complete pro-forma business documents

IGCSE Accounting (0452) – Complete Syllabus Notes

Contents

1. Syllabus‑Map Checklist
2. 1. Fundamentals of Accounting
3. 2. Sources & Recording of Data
4. 3. Verification of Accounting Records
5. 4. Accounting Procedures
6. 5. Preparation of Financial Statements
7. 6. Analysis & Interpretation of Information
8. 7. Accounting Principles & Policies
9. 8. Pro‑forma Business Documents
10. 9. Practice Exercises

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Syllabus‑Map Checklist

Syllabus Unit	Covered in These Notes?	Action Required (if any)
1. Fundamentals of accounting	Yes	Added paragraph on why profit & loss is measured.
2. Sources & recording of data (double‑entry, books of prime entry, division of ledger)	Yes	Explicitly listed division of the ledger; clarified that folio columns and three‑column running balances are not required.
3. Verification of accounting records (trial balance, error types, bank reconciliation, control accounts)	Yes	Added full list of error types; expanded bank‑reconciliation adjustments; clarified control‑account purpose.
4. Accounting procedures (depreciation, accruals & pre‑payments, doubtful debts, inventory valuation)	Yes	–
5. Preparation of financial statements (sole trader, partnership, limited company, clubs/societies, manufacturing, incomplete records)	Yes	–
6. Analysis & interpretation (ratios, inter‑firm comparison, uses & limitations)	Yes	–
7. Accounting principles & policies (entity, matching, consistency, etc.)	Yes	Added concise summary of each principle.
8. Pro‑forma business documents (invoice, purchase order, receipt, credit note, debit note, bank deposit slip, cheque, statement of account, pay‑in slip)	Yes	Expanded with labelled examples and key fields.

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1. Fundamentals of Accounting

1.1 What Is Accounting?

• Book‑keeping – systematic recording of every financial transaction.
• Accounting – classification, summarising, interpreting and communicating the recorded data to users.

1.2 Why Measure Profit & Loss?

Profit and loss figures help owners, managers and external users to:

• Assess the profitability of the business.
• Make informed decisions about pricing, investment and cost control.
• Compare performance over time or against competitors.
• Fulfil statutory reporting requirements.

1.3 The Accounting Equation

Applies to all business forms (sole trader, partnership, limited company, clubs/societies):

\[ \text{Assets} = \text{Liabilities} + \text{Owner’s Equity} \]

The equation must remain in balance after every transaction.

1.4 Types of Business Organisations (IGCSE focus)

Organisation	Key Features
Sole trader	Owned by one person; owner’s equity = Capital – Drawings.
Partnership	Two or more owners; profit shared according to agreement.
Limited company	Separate legal entity; share capital, retained earnings, limited liability.
Clubs / societies	Non‑profit; surplus retained for future activities, not distributed.

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2. Sources & Recording of Data

2.1 Double‑Entry Principles

• Every transaction affects **at least two** accounts.
• One account is debited, another is credited; total debits = total credits.

Account Type	Debit	Credit
Assets	Increase	Decrease
Liabilities	Decrease	Increase
Owner’s Equity	Decrease	Increase
Revenue	Decrease	Increase
Expenses	Increase	Decrease

2.2 Division of the Ledger (required by the syllabus)

• Real accounts – assets, liabilities and capital (balance‑sheet items).
• Nominal accounts – revenues and expenses (profit‑and‑loss items).
• Subsidiary ledgers – detailed records for customers (sales ledger) and suppliers (purchases ledger).
• Folio columns and three‑column running balances are **not** required for IGCSE.

2.3 Books of Prime Entry (Source Documents)

• Sales Invoice – records a credit sale.
• Purchase Order – request to a supplier; basis of a purchase invoice.
• Receipt – evidence of cash received.
• Credit Note / Debit Note – adjustments to original invoices.
• Bank Deposit Slip / Cheque – cash or cheque deposits.
• Statement of Account – summary of transactions with a party.
• Pay‑in Slip (Petty‑Cash Imprest) – records cash taken from or returned to the petty‑cash fund.

2.4 Journals (first entry point)

• Sales Journal – all credit sales.
• Purchases Journal – all credit purchases.
• Cash Book – cash receipts & payments (dual‑column for cash & bank).
• General Journal – any transaction not suitable for the specialised journals (e.g., depreciation, accruals).

2.5 Ledger Accounts

Each journal entry is posted to its own T‑account (debit side left, credit side right). The balance is the difference between the two sides.

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3. Verification of Accounting Records

3.1 Trial Balance

1. List every ledger account with its ending debit or credit balance.
2. Total the debit column and the credit column.
3. If the totals match, the books are arithmetically correct (though not necessarily free of errors).

3.2 Types of Errors Required by the Syllabus

Error Type	Effect on Trial Balance	How to Detect
Omission of a transaction	No effect (both sides missing)	Cross‑check source documents.
Commission error (wrong amount)	Unbalanced	Re‑calculate totals.
Single‑sided entry	Unbalanced	Trial‑balance mismatch.
Transposition error	Unbalanced (unless difference is a multiple of 9)	Check totals ending in 0 or 5.
Complete reversal	Unbalanced (debits become credits)	Review journal postings.
Compensating error	Balanced (errors cancel each other)	Analyse individual journal entries.
Original entry error	Balanced (wrong accounts but equal debits/credits)	Cross‑check with source documents.
Principle error (e.g., expense recorded as asset)	Balanced	Check that entries respect accounting principles.

3.3 Bank Reconciliation Statement (BRS)

Adjust the cash‑book balance for items that the bank has recorded but the business has not, and vice‑versa.

• Deposits in transit – cash or cheques received but not yet reflected on the bank statement.
• Cheques outstanding – cheques issued by the business but not yet cleared by the bank.
• Bank errors – mistakes made by the bank (e.g., wrong amount credited).
• Bank charges & interest – recorded by the bank only.

Formula (showing the cash‑book side):

\[ \text{Adjusted Cash‑Book Balance} = \text{Cash‑Book Balance} + \text{Deposits in Transit} - \text{Cheques Outstanding} \pm \text{Bank Errors} \]

3.4 Control Accounts

Summarise the total of a group of subsidiary ledger balances.

• Sales Ledger Control Account – total of all customers’ balances.
• Purchases Ledger Control Account – total of all suppliers’ balances.

For IGCSE you do **not** need to reconcile the control‑account balance with each individual subsidiary ledger; you only need to ensure the control‑account itself balances in the trial balance.

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4. Accounting Procedures

4.1 Capital vs. Revenue Items

• Capital items – long‑term assets, capital introduced, drawings. Appear on the balance sheet.
• Revenue items – day‑to‑day income and expenses. Appear on the income statement.

4.2 Depreciation

Allocate the cost of a fixed asset over its useful life.

Method	Formula	Typical Use
Straight‑Line	\(\displaystyle \frac{\text{Cost} - \text{Residual Value}}{\text{Useful Life (years)}}\)	Most common for plant & equipment.
Reducing‑Balance	\(\text{Depreciation} = \text{Opening NBV} \times \text{Depreciation Rate}\)	When the asset loses value faster in early years.
Revaluation (rare for IGCSE)	Adjust NBV to current market value; surplus recorded in a revaluation reserve.	For assets that can appreciate (e.g., land).

4.3 Accruals and Pre‑payments

• Accrued expenses – incurred but not yet paid (e.g., wages). Debit expense, credit accrued liability.
• Accrued income – earned but not yet received (e.g., interest). Debit receivable, credit revenue.
• Pre‑paid expenses – paid in advance (e.g., insurance). Debit prepaid asset, credit cash; expense recognised over the period.
• Unearned income – cash received before service is performed. Debit cash, credit liability; recognise as revenue when earned.

4.4 Doubtful Debts & Bad Debts

1. Estimate a percentage of receivables likely to be uncollectible (policy‑based).
2. Record the provision: Debit Bad Debt Expense, Credit Provision for Doubtful Debts.
3. If a specific debt becomes irrecoverable, write‑off: Debit Provision for Doubtful Debts, Credit Debtors.

4.5 Inventory Valuation – Lower of Cost or Net Realisable Value (NRV)

Choose the lower of:

• Cost of inventory (including purchase price, transport, duties, etc.)
• NRV = Estimated selling price – Estimated costs of completion & disposal

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5. Preparation of Financial Statements

5.1 General Layout (All Business Types)

1. Income Statement (Profit & Loss Account) – Revenue – Expenses = Net Profit (or Loss).
2. Statement of Financial Position (Balance Sheet) – Assets = Liabilities + Owner’s Equity.
3. Partnerships and limited companies also require a Statement of Changes in Equity (or Capital Account).

5.2 Sole Trader

• Owner’s equity = Capital introduced – Drawings + Net Profit.
• Capital account is a single‑column statement.

5.3 Partnership

• Each partner has a separate capital account.
  Opening Capital + Share of Profit – Drawings = Closing Capital
• Profit‑sharing ratio is set out in the partnership agreement.

5.4 Limited Company

• Statement of Changes in Equity shows:
  1. Opening Share Capital
  2. Issue of New Shares (if any)
  3. Retained Earnings (Profits less dividends)
  4. Closing Share Capital
• Dividends are shown as a deduction from retained earnings.

5.5 Clubs / Societies (Non‑Profit)

• Surplus = Income – Expenditure. The surplus is retained for future activities, not distributed to members.

5.6 Manufacturing Accounts (Optional for IGCSE)

Three‑stage process:

1. Raw Materials Account – Opening stock + Purchases – Closing stock = Raw Materials Used.
2. Work‑in‑Progress (WIP) Account – Opening WIP + Direct Labour + Direct Materials Used + Overheads – Closing WIP = Cost of Goods Manufactured.
3. Finished Goods Account – Opening FG + Cost of Goods Manufactured – Closing FG = Cost of Goods Sold (used in the Income Statement).

5.7 Incomplete Records (Simplified Method)

When only a cash book, sales ledger and purchases ledger are available, reconstruct missing accounts using an “Adjusted Trial Balance”:

1. Start with the cash‑book balances.
2. Add or subtract adjustments for unrecorded transactions (e.g., accruals, pre‑payments).
3. Derive the missing trial‑balance figures and prepare the financial statements.

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6. Analysis & Interpretation of Information

6.1 Required Ratios (IGCSE)

Ratio	Formula	Interpretation
Gross Profit Margin	\(\displaystyle \frac{\text{Gross Profit}}{\text{Sales}} \times 100\)	Shows how much profit remains after cost of sales.
Net Profit Margin	\(\displaystyle \frac{\text{Net Profit}}{\text{Sales}} \times 100\)	Overall profitability after all expenses.
Current Ratio	\(\displaystyle \frac{\text{Current Assets}}{\text{Current Liabilities}}\)	Short‑term liquidity – ability to meet current liabilities.
Acid‑Test (Quick) Ratio	\(\displaystyle \frac{\text{Current Assets} - \text{Stock}}{\text{Current Liabilities}}\)	Liquidity without relying on stock.
Return on Capital Employed (ROCE)	\(\displaystyle \frac{\text{Profit before interest and tax}}{\text{Capital Employed}} \times 100\)	Efficiency of capital utilisation.
Debt‑to‑Equity Ratio	\(\displaystyle \frac{\text{Total Liabilities}}{\text{Owner’s Equity}}\)	Financial risk – proportion of finance supplied by creditors.

6.2 Uses & Limitations of Ratio Analysis

• Uses – compare performance over time, benchmark against competitors, identify trends.
• Limitations – depends on accurate data, ignores qualitative factors, may be distorted by accounting policies, seasonal fluctuations.

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7. Accounting Principles & Policies

• Entity Principle – The business is a separate entity from its owners.
• Going‑Concern Principle – Assume the business will continue operating for the foreseeable future.
• Matching (Accrual) Principle – Expenses are matched with the revenues they help generate.
• Consistency Principle – Use the same accounting methods from period to period unless a change is justified.
• Prudence (Conservatism) Principle – Anticipate no profits, anticipate all probable losses.
• Materiality Principle – Record items that could influence decisions of users.
• Monetary Unit Principle – Record transactions in a stable currency; ignore inflation for IGCSE.

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8. Pro‑forma Business Documents

These documents are the “source documents” that give rise to entries in the books of prime entry. Knowing the layout helps you extract the correct figures for journalising.

8.1 Sales Invoice (Credit Sale)

Sales Invoice
Date	____________________
Invoice No.	____________________
Customer	____________________
Description of Goods/Services	____________________
Quantity	____________________
Unit Price	____________________
Total (excl. VAT)	____________________
VAT @ 20%	____________________
Grand Total	____________________
Terms of Payment	____________________

8.2 Purchase Order (Request to Supplier)

Purchase Order
Date	____________________
PO No.	____________________
Supplier	____________________
Item Description	____________________
Quantity	____________________
Unit Price	____________________
Total (excl. VAT)	____________________
VAT @ 20%	____________________
Grand Total	____________________
Delivery Date	____________________

8.3 Receipt (Cash Received)

Receipt
Date	____________________
Receipt No.	____________________
Payer	____________________
Amount Received	____________________
Method (Cash/Bank Transfer)	____________________
Reference (Invoice No.)	____________________

8.4 Credit Note (Reduction to a Sales Invoice)

Credit Note
Date	____________________
Credit Note No.	____________________
Original Invoice No.	____________________
Reason for Credit	____________________
Amount Credited	____________________

8.5 Debit Note (Increase to a Purchase Invoice)

Debit Note
Date	____________________
Debit Note No.	____________________
Supplier	____________________
Original Invoice No.	____________________
Reason for Debit	____________________
Additional Amount	____________________

8.6 Bank Deposit Slip

Bank Deposit Slip
Date	____________________
Account No.	____________________
Cash	____________________
Cheques	____________________
Total Deposit	____________________
Depositor’s Signature	____________________

8.7 Cheque (Payment)

Cheque
Date	____________________
Cheque No.	____________________
Payee	____________________
Amount (Figures)	____________________
Amount (Words)	____________________
Signature	____________________

8.8 Statement of Account (Customer or Supplier)

Statement of Account
Period Covered	____________________
Opening Balance	____________________
Transactions (Date, Ref., Debit, Credit)	____________________
Closing Balance	____________________

8.9 Pay‑in Slip (Petty‑Cash Imprest)

Petty‑Cash Pay‑in Slip
Date	____________________
Reference (Receipt No.)	____________________
Amount Received	____________________
Purpose	____________________
Prepared By	____________________
Approved By	____________________

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9. Practice Exercises

1. Record the following transactions in the appropriate journals and post to the ledger:
   1. 30 Jan – Purchased office equipment for £2 500 cash.
   2. 5 Feb – Sold goods on credit to ABC Ltd for £1 200 (VAT 20%).
   3. 12 Feb – Received a cheque for £600 from ABC Ltd (reference: invoice 102).
   4. 20 Feb – Paid a supplier £800 by cheque (reference: PO 45).
2. Prepare a trial balance from the ledger balances above and identify any errors.
3. Construct a bank reconciliation statement assuming the bank statement shows:
   • Balance as per bank: £4 500
   • Cheques outstanding: £300
   • Deposits in transit: £200
   • Bank charge: £25
4. Calculate the gross profit margin and current ratio for the following figures:
   • Sales £15 000, Cost of Sales £9 000
   • Current assets £8 000, Current liabilities £5 000
5. Identify the error type in each of the following scenarios:
   1. A sales invoice of £500 is omitted from the sales journal.
   2. £1 200 is recorded as £1 020 in the cash book.
   3. A purchase of £750 is entered as a credit to Purchases and a debit to Sales.

Answers are provided in the teacher’s guide.