IGCSE Accounting (0452) – Complete Syllabus Notes
1 The Fundamentals of Accounting
- Purpose of accounting: record, classify and summarise financial information so that users can make informed decisions.
- Book‑keeping vs. accounting: book‑keeping is the systematic recording of transactions; accounting adds analysis, interpretation and reporting.
- Profit‑or‑loss purpose: most businesses aim to earn a profit (revenues > expenses).
- Business‑entity principle: the affairs of the business are separate from those of its owner(s).
It underpins the accounting equation:
| Assets | = | Liabilities | + | Owner’s equity |
|---|
| Cash, stock, equipment … | | Loans, creditors … | | Capital, retained profit … |
- Double‑entry (duality) principle: every transaction affects at least two accounts – one debit and one credit – keeping the accounting equation in balance.
- Matching principle: expenses are recognised in the same period as the revenues they help generate. (Listed in the syllabus under “principles”.)
2 Sources and Recording of Data
2.1 Business documents (six documents required by the syllabus)
- Invoice (sales or purchase)
- Debit note / Credit note
- Statement of account (or bank statement)
- Cheque
- Receipt
- Cash‑voucher (used for petty‑cash payments)
Other useful documents such as purchase orders or sales orders may appear in practice but are not required for the exam.
2.2 Books of prime entry
| Book | What is recorded | Key advantage for the exam |
|---|
| Cash book | All cash receipts and payments (also a bank account) | Shows cash flow and provides the opening/closing cash balance directly. |
| Sales journal | Credit sales (and related tax) | Groups many similar sales entries, reducing the amount of posting work. |
| Purchases journal | Credit purchases (and related tax) | Same advantage as the sales journal but for purchases. |
| General journal | Non‑standard transactions – e.g., depreciation, accruals, corrections | Allows any transaction that does not fit the other three books to be recorded. |
Imprest system (petty‑cash): a fixed amount of cash is kept on hand. When the cash is spent a voucher is produced; the total of vouchers is reimbursed and the imprest amount restored to its original level. This system provides a simple control over small cash payments.
Exam note: folio columns and three‑column running‑balance accounts are not required for the IGCSE exam – a simple T‑account format is sufficient.
2.3 Ledger accounts
- Three main ledgers are required:
- Sales ledger – records each customer’s trade receivables.
- Purchases ledger – records each supplier’s trade payables.
- Nominal (general) ledger – contains all income, expense, asset, liability and equity accounts.
- Posting: transfer amounts from the journals to the appropriate ledger accounts.
- Nominal (income & expense) accounts are closed to the profit‑or‑loss account at year‑end; real (asset, liability, equity) accounts carry forward.
3 Verification of Accounting Records
3.1 Trial Balance
- Prepared after all posting is complete.
- Lists every ledger account with its final debit or credit balance.
- The total of the debit column must equal the total of the credit column – a first check for arithmetic errors.
3.2 Types of errors
| Error type | Effect on trial balance |
|---|
| Omission (transaction not recorded) | No effect |
| Commission (wrong amount recorded) | Totals may differ |
| Reversal (debit entered as credit and vice‑versa) | Totals may differ |
| Transposition (e.g., £123 recorded as £132) | Totals may differ |
| Duplication (transaction recorded twice) | Totals may differ |
| Complete reversal (both sides of the entry reversed) | No effect |
| Original entry (the correct entry is made, then the same amount is entered again on the opposite side) | No effect |
3.3 Bank reconciliation
- Adjust the cash‑book balance for:
- Deposits in transit
- Unpresented cheques
- Bank charges and interest
- Errors identified on the bank statement
- The adjusted cash‑book balance should agree with the bank statement balance.
3.4 Control accounts
- Summarise large groups of subsidiary‑ledger balances (e.g., Sales Ledger Control, Purchases Ledger Control).
- For the IGCSE exam you are **not required** to reconcile the control‑account balance with the total of the subsidiary ledger – you only need to show the control‑account balance in the trial balance.
4 Accounting Procedures
4.1 Capital vs. revenue items
- Capital items (e.g., plant, buildings, motor vehicles) provide benefits over several years – recorded as assets and depreciated/amortised.
- Revenue items (e.g., repairs, wages, consumables) relate to the current period – expensed immediately.
4.2 Depreciation
| Method | Formula | When to use |
|---|
| Straight‑line | (Cost – Residual value) ÷ Useful life | When the asset provides equal benefit each year. |
| Reducing‑balance | Opening NB × Depreciation rate | When the asset is more productive early in its life. |
| Revaluation | New fair value – Residual value ÷ Remaining useful life | Used only when an asset is re‑valued at a higher (or lower) fair value during the year. |
Example (straight‑line): Cost £12 000, residual £2 000, useful life 5 years → (£12 000 – £2 000) ÷ 5 = £2 000 per year.
4.3 Accruals and pre‑payments
- Accrued expenses – costs incurred but not yet paid (e.g., wages payable).
- Accrued income – revenue earned but not yet received (e.g., interest receivable).
- Pre‑payments – cash paid in advance of the benefit (e.g., insurance paid for 12 months).
4.4 Irrecoverable debts & provision for doubtful debts
- Irrecoverable debt – written off when it is clear the customer cannot pay.
- Provision for doubtful debts – estimated amount of trade receivables that may not be collected; recorded as an expense and a contra‑asset (Allowance for doubtful debts).
4.5 Inventory valuation
- Recorded at the lower of cost and net realisable value (NRV).
- Cost includes purchase price, import duties, transport, and other directly attributable costs.
4.6 Adjustments for the sole trader
- Owner’s drawings – goods taken by the owner for personal use are removed from stock and recorded as a reduction of capital (or as “drawings” in the statement of financial position).
- Adjust the profit‑or‑loss account only for expenses; the drawing entry affects only the equity side of the balance sheet.
5 Preparation of Financial Statements
5.1 Types of entities
- Sole trader, partnership, limited company, club/society, manufacturing business.
5.2 Statement of financial position (Balance Sheet)
| Classification | Examples |
|---|
| Current assets | Cash, stock, trade receivables (due within 12 months) |
| Non‑current assets | Plant, equipment, buildings |
| Current liabilities | Trade payables, bank overdraft (payable within 12 months) |
| Non‑current liabilities | Long‑term loans |
| Owner’s equity | Capital, retained profit (or loss) |
5.3 Income statement (Profit & Loss Account)
- Revenue – Cost of sales = Gross profit
- Gross profit – Operating expenses = Net profit (or loss)
5.4 Appropriation account (limited companies only)
- Shows how profit is allocated: dividends, retained profit, reserves.
5.5 Statement of changes in equity (limited companies)
- Shows movements in share capital, share premium, retained profit and other reserves during the year.
5.6 Manufacturing accounts (optional for IGCSE)
- Cost of production = Opening stock of raw materials + Purchases + Direct wages + Direct expenses + Overheads – Closing stock of raw materials.
- Add opening work‑in‑progress, subtract closing work‑in‑progress to obtain cost of goods manufactured.
5.7 Incomplete records
- If some books are missing, reconstruct the trial balance using the profit‑or‑loss account, balance sheet and any available documents (e.g., bank statements, invoices).
6 Analysis and Interpretation
6.1 Ratio analysis (the eight ratios required by the syllabus)
| Ratio | Formula | Interpretation |
|---|
| Current ratio | Current assets ÷ Current liabilities | Liquidity – ability to meet short‑term obligations. |
| Quick (acid‑test) ratio | (Current assets – Stock) ÷ Current liabilities | Liquidity excluding inventory. |
| Gross profit margin | Gross profit ÷ Sales × 100 % | Profitability of core trading activity. |
| Net profit margin | Net profit ÷ Sales × 100 % | Overall profitability after all expenses. |
| Return on capital employed (ROCE) | Net profit ÷ (Capital + Reserves) × 100 % | Efficiency of capital use. |
| Debtors turnover | Sales ÷ Average trade receivables | Speed of debt collection. |
| Creditors turnover | Purchases ÷ Average trade payables | Speed of payments to suppliers. |
| Stock turnover | Cost of goods sold ÷ Average stock | Efficiency of inventory management. |
6.2 Uses of ratios
- Trend analysis – compare performance over time.
- Benchmarking – compare with other firms in the same industry.
- Decision‑making – help investors, creditors, management and other users evaluate the business.
7 Accounting Principles and Policies
7.1 Fundamental accounting principles (Cambridge wording)
- Business entity
- Going concern
- Historic cost
- Money measurement
- Duality (double‑entry)
- Accruals
- Matching
- Consistency
- Materiality
- Prudence (conservatism)
- Realisation (revenue recognition)
7.2 Accounting policies
- Specific methods chosen by management to apply the principles (e.g., depreciation method, inventory valuation, revenue recognition).
- Must be disclosed in the notes to the financial statements when they affect presentation or comparability.
7.3 Going‑Concern Assumption – Detailed Study
Definition
The going‑concern assumption states that a business will continue to operate for the foreseeable future (normally at least 12 months) and has neither the intention nor the need to liquidate its assets or curtail its operations.
Why it matters
- Allows assets to be recorded at historic cost (cost less depreciation) rather than at liquidation values.
- Liabilities are measured at the amounts payable in the normal course of business.
- Supports the classification of current versus non‑current items.
- Underpins accruals, matching and consistency – all of which assume ongoing operations.
Implications for the financial statements
| Aspect | Effect when going‑concern is assumed |
|---|
| Asset valuation | Recorded at historic cost less depreciation/amortisation; no need to write‑down to net‑realizable value. |
| Liabilities | Recorded at the amount that will be paid in the ordinary course of business. |
| Presentation | Current assets/liabilities are those expected to be realised or settled within 12 months; all others are non‑current. |
| Depreciation & amortisation | Allocated over the estimated useful life of the asset, assuming continued use. |
| Provision for doubtful debts | Based on expected collectability of trade receivables, not on immediate cash recovery. |
Testing the going‑concern assumption (management’s responsibility)
- Prepare cash‑flow forecasts for at least the next 12 months.
- Review financing arrangements – availability of overdrafts, revolving credit, or other sources of funding.
- Analyse profitability trends – recurring losses may indicate a problem.
- Examine legal or contractual obligations that could force liquidation (e.g., breach of loan covenants).
- Identify significant events after the reporting period (e.g., loss of a major customer, natural disaster).
Disclosure requirements (Cambridge/IFRS IAS 1 style)
If management has material doubt about the entity’s ability to continue as a going concern, the notes to the financial statements must disclose:
- Nature of the uncertainty – e.g., loss of a key contract, inability to refinance a loan, severe operating losses.
- Management’s plans – cost‑cutting measures, asset sales, raising new equity, restructuring debt, seeking additional finance.
- Potential impact – how the financial statements would be affected if the assumption proved false (e.g., re‑valuation of assets at liquidation values, re‑classification of liabilities).
Example of a going‑concern disclosure
Notes to the Financial Statements – Going Concern
During the year XYZ Ltd. recorded a loss of $15,000 and received a notice of default from its bank on a $100,000 loan. Management considers these events to be material uncertainties that may cast doubt on the company’s ability to continue as a going concern.
To mitigate the risk, the Board has approved a cost‑reduction programme of $20,000, is negotiating a restructuring of the loan with the bank, and is seeking a new equity injection of $30,000. If these plans are not successful, the company may have to re‑value its plant and equipment at net‑realizable values and re‑classify current liabilities as long‑term obligations.
Relationship with other principles
- Accruals principle: Revenues and expenses are recognised when earned or incurred, assuming the business will continue to operate.
- Matching principle: Costs are matched with the revenues they help generate, presupposing ongoing operations.
- Consistency principle: The same accounting policies are applied from period to period, reflecting continuity.
- Prudence (conservatism): While prudence requires caution, it does not override the going‑concern assumption unless liquidation is imminent.
Common misconceptions
- “Going‑concern means the business will never close.” – It only assumes continuity for the near future (typically at least 12 months).
- “All assets are recorded at market value.” – Assets are recorded at historic cost (cost less depreciation) unless the assumption is no longer valid.
- “A single loss invalidates the assumption.” – Occasional losses are normal; a pattern of losses together with other indicators may raise doubt.
Key points to remember
- The going‑concern assumption is a fundamental premise for preparing financial statements.
- It justifies the use of historic cost, the classification of current/non‑current items and the application of accruals and matching.
- Management must assess, document and disclose any material uncertainty about continuity.
- If the assumption cannot be applied, assets must be re‑valued at liquidation values and classifications may need to be altered.