Cambridge IGCSE Accounting (0452) – Complete Syllabus Notes

1 The Fundamentals of Accounting

• Purpose of Accounting: Record, classify, summarise and interpret financial information so that users can make informed decisions.
• Accounting Equation (Statement of Financial Position):
  Assets = Liabilities + Owner’s Equity
  Every transaction must keep this equation in balance.
• Key Concepts
  • Asset – resources owned (cash, stock, equipment, etc.).
  • Liability – obligations to outsiders (loans, creditors, etc.).
  • Owner’s Equity – capital contributed by the owner(s) plus retained earnings.
• Book‑keeping vs. Accounting
  • Book‑keeping is the systematic recording of transactions (the “what”).
  • Accounting interprets, analyses and reports the recorded information (the “why” and “what it means”).

2 Sources and Recording of Data

2.1 Double‑Entry System

Each transaction is recorded twice – once as a debit and once as a credit – so the accounting equation remains in balance.

Rule	Debit (Dr)	Credit (Cr)
Assets increase	✔
Assets decrease		✔
Liabilities increase		✔
Liabilities decrease	✔
Owner’s equity increase (capital, revenue)		✔
Owner’s equity decrease (drawings, expenses)	✔

2.2 Business Documents (Source Documents)

Document	Purpose	Typical Information
Sales invoice	Record credit sales to customers	Date, customer, goods/services, amount, terms
Purchase invoice	Record credit purchases from suppliers	Date, supplier, goods/services, amount, terms
Debit note	Increase amount owed to a supplier (e.g., purchase returns)	Supplier, goods returned, amount
Credit note	Reduce amount owed by a customer (e.g., sales returns)	Customer, goods returned, amount
Bank statement	Evidence of cash receipts/payments via bank	Date, description, debit/credit, balance
Petty‑cash voucher	Authorise small cash payments	Date, purpose, amount, signature
Receipt	Proof of cash received	Date, payer, amount, purpose

2.3 Books of Prime Entry

First point of entry for transactions before posting to the ledger.

Book	Transactions Recorded	Key Advantage
Cash Book (dual‑column)	All cash receipts and payments, bank transactions	Immediate cash balance; simplifies bank reconciliation
Petty‑Cash Book (Imprest System)	Small, frequent out‑goings (postage, stationery, etc.)	Fixed imprest amount gives tight control; vouchers provide audit trail
Sales Journal	Credit sales of goods	All sales entries are grouped for rapid posting to Debtors Control
Purchases Journal	Credit purchases of goods	All purchases entries are grouped for rapid posting to Creditors Control
Sales Returns Journal (Debtors’ Returns)	Goods returned by customers	Adjusts sales and debtor balances in one place
Purchases Returns Journal (Creditors’ Returns)	Goods returned to suppliers	Adjusts purchases and creditor balances efficiently
General Journal (Journal Proper)	Non‑routine items – depreciation, accruals, corrections, opening entries	Provides flexibility for any transaction that does not fit a specialised journal

2.4 The Three‑Part Ledger

• Sales Ledger – contains individual debtor (customer) accounts; totals are posted to the Debtors Control Account in the General Ledger.
• Purchases Ledger – contains individual creditor (supplier) accounts; totals are posted to the Creditors Control Account in the General Ledger.
• Nominal (General) Ledger – all other accounts (cash, capital, expenses, income, etc.).

2.5 Example – Flow of a Credit Sale

1. Source document: Sales invoice to Customer A for £1 200 (net of trade discount).
2. Journal entry (Sales Journal):
   Debit Debtors £1 200 | Credit Sales £1 200
3. Posting to the ledger:
   • Debtors Control Account – Debit £1 200
   • Sales Ledger – Customer A – Debit £1 200
4. Cash received within discount period (2 % cash discount):
   • Cash Book – Debit Cash £1 176
   • Cash Book – Debit Cash Discount Allowed £24
   • Cash Book – Credit Debtors £1 200

3 Verification of Accounting Records

3.1 Trial Balance

A trial balance lists the closing balances of all ledger accounts to check that total debits equal total credits.

Account	Debit (£)	Credit (£)
Cash	5 200
Debtors	3 800
Purchases	2 500
Sales		7 400
Capital		4 000
Drawings	1 200
Total	12 700	12 700

If the totals differ, investigate the common errors listed below.

3.2 Errors in the Accounts

Type of Error	Affects Trial Balance?	Typical Remedy
Omission of a transaction (no journal entry)	No	Enter the missing journal and post.
Commission error (right amount, wrong side)	Yes	Reverse the incorrect entry and record the correct one.
Transposition error (e.g., £53 recorded as £35)	Yes	Adjust by the difference (£18) on the correct side.
Single‑sided error (debit without credit or vice‑versa)	Yes	Make a correcting entry to bring the trial balance back into balance.
Principle error (e.g., recording a capital item as revenue)	No	Re‑classify using a correcting entry; profit will change but trial balance stays balanced.
Original entry error (posting the correct amount to the wrong account)	No	Reverse the original posting and post to the correct account.
Reversal error (debit recorded as credit and vice‑versa)	No	Reverse the entry and record it correctly.

3.3 Bank Reconciliation

1. Start with the cash‑book balance.
2. Add: deposits in transit (recorded in cash book but not yet cleared).
3. Deduct: outstanding cheques (issued but not yet presented).
4. Adjust for bank‑only items (fees, interest, bank errors).
5. The adjusted cash‑book balance should equal the balance shown on the bank statement.

3.4 Control Accounts

• Purpose: Summarise the total balances of subsidiary ledgers (debtors and creditors) in a single General‑Ledger account.
• Source of information: Totals from the Sales Journal, Sales Returns Journal, Purchases Journal and Purchases Returns Journal.
• Reconciliation: The balance in a control account must agree with the total of the corresponding subsidiary ledger.

Example – Debtors Control Account (excerpt)

Date	Details	Debit (£)	Credit (£	Balance (£)
1 Jan	Opening balance	2 500		2 500
5 Jan	Sales Journal total	3 200		5 700
12 Jan	Sales Returns total		400	5 300

The same £5 300 must equal the sum of all individual debtor balances in the Sales Ledger.

4 Accounting Procedures

4.1 Capital vs. Revenue Expenditure

• Capital expenditure: Improves or acquires a long‑term asset (e.g., purchase of machinery). Recorded as an asset and depreciated.
• Revenue expenditure: Relates to day‑to‑day running (e.g., repairs, wages). Recorded as an expense in the period incurred.

4.2 Depreciation

Method	Formula	When Used
Straight‑Line	Annual Depreciation = (Cost – Residual Value) ÷ Useful Life	Assets with uniform usage.
Reducing Balance (Written‑down)	Depreciation = Opening Net Book Value × Rate	Assets that lose value faster in early years (e.g., computers).
Revaluation	New value – Accumulated Depreciation = Revised Net Book Value	Used when an asset’s fair market value has increased significantly.

Worked Example – Straight‑Line

Machine cost £6 000, residual value £600, useful life 5 years.

• Annual depreciation = (£6 000 – £600) ÷ 5 = £1 080.
• Journal entry each year: Debit Depreciation Expense £1 080 | Credit Accumulated Depreciation £1 080.

4.3 Accruals and Deferrals

• Accrued Income (e.g., interest earned but not yet received):
  Debit Debtors | Credit Revenue.
• Accrued Expenses (e.g., wages incurred but not yet paid):
  Debit Expense | Credit Creditors.
• Pre‑paid Income (Prepaid Revenue) (cash received before the service is performed):
  Debit Cash | Credit Unearned Revenue (liability).
  When earned: Debit Unearned Revenue | Credit Revenue.
• Pre‑payments (Prepaid Expenses) (e.g., insurance paid in advance):
  Debit Pre‑payments (asset) | Credit Cash.
  When the benefit is realised: Debit Expense | Credit Pre‑payments.

4.4 Provisions

Liabilities of uncertain timing or amount (e.g., provision for doubtful debts).

• Initial entry: Debit Bad‑Debt Expense | Credit Provision for Doubtful Debts.
• When a specific debt is written off: Debit Provision for Doubtful Debts | Credit Debtors.

4.5 Inventory Valuation

• Cost of Goods Sold (COGS) = Opening Stock + Purchases – Closing Stock.
• Lower of Cost or Net Realisable Value (NRV):
  Compare each item’s recorded cost with the amount it could be sold for (NRV). Write the item down to the lower amount.

Worked Example – Lower of Cost/NRV

Item cost £500, NRV £450 → record at £450.

• Journal entry: Debit Loss on Inventory £50 | Credit Inventory £50.

4.6 Goods Taken by the Owner for Personal Use

When the owner removes stock for personal use, the transaction reduces both inventory and profit.

• Journal entry: Debit Drawings (or Owner’s Capital) | Credit Inventory.
• The reduction in inventory is treated as an expense, thereby reducing net profit.

4.7 Adjustments for Accrued & Pre‑paid Income (Optional for IGCSE)

Accrued income and prepaid income are treated in the same way as other accruals/deferrals – ensure they are recognised in the period to which they relate.

5 Preparation of Financial Statements

5.1 Sole Trader

• Income Statement (Profit & Loss Account): Revenue – Expenses = Net Profit.
• Statement of Financial Position: Assets = Liabilities + Owner’s Equity (capital + retained profit – drawings).
• Statement of Changes in Owner’s Equity: Opening Capital + Net Profit – Drawings = Closing Capital.

5.2 Partnerships

• Each partner has a separate Capital Account.
• Profit is shared according to the agreed profit‑sharing ratio.
• Key statements:
  • Income Statement (as for a sole trader).
  • Statement of Changes in Partners’ Capital (opening capital, profit share, interest on capital (if any), drawings, closing capital).
  • Statement of Financial Position (same format as sole trader).

5.3 Limited Companies

• Separate legal entity – owners are shareholders.
• Required statements:
  • Income Statement.
  • Statement of Financial Position (including Share Capital, Retained Earnings, Reserves).
  • Statement of Changes in Equity (opening equity, profit for the year, dividends, issue/repurchase of shares, closing equity).

5.4 Clubs & Societies (Non‑Profit)

• Statement of Financial Activities (similar to an Income Statement) – Income – Expenditure = Surplus/Deficit.
• Statement of Financial Position – assets, liabilities and members’ funds (equivalent to equity).
• Often includes a “Members’ Contributions” account instead of share capital.

5.5 Manufacturing Accounts (Only for the optional “Manufacturing” content)

1. Production (or Manufacturing) Account:
   Opening Stock of Raw Materials + Purchases of Raw Materials + Direct Wages + Direct Expenses + (Opening Stock of Work‑in‑Progress – Closing Stock of Work‑in‑Progress) = Cost of Production.
2. Cost of Goods Sold:
   Opening Stock of Finished Goods + Cost of Production – Closing Stock of Finished Goods = COGS.
3. Gross Profit = Sales – COGS; Net Profit = Gross Profit – Operating Expenses.

5.6 Incomplete Records (Trading Account Method)

When the full set of books is not available, the following steps are used:

1. Prepare a Trading Account to determine Gross Profit using the formula:
   Sales – (Opening Stock + Purchases – Closing Stock) = Gross Profit.
2. Use the Gross Profit figure to complete the Income Statement and the Statement of Financial Position.
3. Adjust for any known expenses, depreciation, accruals, and pre‑payments that are not recorded in the incomplete records.

6 Analysis & Interpretation

6.1 Why Analyse Financial Statements?

• To assess profitability, efficiency, liquidity and solvency.
• To help interested parties (owners, creditors, investors, managers, government) make informed decisions.

6.2 Common Ratios (with formulas and interpretation)

Category	Ratio	Formula	Interpretation
Profitability	Gross Profit %	(Gross Profit ÷ Sales) × 100	Higher % indicates good control of production/purchasing costs.
	Net Profit %	(Net Profit ÷ Sales) × 100	Shows overall profitability after all expenses.
Efficiency (Activity)	Stock Turnover	Cost of Goods Sold ÷ Average Stock	Higher turnover = stock is sold quickly; low turnover may signal over‑stocking.
	Debtor Turnover	Credit Sales ÷ Average Debtors	Higher turnover = quicker collection of receivables.
	Creditor Turnover	Credit Purchases ÷ Average Creditors	Higher turnover = quicker payment to suppliers; very high may strain cash flow.
Liquidity	Current Ratio	Current Assets ÷ Current Liabilities	Ratio > 1 indicates ability to meet short‑term obligations.
	Quick (Acid‑Test) Ratio	(Current Assets – Stock) ÷ Current Liabilities	More stringent test of liquidity; excludes stock.
Solvency	Debt‑to‑Equity Ratio	Total Liabilities ÷ Owner’s Equity	Shows proportion of financing that comes from creditors.
	Interest Cover	Profit Before Interest & Tax ÷ Interest Expense	Higher ratio = easier to meet interest payments.

6.3 Comparative Analysis

• Horizontal analysis – compares figures from different periods (e.g., % change year‑on‑year).
• Vertical analysis – expresses each item as a percentage of a base figure (e.g., each expense as a % of sales).

6.4 Limitations of Ratio Analysis

• Based on historical cost – may not reflect current market values.
• Different accounting policies (e.g., depreciation methods) can distort comparisons.
• Ratios do not indicate causation; they must be interpreted with knowledge of the business environment.
• Seasonal businesses may show misleading results if periods are not comparable.

6.5 Interested Parties & Their Information Needs

Party	Primary Information Required
Owner/Shareholder	Profitability, return on investment, cash flow.
Creditors (banks, suppliers)	Liquidity, solvency, ability to repay.
Management	All ratios – for planning, control and performance evaluation.
Government/Tax authorities	Profit for tax, compliance with statutory reporting.
Potential investors	Growth trends, profitability, risk indicators.

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These notes cover every required sub‑section of the Cambridge IGCSE Accounting (0452) syllabus for 2026. Use the examples and tables as a quick‑reference guide while practising past‑paper questions.