance Writing off such debts is an application of prudence, thus
Balance b/d(arrears
xxx b/d(advance xxx not overstating one’s profit (by not overestimating their
previous year)
previous year) assets).
Income Bank A/C(received Bad debts recovered: If a debtor pays some/all of their
xxx xxx
Statement(transfer) during the year) debt after it is written off, the cash book is debited, and
Balance bad debts recovered A/C is credited with the amt. (s).
Balance c/d (advance paid. Alternatively, the debt can be reinstated by
xxx c/d(arrears current xxx
current year reversing the entry when it was written off, and then
year)
debiting the cash book and crediting the debtor’s A/C.
xxx xxx
If no names and dates have been provided, the entry in
Balance b/d xxx Balance b/d xxx the bad debts A/C could be stated as “debtors written off”
on the last day of the accounting period.

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CAIE IGCSE ACCOUNTING (0452)

The only definite way of avoiding bad debts is by not Date Details $ Date Details $
selling goods on credit, which is not practical. Practical Income Statement
methods of reducing the chance of bad debts are: Year 1 Year 1 Balance b/d
(if PDD is xxx xxx
obtaining credit references from banks and other Dec 31 Jan 1 (previous year)
reduced)
suppliers for a potential debtor, fixing a credit limit per
Income
debtor. The debts are monitored over time. This is known Balance c/d
Statement
as credit control. Invoices and month end statements Year 1 (current Year 1
(balancing xxx
should be issued along with letters to notify debtors of any Dec 31 year/balancing Dec 31
amounts outstanding. Legal action can be taken, but is too figure/created
figure)
during the year)
expensive and does not justify the funds recoverable.
Going by the principle of prudence, businesses estimate Income
the amounts lost due to possible bad debts, which also Year 1 Statement (if
aligns with the principle of accruals (estimated bad debts Dec 31 PDD is
from sales, are recorded in the year the sales are made, increased)
rather than the year the debts are actually written off). xxx xxx
This shows the assets of the business at a more realistic Year 2
value. Balance b/d xxx
Jan 1
The amount to be estimated can done so by: estimating
this amount per debtor based on their A/C’s individual
debts/transactions; estimating the amounts based on past 5. Accounting Principles
experience of a debtor and devising a percentage of
debts estimated which won’t be paid; using an aging
schedule and assigning a higher percentage on older 5.1. Accounting Principles
debts and vice versa (based on the logic that older debts
are more unlikely to be paid than newer ones. In totality, a Business Entity/Accounting entity and ownership
percentage can be set too, for e.g. 5% of the total trade The owner of a business is regarded as being
receivables). This is generally given in an examination. completely separate from the business and vice versa
Creating a provision for doubtful debts: The personal assets, spending, liabilities etc. Of the
Dr IS and Cr provision for doubtful debts A/C owner do not appear in the accounting records of the
In the BS/SOFP deduct the balance in the provision for business and vice versa. Every (financial) transaction
doubtful debts A/C from the trade receivables. is recorded from the view point of the business
In the IS the bad debts are showed along with the If a transaction involves both the owner and the
provision for doubtful debts as expenses, and in the business, it involves either the capital A/C or the
BS/SOFP the deduction of the provision for doubtful debts drawings A/C or the current A/C
is shown (on the total trade receivables which is already Duality/Dual aspect
less any bad debts) Every (financial) transaction has 2 aspects- a giving
The provision for doubtful debts may have to be changed and a receiving.
if for example (if a percentage of debts is taken) the debts Applied in the double entry system of bookkeeping
have increased/decreased or if an amount has been set Money measurement
for whatsoever reason and has to be changed. This Only info. Which can be expressed in terms of money
adjustment is made at the end of the financial year. can be recorded in the accounting records.
Adjusting a provision for doubtful debts: Several aspects of a business such as staff expertise,
If the provision has to be increased, then subtract it in the morale of the workforce, the release of a
the IS with the difference, and vice versa for a competitor product etc. Will not be shown in the
decrease. accounting records as its value cannot be given a
In the BS/SOFP deduct the new provision for doubtful concrete monetary value.
debts from the total trade receivables Money is a traditionally recognized unit of measuring
the value of an item/ transaction. It is factual and not
Only the amount increased or decreased (on the provision for based on personal opinions
doubtful debts) is shown in the IS as the rest has been Realization
accounted for in previous accounting years/periods. If the A profit should not be recorded before it is earned, i.e.
amount is decreased, then the difference is recorded in the Profit is only recorded when the legal title of goods or
Income Statement as decrease/reduction in provision for services passes on from the seller to the buyer (who is
doubtful debts as a form of income and vice versa for an obliged to pay for them).
increase. The confirmation of the buying of goods doesn’t really
mean anything as the legal title of the goods hasn’t yet
Provision for Doubtful Debts format: changed from the seller to the buyer (No transfer of
goods)

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This principle is even followed if goods are sold on Cr 20, Insurance paid =
and the customer hasn’t made a payment- The 300, T hereforeinsurancepertainingtothecurren
transaction will still be recorded as income) 300(paid) - 40(prepaid)− 20 (for the previous
Going Concern accounting period)
It is assumed that the business will continue to Extension of the principle of realization; includes other
operate for an indefinite period of time and that there expenses and other income.
is no intention to close down the business or reduce its Prudence
size by a considerable amount Ensures the accounting records present a realistic
The accounting records of a business are always picture of the business.
maintained on the basis of assumed continuity. Non- Profits and assets should not be overstated. Liabilities
current assets will be shown at their NBV (cost less and expenses should not be understated and all
depreciation) and not a possibly quasi-realistic possible losses should be accounted for appropriately
estimate. Inventory will be valued at a price lower than (provision for doubtful debts is maintained)Profit
its cost / net realizable value should only be recognized once all possible losses are
If it is expected that the business will cease to operate accounted for.
in the near future, all asset values on SOFP can be Prudence precedes all principles; bad debts are
adjusted towards their market values thus these written off after a certain period, even though the
values become more meaningful than their book income is realized. Provisions are made for
values depreciation and possible bad debts.
Historical cost Materiality
All assets and expenses are recorded in the ledger Items of low value (low cost NCA or what comes under
accounts at their actual cost. sundry expenses for e.g.) are either grouped or
At times a more prudent approach is taken whenever recorded in ways where other principles may be
applying this Principle, thus depreciating the value of ignored
non-current assets thus bringing the value closer to a Immaterial non-current assets which cost more to
net realizable value account for spreading over their cost over their useful
Applying this principle makes it difficult to compare life are recorded as expenses. E.g. Inventories of
financial transactions due to inflation. Prudence office supplies are not considered in the financial
precedes Historical Cost, always. statements as they are considered immaterial
Accounting Period A large business which operates on a global scale
Because reports are required at regular intervals, the might not record the purchase of a laptop as capital
life of a business is divided into accounting periods- expenditure although it is clearly a NCA), but sole
usually years. traders will.
Useful comparisons can be made with the business
itself over time. The total expenses of a period will be
5.2. Accounting Policies
transferred to the income statement. Balances at the
end of a trading period (amounts which do not pertain
Policies set up by the IAS (International Accounting
to the specific financial year) are carried down to
Standards)
regulate how international accounting records
become the opening balance of the next trading
are maintained.
period.
Accounting policies and principles are selected based on:
According to going concern, the business should
Relevance: financial information is relevant only if it
operate forever, so to prepare financial statements,
affects the business decisions, as they are the base of
it’s lifetime is divided into years
further
decisions that will be taken. Information in
Consistency
financial
statements can be used to alter or reconfirm
When a choice of method is available, if one is chosen
future
expectations, set future goals etc and thus must
(with the most realistic outcome), it must be followed
be relevant
throughout the coming accounting periods.
Reliability: financial information is reliable only if it
can
The reducing balance method of dep. For e.g. is
be depended upon to represent actual events and is
consistently used to depreciate delivery vans
free from
error and bias. Financial statements must
A comparison of financial statements from one
be capable of being
independently verifiable and free
accounting period to the next will be made difficult if
from any significant errors.
Whenever judgments or
this principle is not followed.
estimates are being made, suitable caution
must be
Accruals/Matching
taken.
The revenue of a period is matched against the
Understandability: financial reports must be capable
corresponding expenses pertaining to the period
of
being understood by the users of that report (who
Example: Insurance is prepaid for 2 months at the end
are assumed to
have basic accounting knowledge). No
of the accounting period (
information should be
omitted from the financial
40intotal).Atthestartofthesameaccountingperiodinsurancedue =

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statements because it is thought to

be too difficult to Details Dr $ Cr $
understand. Drawings xxx
Comparability: a financial report can only be
xxx xxx
effectively
compared with reports for other periods of
the same or similar
businesses if similarities and
Closing inventory is not shown in the trial balance.
differences can be identified.
The differences in
The Trial balance is useful in locating arithmetic errors,
policies must be identified to make valid
comparisons
but cannot guarantee an error free ledger. It is also useful
in preparing financial statements. If the Dr & Cr columns
6. Verification of Accounting totals tally, then the ledgers are arithmetically correct.

Records Errors the trial balance cannot detect:

Name Description of entries made
Correct amount, correct side,
6.1. The Trial Balance Error of commission
but wrong A/C of correct class
Correct amount, correct A/C,
It is a statement which is prepared to check the Error of complete reversal
but wrong side of each A/C
arithmetical accuracy of ledger accounts.
As mentioned, a transaction has one Dr effect and one Cr Transaction completely omitted
Error of omission
effect equal in amount, therefore all the total debits from the ledgers
should equal the total credits. Incorrect figure used for both
Error of original entry
It shows that the total Dr balance = the total Cr balance. entries
The Trial Balance is a statement of ledger balances on a Correct amount, correct side,
Error of Principle
particular date but wrong class of A/C
How A/C (s) are shown in the trial balance: Two or more errors cancel each
If the debit side of an A/C has greater value than the Compensating errors
other out
credit side, then the difference is recorded as a debit
balance
A trial balance may not always tally. This might be
If the credit side of an A/C has greater value than the
because:
debit side, then the difference is recorded as a credit
An error of addition within the TB
balance
An error of addition in the ledger A/C s
Double-entry figures differ
Accounts that normally have Accounts that normally have
An only a single entry made instead of a double entry
Dr balances (EAD) Cr balances (CLIP)
Both entries made in the same side of the ledger
Assets Liabilities To locate errors:
Expenses Incomes Check TB and ledger balance addition
Drawings Capital Check that ledger A/C balance is entered on the
Purchases Sales correct side (Dr or Cr)
Sales Returns (E) Purchase Returns Check that every ledger A/C balance is entered in the
trial balance
Look for a transaction equal to the difference in the
It is not a part of the double-entry system.
totals of the TB & check for its double entry.
Look for a transaction that is equal to half the
Trial Balance for the year ended….
difference & then check whether it has been entered
on the same side twice.
Details Dr $ Cr $
Check the double entry for each transaction after the
All assets xxx
previous trial balance was made (last resort).
All liabilities xxx Practical Tip: If the difference in the totals of the TB is
All expenses xxx perfectly divisible by 9, then check if an amount has been
All income xxx entered without a zero (e.g. If 99 has been entered as
Any provision xxx debit instead of 990, the difference 891 can be divided by
9 perfectly giving 99. Thus, any transactions with the value
Sales xxx
99 can be located and rectified)
Purchase xxx
Sales returns xxx
6.2. Correction of errors
Purchase return xxx
Capital xxx If the trial balance does not tally, and not errors are
immediately identifiable, a suspense A/C is prepared by

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making an entry to balance the trial balance (by inserting (difference due to the clearance period.) and certain other
the difference). Thus, Draft financial statements can be items are not included in certain A/C (s)
prepared. As and when errors are found, they are Items in cash book not in bank statement:
corrected through journal entries. Cheques not yet presented
The correction of these errors is made through the Amounts not yet credited
general/nominal journal. E.g. Cash Sales of $50 was not Errors in cash book (to be corrected)
credited in the cash book Entry in Journal Items in bank statement but not in cash book:
Bank charges and bank interests
Date Details Debit Credit Dishonoured cheque(s)
23/02/12 Suspense A/C……….Dr 50 Standing order (an instruction to a bank by an account
Sales A/C 50 holder to make regular fixed payments to a person or
organisation)
Half entry made for sales, now
Credit transfer (a wire transfers)
corrected
Direct Debits (an arrangement made with a bank that
allows a third party to transfer money from a person's
Errors which do not affect the tallying of the trial balance
account on agreed dates, typically to pay bills)
(commission, compensating, complete reversal, original
Errors in bank statement (to be corrected)
entry, omission and principle) are also corrected through
To compare the cash book with the bank statement, the
the journal by making the appropriate debits and credit s
credit side of the bank statement is compared to the debit
to reverse the error and make the correct entry. E.g. Cash
side of the cash book, as these transactions are recorded
Sales of 250 dollars recorded as Credit sales for B Dawg.
from opposite points of views. A tick is placed against
Correction would be : Debit- 250- Cash book, Credit - 250
transactions that match up.
B Dawg A/C Narrative: Cash sales mistakenly recorded as
The cash book is then updated with items not in it and in
credit sales, now rectified.
the bank statement (obviously excluding errors)
In the exam, a full journal entry would have to be made
Items debited in the bank statement but not credited in
like in the previous example.
the cash book
In the preparation of draft financial statements, if the
Charges, credit transfers paid into the bank, standing
difference on the suspense A/C is a debit balance, it is
orders, dishonoured cheques etc.
recorded in the SOFP as an asset and a liability if the
Items credited on the bank statement but not debited in
suspense A/C has a credit balance.
the cash book
As corrections are made, the profit might be affected. If
Credit transfers and direct debits paid into the bank,
any item affects the trading section of the IS, then both
etc.
the gross and net profit are affected, but if an item affects
Preparing a bank reconciliation statement:
only the PNL, it will affect only the Net Profit.
Match up the debit side of the statement with the
To amend the profits, a statement of corrected profit is
credit side of the bank account and credit side of the
made.
statement with the debit side of the bank account.
If expenses have been omitted, profit for the year will
CHECK FOR ANY TOTALLING ERRORS ETC.
decrease with the correction and vice versa for income.
Correct any errors in the cash book and balance and
Correcting the profit for the year also means the SOFP is
carry down the balance (this balance should appear
also altered. The needed changes will also have to be
on the SOFP if it is the last day of the financial year and
made to all appropriate sections of the SOFP. If the
is the amount the bank statement’s balance has to be
expenses have increased, then the profit will decrease
reconciled to.
etc. Basic concepts will have to be applied in correcting
Prepare the BRS
profit.
USE PARENTHESIS OVER AMOUNTS THAT HAVE A
CREDIT BALANCE
6.3. Bank Reconciliation CHECK THE STARTING BALANCES OF THE BANK
STATEMENT AND BANK ACCOUNT FOR ANY
A bank statement is a statement of account equivalent DISCREPANCIES.
issued by the bank to a business showing the bank If errors are present in the bank statement correct
transactions pertaining to a particular period. It is the them in the BRS.
opposite of the business’ bank account in the business’ Advantages of Bank Reconciliation:
ledger (debit will be credit and vice versa.) It’s basically a An accurate bank balance is obtained (after updating)
copy of the customer’s account in the bank’s ledger. Errors in the bank account and bank statement can be
If the two balances (on the bank statement and the bank identified and corrected.
a/c) don’t match, it is necessary to reconcile them to Helps in discovering fraud and embezzlement (theft or
explain why there is difference. misappropriation of funds placed in one's trust or
There is generally always a difference, as the business belonging to one's employer).
and the bank don’t record transactions at the same time

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Amounts not credited and cheque(s) not yet presented The opposite balances are not netted out. They are shown
can be identified. separately with the credit balance showing amounts
Any ‘stale’ cheque(s) can be identified (older than 6 owing to and debit balances showing amounts owed to
months) and written back into the bank account. the business.

6.4. Control A/C(s) Sales Ledger Control Account Format:

Control A/C are ledger A/Cs that represent all the Dates Details $ Dates Details $
individual debtors’ and creditors’ A/Cs in a trade Balance b/d xxx Balance b/d xxx
receivables control A/C and a trade payables control A/C. Sales xxx Bank/Cash xxx
The trade receivables control A/C contains the total Bank (Dishonored
balance of trade payables at a given date. xxx Discount Allowed xxx
Cheque)
The trade receivables control A/C contains the total
Bank/Cash
balance of trade receivables at a given date. This is xxx Sales Returns xxx
(refunds)
checked about every month, and if it does not agree
either there is an error in the control A/C or in the Interest charged xxx Bad debts xxx
debtors’/creditors’ A/C Contra/Set-off
If the trial balance does not tally/balance, and errors are (transfer to xxx
not readily located, the accounting records will have to be purchase ledger)
checked which is very time consuming. This process can Balance c/d xxx
be made faster if sales and purchases ledger control xxx xxx
A/C(s) are prepared. They individually contain the total
Balance b/d xxx
trade receivables and payables that are recorded from
the prime books. They thus act as a check on these A/C (s)
To prepare a sales ledger control account is obtained
These however, can only check arithmetical accuracy.
from the books of prime entry.
Errors of omission and commission will not be revealed.
When a full set of accounting records are maintained, it is
Item Source
usual to also prepare a sales and purchases ledger
Sales Sales Journal
control A/C for the following reasons:
Help with the locating of errors when the TB does not Sales returns Sales return journal
tally. Cash and cheques received from
Cash book
Proof of arithmetical accuracy of the ledgers they debtors
control. Discount allowed to debtors Cash book
Draft financial statements can quickly be prepared Dishonored cheques Cash book
because theses A/C(s) show the total amt. directly.
Refunds to debtors Cash book
Help reduce fraud as the maker of these A/C(s) are
not the same as the maker of the ledgers for the Bad debts written off Journal
particular A/C (s) Interest charged on overdue
Journal
They provide a summary of the transactions affecting accounts
the debtor and creditors for each period.
Note: the control A/C(s) are not a part of the double-entry Purchases Ledger Control Account:
system of bookkeeping.
Purchases Ledger Control A/C = Total Trade Payables A/C Dates Details $ Dates Details $
Sales Ledger Control A/C = Total Trade Receivables A/C Balance b/d xxx Balance b/d xxx
These A/C(s) only show the debtors and creditors that
Cash/Bank xxx Credit Purchases xxx
arise from the regular trading of the business.
Balances on both sides of a control A/C can be present if: Discount received xxx Interest charged xxx
Bank/Cash
Overpayment by a debtor Overpayment to a creditor Purchase returns xxx (refunds from xxx
Debtor returns good after Returning goods to the trade payables)
paying the account creditor after paying the A/C Contra/Set-off \n
Debtor pays in advance of the Paying the creditor in advance (transfer to xxx
goods for the goods purchase ledger)
Cash discount not being Balance c/d xxx
Cash discount not being
informed of before payment xxx xxx
informed about before
was made and then full Balance b/d xxx
payment being made.
payment made.

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To prepare a purchase ledger control account is obtained The income statement (PNL and Trading A/C) should have
from the books of prime entry. a heading regarding the financial year/period covered
and the name of the business trading.
Item Source
Purchases Purchases journal Income Statement format:
Purchases returns Purchases returns journal
Details $ $ $
Cash and cheques paid to
Cash book Revenue xxx
creditors
Discount received from Less: Sales returns xxx xxx
Cash book
creditors Less: COGS
Refunds from creditors Cash book Opening Inventory xxx
Interest charged on overdue Net Purchases xxx
Journal
accounts Carriage Inwards xxx
Closing Inventory (xxx) (xxx)
Contra entries in Control A/C(s): Inter ledger transfers are
GROSS PROFIT xxx
made to show businesses setting off their debts in the case if
Add: Income xxx
both businesses trade with each other. There are 2 ledger
A/C(s) made for such businesses one in the debtor’s ledger Less: Pre-paid income (xxx)
and one in the creditors’ ledger. Setting off their A/C (s) is Add: Outstanding income xxx xxx
preferred over both businesses sending a cheque to each Total xxx
other as now only one check is sent across
Less: Expenses xxx
E.g. Trader A owes Trader B 10 dollars, and Trader B Add: Outstanding xxx
owes Trader A 5 dollars. Traders A and B will set off their Less: Prepaid (xxx) xxx (xxx)
A/C(s) and the net figure of 5 dollars is paid by Trader A PROFIT/LOSS FOR THE YEAR xxx

7. Financial Statements of 7.2. Statement of Financial Position

Sole Trader The statement of financial position of a business on a
certain date and shows the assets of a business as being
equal to its capital plus any other liabilities (amount owed
7.1. Income Statement i.e. The assets show how the resources are being used
and the liabilities show where these resources come
To find out the result of their business transactions, the
from.
sole trade will prepare:
Income statement
Balance sheet Format
Statement of Financial Position
These are prepared at the end of the financial year to
Balance sheet as at….
know the profit/loss and the value of assets and liabilities
at a particular date. Details Cost Dep NBV
Income statement:
Non Current Assets:
Trading section
Profit/Loss section Premises xxx (xxx) xxx
Trading A/C is concerned with buying and selling goods, Land xxx (xxx) xxx
calculates gross profit (Rev- COS). Building xxx (xxx) xxx
Revenue = net sales (Sales less returns) Motor vehicle xxx (xxx) xxx
COS= total cost of goods only sold, i.e. Not always all
Equipment etc. xxx (xxx) xxx
the goods bought.
COS= OI+P-CI [Opening inventory + (net purchases, xxx
less any additional purchases drawings and/or Current Assets:
returns)– Closing inventory] Closing Inventory xxx
P(net)= Purchases - Purchases Returns + Carriage Account Receivable/Trade receivables xxx
inwards- goods for own use.
(-)Allowances for doubtful debts (xxx) xxx
NOTE: Cash discount/discount allowed and discount
Cash at bank xxx
received will not be included in the trading A/C as they
arise from the early payment of debts, and are not Cash in hand xxx
sales related. Prepayment xxx xxx

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Details Cost Dep NBV business has made a loss.

Total Assets/Closing capital xxx When the business makes a profit, it is added to the
capital as the amount owed by the business increases and
Financed by: thus it can be concluded that a profit is an increase in net
Capital xxx assets (capital)
Net profit xxx
(-)Drawing (xxx) xxx 7.3. Service business
Current liabilities:
A service business is one which doesn’t buy and sell goods
Account payable/Trade payable xxx
The financial statements of a service business still need to
Bank over draft xxx be prepared with the difference only income statement as
Accrued expenses xxx xxx only the profit/loss section is prepared with no trading
Long term liabilities: section
Format:
Bank loan xxx
Debenture xxx Details $ $
Long-term loan xxx Commission/Fees/Rent Received xxx
xxx Add: Income xxx
Add outstanding, Less Prepaid xxx xxx
Non-current liabilities are those which are not due in the
xxx
next 12 months (E.g.: long term loans)
Current liabilities are short term ones (due within the next Less: Expenses xxx
12 months) and arise from the regular trading activities of Add Outstanding, Less prepaid xxx xxx
the business whose values constantly change (E.g. trade PROFIT/LOSS FOR THE YEAR xxx
payables)
Assets and liabilities are arranged in different groups:
Assets are divided into current (Values are constantly 8. Financial Statements of
changing, short term assets which arise from the
regular trading of the business, E.g.: Inventory) and Partnerships
non-current assets (long term assets which are not
used for resale but help the business earn revenue.
8.1. Partnerships
E.g.: Motor Vehicles)
Non-current assets are listed in order of increasing
A partnership is a business in which 2 or more (max. 20 –
liquidity (liquid= least permanent) (The ability to be
normal) people come together and work with the view of
converted into cash), typically: Land and buildings,
making profits.
Machinery, Fixtures and equipment and motor
Several professionals such as accountants and solicitors
vehicles.
come together to form a partnership. This is common
Current assets are also listed in order of increasing
amongst family businesses. At times sole traders expand
liquidity (furthest away from cash shown first),
by amalgamating their businesses.
typically: Inventory, Trade receivables, Other
An additional account is made- the profit and loss
receivables, Bank, Cash. Trade receivables are said to
appropriation A/C, which shows how the profit for the year
be more liquid as compared to the inventory as they
or loss for the year is shared between the partners
can be sold to other businesses.
Partnership businesses:
Current and Non-current liabilities appear in
ascending order of which liability will have to be paid Advantages Disadvantages
first. Note: Other payables will appear after trade
Additional finance Profits have to shared
payables.
A SOFP should have the heading to the date to which it Additional knowledge, Decisions have to be
relates and must include the trading name of the experience and skill recognized by all partners
business. One partner’s decision affects
Responsibilities are shared
After all the financial statements are prepared every item all other partners.
on the trial balance must have one effect (either IS or All partners responsible for
Discussions before decision
SOFP) on the financial statements and additional notes the debts of the business
will have 2 effects on the financial statements (one on the
IS and the other on the SOFP) Most partnerships draw up a partnership agreement. Not
The balance of the capital A/C will increase in the SOFP if legally required, but it helps prevent misunderstandings
the business has made a profit or decrease if the and arguments in the future. It’s clauses cover aspects of

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the business like : Capital invested per partner, sharing of The profit for the year is taken, interest on drawings is
profits or loss, interest on capital invested, salaries of added, and interest on capital is deducted, salaries to
partners, possible upper limit on drawings, interest on partners are deducted and any other items are included
drawings, interest on partners loan to company. as appropriate. The final amount after the appropriation
Money is borrowed from a partner for a particular span of (residual profit) is shared.
time if necessary; note this is NOT a part of capital. It is Format:
treated exactly like a normal loan, just that its interest (if
accrued) can be recorded in the current A/C of the Net Profit before adjustment xxx
partner instead of a separate liability A/C. If the interest is Interest on drawing
paid it is recorded in a regular interest on loan A/C Partner A xxx
The capital A/C prepared in a partnership A/C can either
Partner B xxx xxx
have 2 or more sections for the partners, or several
xxx
A/C(s) can be prepared. These capital A/Cs refer to fixed
capital A/Cs. For other entries involving partners a Interest on capital
separate current A/C and drawings A/C is made. Partner A xxx
Partner B xxx (xxx)
8.2. Capital and Current A/C xxx
Salaries
Current Account Format: Partner A xxx
Partner B xxx (xxx)
Date Details A $ B $ Date Details A$B$
Net Profit after adjustment xxx
1 Balance  b/d xxx xxx 1 Balance b/d xxx xxx
Interest on Interest on
31 xxx xxx xxx xxx
drawing capital 9. Financial Statements of
31 Drawing xxx xxx Interest on loan
31 Balance c/d xxx xxx Salaries xxx xxx Limited Companies
Profit Share xxx xxx
A limited company is a business which is a separate legal
xxx xxx xxx xxx
entity from its owners (shareholders) and whose liability
for the company is limited to the value of shares they
8.3. Income Statement hold.
A limited company can be formed as a new business or a
It is the same as sole trader sole trader or partnership can be converted into a limited
company for expansion purposes.
Statement of Financial Position (SOFP) The capital of a limited company is divided into units
called shares and the face value of the share(s) is the
Format: extent to which the shareholders are liable for the debts
Statement of financial position at….. of the company.
Details Y Z $ Through shares a large amount of capital can be raised.
Profits are distributed as dividends which are stated as a
Capital Accounts xxx xxx xxx
percentage of the face values of the shares.
Current Accounts There are 2 kinds of shares:
Opening balance xxx xxx
Salary xxx Preference Shares Ordinary/ Equity shares

Interest on loan xxx xxx Fixed rate of dividend Dividend depends on profit

Shares of profit xxx xxx Fixed rate and amount of Variable rate and amount of
dividend dividend
xxx xxx
Dividend is always paid, but if Dividend can be paid. If profits
Drawings (xxx) (xxx)
profit does not allow, will be allow for high dividend- paid,
Interest on drawings (xxx) (xxx) paid in the future when else even no divided is
xxx xxx xxx sufficient funds available. possible
xxx Holders have some
Preference is given to these involvement in the running of
8.4. Profit and loss appropriation A/C shares when it comes to the business and can vote at
dividend payment shareholder’s meetings at
one vote paid share.

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CAIE IGCSE ACCOUNTING (0452)

Preference Shares Ordinary/ Equity shares Mostly, all the profit made by a limited company is not
Holders have minimal given out as dividend, any even if it is intended to do so, it
involvement in running of the may not be possible, as not enough cash maybe in hand
Included in the profit and loss or assets in a liquid form etc.
company and are usually not
appropriation A/C If any dividend or interest on debentures accrues, it is
entitled to vote at
shown in the statement of financial position as a current
shareholder’s meetings.
liability.
Included in the PNL (Income
Whatever profit is not distributed and/or put into a
Statement)
general reserve (to plough back profits to aid further
growth) will be transferred to the retained profit and is
All the shareholders cannot be involved in the day-to-day shown in the SOFP under reserves which is added to the
decision making of a company, so a board of directors
share capital.
(elected), CEO Etc. are hired. Any legal action against the The capital section of the statement of financial position
company is against the company itself and not its
of a limited company includes the share capital, reserves
members. (e.g. general reserve, retained profits refer to funds
Earlier, when a business was formed a maximum (limit) of
ploughed back over the years, etc) under the heading
capital issued had to be stated - authorised share capital. Capital and Reserves.
Share capital issued is called issued share capital (this is
The total of these values = Shareholder’s fund.
the value of the shares issued). More can be issued at a
later stage whenever required.
A company may not require the full value of the called-up
9.2. Income Statement
capital and may only require a fraction of it (if a share is
Limited company income statement format:
worth 1 dollar, the company may only call up 0.50 dollars
per share). If more capital is required, it can be “called Details $
up”. Since some shareholders may not pay the called-up Revenue xxx
capital per share, the actual called up capital received is Cost of sales (xxx)
known as the paid-up capital. Gross profit xxx
A company might raise additional funds by issuing
Administrative expenses (xxx)
debentures (loan capital) or loan notes, where through
small loans, several thousands of dollars may be raised. Distribution expenses (xxx)
They carry a fixed rate of interest and are given Profit from operations xxx
preference over all payments including the payment of Finance cost (xxx)
dividends on preference shares. Interest on Debentures Profit for the year xxx
are included in the income statement. Debentures
holders are not members of the company nor do they own
any part of the company and do not have voting rights at 9.3. Statement of Changes in Equity
shareholders meetings. If a company dissolves, the
liabilities and debenture holders are repaid first, then the Format:
preference shareholders are paid after which ordinary
shareholders are paid Ordinary Preference
General Retained
Limited companies are required to publish a statement of share share Total
reserve earnings
changes in equity, some may prepare a profit and loss capital capital
appropriation A/C. Details $ $ $ $ $
A statement of changes in equity is like the capital section Balance (date
of a statement of financial position, which changes over at beginning xxx xxx xxx xxx xxx
time. It shows the reserves and any transfers made from of year)
the retained profits to the general reserve for e.g.
Profit for the
Proposed dividend is not included in the books of xxx xxx
year
accounts.
Interim ordinary dividend might be paid during the year, Dividends
(xxx) (xxx)
as this is already paid, it is shown in the SOFP at the end of paid
the financial year. Transfer to
If it is known that a certain dividend is paid per year in general xxx (xxx) ---
total, for e.g.: 5000 dollars. If the interim ordinary dividend reserve
paid is 3000 dollars, then 2000 dollars ( 5000− 3000) is Balance(date
declared as the proposed ordinary share dividend and at end of xxx xxx xxx xxx xxx
included in statement of financial position. year)

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9.4. Statement of Financial Position Business Clubs and Societies/ Non- Trading
Terminology: Organisations Terminology:
Format: Profit for the year
Surplus
Statement of financial position at…… (Net profit)
Details $ $ $ Loss for the year
Deficit
Cost Dep NBV (Net loss)
Non-current assets xxx (xxx) (xxx)
A surplus is the excess of income over expenditure
Current assets whereas a deficit is the excess of expenditure over
Inventory xxx income. The principles used to prepare a profit and loss
Trade receivables xxx A/C are like those applied when preparing an income and
Other receivables xxx expenditure A/C.
If any fund-raising activity like a competition is conducted,
Bank xxx xxx
it is important to set off the income against the
Total assets xxx
expenditure for that activity in the income and
Equity expenditure A/C.
Issued share capital xxx Subscriptions owing or prepaid can be included under
other receivables and other payables respectively and an
Ordinary Shares xxx
appropriate note should be included.
General reserve xxx
To correctly match the expenses against the income, the
Retained earnings xxx subscriptions relating to a particular time frame must be
Total equity xxx included in the income and expenditure A/C. A
Non-current liabilities subscription’s A/C is prepared to calculate this figure.
There could be 2 balances on this A/C as some members
Debentures xxx
might have paid for their subscriptions in advance and
Current liabilities some have not yet done so. They need to be kept a track
Trade payables xxx of individually.
Other payables xxx xxx
xxx 10.1. Subscription A/C format
Details $ Details $
10. Clubs and Societies Balance b/d (Outstanding Balance b/d (Advance
xxx xxx
previous year) previous year)
Certain organisations are non-trading, such as clubs, or
Income for current year
societies. Their main objective is not to make a profit, but Receipts during the year
(Income & Expenditure xxx xxx
to provide facilities to its members. (Bank A/c)
A/c)
The main source of income for these organisations is
Closing balance c/d Balance c/d (Outstanding
subscriptions (usually an annual payment to the xxx xxx
(Advance current year) current year)
organisation for the usage of facilities provided). A
treasurer is assigned who manages all of this and pays xxx xxx
the money owing to external entities and collects money Balance b/d
Balance b/d(subscriptions
owing to the organisation. xxx (subscriptions received in xxx
due)
Terminology in the Financial Statements and Accounting advance)
Records:

Business Clubs and Societies/ Non- Trading 10.2. Receipts and Payments A/C
Terminology: Organisations Terminology:
The receipts and payments A/C mostly does not
Summary of cash
Receipts and Payments A/C differentiate between cash and bank transactions. For the
and bank book
most part it is exactly like a cash book. Note: The balances
Trading A/C Trading A/C on the A/C can either mean just cash, just bank or both. A
Income and expenditure A/C (will only credit balance brought down means an overdraft.
have the contents: Income and Receipts and Payments A/C Format
Profit and loss A/C
Expenditure. There will be no other
income/expenses here.) Receipts Payments
Balance Details $ Details $
Balance Sheet/SOFP
Sheet/SOFP Opening Balance b/d xxx Expenses xxx

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Receipts Payments The balance sheet of a club or society is very similar to

that of a business; however, capital does not exist. This is
Purchase of non-current
Members subscription xxx xxx because members of a club or society do not invest
assets
money and draw out funds the same way a proprietor of
Donations xxx Closing balance c/d xxx
business does. Any surplus is accumulated to form the
Receipts from activities xxx capital fund known as the accumulated fund. Similarly, a
Proceeds from the sales deficit decreases this fund.
xxx
of non-current assets Just as in a business Assets= capital + liabilities, in a club
xxx xxx of society: Assets= Accumulated funds + Liabilities.
Balance c/d xxx
Details $ $
Assets:
The receipts and payments A/C only shows funds received
or payed, it does not show the actual income or expenses xxx
for the financial period. These will have to be calculated xxx
with adequate information. xxx xxx
Clubs and societies trade. Those that do, do not regard it
Less: Liabilities:
as their main source of income. They maintain a separate
xxx
income statement (only the trading A/C section) for each
of these activities. The wages of shop attendants, xxx (xxx)
depreciation on café equipment etc. Any profit or loss Accumulated Fund xxx
from these activities is transferred to the income and
expenditure A/C under other income/ expenses.
11. Manufacturing Businesses
10.3. Income and Expenditure A/C
Certain businesses don’t just buy and sell goods, there are
also manufacturing businesses, like a textile
Income and expenditure account format:
manufacturer who make clothes.
Income and expenditure acc for the year ended……. The double entry records for these businesses will be like
that of a trading business. Additionally, there will be a
Details $ $ $
manufacturing A/C, which is used to calculate the cost
Income
involved for the business to manufacture goods it has
Members Subscriptions xxx produced in a particular financial year.
Profit on café xxx Types of inventory:
Sports Competition Raw Materials
Work in Progress
Sale of tickets xxx
Finished Goods
(-)Competition prizes (xxx)
xxx
11.2. Manufacturing A/C
Donations xxx
Profit on disposal of non-current asset xxx Manufacturing A/c is prepared, in order to know the cost
xxx of production of finished goods using the formula:
Expenditure Prime Cost + Factory Overheads
Prime Cost = Direct Material + Direct Labour + Direct
Expenses xxx
Expenses
Depreciation of non-current assets
Calculation of unit cost: if a manufacturer makes one
Loss on social evening identical product, its unit cost can be calculated by the
Sales of tickets xxx U nitCost
formula:
Costof Production ​

(-)expenses (xxx)
xxx Manufacturing A/C Format
Loss on disposal of non-current asset xxx
Details $ $
xxx
Opening Stock of Raw Material xxx
Surplus for year xxx
Purchase of Raw material xxx
xxx
10.4. Statement of Affairs Closing Stock of Raw Material (xxx) xxx
Cost of Raw material consumed xxx

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Details $ $ Details $ $
Direct expenses xxx
Factory wages xxx
Machine hire etc
Prime cost
xxx xxx
xxx
12. Incomplete Records
Machine repairs xxx Certain businesses do not maintain a full set of double
Machine depreciation xxx entry bookkeeping records (for example small
Factory rent and property taxes xxx businesses). No trial balance can be drawn up for them
and some preparatory calculations are required before
Insurance xxx
they can start preparing their financial statements.
Heat and light xxx Under single entry system, none of the aspects (Dr. or Cr.)
Indirect factory wages and salaries etc xxx of the financial transaction are recorded, one of the
Total indirect cost xxx aspects are recorded or both the aspects are recorded
Cost of production xxx When a list of assets and liabilities is prepared without
any double entry bookkeeping, it is known as a statement
of affairs which is like a balance sheet.
11.3. Income Statement & SOFP
Income statement format:
12.2. Why is the single entry system
used?
Detail $ $
Revenue xxx Usually small businesses don’t maintain complete records
of accounting books such as sole traders, partnerships
(-)returns inwards (xxx)
Business which are not supposed to compulsorily
xxx maintain financial statement by law generally adopt single
Opening inventory of the finished goods xxx entry system
Add cost of production xxx Since maintenance of books of accounts involves lot of
Purchases of finished goods xxx accounting knowledge and manual work, businesses
xxx prefer to not maintain complete books
Cheaper as number of books is less and
(-)Less closing inventory of finished goods (xxx)
accountant/clerk/cashier need not be appointed
Cost of sales of finished goods (xxx)
Gross profit xxx 12.3. Capital Account Format
Add other income xxx
xxx Date Details $ Date Details $

(-)Expenses: Year 1Dec 31 Drawing xxx Year 1Jan 1 Balance b/d xxx

Administration expenses xxx Balance c/d xxx Jan 1 Bank xxx

Distribution expenses xxx Profit ?

Financial costs xxx xxx xxx

Selling expenses xxx Year 2Jan 1 Balance b/d xxx

Depreciation of non-factory non-current

xxx To calculate profit, a capital A/C can be made to account
assets
for any changes in capital through (for example:
(xxx) drawings) and then the difference in capital is taken as
Profit for the year xxx either the profit or loss. Doing this however will not give
any information about the gross profit, sales etc. No
Statement of financial position format: analysis can take place (Analysis will help with taking
informed future decisions). So, this is one drawback
Details $ $ involved.
CURRENT ASSETS Profit = Closing Capital + Drawings - Additional Capital -
Opening Capital
Inventories
At times a business is able to provide some information
Raw materials xxx about money received and paid etc. In addition to assets
Work in progress xxx and liabilities which can make it possible to calculate
Finished goods xxx sales, purchases and expenses. Therefore, a full set of

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financial statements can be made after some

13.2. Accounting Ratios
calculations.
The amount paid to the creditors is not always going to be Definitions:
equal to the purchases figure and the same applies for
Working Capital: Current Assets- Current Liabilities.
the sales figure which relative to the amount received
Capital Owned: Capital (in the accounting equation).
from debtors for obvious reasons such as goods being
Amount
owed by a business to the owner of that
bought from the previous year, good that have not yet
business on a certain
date
been paid for etc. Capital Employed: Capital + Non- current liabilities (In
Credit Sales = Total Sales - Cash Sales or Prepare a sales
the
accounting equation). Total funds used by a
ledger control A/C
business.
Credit purchases = Total Purchases - Cash Purchases or
ASSETS = CAPITAL + LIABILITIES
Prepare a purchases ledger control A/C
Gross Prof it A − C L = C + NC L = C apital Employed
Mark-up: Cost Of  Sales * 100
CL- Current Liabilities
​

Gross Prof it
Margin: Revenue * 100 ​
NCL- Non-Current Liabilities
The rate of inventory turnover is the number of times a C- Capital
business replaces its inventory in a given period of time Profitability Ratios:
Gross Prof it
and is also given by the formula: Cost Of  Sales * 100 ​
ROCE: Returnoncapitalemployed =
Netprof it(prof itf ortheyear)
where average inventory is Capitalemployed ​ X100
Opening inventory + Closing inventory
2 ​
Relates profit for the year to the capital employed.
Stolen Cash = Prepare a cash book Return on investments. Shows how efficiently
Depreciation = Apply revaluation method capital is used.
Net profit as a percentage of the capital employed,
therefore is comparison. Profit per $100 (without
13. Analysis and percentage sign) invested
Improve: Increase selling price of goods. Buy
Interpretation cheaper goods. Invest lesser capital, or pull out
unnecessary funds.
13.1. Inter firm comparisons Worsen: Increasing trade discount Selling goods at
cheaper prices Not passing on increased costs to
Comparing the accounting ratios of one business to customers. Increased running costs
Grossprof it
another gives valuable results, however, this has to be Grossprofitmargin : Sales(Revenue) x100
​

done carefully, as there are certain limitations. Gross profit as a percentage of turnover. The
Businesses should compare themselves to other similar higher the return the more profitable the business
businesses. is.
When making comparisons, remember that: Gross profit as a percentage of sales Gross profit /
Businesses apply different accounting policies (e.g. gain per $100 of sales relative to only sales factors
depreciation) Improve: Increase selling price of goods. Buy
Different operating policies may be in place, such as cheaper goods.
renting, funding from loans, etc. Which affect the SOFP Worsen: Increasing trade discount. Selling goods
and the Profit for the year. at cheaper prices. Not passing on increased costs
Non-monetary information is not shown on the to customers
financial statements, (e.g. Staff expertise, skill of the N etprofitmargin : Netprof it(prof itf ortheyear)
x100
Sales(revenue) ​

labourers, etc.), but is very important.

Return on $100 worth of sales. Indicates how well a
Not all the information about a business can be found
business is controlling its expenses
on the financial statements (age of NCA, avg.
Net profit as a percentage of sales. Represents
inventory) these can also be used for comparisons,
what percentage of sales is being actually kept for
but are not on the financial statements.
the business. The actual return seen (in most
Trends in the patterns of other businesses may not be
cases) on $100 worth of sales. Affected by change
observable, as the financial statements may not be
in gross profit margin
available for other years.
Improve: Increase selling price of goods. Buy
Not all accounting years are typical.
cheaper goods. Reduce running expenses
Year-end dates for businesses vary, so influenced
Worsen: Increasing trade discount. Selling goods
factors may be different (e.g. low inventory of air
at cheaper prices. Not passing increased costs to
conditioners in the winter)
customers. Increasing expenditure
Accounting records are not altered with inflation.
Liquidity Ratios:

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Current Ratio/Working capital ratio: Current Assets : Worsen: Lower sales (higher inventory levels)Over-
(is to) current liabilities purchasing inventory, very high selling prices,
Compares relatively liquid assets that can be falling demand, inefficiency and slowing activity.
exchanged into cash within the next 12 months Collection period for trade receivables:‎
with the values of Liabilities which are due for T rade receivables
Credit sales ​ ×X
short term payment. Where X= 365 for CP in days, X= 52 for CP in weeks, X=
Measures the ability of a business to meet its 12 for CP in months. Also called trade
liabilities when due. Ratios between 1.5:1 to 2:1 are receivables/sales ratio
satisfactory. Having a lot of current assets as Trade receivables to sales ratio. Average time for
compared to current liabilities, for e.g. (14:1) can debtors to pay their A/C(s)
mean poor allocation of money. When a business If trade receivables = credit sales, then one year
doesn’t have an adequate working capital, it should be collection period as sales were made in
generally cannot pay off due liabilities, has one year. The length of time taken to actually pay
difficulties obtaining further credit supplies (due to should be compared to this. The longer a business
low credit-worthiness), cannot take advantage of will have to wait, the more likely it will become a
cash discounts or business opportunities when bad debt. The collection period varies from year to
they arise. year and a decrease means credit control works
Improve: Introduce more capital. Obtain non- efficiently
current loans. Sell surplus NCA. Sell off goods (if at Improve: Improve credit control policy. Offer cash
a profit)Reduce drawings by owner or reduce discount for early payment. Charge interest on
dividends overdue A/C(s)Refuse to supply, until debt is paid.
Worsen: Buying more goods on credit. Buying NCA Invoice discounting or debt factoring can be
Quick ratio/acid test ratio: Current Assets less done(Factoring and Invoice Discounting are both
inventory: (is to) current liabilities financial services that can release the funds tied
Compares the current assets of a business minus up in your unpaid invoices, involving a provider
its inventory to the current liabilities of the who agrees to advance money against outstanding
business. This is done as inventory is considered to debtor balances. A debt factor will maintain the
not be liquid. sales ledger, collect debts and pay the business.
Compares the assets that can easily converted to They chase the debtors for repayment. A
cash to the liabilities of the business. Inventory is 2 discounter will pay for certain debts in advance,
stages away from being money, first it has to be but will not maintain the sales ledger. Both
sold, then the debt is to be collected. A ratio of 1:1 services are chargeable.)
is regarded as satisfactory as all (current) Worsen: Not following up on debt collection, etc
liabilities can immediately be paid with liquid T rade payables
Payment period for trade payables: Credit purchases ​ ×
assets. Similar to current ratio. Higher than 1:1 is X
considered to be poor management of liquid
Where X= 365 for PP in days, X= 52 for PP in weeks, X=
assets. 12 for PP in months Also called trade payables/
Improve: Introduce more capital. Obtain non-
purchases ratio.
current loans. Sell surplus NCA. Reduce drawings
Average time taken to pay the creditors A/C(s)
by owner or reduce dividends. Sell off inventory
Should be compared with the term of credit
even if not profitable (if cash seriously required)
allowed by the creditors. If it increases, it means
Worsen: Buying more goods. Buying NCA. Buying
that the business if failing to pay/is short of
goods for cash
immediate funds. If debtors are not settling their
Rate of inventory turnover/ inventory turn:‎( Cost of
A/C(s) it can get difficult for the business to settle
sales) / (Average inventory) ‎= no. of times inventory is
their own A/C(s).
sold and replaced in the given period‎( Average
Additional Info: Taking longer to pay off one’s debts
inventory / Cost of sales)*365‎= no. of days on avg.
means that one can use its funds for other
inventory is held before being sold
purposes, but can also lead to the supplier
The quicker the rate of inventory turnover, the
refusing future credit and or goods, a lower credit
lesser time funds are frozen in inventory, which is
score, loss of cash discount and damage to the
the least liquid CA
existing relationship.
If average inventory= COS, then it will take one
year to sell these goods, so *365 days= 1 year.
COS = total inventory sold in year, therefore it 13.3. Users of Accounting Statements
divided by avg. inventory gives no. of times
Internal users
inventory is replaced
Improve: Sell more goods Owners: monitoring performance and progress.
Gauge
profitability.

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Prospective shareholders will look at investment

13.4. Limitations of financial statements
ratios
(investment ratios not a part of the syllabus)
Managers: Same reasons as owners, just that the
Accounting statements have their limitations, as they
business is
managed by an employee, not the owner.
cannot
comprehensively cover every aspect of a business.
External users:
They are thus
limited by:
Bank manager: To know whether loans or overdrafts
Time (Historic Cost): The past cannot be used to
can be
granted, to see if the business has enough
properly
predict the future. The financial position of
funds to pay up. the business
changes from the time the accounting
Other Lenders: To see if repayment can be made.
year ends to when financial
statements are prepared
Creditors/Trade payables (present and potential): To
(as it still operates)
determine
the credit limit allowed and the length of
Accounting policies: Different businesses use different
credit allowed. To
know the liquidity position and the accounting policies, so meaningful inter-firm
trade payables collection
period.
comparisons are
difficult to make. If the accounting
Potential buyers and investors: To know the
policy is changed, then
year to year comparisons will
profitability of the
business and market value of the
become difficult.
assets.
Difference in definition: Adjustments in profit from
Club members: To know if the club can continue to year to
year and firm to firm vary, thus one should
operate.
ensure only an
apples to apples comparison is made.
Customers (Minor point): ensuring the continuity of
Money Measurement: Non-monetary/ Non—financial
the supply
of goods.
factors often
affect the financial position of a business,
Employees and trade unions: to know if the business but these do not
appear in the financial statements.
can continue
to operate, thus providing jobs, paying
E.g. morale of the
workforce, adaption capability to
adequate wages and
possibly contributing to pension changing market conditions,
Gov. Policies, impact of
schemes.
new tech. etc.
Government Departments: Compiling business
statistics and/or
checking if correct tax is paid.

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Accounting (0452)

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