non-financial aspects

Cambridge IGCSE Accounting (0452) – Complete Syllabus Notes

Unit 1 – The Fundamentals of Accounting

• Purpose of accounting: provide relevant, reliable information to users for decision‑making, control and accountability.
• Primary users: owners, managers, investors, lenders, employees, tax authorities, regulators, the public.
• Accounting equation: Assets = Liabilities + Owner’s (or Shareholders’) Equity.
• Types of business entities:
  • Sole trader – one owner, unlimited liability.
  • Partnership – two or more owners, unlimited liability.
  • Limited company – separate legal entity; shareholders’ liability limited to share capital.
  • Club / society – not‑for‑profit, may be unincorporated.
• Basic accounting concepts (required by the syllabus):
  • Entity (separate legal entity)
  • Going‑concern
  • Accruals / Matching (income and expenses recorded in the period to which they relate)
  • Consistency
  • Prudence (conservatism)
  • Historical cost
  • Materiality
  • Money measurement
  • Realisation
  • Duality (double‑entry)

Unit 2 – Sources & Recording of Data

• Source (business) documents: invoices, receipts, credit notes, bank statements, payroll sheets, purchase orders, delivery notes, sales orders.
• Books of prime entry:

  Book	Purpose
  Sales book (sales journal)	Record credit sales
  Purchases book (purchases journal)	Record credit purchases
  Cash book	Record all cash receipts & payments (also a bank account)
  Journal	Record non‑repeating, adjusting or correcting entries
  Petty‑cash book (imprest system)	Small cash disbursements; replenished to a fixed imprest amount

• Imprest system of petty cash:
  • Establish a fixed cash amount (the imprest).
  • Record each payment in the petty‑cash book.
  • When the cash is low, reimburse the imprest amount and record the total expense.
• Trade discounts vs. cash discounts:
  • Trade discount – reduction in the list price given at the point of sale; recorded only in the sales/purchase books, not in the journal.
  • Cash discount – incentive for early payment; recorded in the journal (e.g., “Cash discount received” or “Cash discount allowed”).
• Double‑entry bookkeeping – every transaction affects at least two accounts: one debit and one credit, keeping the accounting equation in balance.
• Ledger – individual T‑accounts where postings from the books of prime entry are recorded.
• Trial balance – a list of all ledger balances (debit and credit) used to check that total debits equal total credits before preparing statements.
• Control accounts & subsidiary ledgers:
  • Control accounts (e.g., Purchases Control, Sales Control) summarise the total of a group of subsidiary ledger balances.
  • Subsidiary ledgers contain the detailed balances of individual creditors, debtors, or inventory items.

  Example – Purchases Control account
  Dr Purchases Control          £12,500
     Cr Purchases Ledger – Supplier A      £5,000
     Cr Purchases Ledger – Supplier B      £7,500
          

Unit 3 – Verification of Accounting Records

• Preparing a trial balance:
  1. Extract the closing balance of each ledger account.
  2. Enter the balance in the appropriate debit or credit column.
  3. Total the debit and credit columns – they must be equal.
• Error types (as named in the syllabus):
  • Omission – a transaction is completely left out.
  • Commission – a transaction is recorded, but with the wrong amount or in the wrong account.
  • Principle error – a transaction is recorded in violation of an accounting principle (e.g., capital expense recorded as revenue).
  • Compensation (or balancing) error – two or more errors that offset each other.
  • Complete reversal – a debit is recorded as a credit (or vice‑versa).
  • Transposition error – digits are reversed (e.g., £540 recorded as £450).
• Error correction – make a journal entry that reverses the effect of the error (or records the omitted transaction).
• Bank reconciliation statement (format):

  Bank reconciliation as at 31 Mar 20XX
  Balance as per bank statement               £8,750
  Add: Deposits in transit                     £1,200
  Less: Outstanding cheques                  (£950)
  Add/Less: Bank errors (if any)               £0
  Add: Interest credited                       £30
  Less: Bank fees                              (£15)
  -------------------------------------------------
  Adjusted cash book balance                  £9,015
          

  • Outstanding cheques – issued but not yet cleared.
  • Deposits in transit – received but not yet recorded by the bank.
  • Bank errors – mistakes made by the bank.
  • Interest and fees – adjustments to the cash book.

Unit 4 – Accounting Procedures

• Capital vs. revenue receipts:
  • Capital receipts – issue of shares, loan proceeds, sale of a fixed asset.
  • Revenue receipts – sales revenue, interest received, rent received.
• Capital vs. revenue expenditure:
  • Capital expenditure – purchase of a non‑current asset, building extension, acquisition of patents.
  • Revenue expenditure – rent, wages, repairs, utilities.
• Depreciation methods (required):

  Method	Formula	Typical use
  Straight‑line	(Cost – Residual value) ÷ Useful life	Even charge each year.
  Reducing balance	Opening NBV × Depreciation rate	Higher charge in early years.

• Disposal of non‑current assets (full procedure):
  1. Remove the asset’s original cost from the books.
  2. Remove the accumulated depreciation.
  3. Record the cash received (or receivable).
  4. Recognise any gain or loss on disposal:

     Gain/Loss = Proceeds – (Cost – Accumulated Depreciation)
                     

  5. Journal entry example (asset cost £5,000; accumulated depreciation £2,000; proceeds £3,500):

     Dr Accumulated Depreciation – Equipment   £2,000
     Dr Cash                                   £3,500
     Dr Loss on Disposal of Equipment          £500
        Cr Equipment                           £5,000
                     

• Accruals and pre‑payments:
  • Accrued expense – incurred but not yet paid (e.g., wages payable).
  • Accrued income – earned but not yet received (e.g., interest receivable).
  • Pre‑paid expense – paid in advance for a future period (e.g., insurance).
  • Deferred income – received in advance of earning (e.g., rent received in advance).
• Provision for doubtful debts:
  1. Calculate the estimated uncollectible amount (e.g., 5 % of trade receivables).
  2. Journal entry:

     Dr Bad Debt Expense                     £XXX
        Cr Allowance for Doubtful Debts      £XXX
                     

• Inventory valuation (required methods):
  • FIFO – first‑in, first‑out.
  • Weighted‑average cost – total cost of goods available ÷ total units available.
  • Lower of cost and Net Realisable Value (NRV) – if NRV is lower than cost, write‑down to NRV.
• Manufacturing accounts (cost of production):

  Opening Stock of Raw Materials          £4,000
  Add: Purchases of Raw Materials          £12,000
  Less: Closing Stock of Raw Materials    (£5,000)
  ------------------------------------------------
  Raw Materials Used                      £11,000
  Add: Direct Labour                       £8,000
  Add: Direct Expenses (e.g., power)      £2,000
  ------------------------------------------------
  Prime Cost                              £21,000
  Add: Production Overheads                £4,000
  ------------------------------------------------
  Factory Cost                            £25,000
  Add: Opening Work‑in‑Progress            £1,500
  Less: Closing Work‑in‑Progress          (£2,000)
  ------------------------------------------------
  Cost of Production                      £24,500
  Add: Opening Finished Goods Stock        £3,000
  Less: Closing Finished Goods Stock       (£4,500)
  ------------------------------------------------
  Cost of Goods Sold                      £23,000
          

• Incomplete‑records (adjusted trial balance) – basic steps:
  1. Prepare an adjusted trial balance using the information given.
  2. Identify missing items (e.g., opening stock, purchases, expenses).
  3. Calculate profit or loss and adjust capital/equity accordingly.
  4. Prepare a Statement of Financial Position and an Income Statement.
• Closing entries – transfer temporary account balances to capital/retained earnings:

  Dr Sales Revenue                     £XX,XXX
     Cr Cost of Goods Sold                     £XX,XXX
     Cr Wages Expense                         £X,XXX
     Cr Rent Expense                          £X,XXX
     …
     Cr Net Profit (or Loss)                  £X,XXX
     Cr Capital (or Retained Earnings)        £X,XXX
          

Unit 5 – Preparation of Financial Statements

• Statement of Financial Position (Balance Sheet) – shows assets, liabilities and equity at a specific date.
  • Sole trader – capital and drawings.
  • Partnership – separate capital accounts for each partner and drawings.
  • Limited company – share capital, retained earnings, reserves.
  • Club / society – fund balances (e.g., General Fund, Capital Fund).
• Income Statement (Profit & Loss Account) – summarises revenue, cost of goods sold, expenses and profit for the period.
• Cash Flow Statement (indirect method):

  Cash Flow from Operating Activities
     Profit before tax                         £XX,XXX
     Add: Depreciation                          £X,XXX
     Add: Increase in trade receivables        (£X,XXX)
     Add: Decrease in inventories              £X,XXX
     …
     Net cash generated from operations         £XX,XXX
  
  Cash Flow from Investing Activities
     Purchase of equipment                     (£X,XXX)
     Proceeds from disposal of equipment       £X,XXX
     …
     Net cash used in investing                (£X,XXX)
  
  Cash Flow from Financing Activities
     Proceeds from issue of share capital       £X,XXX
     Repayment of loan                         (£X,XXX)
     …
     Net cash from financing                    £X,XXX
  
  Net increase (decrease) in cash and cash equivalents   £XX,XXX
  Cash at beginning of period                            £X,XXX
  Cash at end of period                                 £XX,XXX
          

• Example – Sole‑Trader Income Statement (excerpt)

  Sales Revenue                     £45,000
  Less: Cost of Goods Sold
     Opening Stock          £5,000
     Purchases              £20,000
     Closing Stock          (£6,000)
     -------------------------------
     Cost of Goods Sold                £19,000
  Gross Profit                               £26,000
  Less: Operating Expenses
     Rent                 £4,000
     Wages                £6,000
     Depreciation         £1,200
     -------------------------------
     Total Expenses                     £11,200
  Net Profit                                   £14,800
          

Unit 6 – Analysis & Interpretation

• Ratio analysis – formulas and interpretation

  Category	Ratio	Formula	Interpretation
  Profitability	Gross Profit Margin	Gross Profit ÷ Sales × 100 %	Portion of sales left after cost of sales.
  	Net Profit Margin	Net Profit ÷ Sales × 100 %	Overall profitability.
  Liquidity	Current Ratio	Current Assets ÷ Current Liabilities	Ability to meet short‑term obligations.
  	Quick Ratio	(Current Assets – Stock) ÷ Current Liabilities	Liquidity without relying on inventory.
  Efficiency	Stock Turnover	Cost of Goods Sold ÷ Average Stock	How quickly inventory is sold.
  	Debtor Days	Trade Receivables ÷ (Sales ÷ 365)	Average collection period.
  Solvency / Gearing	Debt‑to‑Equity Ratio	Total Liabilities ÷ Equity	Financial risk level.
  Return	Return on Capital Employed (ROCE)	Profit before interest & tax ÷ (Capital + Reserves)	Efficiency of capital use.

• Trend analysis – compare the same line items over two or more periods to identify growth, decline or stability.
• Common‑size statements – express each line item as a percentage of:
  • Sales (income statement) – shows cost structure.
  • Total assets (balance sheet) – shows asset composition.
• Break‑even analysis:

  Break‑even point (units) = Fixed Costs ÷ (Selling price per unit – Variable cost per unit)
  Break‑even point (sales £) = Fixed Costs ÷ Contribution margin % 
          

• Limitations of ratio analysis – historical data, different accounting policies, seasonal effects, non‑financial factors, and the fact that ratios are based on accounting estimates.

6.5 Limitations of Accounting Statements – Non‑Financial Aspects

• Historical cost valuation – assets are recorded at purchase price, ignoring current market values, replacement costs or technological obsolescence.
• Intangible assets often omitted or undervalued – brand reputation, goodwill, patents, employee skills and customer loyalty are not fully captured.
• Operational efficiency not disclosed – ratios cannot reveal waste, quality of production processes, or capacity for innovation.
• Environmental and social impacts excluded – pollution costs, carbon emissions, community relations and CSR activities rarely appear in the numbers.
• Human‑capital factors missing – morale, turnover, training effectiveness and leadership quality are qualitative but crucial for performance.
• Future prospects are absent – financial statements are historical; they do not show market trends, strategic plans or growth opportunities.
• Subjectivity in estimates – depreciation methods, doubtful‑debt provisions and impairment judgments involve management discretion, potentially biasing results.
• Comparability problems – different accounting policies (e.g., inventory valuation) hinder meaningful comparison of non‑financial performance between firms.

Summary Table – Non‑Financial Limitations

How to Complement Accounting Statements

• Management discussion & analysis (MD&A) – narrative on strategy, risks, opportunities and future plans.
• Key performance indicators (KPIs) – e.g., employee turnover, customer‑satisfaction score, carbon footprint, on‑time delivery rate.
• Sustainability / CSR reports – detail environmental initiatives, community projects and ethical policies.
• Non‑financial reporting frameworks – GRI (Global Reporting Initiative), ISO 26000, UN Sustainable Development Goals.

Unit 7 – Accounting Principles & Policies (Required by the Syllabus)

• Entity (separate legal entity) – the business’s affairs are recorded separately from those of its owners.
• Going‑concern – financial statements are prepared assuming the business will continue to operate.
• Accruals / Matching principle – income and related expenses are recorded in the period they arise, not when cash changes hands.
• Consistency – once an accounting method is adopted, it should be applied consistently from period to period unless a change is justified.
• Prudence (conservatism) – anticipate and record probable losses but not unrealised gains.
• Historical cost – assets and liabilities are recorded at the amount of cash or cash equivalents paid or received at the time of acquisition.
• Materiality – items that could influence decisions of users must be disclosed; immaterial items may be omitted.
• Money measurement – only transactions that can be expressed in monetary terms are recorded.
• Realisation – revenue is recognised when the earnings process is complete and collection is reasonably assured.
• Duality (double‑entry) – every transaction affects at least two accounts, keeping the accounting equation in balance.
• Disclosure – significant accounting policies, estimates and contingencies must be disclosed in the notes to the accounts.

Effect of Principles on Record‑Keeping & Statements

• Entity → separate ledgers for the business, not the owners.
• Going‑concern → assets are not written down to liquidation values.
• Accruals → use of accrued expenses, prepaid expenses, depreciation and provisions.
• Consistency → same depreciation method, inventory valuation method, etc., each year.
• Prudence → provision for doubtful debts, lower of cost & NRV.
• Historical cost → fixed assets shown at cost less accumulated depreciation.
• Materiality → minor errors may be corrected by adjusting entries rather than restating figures.

Appendix – Ratio Formulas (Exact Syllabus Requirements)