Cambridge IGCSE Accounting (0452) – Complete Syllabus Notes

1. Fundamentals of Accounting

• Purpose of accounting: record, classify and interpret financial information to support decision‑making for owners, managers, creditors and other users.
• Fundamental accounting equation: Assets = Liabilities + Owner’s Equity
• Entity concept: a partnership, sole trader, limited company, club or society is a separate legal entity from its owners.
• Profit‑and‑loss measurement: profit (or loss) for a period = total income – total expenses. It reflects the performance of the entity and feeds into the equity section of the balance sheet.
• Decision‑making relevance: users assess profitability, liquidity, solvency and efficiency to decide on investment, credit, pricing and other strategic matters.

2. Sources & Recording of Data

2.1 Primary source documents

• Invoices, receipts, credit notes, bank statements, purchase orders, sales orders, petty‑cash vouchers, etc.

2.2 Trade discount vs Cash discount

• Trade discount: reduction in the list price offered at the point of sale; recorded only in the sales/purchase invoice and does not appear in the accounts.
• Cash discount: incentive for early payment (e.g., 2 % if paid within 10 days); recorded in the books as a reduction of revenue (sales discount) or expense (purchase discount).

2.3 Books of prime entry

• Sales journal, purchases journal, cash book, journals for receipts & payments, and the petty‑cash (imprest) book.

2.4 Imprest (petty‑cash) system

1. Set a fixed cash float (e.g., £200).
2. Make small payments and record each voucher.
3. When the float is low, replenish it by debiting the Petty‑Cash account and crediting Cash/Bank for the total vouchers presented.

2.5 Double‑entry bookkeeping

Every transaction affects at least two accounts – one debit and one credit. The normal flow is:

Source document → Journal → Ledger → Trial Balance → Adjustments → Financial Statements

3. Verification of Accounting Records

3.1 Trial Balance

• Ensures total debits equal total credits after posting.

3.2 Types of errors and their effects

Error type	Effect on Trial Balance	Effect on Profit & Loss	Effect on Statement of Financial Position
Transposition (e.g., £123 written as £132)	Unbalanced (difference = £9)	May over‑/under‑state expense or income	Asset or liability misstated by same amount
Omission (transaction not recorded)	Balanced (both sides omitted)	Profit understated or overstated	Asset or liability omitted
Commission (amount entered on wrong side)	Unbalanced (difference = 2 × amount)	Profit opposite to correct amount	Asset or liability opposite side
Double posting	Unbalanced (difference = amount)	Expense or income duplicated	Asset or liability duplicated
Wrong amount	Unbalanced (difference = error amount)	Profit affected by error amount	Asset or liability affected by error amount
Wrong side	Unbalanced (difference = 2 × amount)	Profit opposite to correct amount	Asset turned into liability or vice‑versa

3.3 Suspense accounts

• Used temporarily when the trial balance does not balance.
• All unresolved differences are posted to Suspense Account until the correct entry is identified and the suspense balance is cleared.

3.4 Bank reconciliation

• Adjusts the cash book balance to match the bank statement by accounting for deposits in transit, outstanding cheques, bank charges, interest, and errors.

3.5 Control accounts

• Summarise large groups of subsidiary ledger balances (e.g., Trade Receivables Control), helping to locate posting errors.

4. Accounting Procedures

4.1 Capital vs. Revenue items

• Capital items: relate to long‑term financing – capital introduced, drawings, interest on capital, revaluation surplus.
• Revenue items: relate to day‑to‑day operations – sales, purchases, wages, rent, interest on drawings.

4.2 Depreciation

Method	Formula	When it is used
Straight‑line	(Cost – Residual Value) ÷ Useful Life	Asset provides equal benefit each year.
Reducing balance	Opening NB × Depreciation Rate	Asset loses more value in early years.

4.3 Accruals & Pre‑payments

• Accrued expenses – incurred but not yet paid (e.g., wages payable).
• Accrued income – earned but not yet received (e.g., interest receivable).
• Pre‑payments – paid before the related expense is incurred (e.g., insurance prepaid).

4.4 Doubtful debts & Provisions

• Identify receivables that may not be collected.
• Record a provision (e.g., 2 % of trade receivables) to reflect the estimated loss.

4.5 Inventory valuation

• Inventories are valued at the lower of cost and net realisable value (NRV). Choosing the lower amount ensures that profit is not overstated.
• Cost can be determined by FIFO or weighted‑average (both acceptable for IGCSE).
• Incorrect valuation affects:
  • Cost of goods sold → gross profit → net profit
  • Closing stock → total assets → equity

4.6 Other current‑year adjustments (optional for syllabus)

• Prepaid expenses, accrued income, accrued expenses, and provisions for warranties or tax.

5. Preparation of Financial Statements

5.1 Statements required by the syllabus – quick reference

Entity type	Financial statements required
Sole trader	Income Statement (P&L) & Statement of Financial Position
Partnership	Current‑year (profit & loss) account, Appropriation account, Capital accounts, Statement of Financial Position
Limited company	Income Statement, Statement of Changes in Equity, Statement of Financial Position
Clubs & societies	Receipts & Payments Account & Income‑Expenditure Account
Manufacturing enterprises	Prime cost account, Factory overheads account, Gross profit account, Income Statement, Balance Sheet
Businesses with incomplete records	Opening & Closing Statements of Affairs (statement of financial position style)

5.2 Partnership Accounts – The Appropriation Account

5.2.1 Definition

An Appropriation Account is a specialised statement prepared at the end of a reporting period to show how the partnership’s net profit (or loss) is distributed among the partners after applying the terms of the partnership deed.

5.2.2 Purpose

• Allocate profit or loss according to the agreed sharing ratio.
• Adjust for interest on capital (reward for investment) and interest on drawings (charge for use of funds).
• Deduct total drawings made during the year.
• Show the closing balance of each partner’s capital account – essential for the balance sheet.
• Provide a transparent, auditable trail that reduces the risk of disputes and demonstrates compliance with the partnership agreement.

5.2.3 Typical structure

Particulars	Amount (£)
Net profit transferred from Profit & Loss Account
+ Interest on capital (if applicable)
– Interest on drawings (if applicable)
– Total drawings (all partners)
Profit available for appropriation
– Share of profit – Partner A
– Share of profit – Partner B
– Share of profit – Partner C (if any)
Balance transferred to partners’ capital accounts

5.2.4 Step‑by‑step preparation

1. Start with the net profit (or loss) from the partnership’s Profit & Loss Account.
2. Add any interest on capital required by the deed:
   Interest on Capital = Opening capital × agreed rate
3. Deduct any interest on drawings required by the deed:
   Interest on Drawings = Drawings × agreed rate
4. Deduct the total drawings made by each partner during the period.
5. The remainder is the profit available for appropriation.
6. Allocate this amount to the partners using the agreed profit‑sharing ratio.
7. Transfer each partner’s share to his/her capital account – this updates the closing capital balances shown on the Statement of Financial Position.

5.2.5 Illustrative example (Year ended 31 December 2025)

Data

• Net profit: £48,000
• Opening capital balances: A – £30,000; B – £20,000; C – £10,000
• Interest on capital: 5 % per annum
• Drawings: A – £6,000; B – £4,000; C – £2,000
• Interest on drawings: 3 % per annum
• Profit‑sharing ratio: A : B : C = 3 : 2 : 1

Particulars	Amount (£)
Net profit transferred from P&L account	48,000
+ Interest on capital	1,500 (A) + 1,000 (B) + 500 (C) = 3,000
– Interest on drawings	180 (A) + 120 (B) + 60 (C) = 360
– Total drawings	12,000
Profit available for appropriation	48,000 + 3,000 – 360 – 12,000 = 38,640
Share of profit – A (3/6)	19,320
Share of profit – B (2/6)	12,880
Share of profit – C (1/6)	6,440
Transfer to capital accounts	38,640 (total)

Closing capital balances

• A: £30,000 + 19,320 – 6,000 = £43,320
• B: £20,000 + 12,880 – 4,000 = £28,880
• C: £10,000 + 6,440 – 2,000 = £14,440

5.3 Other partnership statements (brief)

• Capital accounts: record opening balances, additions (interest on capital, share of profit) and deductions (drawings, interest on drawings).
• Current‑year (profit & loss) account: shows the partnership’s profit or loss before appropriation.
• Statement of Financial Position: presents assets, liabilities and partners’ capital at year‑end.

6. Analysis & Interpretation of Financial Information

6.1 Key ratios (exam‑tested)

Ratio	Formula	Interpretation
Gross Profit Ratio	Gross Profit ÷ Net Sales × 100 %	Efficiency of core trading operations.
Net Profit Ratio	Net Profit ÷ Net Sales × 100 %	Overall profitability after all expenses.
Current Ratio	Current Assets ÷ Current Liabilities	Short‑term liquidity; ability to meet obligations.
Quick (Acid‑Test) Ratio	(Current Assets – Stock) ÷ Current Liabilities	Liquidity without relying on inventory.
Return on Capital Employed (ROCE)	Net Profit ÷ (Capital + Long‑term Liabilities) × 100 %	Efficiency of capital utilisation.
Debtor Days	Trade Receivables ÷ (Credit Sales ÷ 365)	Average time to collect debts.
Creditor Days	Trade Payables ÷ (Credit Purchases ÷ 365)	Average time taken to pay suppliers.
Stock Turnover	Cost of Goods Sold ÷ Average Stock	How often inventory is sold and replaced.

6.2 Inter‑firm comparison – issues to consider

• Different accounting policies (e.g., depreciation method, inventory valuation) can distort comparisons.
• Variations in fiscal year‑ends affect seasonal results.
• Size and scale differences mean ratios should be interpreted in context.

6.3 Limitations of accounting information

• Historical cost: assets are recorded at purchase price, not current market value.
• Non‑financial factors (e.g., brand reputation, employee morale) are not reflected.
• Estimates and judgments (provisions, depreciation, NRV) introduce subjectivity.
• Timing differences: accruals and deferrals mean cash flow information is separate.

7. Accounting Principles & Policies (Key Concepts Tested)

• Going concern – financial statements are prepared assuming the business will continue operating.
• Accruals (matching) principle – income and expenses are recognised when earned or incurred, not when cash changes hands.
• Consistency – the same accounting methods are applied from period to period unless a change is justified.
• Conservatism – where uncertainty exists, choose the amount that does not overstate assets or income.
• Materiality – only items that could influence decisions need to be recorded separately.
• Entity concept – the business is separate from its owners; personal transactions of partners are excluded from partnership accounts.

8. Quick Revision Checklist – Appropriation Account

1. Start with net profit (or loss) from the Profit & Loss Account.
2. Add interest on capital (if required by the deed).
3. Deduct interest on drawings (if required by the deed).
4. Deduct total drawings made by each partner.
5. Result = profit available for appropriation.
6. Allocate this amount using the agreed profit‑sharing ratio.
7. Transfer each partner’s share to his/her capital account – this gives the closing capital balances shown on the Statement of Financial Position.

9. Visual Aid (for visual learners)