Current ratio

IGCSE Accounting 0452 – Complete Syllabus Notes (2026)

1. Fundamentals of Accounting

1.1 Purpose of Accounting

• Record, classify and summarise a business’s financial transactions.
• Provide information for internal users (management) and external users (investors, creditors, tax authorities, regulators).

1.2 The Accounting Equation

Assets = Liabilities + Owner’s Equity

• Assets – resources owned or controlled by the business.
• Liabilities – obligations payable to outsiders.
• Owner’s Equity – residual interest of the owners (capital + retained profit/earnings).

1.3 Book‑keeping vs. Accounting

Book‑keeping	Accounting
Recording transactions chronologically (journals, ledgers, cash book).	Interpreting, analysing and presenting information (financial statements, ratios, notes).
Focus on accuracy, completeness and compliance with the double‑entry system.	Focus on relevance, comparability, usefulness and decision‑making.

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2. Sources & Recording of Data

2.1 Source Documents

• Sales invoice (credit & cash)
• Purchase invoice (credit & cash)
• Credit note / Debit note (returns, allowances)
• Receipt & payment voucher
• Bank statement
• Payroll sheet
• Petty‑cash voucher (imprest system)

2.2 Books of Prime Entry

• Sales journal – records all credit sales.
• Purchases journal – records all credit purchases.
• Sales returns (debit) journal – records returns of goods sold.
• Purchases returns (credit) journal – records returns of goods bought.
• Cash book – records all cash receipts and payments (two‑column format).
• General journal – records non‑repeating, adjusting, and correcting entries (e.g., depreciation, accruals, error corrections).
• Petty‑cash imprest book – records small cash payments; replenished by a single entry that totals the receipts.

2.3 The Double‑Entry System

Every transaction affects at least two accounts – one debit and one credit – keeping the accounting equation in balance.

2.4 Posting to Ledger Accounts

2.5 Trade & Cash Discounts

• Trade discount – reduction off the list price, applied before the invoice is issued (not shown in the books).
• Cash discount – incentive for early payment; recorded as a reduction to revenue (sales discount) or purchase cost (purchase discount).

2.6 Imprest System (Petty Cash)

1. Set a fixed imprest amount (e.g., £200).
2. Make small cash payments and record each on a petty‑cash voucher.
3. When the cash left is low, total the vouchers, write a single entry:
   Dr Petty‑cash expenses (various accounts) £ X
   Cr Cash £ X
4. Re‑issue the imprest amount (£200) to bring the cash on hand back to the original level.

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3. Verification of Accounting Records

3.1 Trial Balance

A list of all ledger balances (debits and credits) at a particular date. Total debits must equal total credits. Any imbalance indicates an error in the posting or journalising stage.

3.2 Common Error Types

Error	Effect on Trial Balance
Omission of a transaction	No effect (both debit and credit omitted)
Commission error (debit entered as credit or vice‑versa)	Imbalance
Transposition error (e.g., £540 recorded as £450)	Imbalance (difference is a multiple of 9)
Single‑sided entry (only debit or only credit)	Imbalance
Incorrect amount recorded on one side only	Imbalance

3.3 Bank Reconciliation – Detailed Steps

1. Start with the **balance as per the bank statement**.
2. Add **deposits in transit** (cash receipts recorded in the cash book but not yet cleared by the bank).
3. Deduct **outstanding cheques** (cheques issued and recorded in the cash book but not yet presented to the bank).
4. Adjust for **bank errors** (e.g., a deposit recorded for the wrong amount by the bank).
5. Adjust for **direct credits/debits** by the bank (e.g., bank charges, interest) that are not yet recorded in the cash book.
6. Result = **Adjusted cash book balance** (should equal the adjusted bank statement balance).

3.4 Control Accounts

Control accounts summarise large groups of similar transactions and help detect errors in subsidiary ledgers.

• Sales‑ledger control account – total of all individual customer balances.
• Purchases‑ledger control account – total of all individual supplier balances.

Typical entries for each control account:

Sales‑ledger Control	Debit	Credit
Credit sales (from sales journal)		£ X
Sales returns (debit journal)	£ Y
Cash received from customers	£ Z
Discount allowed to customers	£ D
Bad debts written off	£ B

Similar structure applies to the Purchases‑ledger control account (credit purchases, purchase returns, payments to suppliers, discount received, etc.).

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4. Accounting Procedures

4.1 Capital vs. Revenue Expenditure

• Capital expenditure – creates or enhances a long‑term asset (e.g., purchase of machinery, building extensions).
• Revenue expenditure – incurred in the ordinary running of the business (e.g., repairs, wages, utilities).

4.2 Depreciation

Method	Formula	Example (Cost £10,000, Residual £0, Life 5 years)
Straight‑line	Annual charge = (Cost – Residual) ÷ Useful life	£10,000 ÷ 5 = £2,000 per year
Reducing balance (e.g., 20 %)	Charge = Opening book value × Rate	Year 1: £10,000 × 20 % = £2,000 Year 2: (£10,000‑£2,000) × 20 % = £1,600 …
Revaluation (fair market value)	Adjust asset to market value; increase recorded in a revaluation reserve.	Not required for IGCSE calculations but good to know.

4.3 Disposals of Fixed Assets

When an asset is sold or scrapped:

1. Remove the original cost from the Fixed‑asset account.
2. Remove the accumulated depreciation.
3. Record any cash received.
4. Recognise a gain or loss:
   Gain = Proceeds – (Original cost – Accumulated depreciation)
   Loss = (Original cost – Accumulated depreciation) – Proceeds

4.4 Accruals & Pre‑payments

• Accrued expense – cost incurred but not yet paid.
  Journal entry: Dr Expense £ X / Cr Accrued Expenses £ X
• Accrued income – revenue earned but not yet received.
  Journal entry: Dr Accrued Income £ X / Cr Revenue £ X
• Pre‑paid expense – payment made before the related expense is incurred.
  Journal entry (initial payment): Dr Pre‑payments £ X / Cr Cash £ X
  Adjustment at period‑end: Dr Expense £ X / Cr Pre‑payments £ X
• Pre‑received income – cash received before the related revenue is earned.
  Journal entry (initial receipt): Dr Cash £ X / Cr Pre‑received Income £ X
  Adjustment at period‑end: Dr Pre‑received Income £ X / Cr Revenue £ X

4.5 Irrecoverable Debts & Provision for Doubtful Debts

• Irrecoverable (bad) debt – written off when it is clear the customer cannot pay.
  Journal entry: Dr Bad‑debts Expense £ X / Cr Trade Receivables £ X
• Provision for doubtful debts – estimate of receivables that may become bad.
  1. At year‑end, calculate the required provision (e.g., 5 % of trade receivables).
  2. If the existing provision is lower, create an additional provision:
     Dr Provision for Doubtful Debts Expense £ Δ / Cr Provision for Doubtful Debts £ Δ
  3. If the existing provision is higher, reverse the excess:
     Dr Provision for Doubtful Debts £ Δ / Cr Provision for Doubtful Debts Expense £ Δ

4.6 Inventory Valuation

• Two methods accepted for IGCSE calculations:
  • Weighted‑average cost – total cost of goods available ÷ total units.
  • Specific identification – used when items are distinct (e.g., cars, jewellery).
• Lower of cost and net realisable value (NRV) – if the estimated selling price less any costs to sell (NRV) is lower than cost, inventory is written down to NRV.
  Effect: reduces closing stock, reduces profit, and reduces equity.

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5. Preparation of Financial Statements

5.1 Statement of Financial Position (Balance Sheet)

Non‑current assets	£	Non‑current liabilities	£
Property, plant & equipment (net)	—	Long‑term loans	—
Investments	—	Deferred tax	—

Current assets	£	Current liabilities	£
Cash & cash equivalents	—	Bank overdraft	—
Trade receivables	—	Trade payables	—
Stock (inventory)	—	Accrued expenses	—
Pre‑payments	—	Other current liabilities	—

Equity (Owner’s/Shareholders’ equity)	£
Owner’s/Partners’ capital (opening)	—
Add: Net profit for the year	—
Less: Drawings / Partner withdrawals	—
Closing capital	—

5.2 Statement of Changes in Equity (Limited Companies)

Component	£
Share capital (opening)	—
Issue of new shares	—
Retained earnings (opening)	—
Add: Profit for the year	—
Less: Dividends	—
Closing retained earnings	—
Closing total equity	—

5.3 Income Statement (Profit & Loss Account)

Revenue & Gains	£
Sales (net of returns & discounts)	—
Other income	—
Cost of sales	(—)
Gross profit	—
Operating expenses (wages, rent, depreciation, etc.)	(—)
Net profit before tax	—
Tax expense	(—)
Net profit after tax	—

5.4 Business Forms and Their Specific Statements

• Sole trader – Statement of financial position shows “Owner’s capital”. No separate statement of changes in equity is required.
• Partnership – Includes an appropriation account** that shows:
  • Net profit
  • Interest on partners’ capital (if applicable)
  • Salary/commission to partners (if applicable)
  • Remaining profit to be divided according to the profit‑sharing ratio.
• Limited company – Requires a statement of changes in equity (share capital, retained earnings) and a separate note on dividends.
• Clubs & societies (non‑profit) – Use an income & expenditure account (not a profit & loss) and a receipts & payments statement**:
  • Receipts & payments – cash‑flow style (cash received and cash paid).
  • Income & expenditure – accrual basis (recognises income earned and expenses incurred).

5.5 Manufacturing Accounts (Full Set)

1. Opening stock of raw materials
2. + Purchases of raw materials
3. + Direct wages (labour) + Direct expenses (e.g., power for machines)
4. – Closing stock of raw materials = Raw material used
5. + Direct wages & direct expenses = Prime cost
6. + Production overheads (indirect labour, factory rent, depreciation of plant) = Factory cost of production
7. + Opening work‑in‑progress (WIP) – Closing WIP = Cost of goods manufactured
8. + Opening finished goods – Closing finished goods = Cost of goods sold

5.6 Incomplete Records (Single‑Entry) – Methods

• Gross‑profit method – Estimate COGS from known gross profit margin and then derive closing stock.
• Stock‑turnover method – Uses the relationship:
  Opening stock + Purchases – Closing stock = Cost of goods sold
  where purchases are estimated from the cash book and any known credit purchases.
• Opening/Closing Statements of Affairs – Summarise assets, liabilities and capital at the start and end of the period; the change in capital equals profit less drawings.

5.7 Example – Opening & Closing Statements of Affairs

Opening Statement of Affairs	£
Assets (cash, stock, equipment)	45,000
Liabilities (creditors)	15,000
Capital (owner’s equity)	30,000

Closing Statement of Affairs	£
Assets	55,000
Liabilities	18,000
Capital (closing)	37,000

Change in capital = £7,000 → Profit for the year = £7,000 – Drawings (if any).

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6. Analysis & Interpretation (Accounting Ratios)

All ratios use figures from the same accounting period. Ratios are useful for internal decision‑making and for communicating with external parties.

6.1 Liquidity Ratios

• Current Ratio
  $$\text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}}$$ Interpretation: Ratio > 1 indicates the business can meet its short‑term obligations; very high ratios may indicate excess cash or inefficient use of assets.
• Acid‑Test (Quick) Ratio
  $$\text{Quick Ratio} = \frac{\text{Current Assets} - \text{Stock}}{\text{Current Liabilities}}$$ Interpretation: Excludes stock because it may be slow to convert to cash; a ratio ≥ 1 is generally satisfactory.

6.2 Activity (Efficiency) Ratios

• Inventory Turnover
  $$\text{Inventory Turnover} = \frac{\text{Cost of Sales}}{\text{Average Stock}}$$ Average Stock = (Opening stock + Closing stock) ÷ 2
• Receivables Turnover
  $$\text{Receivables Turnover} = \frac{\text{Credit Sales}}{\text{Average Trade Receivables}}$$
• Payables Turnover
  $$\text{Payables Turnover} = \frac{\text{Credit Purchases}}{\text{Average Trade Payables}}$$

6.3 Profitability Ratios

• Gross Profit Margin (GPM)
  $$\text{GPM} = \frac{\text{Gross Profit}}{\text{Sales}} \times 100$$
• Net Profit Margin (NPM)
  $$\text{NPM} = \frac{\text{Net Profit}}{\text{Sales}} \times 100$$
• Return on Capital Employed (ROCE)
  $$\text{ROCE} = \frac{\text{Profit before interest and tax}}{\text{Capital Employed}} \times 100$$ Capital Employed = Non‑current assets + Working capital (Current assets – Current liabilities)

6.4 Inter‑firm Comparison & Interested Parties

• Inter‑firm comparison – Ratios of a business are compared with:
  • Industry averages (published by trade bodies or textbooks).
  • Key competitors’ published figures.
  • Previous periods of the same business (trend analysis).
  Caution: Differences in accounting policies (e.g., depreciation method, inventory valuation) can make direct comparison misleading.
• Interested parties who use ratios:
  • Managers – for planning, budgeting and performance monitoring.
  • Creditors – to assess repayment ability (liquidity ratios).
  • Investors – to evaluate profitability and growth potential.
  • Employees – to gauge job security and potential profit‑sharing.
  • Tax authorities – to check consistency of reported profits.

6.5 Limitations of Ratio Analysis

• Ratios provide a snapshot; they do not capture seasonal fluctuations unless comparable periods are used.
• Qualitative factors (management competence, market conditions, brand reputation) are not reflected.
• Different accounting policies (e.g., depreciation rates, inventory methods) affect the numbers.
• Ratios may be distorted by one‑off items (e.g., large asset disposals, extraordinary gains).

6.6 Worked Example – Full Set of Ratios (ABC Ltd.)

Item	£
Current assets	57,000
Current liabilities	32,000
Stock (opening)	22,000
Stock (closing)	25,000
Cost of sales	48,000
Sales (revenue)	80,000
Trade receivables (average)	12,000
Trade payables (average)	9,000
Net profit	9,200
Profit before interest & tax	10,500
Non‑current assets (net)	40,000

• Current Ratio = 57,000 ÷ 32,000 = 1.78
• Quick Ratio = (57,000 – 25,000) ÷ 32,000 = 1.00
• Average Stock = (22,000 + 25,000) ÷ 2 = 23,500
• Inventory Turnover = 48,000 ÷ 23,500 ≈ 2.04 times per year
• Receivables Turnover = 80,000 ÷ 12,000 ≈ 6.67 times
• Payables Turnover = (Purchases = Cost of sales + Closing stock – Opening stock) ÷ 9,000
  Purchases = 48,000 + 25,000 – 22,000 = 51,000
  Payables Turnover = 51,000 ÷ 9,000 ≈ 5.67 times
• Gross Profit = Sales – Cost of sales = 80,000 – 48,000 = 32,000
• GPM = 32,000 ÷ 80,000 × 100 = 40 %
• NPM = 9,200 ÷ 80,000 × 100 = 11.5 %
• Capital Employed = Non‑current assets + (Current assets – Current liabilities)
  = 40,000 + (57,000 – 32,000) = 65,000
• ROCE = 10,500 ÷ 65,000 × 100 ≈ 16.2 %

Interpretation (brief): The business is comfortably liquid (current ratio > 1.5), but the quick ratio of exactly 1.00 suggests it relies heavily on stock to meet short‑term debts. Inventory turns just over twice a year, indicating relatively slow movement. Profitability is decent with a 40 % gross margin and an 11.5 % net margin; ROCE of 16 % compares favourably with typical industry benchmarks of 10‑15 %.