ZNOTES.

ORG

UPDATED TO 2023-2025 SYLLABUS

CAIE IGCSE
ACCOUNTING
SUMMARIZED NOTES ON THE THEORY SYLLABUS
Prepared for Sukhdev Saxena for personal use only.
CAIE IGCSE ACCOUNTING

Purposes of Measuring Business Profit and Losses

1. Preface Profits = Income - Expenses
A business can also make a loss wherein the expenses
The following are short forms used in the notes. Note that exceed the income. Loss= negative profit.
these short forms will not be accepted in examinations, By measuring the profit and loss of a business, one can:
and no marks will be awarded for their usage: Understand the progress of the business
Use ratios and compare the profit of a business to
Short Form Full Form other figures in the financial statements to get a more
Statement of financial position/ balance comprehensive view of the business’ progress.
SOFP/BS
sheet Compare the progress of the business to the progress
BRS Bank reconciliation statement of similar businesses.
PNL Profit and loss a/c Comparing the business to itself from year to year
Base the business’ future and make decisions based
IS Income statement
on the profit/loss figure.
Dep. Depreciation
MCB Main cash book
2.2. The Accounting Equation
PCB Petty cash book
TB Trial balance Assets, Liabilities and Owner’s Equity
SPOG Selling price of goods
COS Cost of Sales Profit is the return received by the owner for their
investment of capital.
P Purchases
Capital or Owner’s Equity is the amount the business owes
its owner. When a business begins operation, the owner
The only accepted short forms are: of the business invests capital, which can be any resource
such as:
A/C Account
Cash
b/d Brought down Bank or cash equivalents or Motor vehicles
c/d Carried down. Inventory (the stock of goods).
Contra- only for use in ledgers- Not structured Assets are things/resources the business owns or is owed
C
answers. to the business.
At times, a business can borrow money from an entity
Ticks refer to (optional but recommended) markings a that is not the owner of the business. The business now
candidate will make to ensure the requirements of the has a liability and is liable to pay for the item borrowed.
question have been satisfied. An increase in liabilities increases assets; e.g., cash, if
Some accounts shown do not contain all the columns and borrowed, increases the cash in hand but also increases
details required in an examination. They show relevant the amount the business owes to other entities. This is the
details. All details will be required in the question unless duality concept.
mentioned. Thus, the accounting equation is derived:
Unless instructed otherwise, the date should be written in ASSETS = CAPITAL + LIABILITIES
full (including day, month, and year).

3. Sources and Recording of

2. The Fundamentals of
Data
Accounting
3.1. The Double Entry System of Book-
2.1. The Purpose of Accounting keeping
Bookkeeping: A process of detailed recording of all the
The double entry system of bookkeeping involves giving
financial transactions of a business.
two effects to each business transaction, one which debits
Accounting: Accounting uses the bookkeeping records to
to the A/C receiving and the other which credits where the
prepare financial statements at regular intervals.
amount is being deducted.
The business aims to make a profit. This is calculated in
The rules of double-entry bookkeeping are:
the financial statements, which are usually prepared at
Debit the receiver, credit the giver.
the end of a financial year.
Debit what comes in, credit what goes out.

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CAIE IGCSE ACCOUNTING

Debit the expense, credit the income. Issued when: Goods on credit are sold by the supplier.
Day-to-day transactions are recorded using the double- It can also be issued when goods are sold for
entry bookkeeping system. cheque/cash.
Ledgers are used to record financial transactions, and Notes: Trade discount is shown as being deducted,
their format is as follows: whereas it is mentioned that cash discount is only
allowed if the invoice is paid within a time limit.
Ledger (T) Format: Uses: Customer records Cr purchases & Supplier
records Cr sales.
Date Details $ Date Details $ Dr note
xxx Contents: Name & address of supplier & customer,
date, full details & quantities (sometimes prices) of
Sales, for cash 100 dollars: Dr. Cash A/C for 100 (as cash goods returned or overcharged
is the receiving A/C) and Cr Sales A/C for 100 (as sales Issued when: Goods are not satisfactory, wrong goods,
are responsible for/giving the cash). etc. Issued by the supplier or customer
Purchases of goods 150 dollars (on credit): Dr Purchases Notes: Customer checks goods & invoices for
A/C for 150 and Cr Seller’s A/C for 150. overcharge/ Wrong goods, etc. When the price is
Crediting the seller’s A/C creates a liability as the included, there is always a lower trade discount.
business is now obligated to pay for the goods. Uses: Communication medium | No entries made;
Drawings (assets taken by a business owner for personal however, sometimes they are issued in place of a
use, out of the business) of goods 50 dollars. Dr Drawings rectified invoice
and Cr Purchases, both with 50. The drawings increase, Cr Note
and the goods decrease. Contents: Name & address of the supplier &
Payment of 150 dollars (through bank) to the seller for customer, date, full details, quantities & prices of
goods bought earlier: Credit Bank A/C for 150 and Dr. goods returned or overcharged
Seller’s A/C for 150. There is no outstanding balance on Issued when: Faulty goods/ overcharged goods. Issued
the seller’s A/C, as the debit equals the credit. by the supplier
When an A/C of a person or another business is Notes: Sometimes printed in red/any other color to
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 return outwards & supplier
example. records return inwards.
Sales of 60 dollars to B Dawg (on credit): Cr Sales A/C Statement of A/C
and Dr B Dawg A/C. Contents: Name & address of supplier & customer,
An A/C, a liability to the business due to regular date, balance owing at the start of the period, invoices
trading, is known as a trade creditor/trade payables/ & Cr notes issued, payments received, any cash
creditor. discounts allowed, balance owing at the end of the
An A/C, an asset (because the entity owes money to the period.
business, it’s almost as good as having the money) due to Issued when: At the end of each month by a supplier.
regular trading, is known as a trade debtor/ trade Given to each customer.
receivables/Debtor. Notes: Contains a summary of all transactions.
Balancing a ledger at the end of the month: Uses: No one makes any entries. Reminder to the
The debit and credit columns are individually totaled. customer of Amount Outstanding & can also be used
The difference is noted. If the debit side is heavier to check for errors for both.
than the credit side, the difference is entered as a Cheque
credit entry (Balance c/d) and vice versa. Contents: Pre-printed details. The date, amount &
Total the debit and credit columns and write them. payee have to be filled.
If the balance c/d were Dr, the balance b/d would be Issued when: Payment through bank.
Cr, and vice versa. Notes: Used to pay a pre-stated sum to the payee. It
The balance c/d entry is done on the last day of the comes in a book of pre-printed cheques (Issued by the
month, and the balance b/d entry is made on the bank)
first day of the following month. Uses: Supplier: Counterfoil of paying-in slip used to
make an entry in cash book & for discount allowed.
Customer: Makes the cheque counterfoil to make cash
3.2. Business Documents book entry & discount received.
Receipt
Invoice
Issued when: Goods sold by cash, and not when by
Contents: The name & address of the supplier &
cheque (the cheque acts as one)
customer, the date. Full details, quantities & the prices
Uses: Proof of payment
of goods sold

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3.3. Books of Prime Entry General

Prime Book Format Notes:
Description
Prime books of entry are listing devices which help to Written up
remove a lot of detail from the ledgers. It also means that using copies of
Date-Name-
bookkeeping can be divided between several people. Cr notes Cr
Cr Note
They are also called books of original entry/subsidiary A list of the entries are
Number-
books. Sales names of the simultaneously
Folio-
Transactions are recorded here before being recorded in Returns/Returns businesses, made into the
AmountThe
the ledgers. inwards the value of customer’s
credit note
The cash book & the petty cash book are both ledgers & book/returns goods A/[Link] the end
number
prime books of entries. inwards journal returned & of the month,
pertains to
Trade discount does not appear in the ledger A/C; it may date the totals will
the credit
be shown in the prime books. The value of the goods be posted to
note issued
bought reduces. the sales
There are 7 books of prime entry: returns A/C.
Sales Journal
Sales returns Journal Purchases and Purchases returns Journal
Purchases journal
Purchases returns Journal General
Cash Book Prime Book Format Notes:
Description
Petty Cash Book
Written up
General Journal
using invoices
from suppliers.
Sales and Sales Returns Journal Date-Name-
A list of the The supplier’s
Invoice no.-
names of A/C is
General Purchases Folio-
Prime Book Format Notes: businesses simultaneously
Description Journal/ AmountThe
from which credited with
The Dr entry is Purchases book/ invoice
Cr purchases invoice totals.
made in the Purchases Day number
have been The total is
debtor’s ledger book pertains to
made, value posted into the
A/C as the the invoice
& date. purchase A/C
sales are received
Date-Name- as the total Cr
recorded in purchases of
Invoice
A list of A/Cs the journal the month.
Number-
Sales to which Cr with the total
Folio-Amount Written up
Journal/Sales sales were of the invoice
($)The invoice using Cr notes
book/sales day made, their at the end of
number from suppliers.
book values & the the month, the
pertains to Date-Name- The Suppliers
dates sales A/C is Purchases
the invoice A list of Cr Note A/C is
credited with Return
issued names of Number- simultaneously
the total of the Journal/Purchase
businesses Folio- debited with
sales journal returns
to whom AmountThe the total from
as total credit book/Returns
goods have credit note the Cr [Link]
sales of the outwards
been number the end of the
month book/Returns
returned, pertains to month, the
outwards
value & date the credit total (from the
journal.
note received journal) is
posted in the
purchases
returns A/C.

Cash Book

In practice, it is common to have the cash A/C & bank A/C

shown side by side in what is called a cash book. This book
is moved away from the ledger; however, this still follows

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CAIE IGCSE ACCOUNTING

the double entry system of bookkeeping. Certain The imprest system: Petty cash expenditure is made from
businesses maintain a 3-column cash book where there is the float/imprest amt. The imprest amount stays constant
an added cash discount column on the Dr & the Cr side. (but can be altered). After the balancing of the petty cash
They are both ledgers as well as prime books of entries book, the chief cashier will restore the imprest. This
enables the chief cashier to know exactly how much petty
Two-Column Cash Book: cash has been spent.
Date Details Cash $ Bank $ Date Details Cash $ Bank $
xxx xxx xxx xxx Petty Cash Book Format

Three Column Cash Book: Total Total

Cost 1 Cost 2 Ledger
Discount Cash Bank Discount Cash Received Date Details Paid
Date Details Date Details Bank$ (Stationery) (Transport) A/Cs
Allowed $ $ Received $ $ $

xxx xxx xxx xxx xxx xxx xxx xxx xxx

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

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CAIE IGCSE ACCOUNTING

Date Details Debit Credit Details Dr $ Cr $

xxx xxx All expenses xxx
All income xxx
3.4. The Ledger Any provision xxx
Sales xxx
Ledgers are divided based on the types of accounts they Purchase xxx
contain, this is done so that several people can bookkeep
Sales returns xxx
simultaneously, i.e. Work can be distributed (the same
applies for books of prime entries). Purchase return xxx
Capital xxx
Ledger General Description/Contents Drawings xxx
Sales Ledger Debtors Ledger xxx xxx
Purchases Ledger Creditors Ledger
Real A/C s (assets) & nominal A/C s Closing inventory is not shown in the trial balance.
Nominal Ledger
(income, expenses & capital) The Trial balance helps locate arithmetic errors but
Cash book MCB & PCB cannot guarantee an error-free ledger. It is also useful in
preparing financial statements. The ledgers are
arithmetically correct if the Dr & Cr columns total tally.
4. Verification of Accounting Errors the trial balance cannot detect:
Records Name Description of entries made
Correct amount, correct side,
Error of commission but wrong A/C of the correct
4.1. The Trial Balance class
Correct amount, correct A/C,
It is a statement that is prepared to check the arithmetical Error of complete reversal
accuracy of ledger accounts.
but wrong side of each A/C
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,
particular date Error of Principle
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
Accounts that normally have Accounts that normally have Double-entry figures differ
Only a single entry is made instead of a double entry
Dr balances (EAD) Cr balances (CLIP)
Both entries were made on the same side of the
Assets Liabilities
ledger
Expenses Incomes To locate errors:
Drawings Capital Check TB and ledger balance addition
Purchases Sales Check that the ledger A/C balance is entered on the
correct side (Dr or Cr)
Sales Returns (E) Purchase Returns
Check that every ledger A/C balance is entered in the
It is not a part of the double-entry system. trial balance
Look for a transaction equal to the difference in the
totals of the TB & check for its double entry.
Trial Balance for the year ended….
Look for a transaction equal to half the difference &
Details Dr $ Cr $ then check whether it has been entered on the same
side twice.
All assets xxx
All liabilities xxx

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CAIE IGCSE ACCOUNTING

Check the double entry for each transaction after the

4.3. Bank Reconciliation
previous trial balance was made (last resort).
Practical Tip: If the difference in the totals of the TB is
A bank statement is a statement of account equivalent
perfectly divisible by 9, then check if an amount has been
issued by the bank to a business showing the bank
entered without a zero (e.g. If 99 has been entered as
transactions pertaining to a particular period. It is the
debit instead of 990, the difference 891 can be divided by
opposite of the business’ bank account in the business’
nine perfectly giving 99. Thus, any transactions with the
ledger (debit will be credit and vice versa.) It’s basically a
value 99 can be located and rectified)
copy of the customer’s account in the bank’s ledger.
If the two balances (on the bank statement and the bank
4.2. Correction of Errors a/c) don’t match, it is necessary to reconcile them to
explain why there is a difference.
If the trial balance does not tally, and no errors are There is generally always a difference, as the business
immediately identifiable, a suspense A/C is prepared by and the bank don’t record transactions at the same time
making an entry to balance the trial balance (inserting the (difference due to the clearance period.), and certain
difference). Thus, Draft financial statements can be other 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 were not Errors in the 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
Half of the entry was made for organisation)
Credit transfer (a wire transfer)
sales and is now corrected.
Direct Debits (an arrangement made with a bank that
Errors that do not affect the tallying of the trial balance allows a third party to transfer money from a person's
(commission, compensating, complete reversal, original account on agreed dates, typically to pay bills)
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 credits
credit side of the bank statement is compared to the debit
to reverse the error and make the correct entry. For
example, cash sales of 250 dollars are recorded as credit side of the cash book, as these transactions are recorded
sales for B Dawg. The correction would be Debit- 250- from opposite points of view. A tick is placed against
Cash book, Credit - 250 B Dawg A/C Narrative: Cash sales transactions that match up.
The cash book is then updated with items not in it and in
mistakenly recorded as credit sales, now rectified.
the bank statement (obviously excluding errors)
A full journal entry would have to be made in the exam,
like in the previous example. Items debited in the bank statement but not credited in
In preparing draft financial statements, if the difference the cash book
between the suspense A/C is a debit balance, it is Charges, credit transfers paid into the bank, standing
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.
As corrections are made, the profit might be affected. If the cash book
any item affects the trading section of the IS, then both Credit transfers and direct debits paid into the bank,
the gross and net profit are affected, but if an item affects etc.
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
made. credit side of the bank account and credit side of the
If expenses have been omitted, profit for the year will statement with the debit side of the bank account.
decrease with the correction and vice versa for income. CHECK FOR ANY TOTALLING ERRORS ETC.
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
made to all appropriate sections of the SOFP. If the on the SOFP if it is the last day of the financial year and
expenses have increased, then the profit will decrease, is the amount the bank statement’s balance has to be
etc. Basic concepts will have to be applied in correcting reconciled to.
Prepare the BRS
profit.

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CAIE IGCSE ACCOUNTING

USE PARENTHESIS OVER AMOUNTS THAT HAVE A The receipt from the disposal of non-current assets is
CREDIT BALANCE regarded as a capital receipt; it is recorded in the disposal
CHECK THE STARTING BALANCES OF THE BANK of a non-current asset(s) A/C, not the sales A/C.
STATEMENT AND ACCOUNT FOR ANY Revenue receipt: The income from the running of the
DISCREPANCIES. business, such as commission received, rent received,
If errors are present in the bank statement, correct sales, etc.
them in the BRS.
Advantages of Bank Reconciliation: 5.2. Accounting for Depreciation and
An accurate bank balance is obtained (after updating)
Errors in the bank account and bank statement can be Disposal of Non-Current Assets
identified and corrected.
Helps in discovering fraud and embezzlement (theft or Depreciation is a year-end adjustment that reduces the
misappropriation of funds placed in one's trust or value of non-current assets with time, i.e., it estimates the
belonging to one's employer). loss in value of a non-current asset over its expected
Amounts not credited and cheque(s) not yet presented working life.
can be identified. Non-current/fixed assets depreciate with time as they are
Any ‘stale’ cheque(s) can be identified (older than six used, and depreciation is the loss in their value; this is an
months) and written back into the bank account. application of the principle of prudence, as showing these
assets at their cost prices can be misleading and lead to
overstating a business’s profit which can lead to more
5. Accounting Procedures being drawn by the owner than the business can afford.
Land does not generally depreciate unless it is a mine or a
well wherein something is drawn from the land (it’s then
5.1. Capital and Revenue Expenditure called Depletion); buildings do depreciate.
and Receipts The purchase of a non-current asset is a part of capital
expenditure, so the entire cost of the non-current asset is
Capital and Revenue Expenditure not charged as an expense the year it is purchased, as it
helps the business for several years. The capital
Purchasing a non-current asset is regarded as capital expenditure is thus matched (by estimating) against the
expenditure; thus, its cost is not recorded in the sales, i.e. the cost of the non-current asset is spread over
purchases ledger but in the non-current assets A/C. The the years, which benefits from using that 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 benefits and/or Economic or other reasons and/or the passage of
from using that asset. This is known as depreciation and is time.
revenue expenditure. There are several depreciation methods, but 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 consistently. Refer to TABLE 4 for the different methods of
on the NCA and installation fees. depreciation.
Because the income statement includes revenue
expenditure, recording capital expenditure as revenue Method: Formulae/ Additional info Notes:
expenditure will understate the profit and the NCA (thus The formula gives
affecting the accounting equation) and vice versa. us a constant value
Revenue expenditure is the cost incurred by running the that must be
business on a day-to-day basis. E.g. repairs on any non- Straight line deducted from the
current asset, general expenses, cost of public transport, method of asset annually. 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 stay constant. The

Capital and Revenue Receipt method. asset's value can
fall to nil if no
Capital receipt is the income from sales of NCA. This estimated residual
should not be entered in the IS, but any profit or loss value exists.
incurred from the sale of an NCA should be included in
the Income statement.

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CAIE IGCSE ACCOUNTING

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

Factors to be considered when choosing a method of

depreciation are: Asset Disposal A/C Format
Life expectancy
Residual value Details $ Details $
Estimated benefit from the use of the asset. Equipment (cost) xxx Provision for depreciation xxx
If the straight-line method of depreciation has been used, Income statement xxx Bank xxx
the dep. Amt. Stays constant. Income statement xxx
It is a business’ choice whether to start depreciating the
xxx xxx
asset from the date of purchase; for example, only a
proportion of the dep. May be charged (annual dep. /12*
Just as entries are made in the ledger A/C s for
months of ownership till financial year end) OR it may be
depreciation and the sale of an NCA, similar entries will
decided to ignore the date of purchase and record a full
be entered in the prime books (specifically the
year of depreciation, or not depreciate it in the year of the
general/nominal journal).
purchase at all. The same applies to the sale of a non-
current asset.
When the revaluation method of depreciation is used, 5.3. Other Payables and Other
there is no provision for dep. A/C is created, and the same Receivables
(asset) A/C is used to calculate dep.
Depreciation reduces the year's net profit when debited Often, adjustments are made in the financial statements
into the IS from the provision for dep. to present a more accurate view of the profit/loss of a
In the SOFP, the dep. to date (the accumulated dep. up till business; these adjustments are known as year-end
this financial year + depreciation for this year) is adjustments.
subtracted from the cost price to become the NBV (which In practice, it is expected to find expenses or income paid
thus reduces year by year). in one financial year but related to other financial years.
Only items relating to the specified time period should be
Asset A/C Format included in the income statement; the timing of the actual

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receipts and payments is irrelevant. This is a practical Date Details $ Date Details $
application of the accruals principle. Balance b/d(advance Balance b/d(arrears
It is necessary to adjust the income statement about xxx xxx
previous year) previous year)
amounts prepaid or accrued. This results in a more
Bank A/C(paid during Income
accurate profit/loss figure, and therefore, more xxx xxx
the year) Statement(transfer)
meaningful comparisons can be made between financial
statements of different years and businesses. Balance c/d
Balance c/d(arrears
Accrued: an amount due in an accounting period which xxx (advance current xxx
current year)
remains unpaid till the end of that period year
When an expense is accrued, some benefit or service has xxx xxx
been received during the accounting period, but this Balance b/d xxx Balance b/d xxx
benefit or service has not been paid for by the end of the
period.
Prepaid Expenses: A prepayment is an amount paid in 5.4. Irrecoverable Debts and Provision
advance. When an expense is prepaid, a payment has for Doubtful Debts
been made during the financial year for some benefits or
services to be received in a future accounting period. When goods are sold on credit, in real practice 100% of all
The outstanding amount is added to the respective these debts are not recovered. An amount not paid by the
expense, and prepaid is subtracted. debtor is known as a bad debt. There is always a risk of
Wherever several expenses are accrued, a collective this happening; this could be due the debtor being unable
figure is often shown in place of posting individual figures. to pay, them dying etc. If all means of recovering the debt
For Expenses to be paid (due)/ Accrued expenses: Total have been tried in vain, then the debt is written off. Their
expenses incurred in the trading period (including ones A/C is closed by crediting their A/C with the amount owing
not going to be paid for in this year but have been and debiting a bad debts A/C. At the end of the year, this
incurred)- expenses to be paid for (opening Cr balance) = amt. is transferred to the IS as a loss/expense.
Amount To be transferred to IS. Writing off such debts is an application of prudence, thus
Accrued Income: Where an item of income is accrued, a not overstating one’s profit (by not overestimating their
person receiving a benefit or service from the business assets).
during the accounting period has not paid for it by the Bad debts recovered: If a debtor pays some/all of their
end. debt after it is written off, the cash book is debited, and
Prepaid Income: Where an item of income is prepaid, a bad debts recovered A/C is credited with the amt. (s).
person has paid for a benefit or service from the paid. Alternatively, the debt can be reinstated by
business, but the business has not provided this at the reversing the entry when it was written off, and then
end of the financial year. The accruals principle applies to debiting the cash book and crediting the debtor’s A/C.
prepaid income; thus, any amount for which the legal title If no names and dates have been provided, the entry in
of the goods or services has not been passed on to the the bad debts A/C could be stated as “debtors written off”
buyer has to be deducted from the total income on the last day of the accounting period.
transferred to the IS and shown as a liability in the The only definite way of avoiding bad debts is by not
SOFP/BS. selling goods on credit, which is not practical. Practical
methods of reducing the chance of bad debts are:
Income Account Format obtaining credit references from banks and other
suppliers for a potential debtor, fixing a credit limit per
Date Details $ Date Details $ debtor. The debts are monitored over time. This is known
Balance as credit control. Invoices and month end statements
Balance b/d(arrears
xxx b/d(advance xxx should be issued along with letters to notify debtors of any
previous year)
previous year) amounts outstanding. Legal action can be taken, but is too
Income Bank A/C(received expensive and does not justify the funds recoverable.
xxx xxx Going by the principle of prudence, businesses estimate
Statement(transfer) during the year)
the amounts lost due to possible bad debts, which also
Balance
Balance c/d (advance aligns with the principle of accruals (estimated bad debts
xxx c/d(arrears current xxx
current year from sales, are recorded in the year the sales are made,
year)
rather than the year the debts are actually written off).
xxx xxx This shows the assets of the business at a more realistic
Balance b/d xxx Balance b/d xxx value.
The amount to be estimated can done so by: estimating
Expense Account Format this amount per debtor based on their A/C’s individual
debts/transactions; estimating the amounts based on past
Date Details $ Date Details $ experience of a debtor and devising a percentage of

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debts estimated which won’t be paid; using an aging Inventory must be valued at the end of the financial year.
schedule and assigning a higher percentage on older It is done at a lower cost and net realisable value.
debts and vice versa (based on the logic that older debts The cost of inventory includes the actual price + additional
are more unlikely to be paid than newer ones. In totality, a costs (like Carriage inwards or costs that bring the
percentage can be set too, for e.g. 5% of the total trade inventory to its current position)
receivables). This is generally given in an examination. The net realisable value is the estimated receipt from the
Creating a provision for doubtful debts: sale of the stock/inventory.
Dr IS and Cr provision for doubtful debts A/C Generally, the net realisable value > cost of inventory
In the BS/SOFP deduct the balance in the provision for The examination will require a simple statement from
doubtful debts A/C from the trade receivables. basic data, the one on the next page.
In the IS the bad debts are showed along with the ABC business (Valuation of inventory at DD/MM/YYY)
provision for doubtful debts as expenses, and in the Type X- 50 units at 10 dollars per unit - $500
BS/SOFP the deduction of the provision for doubtful debts Type Y- 30 units at 5 dollars per unit - $150
is shown (on the total trade receivables which is already = $650
less any bad debts)
The provision for doubtful debts may have to be changed
if for example (if a percentage of debts is taken) the debts 6. Preparation of Financial
have increased/decreased or if an amount has been set
for whatsoever reason and has to be changed. This Statements
adjustment is made at the end of the financial year.
Adjusting a provision for doubtful debts: 6.1. Sole Traders
If the provision has to be increased, then subtract it in
the IS with the difference, and vice versa for a
Income Statement
decrease.
In the BS/SOFP deduct the new provision for doubtful To find out the result of their business transactions, the
debts from the total trade receivables sole trade will prepare:
Income statement
Only the amount increased or decreased (on the provision for
Statement of Financial Position
doubtful debts) is shown in the IS as the rest has been
These are prepared at the end of the financial year to
accounted for in previous accounting years/periods. If the
know the profit/loss and the value of assets and liabilities
amount is decreased, then the difference is recorded in the
at a particular date.
Income Statement as decrease/reduction in provision for
Income statement:
doubtful debts as a form of income and vice versa for an
Trading section
increase.
Profit/Loss section
Provision for Doubtful Debts format: Trading A/C involves buying and selling goods and
calculating gross profit (Rev- COS).
Date Details $ Date Details $ Revenue = net sales (Sales less returns)
COS = total cost of goods only sold, i.e. Not always all
Income Statement
Year 1 Year 1 Balance b/d the goods bought.
(if PDD is xxx xxx
Dec 31 Jan 1 (previous year) COS= OI+P-CI [Opening inventory + (net purchases,
reduced)
less any additional purchases drawings and/or
Income returns)– Closing inventory]
Balance c/d
Statement P(net)= Purchases - Purchases Returns + Carriage
Year 1 (current Year 1
(balancing xxx inwards- goods for use.
Dec 31 year/balancing Dec 31
figure/created NOTE: Cash discount/discount allowed and discount
figure)
during the year) received will not be included in the trading A/C as they
Income arise from the early payment of debts and are not
Year 1 Statement (if sales-related.
Dec 31 PDD is The income statement (PNL and Trading A/C) should have
increased) a heading regarding the financial year/period covered
xxx xxx and the name of the business trading.

Year 2
Balance b/d xxx Income Statement Format:
Jan 1

Details $ $ $
5.5. Valuation of Inventory Revenue xxx
Less: Sales returns xxx xxx

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Details $ $ $ Details Cost Dep NBV

Less: COGS Bank Overdraft xxx
Opening Inventory xxx Accrued expenses xxx xxx
Net Purchases xxx Long-term liabilities:
Carriage Inwards xxx Bank loan xxx
Closing Inventory (xxx) (xxx) Debenture xxx
GROSS PROFIT xxx Long-term loan xxx
Add: Income xxx xxx
Less: Pre-paid income (xxx)
Add: Outstanding income xxx xxx Non-current liabilities are those which are not due in the
Total 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 xxx the business, whose values constantly change (E.g. trade
Less: Prepaid (xxx) xxx (xxx) payables)
PROFIT/LOSS FOR THE YEAR xxx Assets and liabilities are arranged in different groups:
Assets are divided into current (Values are constantly
Statement of Financial Position changing, short-term assets which arise from the
regular trading of the business, E.g.: Inventory) and
The statement of financial position of a business on a non-current assets (long-term assets which are not
specific date shows the assets of a business as equal to used for resale but help the business earn revenue.
its capital plus any other liabilities (amount owed i.e. The E.g.: Motor Vehicles)
assets show how the resources are being used, and the Non-current assets are listed in order of increasing
liabilities show where these resources come from. liquidity (liquid = least permanent) (The ability to be
converted into cash), typically Land and buildings,
Balance sheet Format Machinery, Fixtures and equipment and motor
vehicles.
Balance sheet as at…. Current assets are also listed in order of increasing
liquidity (furthest away from cash shown first),
Details Cost Dep NBV typically Inventory, Trade receivables, Other
Non Current Assets: receivables, Bank, and Cash. Trade receivables are
said to be more liquid than inventory as they can be
Premises xxx (xxx) xxx
sold to other businesses.
Land xxx (xxx) xxx Current and non-current liabilities appear in
Building xxx (xxx) xxx ascending, with liability being paid first. Note: Other
Motor vehicle xxx (xxx) xxx payables will appear after trade payables.
Equipment etc. xxx (xxx) xxx A SOFP should have a heading to the date it relates to and
must include the business's trading name.
xxx
After all the financial statements are prepared, every item
Current Assets: on the trial balance must have one effect (either IS or
Closing Inventory xxx SOFP) on the financial statements, and additional notes
Account Receivable/Trade receivables xxx will have two effects on the financial statements (one on
(-)Allowances for doubtful debts (xxx) xxx the IS and the other on the SOFP)
The balance of the capital A/C will increase in the SOFP if
Cash at bank xxx
the business has made a profit or decrease if the
Cash in hand xxx
business has made a loss.
Prepayment xxx xxx When the business makes a profit, it is added to the
Total Assets/Closing capital xxx capital as the amount owed by the business increases,
Financed by: and thus, it can be concluded that a profit is an increase in
net assets (capital)
Capital xxx
Net profit xxx Service Business
(-)Drawing (xxx) xxx
A service business does not buy and sell goods
Current liabilities:
The financial statements of a service business still need to
Account payable/Trade payable. xxx be prepared with the difference only income statement as

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only the profit/loss section is prepared with no trading Capital and Current A/C
section
Format: Current Account Format
Details $ $ Date Details A $ B $ Date Details A$B$
Commission/Fees/Rent Received xxx 1 Balance b/d xxx xxx 1 Balance b/d xxx xxx
Add: Income xxx Interest on Interest on
31 xxx xxx xxx xxx
Add outstanding, Less Prepaid xxx xxx drawing capital
xxx 31 Drawing xxx xxx Interest on loan
Less: Expenses xxx 31 Balance c/d xxx xxx Salaries xxx xxx
Add Outstanding, Less prepaid xxx xxx Profit Share xxx xxx
PROFIT/LOSS FOR THE YEAR xxx xxx xxx xxx xxx

6.2. Partnerships Income Statement

A partnership is a business in which 2 or more (max. 20 – It is the same as sole trader

normal) people come together and work with the view of
making profits. Statement of Financial Position
Several professionals such as accountants and solicitors
Format:
come together to form a partnership. This is common
Statement of financial position at…..
amongst family businesses. At times sole traders expand
by amalgamating their businesses. Details Y Z $
An additional account is made- the profit and loss Capital Accounts xxx xxx xxx
appropriation A/C, which shows how the profit for the year Current Accounts
or loss for the year is shared between the partners
Opening balance xxx xxx
Partnership businesses:
Salary xxx
Advantages Disadvantages Interest on loan xxx xxx
Additional finance Profits have to shared Shares of profit xxx xxx
Additional knowledge, Decisions have to be xxx xxx
experience and skill recognized by all partners Drawings (xxx) (xxx)
One partner’s decision affects Interest on drawings (xxx) (xxx)
Responsibilities are shared
all other partners. xxx xxx xxx
All partners responsible for xxx
Discussions before decision
the debts of the business

Profit and Loss Appropriation A/C

Most partnerships draw up a partnership agreement. Not
legally required, but it helps prevent misunderstandings
The profit for the year is taken, interest on drawings is
and arguments in the future. It’s clauses cover aspects of added, and interest on capital is deducted, salaries to
the business like : Capital invested per partner, sharing of partners are deducted and any other items are included
profits or loss, interest on capital invested, salaries of as appropriate. The final amount after the appropriation
partners, possible upper limit on drawings, interest on
(residual profit) is shared.
drawings, interest on partners loan to company. Format:
Money is borrowed from a partner for a particular span of
time if necessary; note this is NOT a part of capital. It is Net Profit before adjustment xxx
treated exactly like a normal loan, just that its interest (if
Interest on drawing
accrued) can be recorded in the current A/C of the
Partner A xxx
partner instead of a separate liability A/C. If the interest is
paid it is recorded in a regular interest on loan A/C Partner B xxx xxx
The capital A/C prepared in a partnership A/C can either xxx
have 2 or more sections for the partners, or several Interest on capital
A/C(s) can be prepared. These capital A/Cs refer to fixed Partner A xxx
capital A/Cs. For other entries involving partners a
Partner B xxx (xxx)
separate current A/C and drawings A/C is made.
xxx

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Net Profit before adjustment xxx A company may not require the total value of the called-
Salaries up capital and may only require a fraction of it (if a share
is worth 1 dollar, the company may only call up 0.50
Partner A xxx
dollars per share). If more capital is required, it can be
Partner B xxx (xxx) “called up”. Since some shareholders may not pay the
Net Profit after adjustment xxx called-up capital per share, the actual called-up capital
received is the paid-up capital.
A company might raise additional funds by issuing
6.3. Limited Companies
debentures (loan capital) or loan notes, where several
A limited company is a business that is a separate legal thousands of dollars may be raised through small loans.
entity from its owners (shareholders) whose liability for They carry a fixed interest rate and are given preference
over all payments, including the payment of dividends on
the company is limited to the value of shares they hold.
preference shares. Interest on Debentures is included in
A limited company can be formed as a new business, or a
the income statement. Debenture holders are not
sole trader or partnership can be converted into a limited
members of the company, nor do they own any part of the
company for expansion purposes.
company and do not have voting rights at shareholders
The capital of a limited company is divided into units
meetings. If a company dissolves, the liabilities and
called shares, and the face value of the share(s) is the
extent to which the shareholders are liable for the debenture holders are repaid first, and then the
company's debts. preference shareholders are paid, after which ordinary
shareholders are paid.
Through shares, a large amount of capital can be raised.
Limited companies must publish a statement of changes
Profits are distributed as dividends, which are stated as a
in equity; some may prepare a profit and loss
percentage of the face values of the shares.
appropriation A/C.
There are two kinds of shares:
A statement of changes in equity is like the capital section
Preference Shares Ordinary/ Equity shares of a statement of financial position, which changes over
Fixed-rate of dividend Dividend depends on profit time. It shows the reserves and any transfers made from
the retained profits to the general reserve, e.g.
Fixed rate and amount of Variable rate and amount of
The proposed dividend is not included in the books of
dividend dividend
accounts.
The dividend is always paid, Dividends can be paid. If Interim ordinary dividends might be paid during the year,
but if profit does not allow it, it profits allow for high dividend- as this is already paid; it is shown in the SOFP at the end of
will be paid when sufficient paid, else even no divided is the financial year.
funds are available. possible If it is known that a certain dividend is paid per year in
Holders are involved in the total, e.g.: 5000 dollars. If the interim ordinary dividend
Preference is given to these business's running and can paid is 3000 dollars, then 2000 dollars ( 5000− 3000) is
shares when it comes to vote at shareholder’s declared as the proposed ordinary share dividend and
dividend payment meetings at one vote paid included 5000− statement of financial position.
share. Mostly, all the profit made by a limited company is not
Holders have minimal given out as dividends, even if it is intended to do so; it
involvement in the company's may not be possible, as not enough cash may be in hand
Included in the profit and loss
running and are usually not or assets in a liquid form, etc.
appropriation A/C
entitled to vote at If any dividend or interest on debentures accrues, it is
shareholder’s meetings. shown in the statement of financial position as a current
liability.
Included in the PNL (Income
Any profit not distributed and/or put into a general
Statement)
reserve (to plough back profits to aid further growth) will
be transferred to the retained profit and shown in the
All the shareholders cannot be involved in the day-to-day
SOFP under reserves, which is added to the share capital.
decision-making of a company, so a board of directors
The capital section of the statement of financial position
(elected), CEO, Etc. are hired. Any legal action against the
of a limited company includes the share capital reserves
company is against itself and not its members.
(e.g. general reserve, retained profits refer to funds
Earlier, when a business was formed, a maximum (limit)
ploughed back over the years, etc) under the heading
of capital issued had to be stated - authorised share
Capital and Reserves.
capital.
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. Income Statement

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Limited company income statement format: Details $ $ $

Details $ Total equity xxx
Revenue xxx Non-current liabilities
Cost of sales (xxx) Debentures xxx
Gross profit xxx
Current liabilities
Administrative expenses (xxx)
Trade payables xxx
Distribution expenses (xxx)
Other payables xxx xxx
Profit from operations xxx
xxx
Finance cost (xxx)
Profit for the year xxx
6.4. Clubs and Societies
Statement of Changes in Equity Specific organisations are non-trading, such as clubs or
societies. Their main objective is not to make a profit but
Format
to provide facilities to its members.
The primary source of income for these organisations is
Ordinary Preference
General Retained subscriptions (usually an annual payment to the
share share Total
reserve earnings organisation for the usage of facilities provided). A
capital capital
treasurer is assigned to manage all of this, pay the money
Details $ $ $ $ $ owed to external entities, and collect money owed to the
Balance (the organisation.
date at the
xxx xxx xxx xxx xxx Terminology in the Financial Statements and Accounting
beginning of
the year) Records:

Profit for the Business Clubs and Societies/Non-Trading

xxx xxx Terminology: Organisations Terminology:
year
Dividends Summary of cash
(xxx) (xxx) Receipts and Payments A/C
paid and bank book

Transfer to Trading A/C Trading A/C

general xxx (xxx) --- Income and expenditure A/C (will only
reserve have the contents: Income and
Profit and loss A/C
Balance(date Expenditure. There will be no other
at end of xxx xxx xxx xxx xxx income/expenses here.)
year) Balance
Balance Sheet/SOFP
Sheet/SOFP
Statement of Financial Position Profit for the year
Surplus
(Net profit)
Format: Loss for the year
Statement of financial position at……
Deficit
(Net loss)
Details $ $ $
Cost Dep NBV 1. A surplus is the excess of income over expenditure,
Non-current assets xxx (xxx) (xxx) whereas a deficit is excess over income. The
principles used to prepare a profit and loss A/C are
Current assets like those applied when preparing an income and
Inventory xxx expenditure A/C.
Trade receivables xxx 2. If any fund-raising activity like a competition is
Other receivables xxx conducted, it is important to set off the income against
the expenditure for that activity in the income and
Bank xxx xxx
expenditure A/C.
Total assets xxx
3. Subscriptions owing or prepaid can be included under
Equity other receivables and other payables, respectively,
Issued share capital xxx and an appropriate note should be included.
4. To match the expenses against the income, the
Ordinary Shares xxx
subscriptions relating to a particular time frame must
General reserve xxx
be included in the income and expenditure A/C. A
Retained earnings xxx

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subscription’s A/C is prepared to calculate this figure. Income and Expenditure A/C
There could be two balances on this A/C as some
members might have paid for their subscriptions in Income and expenditure account format:
advance and some have not. They need to be kept
track of individually. Income and expenditure acc for the year ended…….
Details $ $ $
Subscription A/C Format Income
Members Subscriptions xxx
Details $ Details $
Profit on café xxx
Balance b/d (Outstanding Balance b/d (Advance
xxx xxx Sports Competition
previous year) previous year)
Income for current year Sale of tickets xxx
Receipts during the year
(Income & Expenditure xxx xxx (-)Competition prizes (xxx)
(Bank A/c)
A/c) xxx
Closing balance c/d Balance c/d (Outstanding Donations xxx
xxx xxx
(Advanced current year) current year) Profit on disposal of non-current asset xxx
xxx xxx xxx
Balance b/d Expenditure
Balance b/d(subscriptions
xxx (subscriptions received in xxx
due) Expenses xxx
advance)
Depreciation of non-current assets
Loss on Social Evening
Receipts and Payments A/C
Sales of tickets xxx
The receipts and payments A/C mostly do not (-)expenses (xxx)
differentiate between cash and bank transactions. For the xxx
most part, it is exactly like a cash book. Note: The
Loss on disposal of non-current asset xxx
balances on the A/C can mean either just cash, just bank,
or both. A credit balance brought down means an xxx
overdraft. Surplus for year xxx

Receipts and Payments A/C Format Statement of Affairs

Receipts Payments
Details $ Details $ The balance sheet of a club or society is very similar to
Opening Balance b/d xxx Expenses xxx that of a business; however, capital does not exist. This is
because club or society members do not invest money
Purchase of non-current
Members subscription xxx xxx and draw out funds the same way a proprietor of a
assets
business does. Any surplus is accumulated to form the
Donations xxx Closing balance c/d xxx capital fund, known as the accumulated fund. Similarly, a
Receipts from activities xxx deficit decreases this fund.
Proceeds from the sales Just as in a business, Assets = capital + liabilities; in a club
xxx
of non-current assets of society, Assets = Accumulated funds + Liabilities.
xxx xxx
Details $ $
Balance c/d xxx
Assets:

The receipts and payments A/C only show funds received xxx
or paid; they do not show the actual income or expenses xxx
for the financial period. These will have to be calculated xxx xxx
with adequate information. Less: Liabilities:
Clubs and societies trade. Those who do not regard it as
xxx
their primary source of income. They maintain a separate
income statement (only the trading A/C section) for each xxx (xxx)
activity. The wages of shop attendants, depreciation on Accumulated Fund xxx
café equipment, etc. Any profit or loss from these
activities is transferred to the income and expenditure
6.5. Manufacturing Accounts
A/C under other income/ expenses.

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Certain businesses don’t just buy and sell goods; there are Detail $ $
also manufacturing businesses, like a textile Opening inventory of the finished goods xxx
manufacturer who makes clothes.
Add the cost of production xxx
The double-entry records for these businesses will be like
that of a trading business. Additionally, there will be a Purchases of finished goods xxx
manufacturing A/C, which is used to calculate the cost xxx
involved for the business to manufacture goods it has (-)Less closing inventory of finished goods (xxx)
produced in a particular financial year. Cost of sales of finished goods (xxx)
Types of inventory:
Gross profit xxx
Raw Materials
Work in Progress Add other income xxx
Finished Goods xxx
(-)Expenses:
Manufacturing A/C Administration expenses xxx

Manufacturing A/c is prepared to know the cost of

Distribution expenses xxx
production of finished goods using the formula: Financial costs xxx
Prime Cost + Factory Overheads Selling expenses xxx
Prime Cost = Direct Material + Direct Labour + Direct Depreciation of non-factory non-current
Expenses xxx
assets
Calculation of unit cost: if a manufacturer makes one
(xxx)
identical product, its unit cost can be calculated by the
U nitCost Profit for the year xxx
formula: Costof Production ​

Manufacturing A/C Format Statement of financial position format:

Details $ $
Details $ $
CURRENT ASSETS
Opening Stock of Raw Material xxx
Inventories
Purchase of Raw material xxx
Raw materials xxx
xxx
Work in progress xxx
Closing Stock of Raw Material (xxx) xxx
Finished goods xxx
Cost of Raw material consumed xxx
xxx
Direct expenses
Factory wages xxx
Machine hire etc xxx xxx
6.6. Incomplete Records
Prime cost xxx Certain businesses do not maintain a complete set of
Machine repairs xxx double-entry bookkeeping records (for example, small
Machine depreciation xxx businesses). No trial balance can be drawn up for them,
and some preparatory calculations are required before
Factory rent and property taxes xxx
they can start preparing their financial statements.
Insurance xxx Under a single entry system, none of the aspects (Dr. or
Heat and light xxx Cr.) of the financial transaction are recorded, one of the
Indirect factory wages and salaries, etc xxx aspects is recorded, or both are recorded.
Total indirect cost xxx When a list of assets and liabilities is prepared without
Cost of production xxx double-entry bookkeeping, it is known as a statement of
affairs, like a balance sheet.

Income Statement and SOFP Why is the Single-Entry System Used?

Income statement format: Usually, small businesses don’t maintain complete
accounting book records as traders’ partnerships.
Detail $ $ Businesses are not supposed to maintain financial
Revenue xxx statements by law compulsorily and generally adopt an
(-)returns inwards (xxx) entry system.
xxx Since the maintenance of books of accounts involves a lot
of accounting knowledge and manual work, businesses

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prefer not to maintain complete books. Definitions:

It is cheaper as the number of books is less, and an Working Capital: Current Assets- Current Liabilities.
accountant/clerk/cashier need not be appointed. Capital Owned: Capital (in the accounting equation).
Amount owed by a business to the owner of that
Capital A/C business on a certain date
Capital Employed: Capital + Non-current liabilities (In
Capital Account Format the accounting equation). Total funds used by a
business.
Date Details $ Date Details $ ASSETS = CAPITAL + LIABILITIES
Year 1Dec 31 Drawing xxx Year 1Jan 1 Balance b/d xxx A − C L = C + NC L = C apital Employed
Balance c/d xxx Jan 1 Bank xxx CL - Current Liabilities
NCL - Non-Current Liabilities
Profit ?
C- Capital
xxx xxx Profitability Ratios:
Year 2Jan 1 Balance b/d xxx ROCE: Returnoncapitalemployed =
Netprof it(prof itf ortheyear)
Capitalemployed X100​

To calculate profit, a capital A/C can be made to account

Relates profit for the year to the capital employed.
for any changes in capital (for example, drawings). Then,
Return on investments. Shows how efficiently
the difference in capital is taken as either the profit or
capital is used.
loss. Doing this, however, will not give any information
Therefore, net profit as a percentage of the capital
about the gross profit, sales, etc. No analysis can occur
employed is comparison. Profit per $100 (without
(Analysis will help make informed future decisions). So,
percentage sign) invested
this is one drawback involved.
Improve: Increase the selling price of goods. Buy
Profit = Closing Capital + Drawings - Additional Capital -
cheaper goods. Invest less capital or pull out
Opening Capital
unnecessary funds.
Sometimes, a business can provide information about
Worsen: Increasing trade discounts Selling goods
money received, paid, etc. In addition to assets and
at cheaper prices, Not passing on increased costs
liabilities, it is possible to calculate sales, purchases, and
to customers. Increased running costs
expenses. Therefore, a complete set of financial Grossprof it
statements can be made after some calculations.
Grossprofitmargin : Sales(Revenue) x100
​

The amount paid to the creditors is not always going to be Gross profit as a percentage of turnover. The
equal to the purchases figure, and the same applies to the higher the return the more profitable the business
sales figure, which is relative to the amount received from is.
debtors for obvious reasons such as goods being bought Gross profit as a percentage of sales Gross
from the previous year, good that has not yet been paid profit/gain per $100 of sales relative to only sales
for, etc. factors
Credit Sales = Total Sales - Cash Sales or Prepare a sales Improve: Increase the selling price of goods. Buy
ledger control A/C cheaper goods.
Credit purchases = Total Purchases - Cash Purchases or Worsen: Increasing trade discount. Selling goods
Prepare a purchases ledger control A/C at cheaper prices. Not passing on increased costs
Gross Prof it to customers
Mark-up: Cost Of Sales * 100​

Netprof it(prof itf ortheyear)

Gross Prof it
Margin: Revenue * 100 ​
N etprofitmargin : Sales(revenue) x100​

The rate of inventory turnover is the number of times a Return on $100 worth of sales. Indicates how well a
business replaces its inventory in a given period of time business is controlling its expenses
Cost of Sale Net profit as a percentage of sales. Represents
and is also given by the formula: Average Inventory × 100
what percentage of sales is being kept for the
​

where Average Inventory is

Opening Inventory + Closing Inventory business. The actual return seen (in most cases)
2 on $100 worth of sales. Affected by a change in
​

Stolen Cash = Prepare a cash book gross profit margin

Depreciation = Apply revaluation method Improve: Increase the selling price of goods. Buy
cheaper goods. Reduce running expenses
7. Analysis and Interpretation Worsen: Increasing trade discount. Selling goods
at cheaper prices. Not passing increased costs to
customers. Increasing expenditure
7.1. Calculation and Understanding of Liquidity Ratios:
Current Ratio/Working capital ratio: Current Assets :
Accounting Ratios
(is to) current liabilities

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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 that are due for short- T rade receivables
×X
Credit sales ​

term payment. X= 365 for CP in days, X= 52 for CP in weeks, and X =

Measures the ability of a business to meet its 12 for CP in months. It is also called the trade
liabilities when due. Ratios between 1.5:1 and 2:1 receivables/sales ratio.
are satisfactory. Having a lot of current assets Trade receivables to sales ratio. Average time for
compared to current liabilities, 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 adequate working capital, it generally should be the collection period, as sales were
cannot pay off due liabilities, has difficulties made in one year. The length of time taken to pay
obtaining further credit supplies (due to low should be compared to this. The longer a business
creditworthiness), and 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 yearly, and a
they arise. decrease means credit control works efficiently.
Improve: Introduce more capital. Obtain non- Improve: Improve credit control policy. Offer a
current loans. Sell surplus NCA. Sell off goods (if at cash discount for early payment. Charge interest
a profit). Reduce drawings by the owner or reduce on overdue A/C(s). Refuse to supply until the debt
dividends. is paid. Invoice discounting or debt factoring can
Worsen: Buying more goods on credit. Buying NCA be done(Factoring and Invoice Discounting are
Quick ratio/acid test ratio: Current Assets less both financial services that can release the funds
inventory: (is to) current liabilities tied up in your unpaid invoices, involving a provider
Compares the current assets of a business minus who agrees to advance money against outstanding
its inventory to the current liabilities of the debtor balances. A debt factor will maintain the
business. This is done as inventory is considered sales ledger, collect debts, and pay the business.
not to be liquid. They chase the debtors for repayment. A
Compares the assets that can easily convert to discounter will pay for certain debts in advance but
cash to the business's liabilities. Inventory is 2 will not maintain the sales ledger. Both services
stages away from being money, first, it has to be are chargeable.)
sold, then the debt is to be collected. A ratio of 1:1 Worsen: Not following up on debt collection, etc.
is regarded as satisfactory as all (current) Payment period for trade payables: Credit purchases
T rade payables
​ ×
liabilities can immediately be paid with liquid X
assets. Similar to the current ratio. Higher than 1:1 X= 365 for PP in days, X= 52 for PP in weeks, X= 12 for
is considered to be poor management of liquid
PP in months, Also called the trade payables/
assets.
purchases ratio.
Improve: Introduce more capital. Obtain non-
Average time taken to pay the creditors A/C(s)
current loans. Sell surplus NCA. Reduce drawings
It should be compared with the terms of credit
by the owner or reduce dividends. Sell off
allowed by the creditors. If it increases, the
inventory even if not profitable (if cash is seriously
business is failing to pay/is short of immediate
required)
funds. If debtors are not settling their A/C(s), it can
Worsen: Buying more goods. Buying NCA. Buying
be difficult for the business to settle their A/C(s).
goods for cash Additional Info: Taking longer to pay off one’s debts
Rate of inventory turnover/ inventory turn:‎( Cost of
means that one can use its funds for other
sales) / (Average inventory) ‎= no. of times inventory is
purposes, but it can also lead to the supplier
sold and replaced in the given period‎( Average
refusing future credit and or goods, a lower credit
inventory / Cost of sales)*365‎= no. of days on avg.
score, loss of cash discount, and damage to the
inventory is held before being sold
existing relationship.
The quicker the rate of inventory turnover, the less
time funds are frozen in inventory, which is the
least liquid CA 7.2. Inter-Firm Comparisons
If average inventory= COS, selling these goods will
Comparing the accounting ratios of one business to
take one year, so *365 days = one year. COS =
total inventory sold in the year; therefore, it is another gives valuable results. However, this must be
divided by the average. the inventory gives no. of done carefully, as certain limitations exist.
times inventory is replaced Businesses should compare themselves to other similar
Improve: Sell more goods businesses.
Worsen: Lower sales (higher inventory levels), When making comparisons, remember that:
Over-purchasing inventory, high selling prices,

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CAIE IGCSE ACCOUNTING

Businesses apply different accounting policies (e.g. Accounting statements have limitations, as they cannot
depreciation) comprehensively cover every aspect of a business. They
Different operating policies may be in place, such as are thus limited by:
renting, funding from loans, etc, which affects the Time (Historic Cost): The past cannot be used to
year's SOFP and Profit. predict the future properly. The financial position of
Non-monetary information is not shown on the the business changes from the time the accounting
financial statements (e.g., Staff expertise, the skill of year ends to when financial statements are prepared
the labourers, etc.), but it is very important. (as it still operates)
Not all the information about a business can be found Accounting policies: Different businesses use different
on the financial statements (age of NCA, avg. accounting policies, making meaningful inter-firm
inventory). These can also be used for comparisons, comparisons difficult. If the accounting policy changes,
but are not on the financial statements. then year-to-year comparisons will become
Trends in the patterns of other businesses may not be problematic.
observable, as the financial statements may not be Difference in definition: Adjustments in profit from
available for other years. year to year and firm to firm vary; thus, one should
Not all accounting years are typical. ensure only an apples-to-apples comparison is made.
Year-end dates for businesses vary, so influenced Money Measurement: Non-monetary/non-financial
factors may be different (e.g., low inventory of air factors often affect the financial position of a business,
conditioners in the winter) but these do not appear in the financial statements.
Accounting records are not altered with inflation. E.g., the morale of the workforce, adaption capability
to changing market conditions, Government Policies,
7.3. Interested Parties and the impact of new tech. etc.

Internal users
Owners: monitoring performance and progress.
8. Accounting Principles and
Gauge profitability.
Prospective shareholders will look at investment
Policies
ratios (investment ratios not a part of the syllabus)
Managers: Same reasons as owners, just that the 8.1. Accounting Principles
business is managed by an employee, not the owner.
External users: Business Entity/Accounting entity and ownership
Bank manager: To know whether loans or overdrafts A business's owner is regarded as completely
can be granted, to see if the business has enough separate from the business and vice versa.
funds to pay. The personal assets, spending, liabilities, etc. The
Other Lenders: To see if repayment can be made. owner does not appear in the business's accounting
Creditors/Trade payables (present and potential): To records and vice versa. Every (financial) transaction is
determine the credit limit and length of credit allowed. recorded from the viewpoint of the business.
To know the liquidity position and the trade payables If a transaction involves both the owner and the
collection period. business, it involves either the capital A/C the
Potential buyers and investors: To know the drawings A/C, or the current A/C
profitability of the business and market value of the Duality/Dual aspect
assets. Every (financial) transaction has two aspects- a giving
Club members: To know if the club can continue to and a receiving.
operate. Applied in the double entry system of bookkeeping
Customers (Minor point): ensuring the continuity of Money measurement
the supply of goods. Only info. Which can be expressed in terms of money
Employees and trade unions: to know if the business can be recorded in the accounting records.
can continue to operate, thus providing jobs, paying Several aspects of a business, such as staff expertise,
adequate wages, and possibly contributing to pension the morale of the workforce, the release of a
schemes. competitor product, etc. It will not be shown in the
Government Departments: Compiling business accounting records as its value cannot be given a
statistics and/or checking if the correct tax is paid. concrete monetary value.
Money is a traditionally recognized unit of measuring
7.4. Limitations of Accounting the value of an item/ transaction. It is factual and not
based on personal opinions.
Statements Realisation

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

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CAIE IGCSE ACCOUNTING

free from error and bias. Financial statements must statements because it is thought to be too difficult to
be capable of being independently verifiable and free understand.
from any significant errors. Whenever judgments or Comparability: a financial report can only be
estimates are being made, suitable caution must be effectively compared with reports for other periods of
taken. the same or similar businesses if similarities and
Understandability: financial reports must be capable differences can be identified. The differences in
of being understood by the users of that report (who policies must be identified to make valid comparisons
are assumed to have basic accounting knowledge). No
information should be omitted from the financial

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CAIE IGCSE
Accounting

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