ZNOTES.ORG PDATED TO 20: 120-22 SYLLABUS CAIE IGCSE ACCOUNTING (0452) SUMMARIZED NOTES ON THE THEORY SYLLABUSCAIE IGCSE ACCOUNTING (0452) 1. Preface ‘The following are short forms used in the notes. Note that these short forms will not be accepted in examinations and no marks will be awarded for their usage: ‘Short Form Full Form sorp/as | Statement of ea balance BRS Bank reconciliation statement PNL Profit and loss a/c 'S Income statement Dep. Depreciation McB Main cash book Pca Petty cash book 8 Trial balance sPOG Selling price of goods cos Cost of Sales P Purchases ‘The only accepted short forms are: AC ‘Account bd | Brought down ad | Carried down, ¢|__ Contra: only for use inledgers- Not structured + Ticks refer to (optional, utrecommended) markings a candidate will make to ensure the requirements of the question have been satisfied. + Some of the accounts shown do not contain all the Columns and details required in an examination. They just show relevant details. ll details will be required in the question unless mentioned. + Date should be writen in ful (including day, month and year) unless instructed otherwise 2. The Purpose of Accounting 2.1. Bookkeeping vs. Accounting ‘+ Bookkeeping: A process of detailed recording of all the financial transactions of a business, ‘Accounting: Accounting uses the bookkeeping records to prepare financial statements at regular intervals. 2.2. Assets, Capital and Liabilities ‘+ Profits the return received by the owner for their Investment of capital WWW.ZNOTES.ORG + Capital or Owner's Equity is the amount the business owes tots owner. When a business begins operation, the owner of the business invests capital, which can be ary resource such as * Cash ‘= Bank or cash equivalents 0 Motor vehicles + Inventory (the stock of goods). Assets are things/resources the business owns or are owed to the business. ‘* Attimes a business can borrow money from an entity which is not the owner of the business. The business now has a liability and is liable to pay for the item borrowed. ‘+ An increase in liabilities results in an increase in assets, for e.g. cashiff borrowed increases the cash in hand, but also increases the amount the business owes to other entities. This is the duality concept. ‘+ Thus, the accounting equation is derived: ASSETS = CAPITAL + LIABILITIES. 2.3. Profits and losses ‘The aim of business is to make a profit. This is calculated inthe financial statements which are usually prepared at, the end of a financial year. *+ Profits = Income - Expenses ‘© Abusiness can also make a loss wherein the expenses are greater than the income. Loss= negative profit. ‘= By measuring the profit and loss of a business, one can ‘© Understand the progress of the business ‘Use ratios and compare the profit of a business to other figures in the financial statements to get a more comprehensive view of the business’ progress. ‘Compare the progress of the business to the progress of similar businesses. ‘= Comparing the business to itself from year to year ‘= Base the business’ future and make decisions based of the profit/loss figure. 3. Sources and Recording of Data 3.1, Double Entry bookkeeping: = The double entry system of bookkeeping involves giving ‘two effects to each business transaction, one which debits to the A/C receiving and the other which credits where the amount is being deducted. + The rules of double-entry bookkeeping are’ ‘+ Debit the receiver, Credit the giver. Debit what comes in, Credit what goes out. * Debit the expense, Credit the income. + Day-to-day transactions are recorded using the double- entry bookkeeping system. ‘+ Ledgers are used to record financial transactions and their formats as follows:CAIE IGCSE ACCOUNTING (0452) Ledger (T) Format: Date | Details | $ | Date | Details |$ + Sales, for eash 100 dollars: Dr Cash A/C for 100 as cash isthe recehing A/C) and Cr Sales A/C for 100 (as sales is responsible for/ghvng the cash Purchases of goods 150 dollars (on credit: Dr Purchases ‘AIC for 100 and Cr Sellers AC for 100. + Crediting the sellers A/C creates a lability as now the business has obligation to pay forthe goods. Drawings (assets taken by the owner of a business for their personal use, out ofthe business) of goods 50 dollars. Dr Drawings and Cr Purchases, both with SO. The drawings increase and the goods decrease. Payment of 150 dallars (through bank a Seller for goods bought earlier: Credit Bank AC for 150 and Dr Seller's A/C for 150.0 Now there is no outstanding balance on the seller's AIC, asthe debit s equal to the credit. When an A/C ofa person er another business maintained, and bas a Dr Balance, the business is owed money by that entity and vice versa as shown in the example * Sales of 60 dolas to 8 dawg (on credit): CrSales A/C and Dr B Dawg A/C, + ANAIC whichis a liability to the business due to reguiar trading is known asa wade credtorntrade payables creditor. An AIC which san asset (because the entity owes money to the business, it's almost as good as having the money) due to regular trading fs known as a trade debtor/ trade receivables/Debtor. Balancing a ledger atthe end ofthe month: «The debit and creditcolumns are individually totalled ‘The difference is noted. ifthe debit side is heavier than the creditside, then the difference is entered as a credit entry (Balance cid) and vce versa. + Total the debit and creit columns and write them, + ifthe balance cd was Dr, then the balance b/d willbe Cr.and vice versa, '* The balance c/d entry is done on the last day of the month andthe balance b/d entry is made on the first day ofthe next month, 3.2, Business Documents * Contents: The name & address of the supplier & customer, the date. Full detalls, quantities & the prices of goods sold ‘Issued when: Goods on credit are sold by the supplier. Can also be issued when goods are sold in for cheque/cash + Notes: Trade discount is shown as being deducted ‘whereas itis mentioned that cash discountis only allowed if the invoice is paid within a time limit, WWW.ZNOTES.ORG + Uses: Customer records Cr purchase & Supplier records Cr sales, jame & address of supplier & customer, date, full details & quantities (sometimes prices) of ‘goods returned or overcharged ‘= Issued when: Goods not satisfactory, Wrong goods etc. Issued by the supplier or customer + Notes: Customer checks goods & invoice for ‘overcharge/ Wrong goods, etc. When the price is included, itis always less trade discount. ‘= Uses: Communication medium | No entries made, however, sometimes they are issued in-place of a rectified invoice fame & address of the supplier & customer, date full details, quantities & prices of goods returned or overcharged + Issued when: Faulty goods/ overcharged goods. Issued by the supplier + Notes: Sometimes printed in red/any other color to distinguish between an invoice + Uses: Customer records returns outwards & supplier record returns inwards. + Statement of AC + Contents: Name & address of supplier & customer, date, balance owing atthe start of the period, invoices & Cr notes issued, payments received, any cash iscounts allowed, balance owing atthe end of the period. + Issued when: At the end of each month, by a supplier Given to each customer. + Notes: Contains summary of all transactions. + Uses: No one makes any entries. Reminder to the customer of Amount Outstanding & can also be used to check for errors for both + Cheque + Contents: Pre-printed details. Date, amount & payee have tobe filed, + Issued when: Payment through bank. + Notes: Used to pay pre-stated sum to payee. Comes in ‘a book of pre-printed cheques (Issued by the bank) ‘Uses: Supplier: Counterfoil of paying-in slip used to make entry in cash book & for discount allowed. Customer: Makes uses of the cheque counterfoil to make cash book entry & discount received. + Receipt + Issued when: Goods sold by cash, and not when by ‘cheque (the cheque acts as one) ‘= Uses: Proof of payment 3.3. Prime books of entry ‘+ Prime books of entry are listing devices which help to remove a lot of detail from the ledgers. it also means that bookkeeping can be divided between several people. ‘They are also called books of original entry/subsidiary books.CAIE IGCSE ACCOUNTING (0452) + Transactions are recorded here before being recorded in the ledgers. ‘©The cash book & the petty cash book are both ledgers & prime books of entries, ‘+ Trade discount does not appear in the ledger A/C; it may be show in the prime books. The value of the goods bought reduces. + There are 7 books of prime entry: + Sales journal ‘Sales returns journal + Purchases journal + Purchases returns Journal * Cash Book = Petty Cash Book * General journal Sales and Sales returns Journal Prime Book — Se7e"alormat Notes: Description T T ‘The Dr entryis made inthe debtor's ledger ‘AIC as the sales are Pare Name” | recorded in AlistofA/Cs| MOK" | the journal Sales towhich Cr with the total Folio-Amount JournavSales saleswere (The imwoice, ofthe book/sales day made, their ter | tnvoiceat the book values & the | eto | endof the dates mice | month, the emo | sales ACs credited with the total of the sales journal as total credit sales of month 7 Written up Date-Name- [USN copies of fe NSM” cr notesthe Cr Alistofthe hose, | entries are Sales names ofthe NUT ‘simultaneously Returns/Returns. businesses, ‘made into the inwards thevalue of AMOUMTPE | customer's booldretuns goods “NEUTRON avc.Atthe end! inwards journal returned & of the month, date PRTAINS 10 | the totals wil creat | | be posted to note issued the sales returns AIC. Purchases and Purchases returns Journal General Prime 800k eran Format Notes: WWW.ZNOTES.ORG General Prime Book Format | Notes: Description waiter op ising veces ron Date-Name-| supplersThe Alistof the Mstofthe | yoiceno> | suppliers AIC Purchases Fal is tourna) | PUSIPESSES | arountThe simutanecusty Purchases book/ invoice credited with Iecpurchases Purchases cay CPURISES ber | mice book | REDEEN errs to tals The ttl oe Nae the invoice | Is posted into recened | the purchase INC as total Cr prchusesot month. Writen up ising cr neces from sagersntie Date-Name- Purchases Alistor Cr Note. Suppliers A. Returns Istof -Number- s Jour ase, namesot SUMP Smuicneously businesses debited with jesuice Amountthe whom goods the total fom book/Returns credit note have been the Crnote at coats turned t¢ umber ‘the end of the book/Returns TUMETT. dertains to value & date month, the outwards journal the creat moet note received) rae urna is peste inthe purchases returns A Cash Book + In practice, itis common to have the cash A/C & bank AC shown side by side in what is called a cash book. This book is moved away from the ledger; however, this stil follows the double entry system of bookkeeping. Certain businesses maintain a 3-column cash book where there is ‘an added cash discount column on the Dr & the Cr side. They are both ledgers as well as prime books of entries, Two Column Cash Book | Date| Details |Cash $ | Bank $|Date Details Cash $) Bank$ Three Column Cash Book: a | Discount Cash/Bank Discount Cash Date Detals toned $s gate Detals Pcneg gD ‘Credit transactions are not shown in the cash book.CAIE IGCSE ACCOUNTING (0452) + Contra Entries: withdrawal of cash/deposition of cash. The Cash column can never have a Cr balance asiitis a physical quantity, ie. it can either be nil or ithas a Dr Balance. However, the bank column can have a Cr balance; this is known as a bank overdraft wherein the bank allows one to pay more than their bank balance is & then charges interest on the sum (most of the times-in practicality). A Cr balance on the bank column of the cash book represents a liability + Discount allowed/Cash Discount: Discount a business allows to its Cr customers to encourage faster payment (within a set time span). This is an expense incurred by the business in-order to have debts settled promptly. However, this is not shown on the receipt. ‘+ The discount columns are not a part of the double-entry system, they are used for convenience. At the end of the trading periods, their totals are taken are carried to their respective A/C s (Dr Entries for discount allowed & Cr entries for discount received). This represents the double entry for all the individual debits in the creditors & credits inthe debtors. * Ifa cheque is dishonoured (There is a problem with the cheque or there is an insufficient balance in the debtor's AIC, etc], the reverse entry of that has to be made when the cheque was deposited & the debtor or payee will have tobe informed that the amount is unpaid. Petty Cash Book ‘+ Businesses maintain a petty cash book (as to not record small cash payments in the cash book & ledgers) That records any low value transactions. Itlists the transactions to be transferred to the ledger A/C & also acts as the ledger A/C for these petty cash transactions. + General working of a petty cash system: A junior cashier is givena float amount so that the chief cashier focuses on more important transactions. They (chief cashier) regularly checks the work ofthe junior cashier. When some petty cash is to be obtained, a petty cash voucher is given to the petty cashier. (this show: purpose, date & signature of receiving person). These are used to check against the petty cash spent. ‘+ The imprest system: Petty cash expenditure is made from the float/imprest amt. The imprest amount stays constant (but can be altered). After the balancing of the petty cash book, the chief cashier will estore the imprest. This, enables the chief cashier to know exactly how much petty cash has been spent. Petty Cash Book Format Total Total Cost! Cost2_Ledger Received Date Detals Paid (seationen) (Transport) ACs 20x [foe 50 vox | 00 General Journal WWW.ZNOTES.ORG + The journal or general journal is used whatever is not entered into any other book of prime entry before they are recorded in the ledgers. + Ajournal entry shows: + The date ofthe transaction + The A/C name to be debited and credited and the respective amounts + Anarrative: a short description of what is being recorded and why itis being recorded. Eg capital of $1000 cash invested + Whena business begins operation, or begins recording its financial transactions, there are opening journal entries that made made to record the investment of capital, any liabilities the business has etc. These items are then posted into the ledger accounts. + General Guidelines: + Show the debit entries first + Slightly indent credit entries in the details column. + Drawa line after each separate entry andits narrative if required (only in the details column) + The purchase and sales of non-current assets are not recorded in any other book of prime entry, so they are recorded in the general journal and then posted into the ledger AC(s). + Any sales made on cash or for a cheque willbe recorded in the cash book & then in the purchases A/C. + Creditsales is recorded in the sales journal and debtors AIC when the sale was made. The totais transferred to the sales A/C as total credit sales for month, The total of the cash sales is also transferred tothe sales ledger from the cash bookat the end of the month + Sales Returns iffor cash are recorded inthe sales A/C {end of month) and cash book during the transaction. Returns on goods bought for credits entered inthe sales returns journal and debtor's A/C at the date of the transaction and the total is posted to the sales returns A/C at the end of the month as “total credit sales returns of month" + There willbe 2 effects in the ledger fromall the books of prime entry other than the cash book & petty cash book, where there wall only be one effect (as they are also ledgers) Date Details Debit Credit 20x 200 3.4. The Ledger ‘+ Ledgers are divided based on the types of accounts they contain, this is done so that several people can bookkeep simultaneously, ie. Work can be distributed (the same applies for books of prime entries). Ledger Sales Ledger Purchases Ledger General Description/Contents Debtors Ledger Creditors LedgerCAIE IGCSE ACCOUNTING (0452) Ledger Nominal Ledger General Description/Contents Real A/C s (assets) & nominal A/C s (income, expenses & capital) Cash book MCB & PCB. 4. Accounting Procedures 4,1. Capital and Revenue Expenditure ‘The purchase of a non-current assets regarded as capital expenditure; thus, its costis not recorded in the purchases ledger, but non-current assets A/C, The entire cost of the non-current asset is not charged as an expense the year itis purchased, as ithelps the business for several years. The capital expenditure is thus matched (by estimating) against the sales, i. the cost of the non- Current asset is spread over the years which benefit from the use of that asset. This is known as depreciation andis revenue expenditure. ‘+ The capital expenditure includes: The cost of the NCA, legal costs incurred for the purchase of the NCA, carriage on the NCA and installation fees. + Because the income statement is made including revenue expenditure, recording capital expenditure as revenue expenditure will understate the profit and understate the NCA (thus giving effect to the accounting equation) and ‘= Revenue expenditure is the cost incurred by running the business on a day-to-day basis. Eg. repairs on any non- current asset, general expenses, cost of public transport, etc. These are matched against the revenue receipt in the income statement. Capital and Revenue Receipt ‘+ Capital receipts the income from sales of NCA. This should not be entered in the 'S, but any profit or loss incurred from the sale of an NCA shauld be included in the Income statement. ‘The receipt from disposal of non-current assets is regarded as capital receipt itis recorded in the disposal of non-current asset(s) A/C, not the sales A/C. ‘+ Revenue receipt: The income from the running of the business, such as commission received, rent received, sales, etc 4.2. Depreciation ‘Depreciation is a year-end adjustment that reduces the value of non-current assets with time, ie. itis an estimate of the loss in value of a non-current asset over its expected working life + Non-currentifixed assets depreciate with time as they are sed, and depreciation is the loss in their value, this is an, application of the principle of prudence as showing these WWW.ZNOTES.ORG assets at their cost prices can be misleading and lead to overstating a businesses’ profit which can lead to more being drawn by the owner than the business can afford * Land does not generally depreciate unless itis a mine or a well wherein something is drawn from the land (it’s then called Depletion), buildings do depreciate. ‘The purchase of a non-current asset is a part of capital ‘expenditure, which is why the entire cost of the non- current asset is not charged as an expense the year it is, purchase as it helps the business for several years. The capital expenditure is thus matched (by estimating) against the sales, ie. the cost of the non-current asset is. spread over the years which benefit from the use of that asset. ‘+ The principle of prudence is also applied where the non- ‘current asset is shown at its net book value in the SOFP/BS, thus overriding the principle of historical cost Depreciation can be caused by Physical deterioration ‘and/or Economic or other reasons and/or the passage of time. ‘There are several methods of depreciation, the most appropriate one (which spreads cost fairly) must be used, but used consistently, Refer to TABLE 4 for the different methods of depreciation. Notes: The formula gives us a constant vale Method: Formulae/ Additional thathas tobe deducted from the Straight line asset per method of ‘annum.The depreciation cstofasset—Residualealue_ depreciation value fied Mumirofmtre ane percentage instalment ‘stays constant The method. value of the asset canfall toni there is no ‘estimated residual valve.CAIE IGCSE ACCOUNTING (0452) Method Formulbe/ dono! ifo| Note This methods used when the greater bereits fom thee ofthe assethave | Thesmouncof been gained in the earlier, TP! redbees eachyear, Years off he ecucing | Srirsofis ethene percentage seducing __depreclaton aroun Balance cedices)Thismernoais “ty conta = metnodot "“usedwhenasser | Spreiaton's depreciation’ become absoete ret book value/ diminishing quickly. Any residual value) "OT O18 oe matolet consigrotonamenthe OWE Th valu deprednion | Sprecavonpecentage IM aete iseeadeaTre the deprecation — iawun | always calculated dollars and thus are ‘rom theisiEY, rounded theandofeathtrancal| Thsmetodot year, andthe amountis | depreciation is Lampored th he NVof iced neni Revaluation the previous financial _impractical/difficult method of year (or cost-iffirstyear | to keep detailed depreciation of ownership)The amount| records regarding by which the value ofthe certain non- assetfallsis the _|currentassets, eg. depreciation for that | Loose tools ete. financial year ‘= Factors to be considered when choosing a method of depreciation are: Life expectancy Residual value ‘Estimated benefit from the use of the asset. ‘Ifthe straight-line method of depreciation has been used, the dep. Amt. stays constant. ‘= Itis a business’ choice whether to start depreciating the asset from the date of purchase, for example, only 2 proportion of the dep. may be charged (annual dep. /12* ‘months of ownership til financial year end) ORit may be decided to ignore the date of purchase and record a full year of depreciation or not depreciate it in the year of purchase at all, The same applies for the sale of a non- current asset. ‘+ When the revaluation method of depreciation is used, no provision for dep. A/C is created, the same (asset) A/C is Used to calculate dep. + Depreciation reduces the net profit of the year when itis debited into the IS from the provision for dep. * Inthe SOFP the dep. to date (which is the accumulated dep. up til this financial year + depreciation for this year) is subtracted from the cost price to become the NBV (which thus reduces year by year) Asset A/C format: WWW.ZNOTES.ORG Date | Details | $ | Date Details $ Year 1 | Balance b/d [xxx] Year 1 Balance 2001 Bank AC ox Year2 Balance bid xxx Year2) Balance c/d 0x Year3 Balance b/d xxx) | Asset disposal AC xx Balance dd ox 00 20% Year 4 | Baance bid fr] Provision for depreciation A/C format: Date Details | $ | Date [ [vear1] Dec 31 Balance c/d oxx| Dec 31 | Year2 | if Details $ Year 1 T Income statement 00% Year? | [ Dec31 Balance cfd ox) jant | Balance bid xx [Dect Income Statement |20 wo) 001 Year3 [veara| Dec 31 Balance c/d ox) jant T [ec 31] Income Statement /20« Balance b/d 20x [Yeara | I Jani | Balanceb/d xx ‘Asset Disposal A/C format: Details | $ Details $ Equipment (cost) jx) Provision for depreciation |x Income statement [10 Bank 0K Income statement |x ox 200% ‘+ Justas entries are made in the ledger A/C s for depreciation and the sale of an NCA, the similar entries willbe entered in the prime books (specifically the general/nominal journal) 4,3. Other payables and receivables + Often, adjustments are made in the financial statements to present a more accurate view of the profit/loss of a business, these adjustments are known as year-end adjustments. ‘= In practice, tis common to find expenses or income paid inone financial year, but which relates to other financial years, + Only items relating to the specified time-period should be included in the income staternent: the timing of the actualCAIE IGCSE ACCOUNTING (0452) receipts and payments is not relevant. This is a practical application of the accruals principle. * Ibis necessary to adjust the income statement with regards to amounts prepaid or accrued, This results in a more accurate profits figure and therefore more meaningful comparisons can be made between financial statements of different years and businesses + Accrued: an amount due in an accounting period which remains unpaid til the end of that period ‘= When an expense is accrued, it means that some benefit or service has been received during the accounting period, but this benefit or service has not been paid for by the end of the period. ‘Prepaid expenses: A prepayment is an amount paid in, advance, When an expense is prepaid, it means that a payment has been made during the financial year for some benefits or services to be received in a future accounting period. = Qutstanding amount is add to the respective expense and prepaid is subtracted from that expense = Wherever several expenses are accrued, a collective figure is often showed in-place of posting individual figures. ‘+ For Expenses to be paid (due)/ Accrued expenses: Total expenses incurred in the trading period (including ones not going to be paid for in this year, but have been. incurred)- expenses to be paid for (opening Cr balance) = Amount To be transferred to I. + Accrued Income: Where an item of income is accrued it means a person receiving a benefit or service from the business during the accounting periad has not paid for it by the end of the period, ‘+ Prepaid income: Where an item of income is prepaid, it means that a person has paid for a benefit or service from the business, but this has not been provided by the business at the end of the financial year. The principle of accruals is applied to prepaid income, thus any amount for which the legal title of the goods or services have not been passed on to the buyer has to be deducted from the total income transferred to the IS and shown as a liability inthe SOFP/BS. Income Account Format: Date Details $ Date Details $ Balance saree ear bidaance previous ear) laome 4, BankarCveceed sutementrarsfen ding the eo) pales xedmece] || areas crremboa a year) Balancebid ox WWW.ZNOTES.ORG Balance bid ox Expense Account Format: Date) Details $ Datel Details $ Balance bid(advance |) [Balance b/dlarrears | previous year) previous year) Bank A/C(paid during Income the year) Statementitransfer) Balance cid ei {advance current ox year Es x Balance bid box Balance b/d pox 4.4. Inventory Valuation * Inventory must be valued at the end of the financial year. Itis done at whichever is the lower between cost and net realisable value + The cost of inventory includes: Actual price + additional costs (like Carriage inwards or costs that bring the inventory to its current position) + The net realisable value is the estimated receipt from the sale of the stock/inventory. + Generally, the net realisable value > cost of iwentory ‘The examination will require a simple statement to be made fram basic datalike the one on the next page. ‘+ ABC business (Valuation of inventory at DD/MM/YYY} ‘+ Type X-50 units at 10 dollars per unit - $500 ‘+ Type Y- 30 units at 5 dollars per unit - $150 + = $650 4.5. Irrecoverable Debts and Provi: for Doubtful Debts ‘+ When goods are sold on credit, in real practice 100% of all these debts are not recovered. An amount not paid by the debtor is known as a bad debt. There is always a risk of this happening; this could be due the debtor being unable to pay, them dying etc. If all means of recovering the debt have been tried in vain, then the debt is written off. Their AIC is closed by crediting thelr A/C with the amount owing and debiting a bad debts A/C, Atthe end of the year, this amt. is transferred to the IS as a loss/expense. ‘Writing off such debts is an application of prudence, thus, not averstating one's profit by not overestimating their assets) ‘+ Bad debts recovered: If a debtor pays some/all of their debt after itis written off, the cash book is debited, and bad debts recovered A/C is credited with the amt. (5). paid, Alternatively, the debt can be reinstated by reversing the entry when it was written off, and then debiting the cash book and crediting the debtor's A/C. ‘Ifo names and dates have been provided, the entry in the bad debts A/C could be stated as “debtors written off" on the last day of the accounting period.CAIE IGCSE ACCOUNTING (0452) + The only definite way of avoiding bad debts is by not selling goods on credit, which is not practical. Practical methods of reducing the chance of bad debts are: obtaining credit references from barks and other suppliers for a potential debtor, fixing a credit limit per debtor. The debts are monitored over time. This is known as credit control. invoices and month end statements should be issued along with letters to notify debtors of any amounts outstanding, Legal action can be taken, but is too expensive and does not justify the funds recoverable. ‘+ Going by the principle of prudence, businesses estimate the amounts lost due to possible bad debts, which also aligns with the principle of accruals (estimated bad debts from sales, are recorded in the year the sales are made, rather than the year the debts are actually written off. This shows the assets of the business at a more realistic value. ‘+ The amount to be estimated can done so by: estimating this amount per debtor based on their A/C’s individual debts/transactions; estimating the amounts based on past experience of a debtor and devising a percentage of debts estimated which wontt be paid: using an aging, schedule and assigning a higher percentage on older debts and vice versa (based on the logic that older debts are more unlikely to be paid than newer ones. in totality, 2 percentage can be set too, for eg. 5% of the total trade receivables). This is generally given in an examination. + Creating a provision for doubtful debts: ‘+ Dr iS and Cr provision for doubtful debts A/C + Inthe BS/SOFP deduct the balance in the provision for doubtful debts A/C from the trade receivables. + Inthe IS the bad debts are showed along with the provision for doubtful debts as expenses, and in the BBS/SOFP the deduction of the provision for doubtful debts is shown (on the total trade receivables which is already less any bad debts) + The provision for doubtful debts may have to be changed iffor example (if a percentage of debts is taken) the debts have increased/decreased or if an amount has been set for whatsoever reason and has to be changed. This adjustments made at the end of the financial year. + Adjusting a provision for doubtful debts: + Ifthe provision has to be increased, then subtractitin the IS with the difference, and vice versa for a decrease. + Inthe BS/SOFP deduct the new provision for doubtful debts from the total trade receivables, Only the amount increased or decreased (on the provision for doubtful debts) is shown in the IS as the resthas been accounted for in previous accounting years/periods. Ifthe amounts decreased, then the difference is recorded in the Income Statement as decrease/reduction in provision for doubtful debts as a form of income and vice versa for an increase. Provision for Doubtful Debts format: WWW.ZNOTES.ORG Date | Detais [| Date | Detais | income Statement Year Year| walanc bd pecs] PODS Peed or | crews yean FO reduced) e B Balance ome vor “eure years SBMENE 1 | yarbaan 1 Bee 31) yearalancng | D231 sgrefreated diving te yean income Years Statement Deca POD increased) Year 2 | Balance b/d bo Jant 2 5. Accounting Principles 5.1, Accounting Principles ‘+ Business Entity/Accounting entity and ownership ‘= The owner of a business is regarded as being ‘completely separate from the business and vice versa + The personal assets, spending, liabilities etc. Of the ‘owner do not appear in the accounting records of the business and vice versa. Every (financial) transaction is recorded from the view point of the business + Ifa transaction involves both the owner and the business, it involves either the capital A/C or the ‘drawings A/C or the current A/C © Duality/Dual aspect ‘= Every (financial) transaction has 2 aspects- a giving, anda receiving. ‘+ Applied in the double entry system of bookkeeping + Money measurement ‘+ Only info, Which can be expressed in terms of money can be recorded in the accounting records. ‘Several aspects of a business such as staff expertise, the morale of the workforce, the release of a competitor product ete. Will not be shown in the ‘accounting records as its value cannot be given a concrete monetary value. ‘= Money is a traditionally recognized unit of measuring the value of an item/ transaction. Itis factual and not based on personal opinions + Realization ‘* Aprofit should not be recorded before itis earned, Le Profits only recorded when the legal title of goods or services passes on from the seller to the buyer (who is, obliged to pay for them). ‘= The confirmation of the buying of goods doesn't really mean anything as the legal title of the goods hasrit yet ‘changed from the seller to the buyer (No transfer of goods}CAIE IGCSE ACCOUNTING (0452) + This principle is even followed if goods are sold on Cr and the customer hasn't made a payment: The transaction will still be recorded as income] * Going Concern ‘= Itis assumed that the business will continue to operate for an indefinite period of time and that there is noiintention to clase down the business or reduce its size by a considerable amount + The accounting records of a business are always maintained on the basis of assumed continuity. Non current assets will be shown at their NBV (cost less depreciation) and not a possibly quasi-realistic estimate. Inventory will be valued at a price lower than its cost /net realizable value ‘If itis expected that the business will cease to operate in the near future, all asset values on SOFP can be adjusted towards their market values thus these values become more meaningful than their book values # Historical cost, = Allassets and expenses are recorded in the ledger accounts at their actual cost. ‘+ Attimes a more prudent approach is taken whenever. applying this Principle, thus depreciating the value of non-current assets thus bringing the value closer toa net realizable value ‘Applying this principle makes it difficult to compare financial transactions due to inflation. Prudence precedes Historical Cost, always. + Accounting Period Because reports are required at regular intervals, the life of a business is divided into accounting periods- usually years. ‘= Useful comparisons can be made with the business itself over time. The total expenses of a period will be ‘transferred to the income statement. Balances at the end of a trading period (amounts which do not pertain to the specific financial year) are carried down to become the opening balance of the next trading period ‘= According to going concern, the business should operate forever, so to prepare financial statements, it lifetime is divided into years = Consistency ‘+ When a choice of method is available, f one is chosen (with the most realistic outcome), it must be followed ‘throughout the coming accounting periods. ‘+The reducing balance method of dep. For e.g. is consistently used to depreciate delivery vans ‘+ Acomparison of financial statements from one accounting periad to the next will be made difficult if this principle is not followed. + Accruals/Matching + The revenue of a period is matched against the corresponding expenses pertaining to the period ‘= Example: Insurance is prepaid for 2 months at the end of the accounting pericd ( 20, insurance paid 300, There foreinsurancepertainingtothecurre: 300(paid) - 40 (prepaid) —20 (for the previous accounting period) + Extension of the principle of realization; includes other ‘expenses and other income. + Prudence ‘Ensures the accounting records present a realistic picture of the business. + Profits and assets should not be overstated. Liabilities and expenses should not be understated and all possible losses should be accounted for appropriately (provision for doubtful debts is maintained)Profit, should only be recognized once all possible losses are accounted for. + Prudence precedes all principles; bad debts are written off ater a certain period, even though the income is realized. Provisions are made for depreciation and possible bad debts. + Materiality + Items of low value (low cost NCA or what comes under sundry expenses for e.g.) are either grouped or recorded in ways where other principles may be ignored ‘+ immaterial non-current assets which cost more to account for spreading over their cost over their useful life are recorded as expenses. Eg. Inventories of office supplies are not considered in the financial statements as they are considered immaterial + Alarge business which operates on a global scale might not record the purchase ofa laptop as capital ‘expenditure although itis clearly @ NCA), but sole traders wil 5.2. Accounting Policies + Policies set up by the IAS (International Accounting Standards) regulate how international accounting records are maintained. ‘Accounting policies and principles are selected based on: ‘Relevance: financial information is relevant only if it affects the business decisions, as they are the base of further decisions that will be taken. information in financial statements can be used to alter or reconfirm future expectations, set future goals etc and thus must be relevant ‘= Reliability: financial information is reliable only ifitcan be depended upon to represent actual events andis free from error and bias. Financial statements must be capable of being independently verifiable and free from any significant errors. Whenever judgments or estimates are being made, suitable caution must be taken, + Understandabilty: financial reports must be capable of being understood by the users of that report (who are assumed to have basic accounting knowiedge). No infomation should be omitted from the financial AOintotal) Atthestartofthesameaccountingperiofiinsurancedi WWW.ZNOTES.ORGCAIE IGCSE ACCOUNTING (0452) statements because itis thought to be too difficult to understand, + Comparability: a financial report can only be effectively compared with reports for ather periods of the same or similar businesses ifsimilarities and differences can be identified. The differences in policies must be identified to make valid comparisons 6. Verification of Accounting Records 6.1. The Ti \ Balance * Itis a statement which is prepared to check the arithmetical accuracy of ledger accounts. ‘= As mentioned, a transaction has one Dr effect and one Cr effect equal in amount, therefore all the total debits should equal the total credits. ‘© Itshows that the total Dr balance = the total Cr balance. ‘© The Trial Balance is a statement of ledger balances on a particular date ‘+ How A/C (s) are shown in the trial balance: ‘= Ifthe debit side of an A/C has greater value than the credit side, then the difference is recorded as a debit balance ‘Ifthe credit side of an A/C has greater value than the debit side, then the difference is recorded as a credit balance ‘Accounts that normally have | Accounts that normally have | Dr balances (EAD) Crbalances (CLIP) ‘Assets Uabilties Expenses Incomes Drawings Capital Purchases [ Sales SalesReturns(E) | _ Purchase Returns + Itis nota part of the double-entry system. Trial Balance for the year ended... Details Drs | crs All assets 00 All liabilities 200 Allexpenses 200% All income 00 ‘Any provision 00 sales v0 Purchase 200 Sales returns 00 Purchase return 20% Capital 200 WWW.ZNOTES.ORG Details Drs | crs Drawings ne 200% 200 ‘+ Closing inventory is not shown in the trial balance. ‘= The Trial balance is useful in locating arithmetic errors, but cannot guarantee an error free ledger. Itis also useful inppreparing financial statements. f the Dr & Cr columns totals tally, then the ledgers are arithmetically correct. Errors the trial balance cannot detect: Name Description of entries made | Correct amount, correct side, butwrong A/C of correct class | Correct amount, correct A/C, but wrong side of each A/C ‘Transaction completely omitted from the ledgers Incorrect figure used for both Error of commission Error of complete reversal Error of omission Error of original entry entries Correct amount, correct side, Error of Principle Sean en Compensating errors TW00F More errors cancel each ee other out + Atrial balance may nat always tally. This might be because: * Anerror of addition within the TB + Anerror of addition in the ledger A/C s + Doubie-entry figures differ + Anonlya single entry made instead of @ double entry + Both entries made in the same side of the ledger + Tolocate errors: + Check B and ledger balance addition + Check that ledger A/C balance is entered on the correct side (Dr or Cr) + Check that every ledger A/C balance is entered in the trial balance + Look for a transaction equal to the difference in the totals of the TB & check for its double entry. + Look for a transaction that s equal to half the difference & then check whether it has been entered on the same side twice. + Check the double entry for each transaction after the previous trial balance was made (last resort). + Practical Tip: Ifthe difference in the totals of the TB is perfectly divisible by 9, then check if an amount has been entered without a zero (eg. If9 has been entered as. debit instead of 990, the difference 891 can be divided by 9 perfectly giving 99, Thus, ary transactions withthe value 99 can be located and rectified) 6.2. Correction of errors + Ifthe trial balance does not tally, and not errors are immediately identifiable, a suspense A/C is prepared byCAIE IGCSE ACCOUNTING (0452) ‘making an entry to balance the trial balance (by inserting the difference). Thus, Draft financial statements can be prepared. As and when errors are found, they are corrected through journal entries. ‘= The correction of these errors is made through the .general/nominal journal. E.g. Cash Sales of $50 was not credited in the cash book Entry in Journal Date Details Debit Credit | 2322) Suspense A/C......Dr so) I Sales A/C 50 7” Half entry made for sales, now | corrected + Errors which do not affect the tallying of the trial balance (commission, compensating, complete reversal, original entry, omission and principle) are also corrected through the journal by making the appropriate debits and credit s toreverse the error and make the correct entry. Eg. Cash Sales of 250 dollars recorded as Credit sales for B Dawg, Correction would be : Debit- 250- Cash book, Credit - 250, B Dawg A/C Narrative: Cash sales mistakenly recorded as credit sales, now rectified. ‘= Inthe exam, a full journal entry would have to be made like in the previous example. ‘+ Inthe preparation of draft financial statements, if the difference on the suspense A/C is a debit balance, itis recorded in the SOFP as an asset and a liability if the suspense A/C has a credit balance + As corrections are made, the profit might be affected. if any item affects the trading section of the IS, then both the gross and net profit are affected, but if an item affects only the PNL, it will affect only the Net Profit. + Toamend the profits, a statement of corrected profit is made, + Ifexpenses have been omitted, profit for the year will decrease with the correction and vice versa for income. + Correcting the profit for the year also means the SOFP is also altered. The needed changes will also have to be made to all appropriate sections of the SOFP. ifthe expenses have increased, then the profit will decrease etc. Basic concepts will have to be applied in correcting. profit. 6.3, Bank Reconciliation + Abanksstatementis a statement of account equivalent issued by the bank to a business showing the bank transactions pertaining toa particular period. Its the ‘opposite of the business’ bank account inthe business’ ledger (debit wll be credit and vice versa.) Its basically a copy of the customer's account in the bank’s ledger. + Ifthe two balances (on the bank statement and the bank alc) dont match, itis necessary to reconcile them to explain why there is difference. + There is generally always a difference, as the business and the bank dont record transactions at the same time WWW.ZNOTES.ORG (difference due tothe clearance period} and certain other items are not included in certain A/C (5) Items in cash book not in bank statement: + Cheques not yet presented + Amounts not yet credited + Errors in cash book (to be corrected) Items in bank statement but not in cash book: + Bank charges and bank interests + Dishonoured cheque(s) +. Standing order (an instruction toa bank by an account holder to make regular fixed payments toa person or organisation) + Credit transfer (a wire transfers) + Direct Debits (an arrangement made witha bank that, allows a third party to transfer money from a person's ‘account on agreed dates, typically to pay bils) + Errors in bank statement (to be corrected} To compare the cash book with the bank statement, the credit side ofthe bank statementis compared to the debit side of the cash book, as these transactions are recorded from opposite points of views. A tickis placed against transactions that match up. The cash bookis then updated with tems notin it and in the bank statement (obviously excluding errors) Items debited in the bank statement but not credited in the cash book + Charges, credittransfers paid into the bank, standing ‘orders, dishonoured cheques etc Items credited on the bank statement but not debited in the cash book * Credittransfers and direct debits paid into the bank, ete Preparing a bank reconciliation statement: ‘+ Match up the debit side ofthe statement with the credit side of the bank account and credit side ofthe statement withthe debit side of the bank account. CHECK FOR ANY TOTALLING ERRORS ETC. * Correct any errors in the cash book and balance and carry down the balance (this balance should appear ‘on the SOFP ifits the last day of he financial year and is the amount the bank statement’ balance has to be reconciled to. + Prepare the BRS + USE PARENTHESIS OVER AMOUNTS THAT HAVE A CREDIT BALANCE ‘+ CHECK THE STARTING BALANCES OF THE BANK STATEMENT AND BANK ACCOUNT FOR ANY DISCREPANCIES. «+ errors are present in the bank statement correct them in the BRS. * Advantages of Bark Reconlaton ‘An accurate bank balance is obtained (after updating) + Errors in the bank account and bank statement can be identified and corrected. + Helps in discovering fraud and embezzlement (theft or misappropriation of funds placed one's trust or belonging to one's employer)CAIE IGCSE ACCOUNTING (0452) + Amounts not credited and cheque(s) not yet presented can be identified ‘Any 'stale’ cheque(s) can be identified (older than 6 months) and written back into the bank account. 6.4. Control A/C(s) *+ Control A/C are ledger A/Cs that represent allthe individual debtors’ and creditors ACs ina trade receivables control A/C anda trade payables control A/C + The trade receivables control A/C contains the total balance of trade payables at a given date. + The trade receivables contro! A/C contains the total balance of trade receivables ata given date. This is checked about every month, and ifit does nat agree either there is an error in the control A/C or in the debtors!creditors A/C + ifthe trial balance does not tallyfoalance, and errors are not readily located, the accounting records will have to be checked which is very time consuming, This process can bbe made faster if sales and purchases ledger control ‘AIC(s) are prepared, They individually contain the total trade receivables and payables that are recorded from the prime books. They thus act as a check on these A/C (s) + These however, can only check arithmetical accuracy. Errors of omission and commission will not be revealed. + When a fll set of accounting records are maintained, itis usual to also prepare a sales and purchases ledger control AIC fr the following reasons: + Help withthe locating of errors when the TB does not tall. + Proof of arithmetical accuracy ofthe ledgers they control + Draft financial statements can quickly be prepared because theses A/C(s) show the total amt. directly. + Help reduce fraud.as the maker of these A/C(s) are not the same as the maker of the ledgers for the Particular A/C (s) + They provide a summary ofthe transactions affecting the debtor and creditors for each period. + Note: the control A/C(s) are nota part of the double-entry system of bookkeeping + Purchases Ledger Control A/C = Total Trade Payables A/C * Sales Ledger Control A/C = Total Trade Receivables A/C + These AIC(s) only show the debtors and creditors that arise from the regular trading of the business. + Balances on both sides of a control A/C can be presentif Overpayment by a debtor | Overpayment to a creditor Debtor returns good after | Returning goods tothe | paying the account __| creditor after paying the A/C Debtor pays in advance of the Paying the creditor in advance goods for the goods pine obs orem ne | cash discount not being informed about before was made and then full Bean tcieraa) payment made. WWW.ZNOTES.ORG + The opposite balances are not netted out. They are shown separately with the credit balance showing amounts owing to and debit balances showing amounts owed to the business. Sales Ledger Control Account Format: Dates) Details $ [Dates| Details $ Balance bid ox Balance b/d ox Sales voxx BankiCash box Bank (Dishonored Cheque) > Discount Allowed yoo BankiCash rian Sales Returns p00 Bad debts boo 1) contrarsetoff | (transferto 0x purchase ledger) Balance cid box Interest charged ox vox 0x Balance bid boa + To prepare a sales ledger control account is obtained from the books of prime entry. item Source Sales Sales journal Sales returns | Cash and cheques received from | Sales return journal en Cash book Discount allowed to debtors Cash book Dishonored cheques Cash book Refunds to debtors Cash book Bad debts written off Journal Interest charged on overdue a accounts Purchases Ledger Control Account: Dates Details $ Dates) Details $ Balance b/d sox Balance bid boc Credit Purchases ox Interest charged so. CashiBank ox Discount received 0 Bank/Cash Purchase returns »x (refunds from x trade payables) Contra/Setoffvn 1 | (transferto 0% purchase ledger) 7 Balance cid yo Balance bid poxCAIE IGCSE ACCOUNTING (0452) + To prepare a purchase ledger control account is obtained from the books of prime entry. tem Source Purchases Purchases journal Purchases returns Purchases returns journal Cash and cheques paid to Gn creditors Discount received from cae ba creditors Refunds from creditors Cash book Interest charged on overdue Journal accounts Contra entries in Control A/C(s): Inter ledger transfers are made to show businesses setting off their debts in the case if both businesses trade with each other. There are 2 ledger ‘AIC{s) made for such businesses one in the debtors ledger and one in the creditors’ ledger. Setting off their A/C (s) is preferred over both businesses sending a cheque to each ther as now only one checkis sent across + Eg. Trader A owes Trader B 10 dollars, and Trader B owes Trader A 5 dollars. Traders A and B will set off their AJC(s) and the net figure of 5 dollars is paid by Trader A 7. Financial Statements of Sole Trader 7.1. Income Statement ‘= Tofind out the result of their business transactions, the sole trade will prepare: ‘= Income statement ‘+ Statement of Financial Position These are prepared at the end of the financial year to know the profivioss and the value of assets and liabilities ata particular date. ‘Income staternent: + Trading section + ProfivLoss section ‘+ Trading A/C is concerned with buying and selling goods, calculates gross profit (Rev- COS). ‘= Revenue = net sales (Sales less returns) + COS total cost of goods only sold, i.e. Not always all the goods bought. + COS= Ol#P-Cl [Opening inventory + (net purchases, less any additional purchases drawings and/or returns)- Closing inventory] ‘* Pinet}= Purchases - Purchases Returns + Carriage inwards- goods for own use. ‘+ NOTE: Cash discount/discount allowed and discount received will not be included in the trading A/C as they arise from the early payment of debts, and are not sales related, WWW.ZNOTES.ORG ‘+The income statement (PNL and Trading A/C) should have a heading regarding the financial year/period covered and the name of the business trading, Income Statement format: Details sis $s Revenue 10% Less: Sales returns 10K | 00K Less: COGS Opening Inventory 0 Net Purchases al Carriage inwards 00 Closing Inventory (00d | (00x) GROSS PROFIT = ‘Add: Income 200% Less: Pre-paid income (008) ‘Add: Outstanding income vex | 00 Total eK Less: Expenses a i ‘Add: Outstanding 0 Less: Prepaid (oe) | 300 | (oe) PROFIT/LOSS FOR THE YEAR = 7.2, Statement of Financial Position + The statement of financial position of a business on a certain date and shows the assets of a business as being, equal to its capital plus any other liabilities (amount owed ie. The assets show how the resources are being used and the liabilities show where these resources come from, Balance sheet Format Balance sheet as at... Details Cost | Dep | NBV Non Current Assets: Premises v0 | (00) | 000 Land 20x | (5009) | 2000 Building vex | (009) | Motor vehicle 00 | (009) | 3000 Equipment etc 200% | (9000) | 3000 [0x Current Assets: Closing Inventory 00 Account Receivable/Trade receivables | 0% (Allowances for doubtful debts (00) | 2x Cashat bank 00 Cashin hand 200 Prepayment yx | 3004CAIE IGCSE ACCOUNTING (0452) Details Cost | Dep | NBV Total Assets/Closing capital 2008 Financed by: [ Capital Tex Net profit 0 (9 rawing “eee | 000 Currenttlabilies: L_| ‘Account payable/Trade payable veo Bank over draft vox ‘Accrued expenses root | 360e Long term liabilities: Bankloan T 200% Debenture T 70% Long-term loan 200% a + Non-current liabilities are those which are not due in the next 12 months (E.g.:long term loans) * Current liabilities are short term ones (due within the next 12 months) and arise from the regular trading activities of the business whose values constantly change (E.g. trade payables) Assets and liabilities are arranged in different groups: ‘+ Assets are divided into current (Values are constantly changing, short term assets which arise from the regular trading of the business, E.g. Inventory) and nor-current assets (long term assets which are not, used for resale but help the business earn revenue, E.g: Motor Vehicles) + Non-current assets are listed in order of increasing, liquidity (iquid= least permanent) (The ability to be converted into cash), typically: Land and buildings, Machinery, Fixtures and equipment and motor vehicles. = Current assets are also listed in order of increasing liquidity (furthest away from cash shown first), typically: Inventory, Trade receivables, Other receivables, Bank, Cash. Trade receivables are said to bbe more liquid as compared to the inventory as they can be sold to other businesses. Current and Non-current liabilities appear in ascending order of which liability will have to be paid first. Note: Other payables will appear after trade payables. ‘+ ASOFP should have the heading to the date to which it relates and must include the trading name of the business. + After all the financial statements are prepared every item on the trial balance must have one effect (either 'S or SOFP) on the financial statements and additional notes will have 2 effects on the financial statements (one on the |S and the other on the SOFP) ‘= The balance of the capital A/C will increase in the SOFP if the business has made a profit or decrease if the WWW.ZNOTES.ORG business has made a loss. ‘+ When the business makes a profi, itis added to the capital as the amount awed by the business increases and thus it can be concluded that a profits an increase in net assets (capital) 7.3. Service business + Aservice business is one which doesn't buy and sell goods ‘© The financial statements of a service business still need to be prepared with the difference only income statement as only the profitloss section is prepared with no trading section + Format Details isis Commmission/Fees/Rent Received 00 ‘Add: Income 0K ‘Add outstanding, Less Prepaid ox | 0% Less: Expenses 008 ‘Add Outstanding, Less prepaid y00k | 008 PROFIT/LOSS FOR THE YEAR [xx 8. Financial Statements of Partnerships 8.1. Partnerships ‘* Aparinership is a business in which 2 or more (max. 20 - normal] people come together and work with the view of making profits. + Several professionals such as accountants and solicitors come together to form a partnership. This is common amongst family businesses. At times sole traders expand by amalgamating their businesses, ‘+ An additional account is made- the profit and loss ‘appropriation AJC, which shows how the profit for the year or loss for the year is shared between the partners + Partnership businesses: Advantages ‘Additional finance ‘Additional knowledge, experience and skill Disadvantages Profits have to shared Decisions have to be recognized by all partners (One partner's decision affects all other partners, | Allpartners responsible for the debts of the business Responsibilities are shared Discussions before decision ‘+ Most partnerships draw up a partnership agreement. Not legally required, but it helps prevent misunderstandings ‘and arguments in the future, I's clauses cover aspects ofCAIE IGCSE ACCOUNTING (0452) the business like : Capital invested per partner, sharing of profits or loss, interest on capital invested, salaries of partners, possible upper limit on drawings, interest on drawings, interest on partners loan to compary. ‘= Money is borrowed from a partner for a particular span of time if necessary; note this is NOT a part of capital. Itis treated exactly like a normal loan, just that its interest (if accrued) can be recordedin the current AIC of the partner instead of a separate liability A/C. ifthe interest is, paid it is recorded in a regular interest on loan A/C ‘The capital A/C prepared ina partnership AIC can either have 2 or more sections for the partners, or several AJC(s) can be prepared. These capital A/Cs refer to fixed capital A/Cs. For other entries involving partners a separate current A/C and drawings A/C is made. 8.2, Capital and Current A/C Current Account Format: Date’ Details AS BS/Date Details ASBS 1 | Balance bid oxen) 1 | Balance bid hoxton gi Mtereston Intereston drawing capital 31) Drawing oxox! Interest onloan 31 Balance cid xx xxx Salaries ox xx Profit Share ox xox 8.3. Income Statement ‘Ibis the same as sole trader Statement of Financial Position (SOFP) Format: Statement of financial position at. Details Y zis Capital Accounts se Current Accounts Opening balance yoo |x Salary EJ Interest on loan _—s Shares of profit oe Drawings [G00 | 000) Interest on drawings [00d | 000) vox |x| 200 001 8.4. Profit and loss appropriation A/C WWW.ZNOTES.ORG + The profit for the year is taken, interest on drawings is, added, and interest on capital is deducted, salaries to partners are deducted and any other items are included aS appropriate. The final amount after the appropriation (residual profit) is shared, Format: Net Profit before adjustment 200 interest on drawing Partner A 200 Partner 8 00% | 300K Interest on capital Partner A 00% Partner B 20% | (000) Salaries Partner A 200 Partner 8 200 | (009) Net Profit after adjustment 200 g. Financial Statements of Limited Companies + A limited company is a business which is a separate legal entity from its owners (shareholders) and whose liability for the company is limited to the value of shares they hola, + Alimited company can be formed as a new business or a sole trader or partnership can be converted into a limited company for expansion purposes. ‘+ The capital of a limited company is divided into units called shares and the face value of the share(s) is the extent to which the shareholders are liable for the debts of the company. ‘+ Through shares a large amount of capital can be raised. + Profits are distributed as dividends which are stated as a percentage of the face values of the shares. © There are 2 kinds of shares: Preference Shares Ordinary/ Equity shares Fixed rate of dividend | Dividend depends on profit Fixed rate and amount of | Variable rate and amount of dividend dividend Dividend is always paid, but if Dividend can be paid. If profts| profit does notallow, willbe | allow for high dvidend- paid, paidinthe future when else even no divided is sufficient funds available. possible Holders have some Preference is given to these _involvementin the running of shares when itcomes to the business and can vote at dividend payment shareholder's meetings at ‘one vote paid share.CAIE IGCSE ACCOUNTING (0452) Preference Shares Holders have minimal involvement in running of the ‘company and are usually not entitled to vote at shareholder's meetings Included in the PNL (Income | Statement) Ordinary/ Equity shares Included in the profit and loss ‘appropriation A/C + Allthe shareholders cannot be involved in the day-to-day decision making of a company, so a board of directors (€lected), CEO Ete. are hired. Any legal action against the company is against the company itself and notits members. + Earlier, when a business was formed a maximum (mit) of capital issued had to be stated - authorised share capital + Share capital issued is called issued share capital this is the value of the shares issued). More can be issued ata later stage whenever required. ‘+ A company may not require the full value ofthe called-up capital and may only require a fraction of it(ifa share is worth 1 dollar, the company may only call up 0.50 dollars per share). if more capital is required, it can be “called Up". Since some shareholders may not pay the called-up capital per share, the actual called up capital received is known as the paid-up capita. + A company might raise additional funds by issuing debentures (loan capital) or loan notes, where through small loans, several thousands of dollars may be raised, They carry a fixed rate of interest and are given preference over all payments including the payment of dividends on preference shares. interest on Debentures are included in the income statement. Debentures holders are not members of the company nor do they own any part of the company and do not have voting rights at shareholders meetings. a company dissolves, the liabilities and debenture holders are repaid first, then the preference shareholders are paid after which ordinary shareholders are paid + Limited companies are required to publish a statement of changes in equity, some may prepare a profit and loss appropriation A/C + Astatement of changes in equity is lke the capital section of a statement of financial position, which changes over time. It shows the reserves and ary transfers made from the retained profits to the general reserve for eg. + Proposed dividend is not included in the books of accounts. + Interim ordinary dividend might be paid during the year, as this is already paid, itis shown in the SOFP at the end of the financial year. + Ifitis known that a certain dividend is paid per year in total, for e.g.: 5000 dollars. ifthe interim ordinary dividend paid is 3000 dollars, then 2000 dollars (5000-3000) is declared as the proposed ordinary share dividend and included in statement of financial position. WWW.ZNOTES.ORG + Mostly, allthe profit made by a limited company is not given out as dividend, any even fitis intended to do so, it may not be possible, as not enough cash maybe in hand or assets ina liquid form etc. + Ifany dividend or interest on debentures accrues, itis shown in the statement of financial position as a current liability + Whatever profit is not distributed andlor put into a general reserve (to plough back profits to aid further Browth) wil be transferred tothe retained profit andis shown in the SOFP under reserves whichis added to the share capital + The capital section ofthe statement of financial position ofa limited company includes the share capital, reserves (eg, general reserve, retained profits refer to funds ploughed back over the years, etc) under the heading Capital and Reserves. The total of these value hareholder’s fund. 9.2. Income Statement Limited company income statement format Details $ Revenue 200 Cost of sales (00%) Gross profit 200% ‘Administrative expenses (0004) Distribution expenses (0004) Profit from operations 20% Finance cost (00%) Profit for the year 00 9.3, Statement of Changes in Equity Format: | Ordinary ‘Preference | | ‘General Retained share share Total Gaptel —captay reserve earrings Details s $ ss is Balance (date atbeginning | xx wx | v0 | 30K 008 of year) i Profit for the ale year | Dividends paid (200) (009) Transfer to general yoo | (9004) Balance(date | atendof | xox woe | vox | sox 0 year)CAIE IGCSE ACCOUNTING (0452) 9.4. Statement of Financial Position Format Statement of financial postion at. Details si sis Cost | Dep | NBV Non-current assets rox | boo) | boo) | Current assets Inventory "0 Trade receivables "en Other receivables "00 Bank rank | 008 Total assets 0 Equity Issued share capital = Ordinary Shares 0 General reserve a Retained earnings cs Total equity "oa Non-current lates Debentures “on Current ables Trade payables a Other payables ra | 00 00 10. Clubs and Societies + Certain organisations are non-trading, such as clubs, or societies. Their main objective is not to make a profit, but to provide facilities to its members. ‘The main source of income for these organisations is subscriptions (usually an annual payment to the organisation for the usage of facilities provided). A treasurer is assigned who manages all ofthis and pays the money owing to external entities and collects money owing to the organisation. ‘+ Terminology in the Financial Statements and Accounting Records: Business (Clubs and Societies/ Non- Trading Terminology: ‘Organisations Terminology: Summary of cash ; eee tase Receipts and Payments A/C Trading AC Trading A/C Income and expenditure A/C (will only have the contents: Income and Expenditure. There will be no other income/expenses here.) Profit and loss A/C Balance SheevSOFP WWW.ZNOTES.ORG Balance SheeuSOFP Business Clubs and Societies/ Non- Trading Terminology: Organisations Terminology: Profit for the year errs (Net profit) E Loss for the year (Netloss) Defic ‘+ Asurplus is the excess of income over expenditure whereas a deficitis the excess of expenditure over income. The principles used to prepare a profit and loss ‘AIC are like those applied when preparing an income and expenditure A/C. * If any fund-raising activity ike a competition is conducted, itis Important to set off the income against the expenditure for that activity in the income and ‘expenditure A/C. ‘= Subscriptions owing or prepaid can be included under other receivables and other payables respectively and an appropriate note should be included. + To correctly match the expenses against the income, the subscriptions relating to a particular time frame must be included in the income and expenditure A/C. A subscription’s A/C is prepared to calculate this figure. There could be 2 balances on this A/C as some members. might have paid for their subscriptions in advance and ‘some have not yet done so. They need to be kept a track of individually. 10.1. Subscription A/C format Details $ Details $ Balance bid (Outstanding || Balance b/d (Advance previous year) previous year) Income for current year (income & Expenditure Alo) Closing balance c/d Receipts during the year (Bank Alo) Balance c/d (Outstanding |. see ete ele inl Balance b/d | Esane Ud atoelow yeep vcctor fe Bea 10.2. Receipts and Payments A/C ‘The receipts and payments A/C mostly does not differentiate between cash and bank transactions. For the most parti is exactly like a cash book. Note: The balances on the A/C can either mean just cash, just bank or both. A credit balance brought down means an overdraft. + Receipts and Payments A/C Format Receipts Payments Details $ Details 5 Opening Balance b/d 00% Expenses boxCAIE IGCSE ACCOUNTING (0452) Receipts Payments + The balance sheet of a club or society is very similar to T that of a business; however, capital does not exist. This is because members of a club or society do not invest Members subscription yx Purchase of non-current = money and draw out funds the same way a proprietor of Donations poo Closing balance cld_pooy business does. Any surplus is accumulated to form the Receipts from activities oo TI capital fund known as the accumulated fund. Similarly, a Proceeds from the sales deficit decreases ths fund. of non-current assets + Justas ina business Assets capita + liabilities, ina club fal i of society: Assets= Accumulated funds + Liabilities Balance cid 0x Daa : z + The receipts and payments A/C only shows funds received Assate or payed, it does not show the actual income or expenses | me for the financial period. These wil have to be calculated 2oxx with adequate information rE + Clubs and societies trade. Those that do, do not regard it URNS i as their main source of income. They maintain a separate income statement (only the trading A/C section) for each | rox _| of these activities. The wages of shop attendants, xxx | (on) depreciation on café equipment etc. Any profit or loss ‘Accumulated Fund 0K from these activities is transferred to the income and expenditure A/C under other income/ expenses. 5 . 11. Manufacturing Businesses 10.3. Income and Expenditure A/C + Certain businesses dont just uy and sell gods there are also manufacturing businesses, lke a textile manufacturer who make ciothes: +The double entry records fr these businesses will be lke that ofa trading business, Additionally there will bea Income and expenditure account format: Income and expenditure acc for the year ended... Dee Ls sls manufacturing AVC, which is used to calculate the cost Income: { { involved for the business to manufacture goods it has Members Subscriptions i root | produced in a particular financial yar. Profit on café wx + Types of inventory Sports Competition | + Raw Materials Sale of tickets 00% + Work in Progress - + Finished Goods (Competition prizes (0x8) om a bo 11.2. Manufacturing A/C Profit on disposal of non-current asset x00 | @. Manutacturing Alcs prepared In onder to know the cost 100% of production of finished goods using the formula: Bependitare T T + Prime Cost + Factory Overheads crpenses — * Bre Caste rectal Dec Labour + Diet Depreciation of noncurentassets | + alclaion of uni casi a manufacture makes one Loss on social evening [ | identical product its unit cost can be calculated by the Sales of tickets 2x formula: copopPreductn expenses (0009 1 a Manufacturing A/C Format Loss on disposal of non-currentasset | voor | e + ox Details sis Opening Stock of Raw Material 2x Surplus foryea mee Purchase of Raw material 20x 10.4. Statement of Affairs Closing Stock of Raw Material F009 | son Cost of Raw material consumed [ [0 WWW.ZNOTES.ORG