Cambridge IGCSE Accounting (0452) – Comprehensive Revision Notes
How to Use These Notes
- AO1 – Knowledge & Understanding: Definitions, concepts and formulae are highlighted in bold.
- AO2 – Application: Worked examples and step‑by‑step calculations show how to apply the theory.
- AO3 – Analysis & Evaluation: “Common mistakes”, “What‑if” questions and brief commentary help you evaluate information.
1. The Fundamentals of Accounting
1.1 Purpose, Users & Role in Decision‑Making
- Records, classifies and reports financial transactions.
- Primary users: owners, managers, creditors, employees, government and the public.
- Monitoring & Decision‑making: Accounting information enables performance evaluation (profitability, liquidity) and informs strategic choices such as pricing, investment and financing.
1.2 The Accounting Equation
Assets = Liabilities + Owner’s Equity
| Component | Explanation |
|---|
| Assets | Resources owned or controlled by the business. |
| Liabilities | Obligations to outsiders. |
| Owner’s Equity | Residual interest of the owners (capital, retained earnings). |
1.3 Bookkeeping vs. Accounting
- Bookkeeping: Systematic recording of transactions (journals, ledgers, books of prime entry).
- Accounting: Interpretation, classification, summarising and communicating the recorded data.
2. Sources and Recording of Data
2.1 Business Documents (Prime Sources)
| Document | Typical Use |
|---|
| Invoice (sales & purchase) | Record revenue or expense. |
| Receipt | Proof of cash receipt. |
| Credit note | Return of goods or price reduction. |
| Bank statement | Basis for bank reconciliation. |
| Payroll sheet | Record direct labour and related deductions. |
2.2 Books of Prime Entry
| Book | Entries Recorded |
|---|
| Sales journal | All credit sales of goods. |
| Purchases journal | All credit purchases of goods. |
| Cash book (receipts & payments) | All cash receipts and cash payments. |
| Returns journal | Sales returns and purchase returns. |
| General journal | Non‑regular transactions (e.g., depreciation, corrections). |
2.3 Trade Discounts vs. Cash Discounts
- Trade discount: Reduces the invoice price; recorded only in the sales/purchase journal – no journal entry required.
- Cash discount: Given for early payment; recorded when taken.
Example – Cash discount received 2% on £5,000 purchase:
Dr Creditors £5,000
Cr Cash £4,900
Cr Discount Received £100
2.4 Imprest (Petty‑Cash) System
- A fixed amount of cash is kept on hand for small expenditures.
- When the cash runs low, the imprest fund is replenished to its original amount, with the difference recorded as Petty‑Cash Expenses.
2.5 The Double‑Entry System
Every transaction affects at least two accounts – one debit and one credit – keeping the accounting equation in balance.
Example: Purchase of raw material on credit £5,000
Dr Raw Materials Inventory £5,000
Cr Creditors £5,000
2.6 From Journal to Ledger
- Record chronologically in the Journal.
- Post each journal entry to the appropriate Ledger accounts.
- Summarise each ledger to obtain trial‑balance figures.
3. Verification of Accounting Records
3.1 Trial Balance
- List of all ledger balances (debit or credit).
- Totals of debit and credit columns must be equal – indicates that arithmetical errors are unlikely.
3.2 Types of Errors
| Error Type | Effect on Trial Balance |
|---|
| Omission | No effect |
| Commission | No effect |
| Transposition | Often causes imbalance |
| Single‑sided entry | Creates imbalance |
3.3 Control Accounts
3.4 Suspense Account
- Used temporarily to balance a trial balance when the cause of the imbalance is not yet known.
- Investigated and cleared once the error is identified.
3.5 Bank Reconciliation Statement (BRS)
Bank Reconciliation = Bank Balance
+ Deposits in transit
– Outstanding cheques
± Errors (e.g., bank fees not yet recorded)
4. Accounting Procedures
4.1 Capital vs. Revenue Expenditure
| Capital Expenditure | Revenue Expenditure |
|---|
| Purchase of machinery | Repair & maintenance |
| Building extension | Wages of production staff |
| Installation costs | Utilities |
| Legal fees for acquiring land | Advertising |
4.2 Depreciation
- Straight‑Line: Annual charge = (Cost – Residual value) ÷ Useful life
- Reducing‑Balance (Diminishing Value): Charge = Book value × Rate
4.3 Accruals & Pre‑payments
- Accrued expense: Expense incurred but not yet paid (e.g., wages owing).
- Pre‑paid expense: Payment made in advance (e.g., insurance).
4.4 Provisions for Doubtful and Irrecoverable Debts
- Doubtful debts: Estimated % of trade receivables that may not be collected.
Provision = (Estimated % uncollectible) × Trade receivables
- Irrecoverable debts: Debts that have been written‑off as bad.
Dr Bad Debt Expense £X
Cr Trade Receivables £X
If later recovered:
Dr Cash £X
Cr Bad Debt Recovery £X
4.5 Owner’s Drawings of Goods (Sole Trader)
4.6 Inventory Valuation – Lower of Cost or Net Realisable Value (NRV)
- Cost: Purchase price + directly attributable costs (transport, handling, import duties).
- NRV: Estimated selling price – costs of completion & disposal.
- If NRV < Cost, write‑down to NRV; if NRV ≥ Cost, retain cost.
5. Preparation of Financial Statements
5.1 Statements Required by Business Form
| Business Form | Statements Required |
|---|
| Sole trader | Trading account, Profit & Loss account, Balance sheet. |
| Partnership | Trading account, Profit & Loss account, Balance sheet, Appropriation account. |
| Limited company | Statement of Profit or Loss, Statement of Financial Position, Notes to the accounts. |
| Club / Society (non‑profit) | Statement of Financial Activities, Balance sheet (if required). |
| Manufacturing business | Manufacturing account → Cost of Goods Sold → Profit & Loss account → Balance sheet. |
5.2 Partnership Specific Items
- Interest on partners’ loans – recorded as an expense in the profit & loss account and as interest payable in current liabilities.
- Partners’ capital accounts – show each partner’s opening capital, additions (profits, interest, drawings) and closing balance.
- Partner salaries – treated as an expense (if agreed) and deducted before profit is shared.
- Appropriation account – allocates profit after tax to interest, salaries, and the partners’ share of profit.
5.3 Limited Company Share Capital Concepts
- Issued share capital: Total nominal value of shares that have been allotted to shareholders.
- Called‑up share capital: Portion of issued capital that the company has asked shareholders to pay.
- Paid‑up share capital: Amount actually received from shareholders.
- Preference shares – fixed dividend, priority over ordinary shares in liquidation.
- Ordinary shares – voting rights, variable dividends.
5.4 – Manufacturing Accounts: Calculating the Factory Cost of Production
Objective (AO1‑AO2)
Determine the factory cost of production for a given accounting period.
Key Concepts (AO1)
- Raw Materials (RM): Cost of materials purchased and used.
- Direct Labour (DL): Wages of workers directly involved in making the product.
- Factory Overheads (FO): Indirect production costs (depreciation, utilities, indirect labour, etc.).
- Work‑in‑Progress (WIP): Partially completed goods at the start and end of the period.
- Finished Goods (FG): Completed goods ready for sale (used later to calculate COGS).
Structure of the Manufacturing Account
- Opening Stock of Raw Materials
- Add: Purchases of Raw Materials
- Less: Closing Stock of Raw Materials → Raw Materials Consumed
- Add: Direct Labour
- Add: Factory Overheads
- Add: Opening Work‑in‑Progress
- Less: Closing Work‑in‑Progress → Factory Cost of Production
Formulae (AO1)
Raw Materials Consumed
$$\text{RM Consumed}= \text{Opening RM} + \text{Purchases} - \text{Closing RM}$$
Factory Cost of Production (FCP)
$$\text{FCP}= \text{RM Consumed} + \text{Direct Labour} + \text{Factory Overheads} + \text{Opening WIP} - \text{Closing WIP}$$
Cost of Goods Sold (COGS)
$$\text{COGS}= \text{FCP} + \text{Opening Finished Goods} - \text{Closing Finished Goods}$$
Worked Example (AO2)
| Description | Amount (£) |
|---|
| Opening Stock of Raw Materials | 5,000 |
| Purchases of Raw Materials | 22,000 |
| Less: Closing Stock of Raw Materials | 4,500 |
| Raw Materials Consumed | 22,500 |
| Direct Labour | 12,000 |
| Factory Overheads | 8,000 |
| Opening Work‑in‑Progress | 3,000 |
| Less: Closing Work‑in‑Progress | 2,500 |
| Factory Cost of Production | 46,000 |
Step‑by‑Step Calculation
- RM Consumed = 5,000 + 22,000 – 4,500 = £22,500
- Add Direct Labour: 22,500 + 12,000 = £34,500
- Add Factory Overheads: 34,500 + 8,000 = £42,500
- Add Opening WIP: 42,500 + 3,000 = £45,500
- Subtract Closing WIP: 45,500 – 2,500 = £46,000
- Factory Cost of Production = £46,000
Common Mistakes (AO3)
- Confusing factory cost of production with cost of goods sold. Remember COGS also includes opening and closing finished‑goods inventories.
- Omitting opening or closing WIP figures – this distorts the true production cost.
- Charging selling, distribution or administrative expenses to the manufacturing account – they belong in the profit & loss account.
- Using the closing stock of raw materials instead of the opening stock when calculating RM Consumed.
Link to the Profit & Loss Account (AO2)
After the factory cost of production is known, calculate the Cost of Goods Sold (COGS):
$$\text{COGS}= \text{Factory Cost of Production} + \text{Opening Finished Goods} - \text{Closing Finished Goods}$$
COGS is then deducted from sales in the profit & loss account to arrive at gross profit. Operating expenses (selling, distribution, admin) are deducted afterwards to give net profit.
Practice Question (AO1‑AO3)
Company XYZ – data for the year ended 31 March
- Opening Stock of Raw Materials: £6,200
- Purchases of Raw Materials: £28,500
- Closing Stock of Raw Materials: £5,800
- Direct Labour: £14,300
- Factory Overheads: £9,400
- Opening Work‑in‑Progress: £4,100
- Closing Work‑in‑Progress: £3,600
Calculate the factory cost of production.
Solution (AO2)
- RM Consumed = 6,200 + 28,500 – 5,800 = £28,900
- Add Direct Labour: 28,900 + 14,300 = £43,200
- Add Factory Overheads: 43,200 + 9,400 = £52,600
- Add Opening WIP: 52,600 + 4,100 = £56,700
- Less Closing WIP: 56,700 – 3,600 = £53,100
- Factory Cost of Production = £53,100
Quick Checklist (AO1)
- Calculate RM Consumed correctly.
- Include ALL direct and indirect production costs.
- Adjust for opening and closing WIP.
- Do NOT add selling, distribution or admin costs.
- Remember that COGS = FCP + Opening FG – Closing FG.
6. Analysis and Interpretation
6.1 Key Ratios (Full Syllabus List)
| Category | Ratio | Formula |
|---|
| Liquidity | Current Ratio | Current Assets ÷ Current Liabilities |
| Quick Ratio | (Current Assets – Stock) ÷ Current Liabilities |
| Profitability | Gross Profit % | Gross Profit ÷ Sales × 100 |
| Net Profit % | Net Profit ÷ Sales × 100 |
| Efficiency | Inventory Turnover | Cost of Goods Sold ÷ Average Stock |
| Debtors Turnover | Credit Sales ÷ Average Trade Receivables |
| Financial Structure | Debt‑to‑Equity Ratio | Total Liabilities ÷ Owner’s Equity |
6.2 Sample Interpretation (AO3)
Company A’s current ratio fell from 2.5 to 1.8 year‑on‑year. Possible reasons: increase in short‑term borrowings, accumulation of stock, or delayed payment of creditors. The fall may signal reduced liquidity and could affect creditors’ confidence, prompting the company to consider tighter working‑capital management.
7. Accounting Principles and Policies (AO1)
- Accruals concept: Recognise income and expenses when earned or incurred, not when cash changes hands.
- Consistency: Apply the same accounting policies from one period to the next.
- Going‑concern: Assume the business will continue to operate for the foreseeable future.
- Prudence (Conservatism): Anticipate no profit, but provide for all known liabilities.
- Materiality: Record items that could influence decisions of users.
- Matching principle: Match expenses with the revenues they help generate in the same period.