Cambridge IGCSE Accounting (0452) – Core Syllabus Notes (2026)
Learning Objectives
- Identify and use the key terminology and concepts of accounting (AO1).
- Apply bookkeeping procedures to record, post and adjust transactions (AO2).
- Evaluate the strengths and limitations of the accounting information produced (AO3).
1 The Fundamentals of Accounting
1.1 Purpose of Accounting
- Systematically record all financial transactions (book‑keeping).
- Summarise information to monitor the progress of the business and aid decision‑making (management, investors, creditors, tax authorities).
- Provide the basis for the preparation of the statement of financial position (balance sheet) and the income statement (profit & loss account).
1.2 The Accounting Equation
Assets = Liabilities + Capital
- Every transaction affects at least two accounts – the basis of the double‑entry system.
- Changes in capital arise from profit, drawings and additional investment.
1.3 Double‑Entry Principle
| Account type | Increase | Decrease |
|---|
| Asset | Debit (Dr) | Credit (Cr) |
| Liability | Credit (Cr) | Debit (Dr) |
| Capital (owner’s equity) | Credit (Cr) | Debit (Dr) |
| Revenue (income) | Credit (Cr) | — |
| Expense | Debit (Dr) | — |
1.4 Book‑keeping vs. Accounting
- Book‑keeping: recording transactions in the books of prime entry and posting to the ledger.
- Accounting: analysing, classifying, summarising and interpreting the recorded information to produce financial statements and management reports.
2 Sources and Recording of Data
2.1 Source Documents
- Invoices, receipts, credit notes, debit notes, bank statements, purchase orders, sales orders, petty‑cash vouchers.
- Each document supplies the date, parties, amounts, and the nature of the transaction needed for a journal entry.
2.2 Books of Prime Entry (Journals)
| Journal | Typical Transactions |
|---|
| Cash Book (single‑column or double‑column) | All cash receipts & payments, bank deposits & withdrawals. |
| Sales Journal | Credit sales of goods (sales invoices). |
| Purchases Journal | Credit purchases of goods (purchase invoices). |
| Sales Returns Journal | Credit sales returns (sales credit notes). |
| Purchases Returns Journal | Credit purchases returns (purchase credit notes). |
| General Journal | Any transaction not fitting the above – e.g., depreciation, accruals, opening entries, correction of errors. |
| Petty‑Cash Imprest Journal | Small, frequent cash payments; replenishment entries. |
2.3 Key Concepts in Recording
- Trade discount – reduction of the list price agreed before any sale; recorded in the invoice and does **not** affect the cash amount recorded.
- Cash discount – incentive for early payment (e.g., 2% if paid within 10 days); recorded when the discount is taken.
- All discounts are shown **before** tax (VAT) is calculated.
2.4 Posting to the Ledger
- Transfer each journal entry to the appropriate ledger accounts, posting the debit side to the debit column and the credit side to the credit column.
- Maintain separate ledgers for:
- Real accounts – assets and liabilities (e.g., Cash, Trade Payables).
- Nominal accounts – income and expense items (e.g., Sales, Rent Expense).
- Personal accounts – parties such as Trade Receivables, Capital.
- Balance each ledger (total debits – total credits) to obtain the closing balance.
2.5 Worked Example – Recording a Credit Sale with Trade & Cash Discounts
| Date | Document | Journal Entry |
|---|
| 12 Feb |
Invoice #215 |
Dr Trade Receivables £4 800
Cr Sales Revenue £5 000
Cr Trade Discount Allowed £200
|
| 20 Feb (payment within discount period) |
Receipt |
Dr Bank £4 704
Dr Cash Discount Received £96
Cr Trade Receivables £4 800
|
3 Verification of Accounting Records
3.1 Trial Balance
- List of all ledger account balances (debit or credit) at a specific date.
- Primary purpose: confirm that total debits equal total credits – a necessary but not sufficient condition for error‑free books.
Limitations of the Trial Balance
| Limitation | Explanation |
|---|
| Omission of a transaction |
Both debit and credit are missing, so totals still balance. |
| Compensating errors |
Two or more errors of opposite effect offset each other (e.g., one amount posted to the wrong side and another amount posted to the wrong account). |
| Transposition or slide‑rule errors |
If the error results in equal total debit and credit differences, the trial balance will still balance. |
3.2 Bank Reconciliation
Adjusts the cash book balance so that it agrees with the bank statement balance.
| Bank‑statement item | Adjustment to Cash Book |
|---|
| Unpresented cheques | Deduct from cash‑book balance |
| Deposits in transit | Add to cash‑book balance |
| Bank error (e.g., amount entered incorrectly) | Correct in cash book |
| Direct credits (interest, refunds) | Add to cash book |
| Direct debits (service charges, standing orders) | Deduct from cash book |
3.3 Control Accounts
Summarise a group of related subsidiary ledger balances and provide a check on the accuracy of the subsidiary ledgers.
Preparing a Control Account from Subsidiary Ledger Data
Example – Sales Ledger Control Account (derived from the Trade Receivables subsidiary ledger):
| Customer | Opening | Sales | Receipts | Closing |
|---|
| A Ltd. | £1 200 | £2 500 | £2 000 | £1 700 |
| B Ltd. | £800 | £1 800 | £1 300 | £1 300 |
| C Ltd. | £500 | £1 200 | £900 | £800 |
| Total | £2 500 | £5 500 | £4 200 | £3 800 |
|---|
The Sales Ledger Control Account shows a closing balance of £3 800, which must equal the total of the individual receivable balances (£1 700 + £1 300 + £800 = £3 800).
3.4 The Suspense Account – A Temporary Balancing Tool
What Is a Suspense Account?
A suspense account is a **temporary holding account** used when the trial balance does not balance. It records the difference so that the accountant can continue preparing the financial statements while the underlying error(s) are investigated.
When to Use It
- After posting all ledger balances and the trial balance is out of balance.
- When the nature of the error is not immediately known.
- Never as a permanent account – it must be cleared before the final accounts are issued.
Steps to Apply a Suspense Account
- Calculate the difference between total debits and total credits.
- Enter the difference in the suspense account:
- If debits exceed credits, debit the suspense account.
- If credits exceed debits, credit the suspense account.
- Prepare a new trial balance that now balances (including the suspense account).
- Investigate the ledgers to locate the error(s) – check for:
- Transposition or slide‑rule errors.
- Omitted, double‑posted, or mis‑posted amounts.
- Wrong side of the ledger (debit recorded as credit or vice‑versa).
- Incorrect classification (e.g., capital recorded as revenue).
- Make the correcting journal entry(s) and offset the amount against the suspense account.
- When the suspense account balance is zero, close it – it should not appear in the final accounts.
Illustrative Example
Trial balance (figures in £):
| Account | Debit | Credit |
|---|
| Cash | 12 500 | |
| Purchases | 8 300 | |
| Rent Expense | 1 200 | |
| Sales Revenue | | 20 000 |
| Capital | | 5 000 |
Totals: Debits £22 000, Credits £25 000 → Credits exceed debits by £3 000.
Create a **credit** suspense account of £3 000 and recompute the trial balance:
| Account | Debit | Credit |
|---|
| Cash | 12 500 | |
| Purchases | 8 300 | |
| Rent Expense | 1 200 | |
| Suspense Account | | 3 000 |
| Sales Revenue | | 20 000 |
| Capital | | 5 000 |
| Totals | 22 000 | 22 000 |
|---|
Investigation reveals that a purchase of £3 000 was omitted from the Purchases ledger. Correcting entry:
Dr Purchases £3 000
Cr Suspense Account £3 000
After posting, the suspense account balance is zero and the trial balance is correct.
Typical Errors That Produce a Suspense Balance
| Error Type | Effect on Trial Balance | Typical Remedy |
|---|
| Transposition (e.g., 540 written as 450) | Difference of £90 | Locate the posting and correct the amount. |
| Omitted posting | Difference equals the omitted amount | Enter the missing journal entry. |
| Double posting | Difference equals the duplicated amount | Reverse one of the duplicate entries. |
| Wrong side of ledger | Difference equals twice the amount | Move the amount to the correct side (debit ↔ credit). |
| Incorrect classification (capital vs. revenue) | Difference may be zero but profit is misstated | Re‑classify the entry and adjust the profit & loss. |
Key Points
- The suspense account is **temporary** – it must be cleared before the final accounts are issued.
- It is a diagnostic tool, not a way to hide errors.
- Document each investigation step and the correcting entry made.
- If the suspense balance persists, consider **compensating errors** (two or more errors that offset each other).
4 Accounting Procedures
4.1 Capital vs. Revenue Transactions
| Aspect | Capital | Revenue |
|---|
| Nature | Long‑term investment in the business | Day‑to‑day operating activity |
| Effect on Profit & Loss | Not shown in the income statement | Recorded in the income statement |
| Examples | Purchase of land, building, plant & equipment; owner's additional investment | Rent, wages, utilities, purchases of stock, repairs |
4.2 Depreciation of Non‑Current Assets
Depreciation allocates the cost of a non‑current asset over its useful life.
| Method | Formula | Annual Journal Entry |
|---|
| Straight‑Line |
(Cost – Residual Value) ÷ Useful Life |
Dr Depreciation Expense Cr Accumulated Depreciation |
| Reducing‑Balance (d‑rate) |
Opening NBV × d‑rate |
Dr Depreciation Expense Cr Accumulated Depreciation |
| Units of Production (optional for A‑Level) |
(Cost – Residual Value) ÷ Total Expected Units × Units Produced in the year |
Dr Depreciation Expense Cr Accumulated Depreciation |
Worked Example – Straight‑Line
- Machine cost = £12 000
- Residual value = £2 000
- Useful life = 5 years
Annual depreciation = (12 000 – 2 000) ÷ 5 = £2 000
Dr Depreciation Expense £2 000
Cr Accumulated Depreciation – Machine £2 000
4.3 Disposals of Non‑Current Assets
Compare disposal proceeds with the asset’s carrying amount (Cost – Accumulated Depreciation).
| Result | Journal Entry |
|---|
| Gain on disposal (Proceeds > Carrying amount) |
Dr Cash (proceeds)
Dr Accumulated Depreciation
Cr Asset (cost)
Cr Gain on Disposal
|
| Loss on disposal (Proceeds < Carrying amount) |
Dr Cash (proceeds)
Dr Accumulated Depreciation
Dr Loss on Disposal
Cr Asset (cost)
|
4.4 Accruals and Pre‑payments
- Accrued expense – expense incurred but not yet paid (e.g., wages owing).
Journal: Dr Expense Cr Accrued Liabilities
- Accrued income – revenue earned but not yet received (e.g., interest earned).
Journal: Dr Accrued Receivables Cr Revenue
- Pre‑paid expense – payment made in advance (e.g., rent prepaid).
At payment: Dr Pre‑payments Cr Cash
Adjustment at period‑end: Dr Expense Cr Pre‑payments
- Pre‑paid income – cash received before the related service is performed (e.g., advance rent).
At receipt: Dr Cash Cr Unearned Income (liability)
Adjustment at period‑end: Dr Unearned Income Cr Revenue
4.5 Doubtful Debts, Irrecoverable Debts & Provisions
- Doubtful debts – amounts owed by customers that may become unrecoverable.
Journal (estimate): Dr Bad Debt Expense Cr Provision for Doubtful Debts
- Irrecoverable (bad) debt written off – when a specific debt is confirmed as uncollectible.
Journal: Dr Provision for Doubtful Debts Cr Trade Receivables
- Recovery of a previously written‑off debt – when cash is later received.
Journal: Dr Cash Cr Provision for Doubtful Debts
(If the recovery exceeds the provision, the excess is recorded as a gain in the income statement.)
4.6 Inventory Valuation
Inventory is valued at the **lower of cost or net realisable value (NRV)**.
Cost Calculation (FIFO example)
| Date | Purchases | Units | Unit Cost (£) |
|---|
| 1 Jan | Opening stock | 100 | 5.00 |
| 10 Jan | Purchase | 200 | 6.00 |
| 20 Jan | Purchase | 150 | 5.50 |
Sales during the period = 300 units.
Under FIFO, the 300 units sold are taken from the earliest purchases:
- 100 units @ £5.00 = £500
- 200 units @ £6.00 = £1 200
Cost of goods sold (COGS) = £1 700.
Closing inventory (remaining 150 units) = 150 @ £5.50 = £825.
NRV Adjustment
If the estimated selling price of the closing inventory is £800 and the estimated costs to sell are £50, NRV = £800 – £50 = £750.
Since NRV (£750) < cost (£825), the inventory must be written down to £750.
Dr Loss on Inventory Write‑down £75
Cr Inventory £75
4.7 Goods Taken by Owner (Drawings)
When the owner removes stock for personal use, the transaction affects both capital and inventory.
Dr Drawings (or Owner’s Capital) £XXX
Cr Inventory £XXX
The amount is shown in the statement of changes in owner's equity, not in the profit & loss account.
5 Preparation of Financial Statements
5.1 Statement of Financial Position (Balance Sheet)
- Classify assets as non‑current (e.g., plant, equipment) and current (e.g., cash, trade receivables, inventory).
- Classify liabilities as non‑current (e.g., long‑term loan) and current (e.g., trade payables, accrued expenses).
- Owner’s equity = Capital + Profits – Drawings.
5.2 Income Statement (Profit & Loss Account)
- Revenue – Cost of Goods Sold = Gross Profit.
- Gross Profit – Operating Expenses (rent, salaries, depreciation, etc.) = Operating Profit.
- Operating Profit ± Other Income/Expenses = Net Profit (or Net Loss).
5.3 Statement of Changes in Owner’s Equity
Shows the effect of: capital introduced, net profit for the period, drawings, and any other equity movements (e.g., revaluation surplus).
5.4 Key Evaluation Points (AO3)
- Explain why a trial balance may still be incorrect (limitations, compensating errors).
- Discuss the impact of mis‑classifying a capital expenditure as revenue (over‑states profit, understates assets).
- Evaluate the usefulness of the suspense account – it enables continuation of work but must be cleared to avoid misleading users.
- Consider the effect of inventory valuation choices (cost vs. NRV) on profit and asset measurement.
6 Summary Checklist for the Examination
- Identify the correct source document and choose the appropriate journal.
- Post accurately to the ledger, remembering the debit/credit rules.
- Prepare a trial balance and check for balance; note any limitations.
- If out of balance, use a suspense account, then locate and correct the error.
- Prepare control accounts where required and reconcile bank statements.
- Make all required adjusting entries (depreciation, accruals, pre‑payments, doubtful debts, inventory write‑downs, drawings).
- Produce the three financial statements in the correct order and ensure the suspense account is closed.
- Answer evaluation questions by discussing strengths, weaknesses and the impact of errors on users.
Useful Acronyms
- AO1 – Knowledge & understanding of terminology.
- AO2 – Application of procedures and analytical skills.
- AO3 – Evaluation and judgement of accounting information.