Accounting Notes For IGCSE PDF
Accounting Notes For IGCSE PDF
Accounting Notes For IGCSE PDF
IGCSE
Accounting
Social Sciences Department
Prepared by Mr. Hasan Khan
Contents
1. Introduction to accounting
2. Double entry bookkeeping (part A)
3. The Trial Balances
4. Double entry bookkeeping (part B)
5. Petty cash book
6. Business documents and books of prime entry
7. Final Accounts
8. Accounting rules
9. Accruals and prepayments
10. Depreciation and disposal of fixed assets
11. Bad debts and provision for doubtful debts
12. Bank reconciliation statements
13. Journal entries and correction of errors
14. Control accounts
15. Incomplete records
16. Accounts of clubs and societies
17. Partnership accounts
18. Accounts of manufacturing businesses
19. Limited company Accounts
20. Analysis and interpretation
Chapter 1
Introduction to accounting
_______________________________________________________________________________
Bookkeeping:
The detailed recording of all the financial transactions of business is known as
bookkeeping.
Accounting:
Accounting makes use of these records to prepare periodic financial statements,
which can be used to assess the performance of the business.
Balance sheet:
The owner of a business needs to know the financial position of the business, so a
Balance sheet is prepared. This summarizes the position of a business, in monetary
terms on a certain date.
Chapter 2
_____________________________________________________________________
Day-to-day business transactions are recorded using the double entry system.
This dual aspect of a giving and receiving is recorded in the day-today
records.
A simple T account is divided into two sides by the centre line.
The left-hand side is the debit side (abbreviated to Dr.) and the right-hand
side is the credit side (abbreviated to Cr.)
Account name
Dr
Cr
______________________________
There is a giving and receiving in every transaction, two entries are made- a
debit in one account and a credit in another account.
40,000
Capital account
_Dr__________________________Cr___
1 Mar 2010 Bank
40,000
4
Dr.
Cr.
Assets
Expenses
2.4 Example: March 2, 2010. Business bought premises for $20,000 and paid
by cheque.
Bank account
_Dr__________________________Cr___
1 Mar 2010 capital
$ 40,000
Premises account
_Dr__________________________Cr___
2 Mar 2010 Bank
$20,000
Dr.
Cr.
Liabilities
Revenues/Income
Capital
Chapter 3
_____________________________________________________________________
It is necessary to know which ledger account has a debit balance ad which has a
credit balance. Certain types of account always have debit balance and certain types
of account always have a credit balance.
Trial Balance as at Feb. 2010
Name of accounts
Dr.
Drawings
Purchases
Sales returns
Cr.
Sales
Purchase returns
______
_____
50,000
50,000
______
_____
Chapter 4
_____________________________________________________________________
In two-column cash book the cash account and bank account appear side by
side.
Any money received is recorded on the debit side and entered in the
appropriate column, depending on where it was put in the cash column or
put into the bank column.
Any money paid is recorded on the credit side, being shown in the cash
column if it was paid in cash, and bank column it was paid by cheque.
It is important to remember that there are two accounts side by side, and
each account must be balanced separately.
Contra entries:
(a) Cash withdrawn from the bank and placed in the cash
Debit cash account
Credit bank account
(b) Cash deposited/ paid into the bank
Debit bank account
Credit cash account
Dishonored cheques:
(a) A dishonored cheque is a cheque that a business has received from a
customer and which the customer's bank refuses to pay.
(b) The cheque is returned to the business that paid it into the bank and it is
recorded on the credit side of the cash book.
Discount
Allowed
Cash Bank
Date
Details
Discount
Received
Cash Bank
Chapter 5
_____________________________________________________________________
A petty cash book is used to record low-value cash payments such as postages,
travelling expenses and window cleaning.
When paying out cash, the petty cashier should obtain a petty cash voucher. This voucher is
presented by the person receiving the cash. It should show details of the expenditure and
be signed to indicate that the money has been received from the petty cashier.
The petty cashier starts each period with a certain amount of money. This system is known
as imprest system. At the end of the period, when the petty cash book is balanced, the chief
cashier will give the petty cashier enough cash to restore the balance remaining to the
imprest amount.
10
Date
Details
Total
Date
received
Details Total
paid
Postages Office
Motor
expenses
Cleaning
11
Business documents
and books of prime entry
Chapter 6
_____________________________________________________________________
Invoice:
When goods are sold on credit, the supplier will issue an invoice.
The original copy of the invoice is sent to the customer, who uses it to record his
credit purchases.
A copy of the invoice is retained by the seller, who uses it to record his credit sales.
Sometimes a deduction is shown on an invoice for Trade Discount.
Debit Note:
The purchaser may send a debit note to the supplier to report any faults, shortages
overcharges or damaged goods.
Credit Note:
Statement of Account:
Sales journal
Purchase journal
Sales returns journal
Purchase returns journal
Cash book
Chapter 7
Final Accounts
At the end of a financial period, usually a year, final accounts are prepared.
Final accounts are consist of a Trading account, a Profit and Loss Account and a
Balance Sheet.
Final accounts are usually prepared from a trial balance. Every item in a trial balance
appears once in the final accounts.
13
Sales
18600
180
18420
3200
14300
400
13700
200
13500
500
14000
Gross profit
17200
1220
350
Total income
1570
Less expense
Wages
150
General expenses
400
200
Net profit
750
820
Cost
Premises
fixtures and equipment
34000
NBV
65000
29000
94000
Current assets
Stock
26000
Debtors
28000
Bank
25500
Cash
50
Prepaid insurance
50
79600
20000
Bank overdraft
1500
Outstanding salary
1500
23000
Working capital
56600
150600
25000
125600
Financed by:
Capital
Add net profit
Less drawings
120000
14000
134000
8400
125600
15
Chapter 8
Accounts rules
Concepts
Concepts are basically rules, which set down how the financial activities of a
business are recorded.
Conventions
Conventions are regarded as the generally accepted methods by which the
rules (concepts) are applied to given situations.
Business entity
The business is treated as completely separate from the owner of that
business.
The owner's personal assets, the owner's personal spending etc. do not
appear in the accounting records of the business.
Going concern:
Applying this concept, the fixed assets of a business appear in the Balance
Sheet at book value and stock appears at the lower of cost or net realizable
value.
Duality:
The term double entry is used to describe how the dual aspect of all
transactions is recorded.
16
Money measurement:
The accounts of a business only record the information which can be
expressed in monetary terms.
There are many other aspects of a business which do not appear in the
accounting records because they cannot be measured in terms of money.
The value of a good manager, a loyal workforce and high staff morale are of
great benefit to a business.
Consistency
Once a certain method is chosen it should be applied consistently from year
to year.
Matching
Matching concept is applied on trading profit and loss account, on prepaid
and on accrued.
Prudence
The concept of prudence is applied to provision for doubtful debts and on
stock valuation
Stock valuation:
Applying the concept of prudence, stock must always be valued at the lower
of cost or net realizable value.
17
Chapter 9
The final accounts prepared up to this point have not really been true to life.
In practice, adjustments often have to be made to the accounting records at
the end of the financial position of the business.
Accruals Expenses
Record the amount paid during the year on debit side of the expense
account.
Record the amount accrued at the end of year on debit side with a sentence
of BALANCE C/D of the account.
Less amount accrued at start of year
For example:
Hassan's financial year ends on 31 December every year.
He rents an office at an annual rent of $3200, payable in four quarterly installments
of $800.
During 2009, Hassan paid rent by cheque on 1 Jan, 1 April and 1 July. The rent due
on 1 Oct remained unpaid on 31 December 2009.
Rent account
2009 Jan 1 Bank
800
Apr 1 Bank
800
July 1 Bank
800
___
3200
3200
2010 Jan 1 Balance b/d
800
18
Rent account
2010 Jan 2 Bank
1600
800
Apr 1 Bank
800
July 1 Bank
800
Oct 1 Bank
800
___
4000
4000
Prepayments:
A prepayment is when a payment is paid in advance of the period to which it relates.
If an expense is prepaid it means that an amount is paid during an accounting period
for a benefit or service to be received in a future period.
The matching concept must be applied to ensure that only the expense for the
particular period is entered in the profit and loss account.
Record the amount paid during the year on debit side of the expense
account.
Record the amount prepaid at start of year at the end of year on debit side of
the account.
Less amount prepaid at the end of year of year.
19
For example:
Ahmad's financial year ends on 31 December.
On 1 Oct 2009 he purchased a new motor vehicle and paid one year's motor vehicle
insurance of $800 by cheque.
Write up the Motor vehicle insurance account in Ahmad ledger for the year ended at
31 Dec, 2009.
Bank
800
800
Balance c/d
600
800
2010 Jan 1
On 1 Jan 2010, Ahmad Motor vehicle insurance account showed a debit balance of $
600. On 1 oct 2010 he paid one year's motor vehicle insurance of $ 840 by cheque.
600
Oct 1 Bank
840
Balance c/d
1440
1 Jan 2010 Balance b/d
630
1440
630
20
Chapter 10
Depreciation is an estimate of the loss in value of a fixed asset over its expected
working life. Most fixed assets lose value over time. The accounts of a business
should show a fair view of the financial position so it is necessary to record this loss
in value.
In the profit and loss account depreciation of fixed assets will appear with the other
expenses and the net profit will be reduced.
Methods of calculating depreciation
12000-2000
4 years
=2500
Cost
12000
4320
7680
2765
4915
1769
3146
1133
2013
21
On 1 Jan 2004 Ahmad purchased a machine for $12000. He decided to revalue the
machine at the end of each financial year. On 31 December 2004 he valued the
machine at $8500.
Cost of machine 1 Jan 2004
12000
8500
3500
Example:
Javeed's financial year ends at 31 December.
On 1 Jan 2004 he purchased a machine for $12000. He estimates that he will keep
the machine for 4 years and then sell it for $2000. He decided to use the straight line
method of depreciation.
Make the necessary entries in Javeed's ledger for each of the year ending 31 Dec.
2004, 2005, 2006 and 2007.
Provision for Depreciation of Machinery account
2004 Dec. 31 balance c/d
2500
2500
2500
2500
5000
5000
2500
5000
7500
7500
2500
7500
10000
10000
2500
10000
22
23
Machinery account
A
12000
12000
12000
12000
7500
7500
2007 Jan 2
Dec 31
12000
Cash
3900
P&L
600
12000
24
Chapter 11
debts
A bad debt is an amount owing to a business, which will not be paid by the debtor.
When it is decided that all possible means to obtain payment from the debtor have
failed, the debt should be written off.
This means that the debtor's account in the sales ledger is closed and the amount
due is transferred to a bad debts account in the nominal ledger.
Record the credit sales at the debit side of the customer account.
Credit the debtor's account
Debit the Bad Debts account
Credit the Bad debts account
Example
On 1 May 2000, Ahmad sold goods $240 on credit to Khalid. On 28 May 2000 khalid
paid the account by cheque and purchased further goods, $200, on credit.
Ahmad wrote off the account of Khalid on 31 March 2001
On 20 Aug 2001 khalid sent a cheque to Ahmad for the amount he owed on 28 May
2000.
Ahmad wrote off debtors totaling $542 during the financial year ended 31 Macch
2002
Write up the following accounts
Khalid account
Bad debts account
Bad debts recovered account
25
Khalid account
2000 May 1
28
sales
240
sales
200
440
234
6
200
440
200
200
2002 Mar 31 Debtors
542
542
200
200
542
542
200
200
200
200
26
Example:
2003
510
Oct 31 P & L
510
800
510
1 Nov Balance b/d
510
290
800
2005 31 Oct P & L
230
Balance c/d
570
800
510
800
1 Nov Balance b/d
800
800
2005 1 Nov Balance b/d 570
27
Chapter 12
The bank statement must be compared with the bank account in the cash
book. If the balance differ it is necessary to reconcile them, that is, explain
why the differences have arisen.
Compare the bank statement with the bank account in the cash
book.
(Remember to compare the debit of the bank account against the
credit of the bank statement and place a tick () against those items
which appear in both records.)
Update the cash book: by entering any items which appear on the
bank statement but which have not yet been entered in the bank
account.
29
4182
110
874
984
5166
95
G Bierling
416
511
4655
(If bank balance is not given in the question then we will use updated cash book balance and
we will use the following lay out.)
4655
110
874
984
3671
95
G Bierling
416
511
4182
30
Chapter 13
The journal is a book of prime entry, but it is not part of the double entry system. It is a
journal, noting the entries to be made in the ledger.
Opening journal entries:
These are the entries necessary to open the books when a business is first started, or when
an existing business first to keep proper accounting records.
The assets are listed in the debit column, and the liabilities in the credit column, and the
deference, the capital is inserted as the balance figure.
Example: Ahmed has been in the business for two years, but has not kept any accounting
records. On 1 feb 2002, he provided the following information:
Assets: machinery $12000, motor vehicle $3200, stock $1900, bank $2660, debtors $490
Liabilities: creditors $750
Prepare an opening journal entry for Ahmad on 1Feb 2002
Correction of errors: when the errors are discovered, they should be corrected by a journal
entry. Look at the book example on pages 148-158
31
Chapter 14
Control accounts
Control accounts are sometimes known as total accounts. A control account acts as a
summary of the ledger which it controls.
1 Sales ledger control accounts.
a. A sales ledger control account is sometimes known as a total debtors account. The
control account is balanced at the end of the period.
b. If the balance on the control account differs from the total of the individual debtor's
balances an error must have occurred, either in the sales ledger or within the control
account.
c. It is essential that the information required to prepare a sales ledger control account is
obtained from books of prime entry, not the sales ledger account.
Items appearing in a sales ledger control account
10230
sales returns
Sales
71500
bank
68800
Dishonour cheques
870
cash
1050
Discount allowed
1440
30
Bad debts
Balance c/d
82630
Balance b/d
1380
160
9800
82630
9800
32
Debit entries
Credit entries
Purchase returns
Balance b/d
purchases on credit
Discount received
Balance c/d
Balance b/d
33
Incomplete records
Chapter 15
Small businesses do not maintain a full set of double entry record. As a result trial balances
can't be produced and complete set of final accounts can't be prepared without further
analysis of the records that do exist.
Where the only records available are the assets and liabilities at the
beginning of the year and at the end of the year.
It is not possible to prepare a Trading and Profit and Loss Account.
The information of liabilities and assets are listed in a Statement of affairs. This would have
been called a Balance sheet if it had been drawn up from double entry records.
The only way the profit for the year can be found is by comparing the capital
shown in the opening statement of Affairs with the capital shown in the
closing statement of Affairs. The basic formula is
Closing capital- opening capital drawings- capital introduced = profit
statement of affairs as at 1 January 2001
Fixed assets
Machinery at cost
9500
Current asset
Stock
1050
Debtors
630
Prepayments
120
Bank
2700
4500
970
Accruals
30
1000
3500
13000
Abc bank
5000
Financed by
8000
Capital
8000
34
Equipment
7000
700
6300
Machinery
2500
250
2250
Motor vehicle
1800
1800
10350
Current assets
Stock
1290
Debtors
660
Prepayments
40
1990
860
Accruals
20
Bank OD
120
Working capital
1000
990
11340
2000
9340
Financed by
Capital
9340
35
9340
8000
1340
1040
2380
1800
Net profit
580
A business may be able to provide other information, in addition to the assets and liabilities
at the beginning and end of the year. Where details of money paid and received are also
available, it is possible o calculate the sales, purchases and expenses and so prepare a
Trading and profit and loss account.
Calculation for credit sales
Receipts from debtors
41100
3330
37770
3660
41430
41430
Cash sales
2570
Total sales
44000
Calculation for credit purchase
Payments to creditors
32320
2900
29420
3080
32500
36
32500
Cash purchase
11100
Total purchase
33600
3330
42440
45770
Less bank
41100
Discount allowed
1010
42110
33360
Calculation for total creditors account
2900
34660
37560
Less bank
Discount received
Total creditors account
32320
2160
34480
3080
37
How to change margin into mark up, and mark up into margin?
Margin
1/2
Mark up
1/1+2
1/3
Mark up
1/3
Margin
1/1-3
1/2
Rate of stock turnover
This is the number of times a business replaces its stock in a given period.
The formula is:
Cost of sales
Average stock
32000
5 times
6800+60002
38
Chapter 16
___________________________________________________
Introduction:
The main aim of a non-trading organization is to provide facilities and services for its
members.
At the end of financial year, the accountant prepares a summary of cash book; know
as Receipts and Payments Account.
If there is some form of regular trading, such as a snack bar, sports shop, etc, a
Trading Account may be prepared.
Cr.
Balance b/d
$$$
Purchase
$$$
Subscriptions
$$$
Equipment
$$$
$$$
Wages
$$$
$$$
Balance C/D
$$$
Balance b/d
$$$
39
2. Trading account
Sales
$$$
$$$
Purchases
$$$
$$$
$$$
$$$
Wages of assistant
$$$
Profit on caf
3.
$$$
$$$
This is similar to the profit and loss account prepared for a business. It lists all the
expenses of the organization and all the gains.
Where the expenses are lower than the gain, the difference is referred to as Surplus,
where the expenses are more than the gain; the difference is referred to as Deficit.
(I f opening balance of insurance is given then it must be added and ending must be
subtracted)
(If opening balance of outstanding or accrual is given then it must be subtracted and ending
must be added)
40
$$$$
Profit on caf
$$$$
Annual play
tickets
$$$$
Less expenses
$$$$
$$$$
$$$$
Expenditure:
Wages
$$$$
Insurance
(insurance prepaid)
$$$$
Administration expenses
$$$$
Depreciation
$$$$
$$$$
$$$$
41
Fixed assets
cost
pro. Depreciation
NBV
Premises
$$$$
$$$$
Equipment
$$$$
$$$$
$$$$
$$$$
Current assets
Stock in caf
$$$$
$$$$
Prepayments
$$$$
Bank
$$$$
$$$$
$$$$
$$$$
Accrual expense
$$$$
$$$$
$$$$
$$$$
$$$$
5000
Financed by:
Accumulated fund
$$$$
$$$$
5000
If the club makes a loss then it must be subtracted from accumulated fund.
For subscription account look at the example on page 193 of your book
42
Chapter 17
Partnership accounts
___________________________________________________
A partnership is a business in which two or more people work together as owners with a
view to make profits. Normally there cannot be more than twenty partners.
Partnership agreement:
It is usual for an agreement to be drawn up when a partnership is formed to eliminate any
confusion and misunderstanding which may arise if no written agreement is prepared.
43
9220
160
120
280
9500
Partner's salary
800
1200
Ann
2000
7500
5000
2500
Shares of profit
Ann
1000
Joe
1500
2500
Cr
4000
160
3140
Balance b/d
interest on capital
salary
Profit share
500
800
5000
1000
7300
Balance b/d
3140
7300
Financed by:
Ann
Joe
Capital
8000
12000
Current account
3140
11140
total
(220)
11780
22920
How to write off the goodwill account? And how to record goodwill in the capital
accounts:
Write the goodwill on the debit side of the account using old ratio.
And write the goodwill on the credit side of account using new ratio.
Goodwill account
Ann
2400
Ann
2000
Joe
3600
Joe
3000
Ken
1000
6000
6000
Capital account
Ann
Joe
Ken
2000
3000
1000
balance b/d
12600
9000
bank
Goodwill
2400 3600
Goodwill
10400
Ann
15600
Joe
8000 1200
-
Ken
10000
-
8400
12600 9000
45
Accounts of Manufacturing
Chapter 18
___________________________________________________
Manufacturing account shows how much manufacturing cost the business to make the
goods produced in the financial year. There are four main elements of cost which make up
the cost of manufacturing
1.
2.
3.
4.
Direct cost
Direct labor
Direct expenses
Factory overheads (indirect expenses)
4500
52000
1050
57550
4950
57600
Direct wages
49800
Prime cost
102400
Factory overheads
Indirect wages
32600
2750
General expenses
4100
Machinery repairs
1950
Depreciation of machinery
5000
46400
148800
2100
150900
1900
149000
46
$
181000
5700
149000
2500
157200
6200
Gross profit
151000
30000
Less expenses
Office expense
2000
1000
Net profit
3000
27000
Current assets
Stock of raw material
4950
1900
6200
13050
47
Chapter 19
___________________________________________________
A minimum of two members is necessary to form a limited company, but there is no
maximum. The capital of a company is divided into units known as shares which can be any
monetary amount.
The members (shareholders) of the company are only liable for the debts of the company up
to the amount they agree to pay for their shares.
There are two types of limited company- Public limited company and private limited
company.
Public limited company offers its shares to the public and a private limited company usually
a smaller company and is not allowed to offer its shares to the public.
Share capital:
When a limited company is first formed the amount of its share capital must be
stated. This is known as the authorized share capital
Authorized share capital is the maximum amount of share capital the company is
allowed to issue.
The total amount a company has requested from the shareholders is known as the
called up capital.
The term paid up capital refers to that part of called up capital for which a company
has actually received cash from its shareholders.
Types of shares:
The authorized share capital is divided into different types of shares. The most
common ones are preference shares and ordinary shares.
Preference shares:
a. They received a fixed rate of dividend which is payable before any dividend
is payable to the ordinary shareholders.
b. The dividend is same every year.
c. If a company is wound up any money left after paying outside liabilities is
used to pay back the preference shareholders before anything is returned to
the ordinary shareholders.
d. Preference shareholders are not entitled to vote at shareholders meetings.
Ordinary shareholders:
a. The dividend is not a fixed amount, but varies according to the profits of the
business.
b. If the trading results are poor the ordinary shareholders may received no
dividend at all.
c. Ordinary shareholders are entitled to vote at shareholders meetings on the
basis of one vote per share.
48
Debentures:
a. A company may also obtain funds from debentures, which are long term
loans.
b. Debentures carry a fixed rate of interest, which is payable whether or not
the company makes a profit.
c. Debenture holders are not the member of the company.
Anand Ltd was formed on 1 July 2003 with an authorized capital of $700,000
divided into 400,000 5% preference shares of $1 each and 600,000 ordinary shares
of $0.50 each.
On 30 June 2006 half of the preference shares and all of the ordinary shares had
been issued and were fully paid.
The net profit for the year ended 30 june 2006 was $58000. On that date the
balance brought forward on the profit and loss appropriation account amounted to
$21000.
Half of the preference share dividend was paid on 31 December 2005. On 30 June
2006 the directors recommended the transfer of $8000 to general reserve, the
payment of the remaining preference dividend, and the payment of an ordinary
share dividend of %8.
Prepare the profit and loss appropriation account for the year ended 30 June 2006
$
$
58000
8000
50,000
Dividends-
preference paid
5000
Proposed -
preference shares
5000
Ordinary shares
24000
34000
16000
21000
37000
49
Prepare an extract from the balance sheet of Anand Ltd at 30 June 2006 showing the
shareholders' funds.
Share capital
Authorized
Issued
400,000
200,000
300,000
700,000
300,000
500,000
Reserves
General reserve
34000
37000
71000
571000
50
Chapter 20
___________________________________________________
Profitability ratios
Return on capital employed (ROCE)
100
Capital employed
Gross profit as a percentage of sales
This measures the gross profit for every $100 of sales. It indicates how profitable the
sales were.
Liquidity ratios:
Formula:
This is a measure of the business's ability to meet existing current liabilities as the
fall due.
Anything between 1.5:1 and 2:1 is generally be regarded as satisfactory.
A ratio of over 2:1 may imply poor management of current assets.
51
Quick ratio:
Current assets stock: current liabilities
a. A ratio of 1:1 is usually regarded as satisfactory. This indicates that liquid
assets match the current liabilities.
b. With a ratio of 1:1 the current liabilities can be paid without the need to sell
stock immediately and without selling fixed assets.
c. A ratio more than 1:1 may indicate poor management of liquid assets.
Collection period for debtors
Formula: debtors credit sales 365 days (for answer in days)
Debtors credit sales 52 weeks (for answer in weeks)
How to improve collection period for debtors?
a. Offer cash discount for early settlement of debts
b. Charge interest on overdue debts
c. Refuse further supplies until the outstanding balance is paid
Payment period for creditors:
Formula: Creditors credit purchase 365 days (for answer in days)
Creditors credit purchase 365 days (for answer in weeks)
a. Taking extended credit benefits the liquidity position as the business is able to
use the money for other purposes for a longer period.
b. The drawbacks to delays in paying creditors are the loss of any cash discounts
which may be available, and the damage to the relationship with the suppliers.
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