IGCSE ACCOUNTING

1. Fundamentals of Accounting
1.1 Purpose of Accounting
● Book-keeping: the detailed recording of all financial transactions of a business
○ Records not maintained → something will be overlooked (prone to errors)
○ Basis: double entry book-keeping
● Accounting: Using book-keeping records to prepare financial statements & assist in
decision making
○ To see if business is making P/L
○ Profit: Total revenue exceeds total costs
○ Loss: Total costs exceeds total revenue
● Purpose of maintaining accounting records
○ Information recorded is used to make IS & SOFP
■ Allows for calculation of P/L
■ Understand the progress/growth of the business
■ Base the business future & make decisions based on P/L
1.2 Accounting Equation
● SOFP: statement of the assets & liabilities of a business on certain date
● Assets = Liabilities + Capital
○ Assets: Items owned by the business
■ Non-current assets (NCA)
● Assets obtained for use (not for resale) which helps the business earn
revenue
● Long term assets
● Eg. equipment, premises, motor vehicles, fixtures & fittings etc.
■ Current Assets (CA)
● Short term assets whose amounts are constantly changing
● Eg. bank, trade receivables, inventory etc.
● Inventory
○ Goods a business has available for resale
● Trade Receivables
○ Represents the amount owed to the business by its credit
customer
○ Liabilities: Amounts owed by the business to others
■ ↑ liabilities = ↑ assets
■ Non-current liabilities (NCL)
● Amounts owed that aren’t due for repayment within the next year
● Eg. long-term loan, mortgage etc.
■ Current Liabilities (CL)
● Amounts owed that are due for repayment within the next year
● Eg. trade payable, other payable, bank overdraft
● Trade payable
○ The amount the business owes to the credit supplier
○ Owner’s equity/capital: Total resources provided by the owner
■ More available, less need to be borrowed
■ ↑ capital = ↑ assets
■ Drawings
● Any value taken from the business by the owner of that business
2. Sources & recording of data
2.1 Double entry system of book-keeping
● Process of making a debit entry & a credit entry for each transaction
● Advantages
○ Less risk of errors/fraud
○ Easier to refer to previous transactions
○ Financial position can be ascertained
 ○ Easier to prepare the financial statements & make business decisions
● Format

● Income: Money that an individual/business received in exchange for providing a good/service

○ Eg. Sales, rent received, commission
● Expenses: Cost of an asset used by a company in its operations to produce revenues
○ Eg. Advertising, rent, wages, purchases, electricity & water
● Carriage: cost of transporting goods
○ Carriable inwards: cost of bringing the goods to the business
○ Carriage outwards: cost of delivering goods to the customer
● Entries
○ Sales
■ Dr bank a/c
■ Cr sales a/c
○ Purchases
■ Dr purchase a/c
■ Cr bank a/c
● Ledger
○ Divided based on the types of accounts they contain
■ Several people can bookeep simultaneously
○ Sales ledger
■ Ledger in which the accounts of credit customers are maintained
■ Dr balance = customers owe money
■ Cr balance = business owes customers goods/customer has overpaid
○ Purchases ledger
■ Ledger in which the accounts of credit suppliers are maintained
■ Dr balance = suppliers owe the business goods
■ Cr balance = business owes supplier money
○ Nominal (general) ledger
■ Ledger where all other accounts are maintained
○ Cash books (main CB & petty cash book)
■ A book of prime entry
● Transactions should be recorded before being entered in the ledger
● Then used for cash a/c & bank a/c
■ Part of the double entry system
■ Impossible to have a credit balance on a cash a/c
■ 2 column cash book
● Combines cash & bank together
● Dr Money received
● Cr Money paid out

■ 3 column cash book

● Extra column to record cash discount
○ Allowance given to a customer when an account is settled
within a time limit set by the supplier
○ Encourages customers to pay promptly
○ Not part of double entry system; must be transferred
■ Dr total disc allowed column into disc allowed a/c in
nominal ledger
 ■ Cr total disc received column into disc received a/c in
nominal
● Discount allowed
○ Business allows discount to its credit customers
○ Expense to the business (receive less)
○ Cr: discount in debtors a/c
○ Enter amount into discount allowed column
● Discount received
○ Business receives discount from its credit suppliers
○ Income for the business (pay less)
○ Dr: discount in creditor’s a/c
○ Enter amount into discount received column

■ Contra entries
● Appears on both sides of the cash book
● ‘C’ entered in folio column
● Recorded by applying the usual rules of double entry
○ Dr a/c receiving money
○ Cr a/c giving money
○ Eg. Record surplus cash paid into bank
■ Dr bank a/c (write ‘cash’ in details)
■ Cr cash a/c (write ‘bank’ in details)
○ Eg. Record cash withdrawn from the bank
■ Dr cash a/c (write ‘bank’ in details)
■ Cr bank a/c (write ‘cash’ in details)
■ Bank overdraft
● Liability
○ Amount the business owes the bank
● More has been paid out of the bank than was put into the bank account
● Credit balance on bank a/c = bank overdraft
● To reduce:
○ Collecting debtors
○ Reducing inventory
○ Delaying payment of creditors
○ Reduce drawings
○ Increase capital
○ Sell NCAs
○ Long term loan
■ Dishonoured cheque
● Cheque received which the debtor’s bank refuses to pay
● Due to error (no signature/no date/amount in figures & words don’t
match)
● Debtor doesn’t have enough money in their bank a/c
○ Petty Cash Book
■ Uses
● Records low value cash payments
○ Not necessary to record small cash payments individually in a
cash book/ledger
● Lists the transactions for transferring to ledger accounts
● Acts as a ledger for petty cash transactions
■ Imprest System
 ● Amount spent each period is restored so that the petty cashier starts
each period with the same amount
● Chief cashier is aware of exactly how much is sent each period
■ Petty cash voucher: document that requests for money
● Shows the purpose for the money
● Name & signature of the person receiving the cash
■ Reason for difference in the petty cash
● Lost/missing voucher
● Lost/stolen cash
● Error brought forward/ in counting cash
● Amount not recorded
■ Format

■ Advantages
● Number of entries in the main cash book is reduced
○ Main cashier’s burden is reduced
● Chances of mistakes in recording is minimised
2.2 Business documents
● Can be received/issued by the business to record sale/purchase of goods (proof of transaction)
● Encourage customers to pay invoices
○ Send statement
○ Offer cash discount
○ Limit credit (no more credit sales)
○ Charge interest on overdue a/cs
● Invoice
○ Document issues by the supplier of goods on credit showing the details of quantities &
prices of goods supplied
○ Contents
■ Name & address of supplier & customer
■ Date
■ Full details of goods purchased
○ Issued by the supplier when goods sold on credit
○ Trade discount: reduction in the price of goods
■ Rate often increases according to the
quantity purchased
■ Encourages bulk purchases
■ Given to businesses in the same trade
● Businesses won’t be prepared to
pay the full rate (need to make profit by selling goods)
■ Shown as a deduction on the invoice
○ Entries
■ Customer: Cr purchase
 ■ Supplier: Cr Sales
● Debit Note
○ Issued by a purchaser of goods on credit to request a reduction in invoice received
○ To inform the supplier of any
shortages/exchanges/faults
○ Contents
■ Name & address of supplier & customer
■ Date
■ Full details of goods returned/overcharged
○ No entries made
○ Supplier may re-issue an invoice
● Credit Note
○ Issued by the seller of the goods on credit to notify of
a reduction in an invoice previously issued
○ Contents
■ Name & address of supplier & customer
■ Date
■ Full details of goods returned/overcharged
○ Entries
■ Customer: records purchase return
■ Supplier: records sales return
● Statement of Account
○ Document issued by the seller of goods on credit,
summarising transactions of the month
○ Purpose
■ Reminder to the customer of the amount outstanding
■ Confirmation of settlement terms
■ Ensures no errors have been made by
customer or supplier
○ Contents
■ Name & address of supplier & customer
■ Date
■ Balance owing at the start & end of the
month
■ Invoice & credit notes issued
■ Payments received
■ Cash discount allowed
○ Issued at the end of the month by the supplier to the customer
○ No entries
● Cheques
○ A written order to a bank to pay a stated sum of money to the person/business named
on the order
○ Issued by the customer to the supplier
○ Contents
■ Date
■ Amount
■ Payee
○ Supplier uses counterfoil of the
paying-in slip to make cash book
entry to show money received &
discount allowed
○ Customer keeps cheque counterfoil
■ Used to make cash book entry to show money paid & discount received
● Receipt