Cambridge IGCSE Accounting (0452) – Complete Syllabus Notes

1. Fundamentals of Accounting

1.1 Why we record financial information

• Measure profit or loss for a period – the difference between total income and total expenses.
• Show the financial position of the business at a point in time – assets versus the claims of creditors and owners.
• Assist decision‑making – owners, managers, investors, banks, tax authorities and other stakeholders use the information to plan, control and evaluate performance.

1.2 Key users of accounting information

User	Information required
Owners / shareholders	Profitability, return on capital, dividend‑paying capacity.
Managers	Cost of production, budgeting, performance against targets.
Employees	Wage levels, job security, profit‑sharing schemes.
Creditors (banks, suppliers)	Liquidity, solvency, ability to meet repayments.
Investors	Growth prospects, earnings per share, risk.
Tax authorities	Taxable profit, VAT, corporation tax.
Government / public	Compliance with regulations, social responsibility.

1.3 The Accounting Equation

The accounting equation is the backbone of double‑entry bookkeeping:

Assets = Liabilities + Owner’s Equity (A = L + E)

1.3.1 Components

Component	Typical items
Assets (A)	Cash, bank, receivables, inventory, equipment, land, buildings, prepaid expenses, intangible assets.
Liabilities (L)	Loans, overdrafts, accounts payable, accrued expenses, tax payable, provisions.
Owner’s Equity (E)	Owner’s capital / share capital, retained earnings, drawings (reduces equity).

1.3.2 Capital vs. Revenue Transactions (AO 4.1)

• Capital transactions create or enhance assets and are recorded in the capital (equity) side.
  • Issue of share capital – Bank Dr / Share Capital Cr
  • Purchase of a building for cash – Building Dr / Cash Cr
• Revenue transactions arise from day‑to‑day operations and affect profit.
  • Sale of goods on credit – Accounts Receivable Dr / Sales Revenue Cr
  • Payment of salaries – Salary Expense Dr / Cash Cr

1.3.3 Worked example – applying the equation

Transaction	Assets	Liabilities	Equity
Owner invests $5,000 cash	+5,000 Cash	–	+5,000 Owner’s Capital
Buy equipment for $2,000 cash	+2,000 Equipment –2,000 Cash = 0	–	–
Borrow $3,000 from bank	+3,000 Cash	+3,000 Loan Payable	–
Pay $1,000 salary	–1,000 Cash	–	–1,000 (Expense reduces Equity)

2. Sources of Accounting Information & Recording

2.1 Primary business documents

• Sales invoices (credit & cash)
• Purchase invoices
• Receipts & payment vouchers
• Bank statements & cheques (including counter‑foil)
• Credit notes / debit notes
• Payroll sheets & time‑cards
• Statements of account (customer & supplier statements)
• Petty‑cash vouchers

2.2 Books of prime entry

Book	Purpose
Sales journal (sales day book)	Record all credit sales.
Purchases journal (purchases day book)	Record all credit purchases.
Cash book (dual‑column)	Record all cash receipts and payments.
General journal	Record non‑routine items – depreciation, accruals, errors.
Petty‑cash book	Small cash payments.
Control accounts (e.g., Debtors Control, Creditors Control)	Summarise large groups of similar ledger accounts; aid in detecting errors.

2.3 Double‑entry bookkeeping

• Every transaction creates at least one debit and one credit.
• Debits = Credits → the accounting equation always stays in balance.

2.3.1 Rules of debit and credit

Account type	Increase	Decrease
Asset	Debit	Credit
Liability	Credit	Debit
Equity (capital & reserves)	Credit	Debit
Revenue	Credit	Debit
Expense	Debit	Credit

2.3.2 Example journal entry – purchase on credit

Date        Account                Debit   Credit
01‑03‑20    Purchases (Asset)      1,200
            Accounts Payable               1,200

2.4 Posting to T‑accounts

Each ledger account has a “T” shape. Debits are entered on the left, credits on the right. The balance is the difference between the two sides.

3. Verification of Records

3.1 Trial Balance (AO 3.1)

Lists the closing balances of all ledger accounts. Total debits must equal total credits.

Account	Debit ($)	Credit ($)
Cash	5,200
Accounts Receivable	2,300
Equipment	4,500
Accounts Payable		3,400
Owner’s Capital		8,600
Sales Revenue		7,200
Salary Expense	1,800
Totals	13,800	13,800

3.2 Common errors

• Do NOT affect the trial balance – omission, commission, principle, transposition, posting to the wrong side.
• Do affect the trial balance – single‑sided entry, double‑sided entry to the same side, wrong amount entered.

3.3 Bank reconciliation (AO 3.2)

1. Start with the cash‑book balance.
2. Add deposits in transit.
3. Subtract outstanding cheques.
4. Adjust for bank errors, direct credits/debits, and service charges.
5. The result should equal the bank statement balance.

Sample reconciliation

Cash‑book balance (31 Mar)          $4,800
+ Deposits in transit                500
- Outstanding cheques               300
- Bank service charge                20
= Adjusted bank balance              $5,0‑20
Bank statement balance (31 Mar)    $5,0‑20   ✔

3.4 Control accounts (AO 3.4)

Summarise the totals of subsidiary ledgers.

• Debtors Control Account – total of all individual customer balances.
• Creditors Control Account – total of all individual supplier balances.

Any difference between the control account and the sum of its subsidiaries indicates an error in the subsidiary ledgers.

3.5 Incomplete records (AO 3.5)

When only a cash book is kept, the following statements are prepared:

1. Statement of Affairs (opening) – list of assets, liabilities and capital at the start of the period.
2. Profit or loss – calculated from cash receipts and payments, plus adjustments for non‑cash items.
3. Statement of Affairs (closing) – updated after profit is added to capital and drawings are deducted.

4. Accounting Procedures (Adjustments)

4.1 Accruals & Pre‑payments (AO 5.1)

• Accrued expense – incurred but not yet paid.

  Expense Dr / Accrued Liability Cr
          

• Accrued income – earned but not yet received.

  Accrued Receivable Dr / Revenue Cr
          

• Pre‑paid expense – paid in advance.

  Pre‑paid Expense Dr / Cash Cr
  (Then expense recognised gradually)
          

4.2 Depreciation (AO 5.2)

Method	Formula	Journal entry (annual)
Straight‑line	(Cost – Residual value) ÷ Useful life	Depreciation Expense Dr / Accumulated Depreciation Cr
Reducing balance (e.g., 20 %)	Opening NBV × Rate	Depreciation Expense Dr / Accumulated Depreciation Cr
Revaluation (if permitted)	New fair value – NBV	Revaluation Surplus Cr / Asset Dr (or Accumulated Depreciation Dr)

4.3 Disposal of non‑current assets (AO 5.3)

1. Remove the asset’s cost and its accumulated depreciation.
2. Record any cash received.
3. Recognise a gain or loss:
   • Gain = Proceeds – (Cost – Accum. Dep.)
   • Loss = (Cost – Accum. Dep.) – Proceeds

Example – disposal

Cost of machine                8,000
Accumulated depreciation       5,000
NBV (cost – accum. dep.)       3,000
Proceeds on sale               4,200
Gain on disposal = 4,200 – 3,000 = 1,200

Journal:
Cash                     Dr   4,200
Accum. Depreciation      Dr   5,000
Loss/Gain on Disposal    Cr   1,200
Machine (Cost)           Cr   8,000

4.4 Bad debts & Doubtful‑debt provision (AO 5.4)

• Write‑off irrecoverable debt:

  Bad Debts Expense Dr / Accounts Receivable Cr
          

• Provision for doubtful debts (optional for IGCSE):

  Bad Debts Expense Dr / Provision for Doubtful Debts Cr
          

4.5 Inventory – periodic system (AO 5.5)

Cost of Goods Sold (COGS) = Opening Stock + Purchases + Carriage‑inwards – Closing Stock.

4.6 Manufacturing accounts (AO 5.6)

Only required for the “manufacturing” sub‑topic of the syllabus.

1. Prime cost = Direct materials + Direct labour.
2. Factory overhead = Indirect materials + Indirect labour + other overheads.
3. Cost of production = Prime cost + Factory overhead.
4. Cost of goods manufactured = Cost of production + Opening Work‑in‑Progress – Closing Work‑in‑Progress.

Worked example (simplified)

Direct materials used                12,000
Direct labour                        8,000
Factory overhead                     5,000
Opening WIP                          2,000
Closing WIP                          3,000

Prime cost          = 12,000 + 8,000 = 20,000
Cost of production  = 20,000 + 5,000 = 25,000
Cost of goods manufactured
    = 25,000 + 2,000 – 3,000 = 24,000

4.7 Adjustments specific to Partnerships (AO 5.7)

• Profit sharing ratios are applied to the net profit before drawings.
• Interest on capital (if agreed) is recorded as:

  Interest Expense Dr / Capital – Partner’s Name Cr
          

• Drawings reduce the individual partner’s capital balance.

4.8 Adjustments specific to Limited Companies (AO 5.8)

• Share capital issued – Bank Dr / Share Capital Cr.
• Dividends declared – Retained Earnings Dr / Dividends Payable Cr.
• Retained earnings updated with profit after tax and after any interim dividends.

5. Preparation of Financial Statements

5.1 Sole trader (AO 6.1)

1. Income Statement (Profit & Loss Account)
2. Statement of Financial Position (Balance Sheet)
3. Statement of Changes in Owner’s Capital (optional but useful for AO 6.2)

Example – Sole trader (Year ended 31 Dec)

Income Statement
Sales Revenue	$25,000
Cost of Goods Sold	($12,000)
Gross Profit	$13,000
Operating Expenses	($5,500)
Net Profit	$7,500

Statement of Financial Position
Cash	$4,200
Inventory	$3,000
Equipment (net)	$6,500
Total Assets	$13,700
Accounts Payable	$2,200
Owner’s Capital (opening)	$5,000
Add: Net Profit	$7,500
Less: Drawings	($1,000)
Owner’s Capital (closing)	$11,500
Total Liabilities & Equity	$13,700

5.2 Partnership (AO 6.2)

• Income Statement – same format as sole trader.
• Statement of Financial Position – shows each partner’s capital balance.
• Statement of Changes in Partners’ Capital – records:
  • Opening capital
  • Interest on capital (if any)
  • Share of profit (according to agreed ratio)
  • Drawings
  • Closing capital

5.3 Limited company (AO 6.3)

• Statement of Comprehensive Income (or Profit & Loss).
• Statement of Financial Position (Balance Sheet).
• Statement of Changes in Equity – details share capital, share premium, retained earnings, other reserves.
• Notes to the accounts (optional for IGCSE but useful for understanding accounting policies).

5.4 Clubs / Societies – non‑profit (AO 6.4)

• Statement of Financial Activities – shows income, expenditure and surplus/deficit.
• Statement of Financial Position – assets, liabilities and net assets (equivalent to equity).

6. Analysis & Interpretation

6.1 Accounting ratios (AO 7.1)

All ratios required by the syllabus are listed in the appendix. The table below summarises them with formulas and typical interpretation.

Ratio	Formula	Interpretation
Current Ratio	Current Assets ÷ Current Liabilities	Liquidity – ability to meet short‑term obligations.
Quick (Acid‑test) Ratio	(Current Assets – Inventory) ÷ Current Liabilities	Liquidity excluding stock.
Gross Profit Margin	Gross Profit ÷ Sales Revenue × 100%	Profitability of core trading activities.
Net Profit Margin	Net Profit ÷ Sales Revenue × 100%	Overall profitability.
Return on Capital Employed (ROCE)	Net Profit ÷ (Capital + Long‑term Liabilities) × 100%	Efficiency of capital utilisation.
Debtors Turnover	Credit Sales ÷ Average Debtors	How quickly receivables are collected.
Creditors Turnover	Credit Purchases ÷ Average Creditors	How quickly payables are settled.
Inventory Turnover	Cost of Goods Sold ÷ Average Inventory	Efficiency of stock management.
Asset Turnover	Sales Revenue ÷ Average Total Assets	Effectiveness of asset use to generate sales.

6.2 Inter‑firm comparison (AO 7.2)

When comparing two companies, look at:

• Liquidity ratios – which firm can meet short‑term debts more comfortably?
• Profitability ratios – which firm generates higher returns on sales or capital?
• Efficiency ratios – which firm uses its assets or stock more effectively?

Exercise – Company A has a current ratio of 1.8 and a net profit margin of 6 %; Company B has a current ratio of 1.2 and a net profit margin of 9 %. Discuss the strengths and weaknesses of each firm for a bank considering a loan.

6.3 Interested parties & information needs (AO 7.3)

Party	Key information required
Owners / shareholders	Profitability, dividend potential, return on capital.
Managers	Cost of production, variance analysis, cash flow forecasts.
Creditors (banks, suppliers)	Liquidity ratios, debt repayment schedule, cash flow.
Investors	Earnings per share, growth trends, risk indicators.
Tax authorities	Taxable profit, VAT payable, compliance with tax legislation.
Government / regulators	Statutory filings, environmental costs, employment data.

6.4 Limitations of accounting statements (AO 7.4)

• Historical cost – assets are recorded at purchase price, not current market value.
• Non‑financial information – quality of products, employee morale, market conditions are not reflected.
• Estimates & judgments – depreciation, provisions and accruals involve subjective decisions.
• Timing differences – cash flows may not coincide with the period in which revenue or expense is recognised.
• Comparability – different accounting policies can make comparison between firms difficult.

7. Accounting Principles & Policies

7.1 Fundamental accounting principles (AO 7.5)

Principle	Definition	Illustration
Business Entity	Separate the affairs of the business from those of its owners.	Owner’s personal car is not recorded as a business asset.
Going‑Concern	Assume the business will continue operating for the foreseeable future.	Depreciation is spread over the useful life of an asset.
Money Measurement	Only transactions that can be expressed in monetary terms are recorded.	Employee morale is not entered in the books.
Historical Cost	Assets are recorded at the amount paid at acquisition.	Land bought for $50,000 remains at $50,000 even if market value rises.
Prudence (Conservatism)	Anticipate no profit, but anticipate all losses.	Record an allowance for doubtful debts, but do not record unearned revenue as profit.
Matching (Accrual)	Match expenses with the revenues they help generate.	Allocate depreciation expense to each year of an asset’s use.
Consistency	Apply the same accounting policies from period to period.	Use straight‑line depreciation every year unless a change is justified.
Materiality	Record items that could influence decisions of users.	Do not record a $2 stationery purchase as a separate expense in the trial balance.
Realisation	Revenue is recognised when earned, not when cash is received.	Record sales on credit when goods are delivered.

7.2 Accounting policies (AO 7.6)

• Policies are the specific methods chosen to apply the principles (e.g., depreciation method, inventory valuation method, revenue recognition criteria).
• They must be disclosed in the notes to the accounts so that users can assess comparability and relevance.
• International standards (IFRS/IAS) influence UK‑based IGCSE content by promoting consistency, relevance, reliability and understandability.

Practice Problems (Mixed AO’s)

1. Given: Cash $4,000; Inventory $2,000; Accounts Payable $1,500; Owner’s Capital $4,500. Verify the accounting equation.
2. Record the transaction: “The company receives $800 from a customer for services performed.” Show the journal entry and the effect on the equation.
3. After paying $200 for utilities, adjust the equation and show the new balances.
4. Prepare a trial balance from the following ledger balances (all figures in $):
   • Cash 3,200 (Dr)
   • Accounts Receivable 1,500 (Dr)
   • Equipment 6,000 (Dr)
   • Accumulated Depreciation – Equipment 1,200 (Cr)
   • Accounts Payable 2,800 (Cr)
   • Owner’s Capital 5,700 (Cr)
   • Sales Revenue 9,000 (Cr)
   • Salary Expense 2,200 (Dr)
5. Using the balances in (4), calculate the Gross Profit Margin and Current Ratio (assume no current liabilities other than Accounts Payable).
6. Explain why the “revaluation surplus” created under the revaluation method does not appear in the profit or loss account.