IGCSE Cambridge Accounting (0452) – Complete Syllabus Notes
1. The Fundamentals of Accounting
- Purpose of accounting: record, classify, summarise and interpret financial information to aid decision‑making for owners, managers, investors and other users.
- Book‑keeping vs. accounting: book‑keeping is the systematic recording of transactions; accounting adds interpretation, analysis and preparation of financial statements.
- Business vs. personal accounts: only business transactions are recorded in the accounting records.
- Accounting equation: Assets = Liabilities + Owner’s Equity
- Double‑entry bookkeeping: every transaction affects at least two accounts – one debit and one credit – so total debits always equal total credits.
- Capital vs. revenue transactions:
- Capital transactions affect owner’s equity (e.g., capital introduced, drawings).
- Revenue transactions affect profit or loss (e.g., sales, expenses).
- Non‑trading organisations: charities, clubs and societies record receipts‑payments and income‑expenditure statements rather than profit‑and‑loss accounts.
2. Sources & Recording of Data
2.1 Source documents (primary evidence)
| Document | Purpose |
|---|
| Invoice (sales / purchase) | Evidence of a sale or purchase on credit. |
| Receipt | Proof of cash received or paid. |
| Credit note / Debit note | Adjustments to previously issued invoices. |
| Bank statement | Basis for bank reconciliation. |
| Petty‑cash vouchers (imprest system) | Small cash payments; replenished to a fixed amount. |
| Sales order / Purchase order | Pre‑transaction authorisation. |
2.2 Books of prime entry
- Cash book – records all cash receipts and payments (bank and hand‑cash).
- Sales journal – records credit sales of goods.
- Purchases journal – records credit purchases of goods.
- General journal – records non‑regular transactions (e.g., depreciation, accruals, corrections).
- Petty‑cash book (imprest) – records small cash outflows and the periodic top‑up.
2.3 Ledgers and control accounts
- Sales ledger (debtors ledger) – individual customer accounts.
- Purchases ledger (creditors ledger) – individual supplier accounts.
- Control accounts – summary totals of the sales and purchases ledgers, posted to the general ledger.
- General ledger – contains all nominal and real accounts, including control accounts.
3. Verification of Accounting Records
3.1 Trial Balance
- Prepared at the end of an accounting period.
- Lists debit balances in one column and credit balances in another.
- Purpose: check that total debits = total credits.
- Limitations: it does not detect errors of omission, commission, or transactions recorded in the wrong accounts if debits and credits remain equal.
3.2 Types of errors and correction
| Error type | Effect on trial balance | Typical correction |
|---|
| Omission (transaction not recorded) | No effect – both debit and credit missing. | Enter the missing journal entry. |
| Commission (wrong amount, correct side) | No effect. | Debit/credit the difference to the correct account. |
| Reversal (debit entered as credit and vice‑versa) | No effect. | Reverse the entry (swap debit and credit). |
| Single‑sided error (debit or credit omitted) | Trial balance will not balance. | Enter the missing side. |
| Transposition error (e.g., £530 recorded as £350) | May or may not affect balance. | Adjust with a correcting entry. |
| Posting to wrong account | No effect. | Use a journal entry to move the amount to the correct account. |
3.3 Use of a suspense account
- Temporary holding account for differences that cannot be immediately identified.
- Balances are investigated and cleared before the final trial balance is approved.
3.4 Bank reconciliation
- Start with the balance shown on the bank statement.
- Add: deposits in transit (not yet credited by the bank).
- Deduct: outstanding cheques (issued but not yet presented).
- Adjust for any bank errors.
- The adjusted bank balance should equal the cash book balance.
4. Accounting Procedures
4.1 Capital vs. revenue
- Capital items – long‑term assets, drawings, capital introduced.
- Revenue items – sales, purchases, expenses, depreciation.
4.2 Depreciation
| Method | Formula | When used |
|---|
| Straight‑line | (Cost – Residual value) ÷ Useful life | Uniform usage over the asset’s life. |
| Reducing balance | Opening NB × (Rate ÷ 100) | Higher expense in early years; asset loses value quickly. |
| Revaluation depreciation | Revalued amount – Accumulated depreciation | When an asset is re‑valued upwards; a new depreciation charge is calculated on the revalued amount. |
4.3 Accruals, pre‑payments and pre‑received income
- Accrued expenses – incurred but not yet paid (e.g., wages payable).
- Accrued income – earned but not yet received (e.g., interest receivable).
- Pre‑payments – cash paid in advance for a future expense (e.g., insurance prepaid).
- Pre‑received income – cash received before the related revenue is earned (e.g., advance rent).
4.4 Bad debts & provision for doubtful debts
- Write‑off: Irrecoverable debts are debited to Bad‑Debts Expense and credited to Debtors.
- Provision for doubtful debts: Estimated % (usually 2‑5 %) of trade receivables is charged to the profit‑and‑loss account.
Journal entry:
Debit Bad‑Debts Expense X
Credit Provision for Doubtful Debts X
4.5 Inventory valuation
- Valued at the lower of cost and net realisable value (NRV).
- Cost includes purchase price, import duties, transport, handling and other directly attributable costs.
- NRV = Estimated selling price – Estimated costs of completion & disposal.
5. Preparation of Financial Statements
5.1 Income statement (Profit & Loss Account)
- Revenue (sales, interest, other income)
- Less: Cost of Goods Sold (COGS)
- = Gross profit
- Less: Operating expenses (wages, depreciation, rent, etc.)
- = Net profit (or loss)
5.2 Statement of Financial Position (Balance Sheet)
| Assets | Liabilities & Equity |
|---|
| Non‑current assets (property, plant, equipment) |
Non‑current liabilities (long‑term loans) |
| Current assets (stock, debtors, cash) |
Current liabilities (creditors, bank overdraft) |
|
Owner’s equity (capital, drawings, retained profit) |
5.3 Statement of Changes in Equity (limited companies)
- Shows opening capital, profit for the year, dividends (or drawings), and closing capital.
5.4 Additional statements required by the syllabus
- Manufacturing account – calculates prime cost, factory overhead and cost of production for manufacturers.
- Opening / Closing statements of affairs – used when records are incomplete (e.g., start‑up of a sole trader).
- Club / Society accounts – receipts‑payments account and income‑expenditure account.
- Incomplete records – mark‑up, margin and inventory turnover calculations are required to prepare a statement of affairs.
6. Ratio Analysis – Calculation, Interpretation & Use
6.1 Inventory Turnover (Times)
The inventory turnover ratio shows how many times a business sells and replaces its stock during a period (normally a year).
Definition
Inventory turnover (times) = Cost of Goods Sold ÷ Average Inventory
Average Inventory
Average Inventory = (Opening Inventory + Closing Inventory) ÷ 2
Step‑by‑Step Calculation
- Obtain COGS from the income statement.
- Read opening and closing inventory figures from the balance sheet.
- Calculate average inventory.
- Divide COGS by average inventory.
Interpretation checklist
- Higher turnover → efficient use of stock; goods are sold quickly.
- Very high turnover may indicate frequent stock‑outs and lost sales.
- Low turnover suggests over‑stocking, obsolete items or weak demand.
- Compare with industry averages and the company’s own historic figures.
Worked Example
ABC Ltd. – data for the year ended 31 December 2024
| Item | Amount (£) |
|---|
| Opening inventory | 45,000 |
| Closing inventory | 55,000 |
| Cost of Goods Sold (COGS) | 300,000 |
Solution
- Average inventory = (45,000 + 55,000) ÷ 2 = 50,000
- Inventory turnover = 300,000 ÷ 50,000 = 6 times
Interpretation: The business sold and replenished its stock six times during the year. If the industry average is 8 times, ABC may need to review purchasing or sales strategies.
Related Ratio – Days Stock Outstanding (DSO)
Days stock = 365 ÷ Inventory turnover
For a turnover of 4 times: 365 ÷ 4 ≈ 91 days.
6.2 Other Required Ratios
| Ratio | Formula | Interpretation checklist |
|---|
| Gross Profit Margin |
(Gross Profit ÷ Sales) × 100 |
Higher % → better control of production/purchasing costs; compare with industry. |
| Net Profit Margin |
(Net Profit ÷ Sales) × 100 |
Shows overall profitability after all expenses; low % may signal high overheads. |
| Return on Capital Employed (ROCE) |
(Net Profit ÷ Capital Employed) × 100 |
Measures efficiency of capital use; higher is better. |
| Current Ratio |
Current Assets ÷ Current Liabilities |
≥ 1 indicates ability to meet short‑term obligations; very high may imply idle cash. |
| Acid‑Test (Quick) Ratio |
(Current Assets – Inventory) ÷ Current Liabilities |
Liquidity without relying on stock; ≥ 0.5 is generally acceptable. |
| Receivables Turnover (Times) |
Credit Sales ÷ Average Debtors |
Higher = faster collection; low may indicate credit policy problems. |
| Days Debtors Outstanding (DDO) |
365 ÷ Receivables Turnover |
Shows average collection period; compare with credit terms. |
| Payables Turnover (Times) |
Credit Purchases ÷ Average Creditors |
Higher = faster payment; very high may affect cash flow. |
| Days Creditors Outstanding (DCO) |
365 ÷ Payables Turnover |
Shows average period before paying suppliers. |
6.3 Calculating Mark‑up and Margin (used with incomplete records)
- Mark‑up % = (Selling price – Cost) ÷ Cost × 100
- Margin % = (Selling price – Cost) ÷ Selling price × 100
7. Decision‑Making Using Ratios
7.1 Practical Applications
- Pricing: Use gross profit margin to set selling prices that cover COGS and desired profit.
- Credit policy: Low current ratio or high DDO may prompt stricter credit terms.
- Stock control: Low inventory turnover suggests reviewing purchasing levels or promotional activity.
- Investment decisions: High ROCE indicates attractive returns for potential investors.
- Cash‑flow management: Payables turnover and DCO help plan cash outflows.
7.2 Limitations of Ratio Analysis
- Based on historical data – may not reflect future conditions.
- Different accounting policies (e.g., depreciation methods, inventory valuation) affect comparability.
- Seasonal businesses can produce misleading ratios if figures are not seasonally adjusted.
- Ratios ignore qualitative factors such as market reputation, management quality, or economic climate.
- Single‑period ratios give a snapshot only; trends over several years give a fuller picture.
8. Assessment Practice – Command‑Word Guidance
| Command word | What examiners expect |
|---|
| Define / State | Give a concise definition or short statement (no examples required). |
| Explain | Provide a clear description with reasons or mechanisms; may include one example. |
| Calculate | Show all steps, use correct formulas, give the final answer with units. |
| Interpret / Comment | Analyse a result, discuss its significance, compare with benchmarks. |
| Discuss | Present at least two contrasting points of view, evaluate advantages/disadvantages. |
| Evaluate | Make a judgement based on evidence, consider limitations, suggest improvement. |
9. Practice Questions
- Calculation – XYZ Co. had opening inventory £20,000, closing inventory £30,000 and COGS £150,000. Calculate the inventory turnover ratio.
- Interpretation – The inventory turnover of XYZ Co. is 6 times. Comment on what this indicates about its stock management.
- Days Stock Outstanding – A company’s inventory turnover is 4 times per year. How many days, on average, does inventory remain in stock? (Use 365 days.)
- Gross Profit Margin – From a profit‑and‑loss account: Sales £500,000; COGS £300,000. Calculate the gross profit margin.
- Current Ratio – Current assets £120,000; current liabilities £80,000. Calculate and interpret the current ratio.
- Journal entry – Record a provision for doubtful debts equal to 3 % of trade receivables of £40,000.
- Bank reconciliation – Reconcile the following: Bank statement balance £5,200; deposits in transit £800; outstanding cheques £600; bank error (under‑stated deposit) £200.
- Manufacturing account – Direct materials £45,000; direct labour £30,000; factory overhead £20,000; opening work‑in‑process £5,000; closing work‑in‑process £7,000. Calculate the cost of production.