IGCSE ACCOUNTING 1. Fundamentals of Accounting 1.1 Purpose of Accounting ● Book-keeping: the detailed recording of all financial transactions of a business ○ Records not maintained → something will be overlooked (prone to errors) ○ Basis: double entry book-keeping ● Accounting: Using book-keeping records to prepare financial statements & assist in decision making ○ To see if business is making P/L ○ Profit: Total revenue exceeds total costs ○ Loss: Total costs exceeds total revenue ● Purpose of maintaining accounting records ○ Information recorded is used to make IS & SOFP ■ Allows for calculation of P/L ■ Understand the progress/growth of the business ■ Base the business future & make decisions based on P/L 1.2 Accounting Equation ● SOFP: statement of the assets & liabilities of a business on certain date ● Assets = Liabilities + Capital ○ Assets: Items owned by the business ■ Non-current assets (NCA) ● Assets obtained for use (not for resale) which helps the business earn revenue ● Long term assets ● Eg. equipment, premises, motor vehicles, fixtures & fittings etc. ■ Current Assets (CA) ● Short term assets whose amounts are constantly changing ● Eg. bank, trade receivables, inventory etc. ● Inventory ○ Goods a business has available for resale ● Trade Receivables ○ Represents the amount owed to the business by its credit customer ○ Liabilities: Amounts owed by the business to others ■ ↑ liabilities = ↑ assets ■ Non-current liabilities (NCL) ● Amounts owed that aren’t due for repayment within the next year ● Eg. long-term loan, mortgage etc. ■ Current Liabilities (CL) ● Amounts owed that are due for repayment within the next year ● Eg. trade payable, other payable, bank overdraft ● Trade payable ○ The amount the business owes to the credit supplier ○ Owner’s equity/capital: Total resources provided by the owner ■ More available, less need to be borrowed ■ ↑ capital = ↑ assets ■ Drawings ● Any value taken from the business by the owner of that business 2. Sources & recording of data 2.1 Double entry system of book-keeping ● Process of making a debit entry & a credit entry for each transaction ● Advantages ○ Less risk of errors/fraud ○ Easier to refer to previous transactions ○ Financial position can be ascertained ● ● ● ● ● ● ○ Easier to prepare the financial statements & make business decisions Format Income: Money that an individual/business received in exchange for providing a good/service ○ Eg. Sales, rent received, commission Expenses: Cost of an asset used by a company in its operations to produce revenues ○ Eg. Advertising, rent, wages, purchases, electricity & water Carriage: cost of transporting goods ○ Carriable inwards: cost of bringing the goods to the business ○ Carriage outwards: cost of delivering goods to the customer Entries ○ Sales ■ Dr bank a/c ■ Cr sales a/c ○ Purchases ■ Dr purchase a/c ■ Cr bank a/c Ledger ○ Divided based on the types of accounts they contain ■ Several people can bookeep simultaneously ○ Sales ledger ■ Ledger in which the accounts of credit customers are maintained ■ Dr balance = customers owe money ■ Cr balance = business owes customers goods/customer has overpaid ○ Purchases ledger ■ Ledger in which the accounts of credit suppliers are maintained ■ Dr balance = suppliers owe the business goods ■ Cr balance = business owes supplier money ○ Nominal (general) ledger ■ Ledger where all other accounts are maintained ○ Cash books (main CB & petty cash book) ■ A book of prime entry ● Transactions should be recorded before being entered in the ledger ● Then used for cash a/c & bank a/c ■ Part of the double entry system ■ Impossible to have a credit balance on a cash a/c ■ 2 column cash book ● Combines cash & bank together ● Dr Money received ● Cr Money paid out ■ 3 column cash book ● Extra column to record cash discount ○ Allowance given to a customer when an account is settled within a time limit set by the supplier ○ Encourages customers to pay promptly ○ Not part of double entry system; must be transferred ■ Dr total disc allowed column into disc allowed a/c in nominal ledger ■ ● ● ■ ○ Cr total disc received column into disc received a/c in nominal Discount allowed ○ Business allows discount to its credit customers ○ Expense to the business (receive less) ○ Cr: discount in debtors a/c ○ Enter amount into discount allowed column Discount received ○ Business receives discount from its credit suppliers ○ Income for the business (pay less) ○ Dr: discount in creditor’s a/c ○ Enter amount into discount received column Contra entries ● Appears on both sides of the cash book ● ‘C’ entered in folio column ● Recorded by applying the usual rules of double entry ○ Dr a/c receiving money ○ Cr a/c giving money ○ Eg. Record surplus cash paid into bank ■ Dr bank a/c (write ‘cash’ in details) ■ Cr cash a/c (write ‘bank’ in details) ○ Eg. Record cash withdrawn from the bank ■ Dr cash a/c (write ‘bank’ in details) ■ Cr bank a/c (write ‘cash’ in details) ■ Bank overdraft ● Liability ○ Amount the business owes the bank ● More has been paid out of the bank than was put into the bank account ● Credit balance on bank a/c = bank overdraft ● To reduce: ○ Collecting debtors ○ Reducing inventory ○ Delaying payment of creditors ○ Reduce drawings ○ Increase capital ○ Sell NCAs ○ Long term loan ■ Dishonoured cheque ● Cheque received which the debtor’s bank refuses to pay ● Due to error (no signature/no date/amount in figures & words don’t match) ● Debtor doesn’t have enough money in their bank a/c Petty Cash Book ■ Uses ● Records low value cash payments ○ Not necessary to record small cash payments individually in a cash book/ledger ● Lists the transactions for transferring to ledger accounts ● Acts as a ledger for petty cash transactions ■ Imprest System ● ■ ■ ■ ■ Amount spent each period is restored so that the petty cashier starts each period with the same amount ● Chief cashier is aware of exactly how much is sent each period Petty cash voucher: document that requests for money ● Shows the purpose for the money ● Name & signature of the person receiving the cash Reason for difference in the petty cash ● Lost/missing voucher ● Lost/stolen cash ● Error brought forward/ in counting cash ● Amount not recorded Format Advantages ● Number of entries in the main cash book is reduced ○ Main cashier’s burden is reduced ● Chances of mistakes in recording is minimised 2.2 Business documents ● Can be received/issued by the business to record sale/purchase of goods (proof of transaction) ● Encourage customers to pay invoices ○ Send statement ○ Offer cash discount ○ Limit credit (no more credit sales) ○ Charge interest on overdue a/cs ● Invoice ○ Document issues by the supplier of goods on credit showing the details of quantities & prices of goods supplied ○ Contents ■ Name & address of supplier & customer ■ Date ■ Full details of goods purchased ○ Issued by the supplier when goods sold on credit ○ Trade discount: reduction in the price of goods ■ Rate often increases according to the quantity purchased ■ Encourages bulk purchases ■ Given to businesses in the same trade ● Businesses won’t be prepared to pay the full rate (need to make profit by selling goods) ■ Shown as a deduction on the invoice ○ Entries ■ Customer: Cr purchase ● ● ● ● ● ■ Supplier: Cr Sales Debit Note ○ Issued by a purchaser of goods on credit to request a reduction in invoice received ○ To inform the supplier of any shortages/exchanges/faults ○ Contents ■ Name & address of supplier & customer ■ Date ■ Full details of goods returned/overcharged ○ No entries made ○ Supplier may re-issue an invoice Credit Note ○ Issued by the seller of the goods on credit to notify of a reduction in an invoice previously issued ○ Contents ■ Name & address of supplier & customer ■ Date ■ Full details of goods returned/overcharged ○ Entries ■ Customer: records purchase return ■ Supplier: records sales return Statement of Account ○ Document issued by the seller of goods on credit, summarising transactions of the month ○ Purpose ■ Reminder to the customer of the amount outstanding ■ Confirmation of settlement terms ■ Ensures no errors have been made by customer or supplier ○ Contents ■ Name & address of supplier & customer ■ Date ■ Balance owing at the start & end of the month ■ Invoice & credit notes issued ■ Payments received ■ Cash discount allowed ○ Issued at the end of the month by the supplier to the customer ○ No entries Cheques ○ A written order to a bank to pay a stated sum of money to the person/business named on the order ○ Issued by the customer to the supplier ○ Contents ■ Date ■ Amount ■ Payee ○ Supplier uses counterfoil of the paying-in slip to make cash book entry to show money received & discount allowed ○ Customer keeps cheque counterfoil ■ Used to make cash book entry to show money paid & discount received Receipt