prepare ledger accounts and journal entries to record irrecoverable debts

IGCSE Accounting (0452) – Complete Syllabus Notes

Learning Objectives

• Understand the fundamental concepts and principles that underpin accounting.
• Record transactions using the double‑entry system and post them to the appropriate books of prime entry and ledgers.
• Verify the accuracy of the accounts (trial balance, bank reconciliation, error correction).
• Apply key accounting procedures – capital vs revenue, depreciation, accruals & pre‑payments, doubtful debts, inventory valuation.
• Prepare complete financial statements for the various business types covered by the syllabus.
• Analyse and interpret financial information using common ratios.
• Apply the core accounting principles and policies in every stage of the accounting cycle.

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1. The Fundamentals of Accounting

1.1 Purpose & Users

• Provides information for decision‑making, accountability and control.
• Primary users: owners/partners, managers, banks, investors, tax authorities, employees, and the public.

1.2 The Accounting Equation

Assets = Liabilities + Owner’s Equity

Every transaction must keep the equation in balance.

1.3 Accounting Principles (Cambridge Syllabus)

Principle	Meaning	Why it matters
Entity	The business is separate from its owners.	Ensures personal transactions are not mixed with business ones.
Going Concern	Assumes the business will continue operating for the foreseeable future.	Justifies recording assets at cost rather than liquidation values.
Historical Cost	Assets are recorded at the price paid.	Provides an objective, verifiable measurement.
Dual‑Aspect (Duality)	Every transaction affects at least two accounts – one debit and one credit.	Maintains the accounting equation.
Matching	Expenses are recognised in the same period as the related revenue.	Gives a true picture of profit for the period.
Prudence (Conservatism)	Do not over‑state income or assets; anticipate losses.	Prevents the presentation of an overly optimistic view.
Realisation (Revenue Recognition)	Revenue is recorded when it is earned, not when cash is received.	Ensures income is matched with the period it relates to.
Materiality	Only items that could influence decisions need to be recorded.	Focuses effort on significant transactions.
Consistency	Use the same accounting policies from period to period.	Allows meaningful comparison of financial statements.

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2. Sources and Recording of Data

2.1 Business Documents (Source Documents)

Document	Purpose
Sales invoice	Record a credit sale.
Purchase invoice	Record a credit purchase.
Receipt	Record cash received.
Bank statement	Basis for bank reconciliation.
Credit note	Adjust a sale/purchase when goods are returned.
Debit note	Adjust a purchase when goods are returned.
Bank transfer / electronic payment advice	Record non‑cash payments made via electronic means.
Petty‑cash voucher (imprest)	Record small cash payments from a petty‑cash fund.

2.2 Books of Prime Entry

• Journal – records transactions chronologically (debit first, credit second).
• Cash book – records all cash receipts and payments; also acts as the bank account.
• Purchase & Sales day books – optional for large volumes of credit purchases or sales.
• Petty‑cash book (imprest system) – records small out‑goings; replenished when the fund is exhausted.

2.3 Ledger Divisions

After posting from the journal, balances are kept in the following main ledger groups:

Ledger Group	Typical Accounts
Real (Asset) Ledger	Cash, Bank, Debtors, Stock, Equipment, Buildings.
Personal (Liability) Ledger	Creditors, Bank Loans, Accrued Expenses, Unearned Income.
Nominal (Profit & Loss) Ledger	Sales, Purchases, Salaries, Rent, Depreciation, Bad Debts Expense.

2.4 Trade Discount vs. Cash Discount

Discount Type	When Applied	Accounting Treatment
Trade Discount	When goods are sold on credit (e.g., 10 % off list price).	Recorded directly in the invoice amount; no separate journal entry.
Cash Discount	When the customer pays within a stipulated period (e.g., 2 % if paid within 10 days).	Recorded as a reduction of revenue (or as a discount received on purchases) at the time of receipt.

2.5 The Double‑Entry System

Every transaction affects at least two accounts – one debit and one credit – keeping the accounting equation balanced.

Step	Action
1	Identify the accounts involved.
2	Determine which account is increased (debit) and which is decreased (credit).
3	Record the entry in the journal (debit first, credit second).
4	Post to the relevant ledger accounts.
5	Balance each ledger and prepare a trial balance.

2.6 Sample Journal → Ledger Flow

Date   | Account                | Debit (£) | Credit (£)
-------------------------------------------------------
01/03  | Sales                  |           | 5,000
       | Debtors – ABC Ltd      | 5,000     |
-------------------------------------------------------
Post to:
- Debtors – ABC Ltd (Real ledger – Debit side)
- Sales (Nominal ledger – Credit side)

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3. Verification of Accounting Records

3.1 Trial Balance

• Lists the closing balances of all ledger accounts.
• Debit total must equal credit total; otherwise, an error exists.

3.2 Common Error Types

Error	Effect on Trial Balance
Omission	No effect – both debit & credit missing.
Commission (wrong side)	No effect – amount recorded on opposite side.
Transposition	Usually creates imbalance (e.g., 540 recorded as 450).
Single‑sided entry	Creates imbalance.
Wrong amount	Creates imbalance.

3.3 Bank Reconciliation (Simplified)

1. Start with the cash‑book balance.
2. Add deposits in transit.
3. Subtract outstanding cheques.
4. Adjust for bank errors or direct credits/debits.
5. The result should equal the bank statement balance.

3.4 Control Accounts

• Summarise a group of related ledger accounts (e.g., Debtors Control Account totals all individual debtor balances).
• Useful for spotting discrepancies without examining every subsidiary ledger.

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4. Accounting Procedures

4.1 Capital vs. Revenue

Aspect	Capital	Revenue
Nature	Long‑term benefit	Day‑to‑day operation
Examples	Purchase of machinery, building	Rent, utilities, wages
Journal entry	Debit Asset, Credit Bank/Loan	Debit Expense, Credit Bank/Payables
Effect on P&L	None (treated as asset)	Expensed – reduces profit

4.2 Depreciation

Allocation of the cost of a tangible asset over its useful life.

Method	Formula	When Used
Straight‑Line	(Cost – Residual Value) ÷ Useful Life	Uniform usage.
Reducing‑Balance (Diminishing)	Carrying amount × Depreciation rate	Higher expense early on.
Revaluation	Adjust to fair value; excess recorded in Revaluation Reserve.	When assets are re‑valued upward.

Journal entry (Straight‑Line)

Debit  Depreciation Expense ........ £X
    Credit  Accumulated Depreciation – Equipment ........ £X

4.3 Accruals and Pre‑payments

Type	Definition	Journal Example
Accrued Expense	Expense incurred but not yet paid.	Debit Salaries Expense, Credit Salaries Payable
Accrued Income	Revenue earned but not yet received.	Debit Debtors, Credit Service Revenue
Pre‑paid Expense	Cash paid in advance of the benefit.	Debit Pre‑paid Insurance, Credit Bank
Unearned Income	Cash received before the service is performed.	Debit Bank, Credit Unearned Revenue

4.4 Inventory Valuation

• Valued at the lower of cost and Net Realisable Value (NRV).
• Cost may be determined by FIFO or Weighted Average (both acceptable for IGCSE).

Closing stock journal entry (if stock is lower than cost)

Debit  Loss on Write‑down of Stock ........ £X
    Credit  Stock ........ £X

4.5 Irrecoverable Debts (Bad Debts) & Provision for Doubtful Debts

4.5.1 Direct Write‑Off Method

• Used when a specific debt is identified as unrecoverable and the amount is immaterial.

Journal entry (example £2,500 owed by ABC Ltd)

Debit  Bad Debts Expense ........ £2,500
    Credit  Debtors – ABC Ltd ........ £2,500

Ledger impact

Account	Debit (£)	Credit (£)	Balance (£)
Debtors – ABC Ltd	5,000	2,500	2,500 (debit)
Bad Debts Expense	2,500		2,500 (debit)

4.5.2 Allowance (Provision) Method

• Estimates future bad debts each accounting period.
• Ensures the expense is recognised in the same period as the related sales (matching principle).

Step 1 – Calculate required provision

Required provision = Closing trade receivables × Estimated % doubtful

Example: Closing debtors £30,000; estimated doubtful 5 % → Required provision = £1,500.

Step 2 – Adjust the provision account

If the existing credit balance is £800, the adjustment needed is £700.

Debit  Bad Debts Expense ........ £700
    Credit  Provision for Doubtful Debts ........ £700

Ledger presentation (excerpt)

Account	Debit (£)	Credit (£)	Balance (£)
Provision for Doubtful Debts (opening)		800	800 (credit)
Bad Debts Expense (adjustment)	700		700 (debit)
Provision for Doubtful Debts (after adjustment)		1,500	1,500 (credit)

Step 3 – Write‑off a specific debt using the allowance method

When XYZ Ltd (£1,200) is confirmed as irrecoverable:

Debit  Provision for Doubtful Debts ........ £1,200
    Credit  Debtors – XYZ Ltd ........ £1,200

This removes the amount from Debtors without affecting the current year’s expense.

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5. Preparation of Financial Statements

5.1 General Flow (All Business Types)

1. Prepare a trial balance.
2. Make adjusting entries (accruals, pre‑payments, depreciation, provisions, inventory).
3. Prepare an adjusted trial balance.
4. Draft the Income Statement (Profit & Loss Account).
5. Calculate retained earnings / capital balance.
6. Prepare the Statement of Financial Position (Balance Sheet).

5.2 Statement Formats by Business Type

Business Type	Key Adjustments	Special Statement Features
Sole trader	Drawings, capital introduced, personal expenses.	Statement of Financial Position shows Owner’s Capital.
Partnership	Partner’s drawings, interest on capital, profit‑sharing.	Separate capital accounts for each partner.
Limited company	Dividends, share capital, retained earnings.	Statement of Financial Position includes Share Capital and Reserves.
Clubs / Societies (non‑profit)	Membership fees, donations, unrestricted vs restricted funds.	Statement of Financial Activities (instead of profit & loss).
Manufacturing business	Opening/closing stock, cost of goods sold, overhead allocation.	Manufacturing account (prime cost → total production cost).
Incomplete records	Reconstruct missing entries using known balances and ratios.	Focus on cash, purchases, sales, and inventory to derive profit.

5.3 Sample Income Statement (Sole Trader)

Sales Revenue ........................................ £45,000
Less: Cost of Goods Sold
   Opening Stock .......... £5,000
   Purchases .............. £20,000
   Closing Stock .......... (£7,000)
   ----------------------------------------------------
   Cost of Goods Sold ......................... £18,000
Gross Profit .................................... £27,000
Less: Expenses
   Salaries ............... £8,000
   Rent .................. £3,000
   Depreciation .......... £2,000
   Bad Debts Expense ..... £1,200
   ----------------------------------------------------
   Total Expenses .............................. £14,200
Net Profit ...................................... £12,800