Cambridge IGCSE Accounting (0452) – Complete Syllabus Notes
Learning Objectives
- State the purpose of accounting information and name its primary users.
- Distinguish between bookkeeping and accounting and apply the accounting equation.
- Record transactions using the double‑entry system and the appropriate books of prime entry.
- Prepare a trial balance, locate common errors and correct them (including use of suspense accounts).
- Produce a bank reconciliation statement, showing outstanding cheques, deposits in transit, bank errors, service charges and interest.
- Prepare and interpret control accounts (Purchases‑ledger and Sales‑ledger control accounts).
- Apply key accounting procedures (capital vs revenue, depreciation, accruals & pre‑payments, doubtful debts, inventory valuation).
- Prepare basic financial statements for sole traders, partnerships and companies.
- Analyse financial information using profitability, liquidity and solvency ratios.
1 Fundamentals of Accounting
1.1 Purpose of Accounting Information
The purpose of accounting is to provide reliable, relevant and comparable information that helps users to:
- Make informed decisions (investment, lending, pricing, etc.)
- Plan and control business activities
- Assess performance and accountability
- Meet legal and tax obligations
1.2 Primary Users
- Owners / shareholders
- Managers
- Investors and creditors
- Employees
- Tax authorities and regulators
- General public
1.3 Book‑keeping vs Accounting
| Aspect | Book‑keeping | Accounting |
|---|
| Focus | Systematic recording of every financial transaction | Interpretation, analysis, reporting and decision‑support |
| Key activities | Journalising, posting to ledgers, preparing trial balance | Preparing statements, calculating ratios, budgeting, performance evaluation |
| Objective | Create a complete, accurate set of records | Provide useful information to users |
1.4 Accounting Equation
Assets = Liabilities + Owner’s Equity
Every transaction must keep this equation in balance – the foundation of the double‑entry system.
2 The Double‑Entry System of Book‑keeping
2.1 Core Concepts
- Each transaction affects at least two accounts.
- One account is debited and the other is credited (more accounts may be involved).
- The total of all debit entries must equal the total of all credit entries – this built‑in check helps spot errors.
- Accounts are classified as Assets, Liabilities, Equity, Revenue or Expenses.
2.2 Debit / Credit Rules
| Account Type | Debit (Dr) | Credit (Cr) |
|---|
| Assets | Increase | Decrease |
| Liabilities | Decrease | Increase |
| Equity (Capital) | Decrease | Increase |
| Revenue | Decrease | Increase |
| Expenses | Increase | Decrease |
2.3 Steps for Recording a Transaction
- Identify the accounts affected.
- Determine whether each account is increased or decreased.
- Apply the debit/credit rules to decide the side of each account.
- Write the journal entry (date, accounts, amounts, brief explanation).
- Post the amounts to the relevant ledger (T‑accounts).
- Prepare a trial balance to confirm that total debits = total credits.
2.4 Worked Example – Cash Purchase of Equipment
Transaction: 5 Mar – Purchased equipment for $3 200 cash.
| Date | Account | Debit ($) | Credit ($) | Explanation |
|---|
| 5 Mar | Equipment | 3 200 | | Equipment bought |
| 5 Mar | Cash | | 3 200 | Cash paid |
T‑account illustration
Equipment Cash
----------------- -----------------
Dr 3,200 Cr 3,200
2.5 Worked Example – Credit Sale with Cost of Goods Sold
Transaction: 12 Apr – Sold goods on credit for $1 500; cost of goods sold $900.
| Date | Account | Debit ($) | Credit ($) | Explanation |
|---|
| 12 Apr | Debtors | 1 500 | | Sale on credit |
| 12 Apr | Sales Revenue | | 1 500 | Revenue recognised |
| 12 Apr | Cost of Goods Sold | 900 | | Cost of the goods sold |
| 12 Apr | Inventory | | 900 | Inventory reduced |
2.6 Common Types of Double‑Entry Transactions
- Cash transactions – cash received or paid.
- Credit transactions – sales or purchases on account.
- Adjusting entries – accruals, pre‑payments, depreciation, provisions.
- Closing entries – transfer of temporary balances to capital (useful background knowledge).
3 Source Documents and Books of Prime Entry
3.1 Source (Business) Documents
| Document | Purpose | Typical Transaction(s) |
|---|
| Sales invoice | Evidence of goods/services sold on credit | Revenue & Debtors |
| Purchase invoice | Evidence of goods/services bought on credit | Expenses & Creditors |
| Debit note | Increase a supplier’s invoice (e.g., returned goods) | Increase Creditors |
| Credit note | Decrease a customer’s invoice (e.g., sales return) | Decrease Debtors |
| Receipt | Proof of cash received | Cash & Revenue |
| Cheque (payment) | Evidence of cash paid | Cash & Expenses |
| Bank statement | Reconciliation of bank balances | Bank & Cash |
| Petty cash voucher (imprest system) | Record small cash payments from a fixed petty‑cash fund | Petty Cash & Expenses |
| Electronic payment advice (e‑payment, direct debit) | Record payments made/received electronically | Bank & Relevant Account |
3.2 Books of Prime Entry (Journals)
| Book | Transactions Recorded | Typical Entry (example) |
|---|
| Cash Book (single‑ or double‑column) | All cash receipts & payments | Cash Dr $500 – Sales |
| Petty Cash Book | Small, irregular cash payments (imprest) | Petty Cash Dr $30 – Office Supplies |
| Sales Journal | Credit sales of goods | Debtors Dr $1 200 – Sales Revenue |
| Purchases Journal | Credit purchases of goods | Purchases Dr $800 – Creditors |
| Sales Returns Journal | Goods returned by customers | Sales Returns Dr $150 – Debtors |
| Purchases Returns Journal | Goods returned to suppliers | Creditors Dr $100 – Purchases Returns |
| General Journal | Non‑regular items (depreciation, accruals, corrections, electronic payments) | Depreciation Expense Dr $200 – Accumulated Depreciation Cr $200 |
4 Verification of Accounting Records
4.1 Trial Balance
- List of all ledger balances, debit column first, credit column second.
- Totals of the two columns must be equal; inequality indicates an error.
- Serves as the basis for preparing the final accounts.
4.2 Common Errors & How to Detect Them
| Error Type | Effect on Trial Balance | How to Correct |
|---|
| Omission of a transaction | No effect (both sides missing) | Enter the missing journal entry and repost. |
| Commission error (wrong amount) | Totals differ | Adjust the amount in the journal and repost. |
| Transposition error (e.g., 54 instead of 45) | Totals differ, often by a multiple of 9 | Identify the transposed figures and correct the entry. |
| Single‑side error (only debit or credit recorded) | Totals differ | Record the missing opposite entry. |
| Posting to the wrong ledger account | Totals may still balance | Locate the wrong posting, reverse it, and repost to the correct account. |
| Use of a suspense account | Totals balance but individual accounts are incorrect | Investigate the unidentified difference, post the correct amount to the proper account, and clear the suspense balance. |
4.3 Suspense Account – Simple Example
During posting, a credit of $250 was omitted from the Purchases account. To keep the trial balance balanced, the $250 is temporarily placed in a suspense account.
Suspense Account
----------------
Dr 250 (to balance the trial balance)
After locating the error, the correct entry is made:
Purchases Dr 250
Suspense Account Cr 250 (clears the suspense balance)
4.4 Bank Reconciliation Statement (BRS)
- Start with the **adjusted cash book balance** (after any errors have been corrected).
- Add deposits in transit – amounts recorded in the cash book but not yet appearing on the bank statement.
- Subtract outstanding cheques – cheques issued and recorded in the cash book but not yet cleared by the bank.
- Adjust for **bank errors** (mistakes made by the bank).
- Adjust for **bank charges, interest, direct credits/debits** shown on the statement but not yet recorded in the cash book.
- The resulting figure should equal the **bank statement balance**.
Worked BRS Example
| Item | Amount ($) |
|---|
| Cash book balance (adjusted) | 5,800 |
| + Deposits in transit | 1,200 |
| - Outstanding cheques | 800 |
| - Bank service charge | 30 |
| + Interest credited by bank | 20 |
| + Bank error (credited $100 too much) | 100 |
| Reconciled bank balance | 6,290 |
4.5 Control Accounts
- Summarise the total of a group of subsidiary‑ledger accounts.
- Two control accounts required by the syllabus:
- Purchases‑ledger control account – total of all creditors.
- Sales‑ledger control account – total of all debtors.
- They enable students to check the accuracy of the subsidiary ledgers without examining each individual account.
Worked Example – Purchases‑Ledger Control Account
During the period the following credit purchases were recorded:
- Supplier A – $1 200
- Supplier B – $800
- Supplier C – $500
Payments made:
- Cheque to Supplier A – $600
- Bank transfer to Supplier B – $300
The control account is prepared as follows:
Purchases‑Ledger Control Account
--------------------------------
Dr Cr
-----------------------------
1 200 | 600 (Cheque to A)
800 | 300 (Bank transfer to B)
500 |
-----------------------------
Total | 1 500
Balance = $2 500 (total credit purchases) – $900 (total payments) = **$1 600 Credit** – this figure should equal the total of the individual creditors’ balances in the subsidiary ledger.
5 Key Accounting Procedures
5.1 Capital vs Revenue Items
| Aspect | Capital | Revenue |
|---|
| Nature | Long‑term benefit; creates or improves an asset | Short‑term benefit; relates to day‑to‑day operations |
| Effect on Profit & Loss | No direct effect (recorded as an asset) | Recorded as income or expense |
| Examples | Purchase of machinery, building extension, patent acquisition | Wages, rent, utilities, repair & maintenance |
5.2 Depreciation of Tangible Assets
Systematic allocation of the cost of a tangible asset over its useful life.
| Method | Formula | When Used |
|---|
| Straight‑Line | (Cost – Residual Value) ÷ Useful Life | Asset provides equal benefit each year (most common). |
| Reducing‑Balance | Carrying amount × Depreciation rate | Asset loses more value early (e.g., computers). |
Journal entry – Straight‑Line example
- Cost $12 000, residual $2 000, useful life 5 years → Depreciation $2 000 per year.
| Date | Account | Debit ($) | Credit ($) |
|---|
| 31 Dec | Depreciation Expense | 2 000 | |
| 31 Dec | Accumulated Depreciation – Equipment | | 2 000 |
5.3 Accruals and Pre‑payments
Accruals
- Accrued expenses – incurred but not yet paid.
Example: Wages earned $1 200, paid next month.
Journal: Wages Expense Dr $1 200 / Wages Payable Cr $1 200
- Accrued revenue – earned but not yet received or invoiced.
Example: Services performed $800, invoice to be sent.
Journal: Debtors Dr $800 / Service Revenue Cr $800
Pre‑payments
- Prepaid expense – cash paid before the related expense occurs.
Example: Prepaid rent $1 500 for the next three months.
Initial entry: Prepaid Rent Dr $1 500 / Cash Cr $1 500
Monthly adjustment: Rent Expense Dr $500 / Prepaid Rent Cr $500
- Unearned revenue – cash received before the related revenue is earned.
Example: Subscription received $2 000 for a one‑year service.
Initial entry: Cash Dr $2 000 / Unearned Revenue Cr $2 000
Monthly recognition: Unearned Revenue Dr $166.67 / Subscription Revenue Cr $166.67
5.4 Provision for Doubtful Debts
- Estimate of amounts that may not be collected from trade debtors.
- IGCSE method: **2 % of total trade debtors** (or any percentage specified by the exam question).
- Journal entry (setting up the provision):
Bad Debt Expense Dr $100 / Provision for Doubtful Debts Cr $100
(Assuming $5 000 debtors × 2 %).
- If a specific debtor defaults, write‑off against the provision:
Provision for Doubtful Debts Dr $X / Debtors Cr $X
5.5 Inventory Valuation (Periodic System)
For IGCSE the periodic method is used unless the question states otherwise.
- Cost of Goods Sold (COGS) formula:
Opening Stock + Purchases + Carriage‑inwards – Closing Stock = COGS
- All purchases are recorded in the Purchases account; at year‑end the closing stock is physically counted and valued.
6 Preparation of Basic Financial Statements
6.1 Statement of Financial Position (Balance Sheet)
- Structure: Assets (current then non‑current) on the left; Liabilities (current then non‑current) and Owner’s Equity on the right.
- Equation must balance: Assets = Liabilities + Owner’s Equity.
6.2 Income Statement (Profit & Loss Account)
- Shows Revenue and Gains minus Expenses and Losses for the period.
- Result is Net Profit (or Net Loss) which is transferred to capital.
6.3 Statement of Changes in Owner’s Equity (sole traders & partnerships)
- Opening capital + Additions (net profit, additional capital) – Drawings = Closing capital.
6.4 Example – Complete Set of Accounts (simplified)
Statement of Financial Position (as at 31 Dec)
-------------------------------------------------
Assets
Current assets
Cash $5,200
Debtors 3,400
Inventory 2,100
Non‑current assets
Equipment (net) 8,000
Total Assets $18,700
Liabilities
Current liabilities
Creditors $2,500
Wages Payable 600
Non‑current liabilities
Loan 5,000
Total Liabilities $8,100
Owner’s Equity
Capital (opening) 7,000
Add: Net profit 3,600
Less: Drawings (1,000)
Closing Capital $9,600
Total Equity & Liabilities $18,700
7 Financial Ratio Analysis
| Category | Ratio | Formula | Interpretation (IGCSE level) |
|---|
| Profitability | Gross Profit Margin | Gross Profit ÷ Sales × 100 % | Higher % = better control of cost of sales. |
| Profitability | Net Profit Margin | Net Profit ÷ Sales × 100 % | Shows overall profitability after all expenses. |
| Liquidity | Current Ratio | Current Assets ÷ Current Liabilities | ≥ 1 indicates ability to meet short‑term obligations. |
| Liquidity | Quick (Acid‑test) Ratio | (Current Assets – Inventory) ÷ Current Liabilities | More stringent test of liquidity. |
| Solvency | Debt‑to‑Equity Ratio | Total Liabilities ÷ Owner’s Equity | Shows the proportion of finance provided by creditors. |
| Solvency | Return on Capital Employed (ROCE) | Net Profit ÷ (Capital + Long‑term Liabilities) × 100 % | Efficiency of capital use. |
8 Summary Checklist for the IGCSE Exam
- Identify the source document and the accounts affected.
- Apply the debit/credit rules correctly.
- Record the transaction in the appropriate book of prime entry.
- Post to the correct ledger accounts (T‑accounts).
- Prepare a trial balance and verify that debits = credits.
- If the trial balance balances but individual accounts look wrong, check the suspense account.
- Adjust for accruals, pre‑payments, depreciation and doubtful debts.
- Prepare a bank reconciliation statement, showing outstanding cheques, deposits in transit, bank errors, charges and interest.
- Prepare purchases‑ledger and sales‑ledger control accounts and ensure they agree with the subsidiary ledgers.
- Compile the final accounts (Income Statement, Statement of Financial Position, Statement of Changes in Equity).
- Calculate at least three relevant ratios and comment on the business’s performance.
- Review for common errors (omissions, transpositions, single‑side entries, wrong postings, misuse of suspense accounts).
Glossary of Key Terms
- Asset – Resources owned by the business that are expected to give future economic benefit.
- Liability – Obligations of the business to pay money or provide services to others.
- Equity (Capital) – Owner’s residual interest after deducting liabilities from assets.
- Debit (Dr) – Left side of an account; increases assets/expenses, decreases liabilities/equity/revenue.
- Credit (Cr) – Right side of an account; increases liabilities/equity/revenue, decreases assets/expenses.
- Journal – Chronological record of all transactions.
- Ledger – Collection of all T‑accounts, each showing the history of a single account.
- Trial Balance – Statement of all ledger balances used to test the equality of debits and credits.
- Suspense Account – Temporary holding account used when the correct ledger account is not yet known.
- Control Account – Summary account that links the general ledger to a group of subsidiary accounts (e.g., Purchases‑ledger control).
- Depreciation – Systematic allocation of the cost of a tangible asset over its useful life.
- Accrual – Recognition of revenue or expense before cash changes hands.
- Pre‑payment – Cash paid before the related expense is incurred.
- Doubtful Debts Provision – Estimate of amounts that may not be collected from debtors.
- Imprest System – Fixed petty‑cash fund replenished by recording the total of vouchers and then restoring the original cash amount.
- Electronic Payment (e‑payment) – Recording of payments made or received via bank transfers, direct debits or online systems.