IGCSE Accounting Online Course CIE

The purpose of accounting

All businesses must either use an accountant or keep their own accounting records.  For example, a bakery needs to know how much money they are making from sales and how much is being spent on rent, staff and ingredients.  This will indicate whether they are making a profit or a loss.  Book-keeping is the process of recording these transactions, whilst accounting analyses this information to understand the performance and help the business make future decisions.  In this topic, you will cover:

• understand and explain the difference between book-keeping and accounting
• state the purposes of measuring business profit and loss
• explain the role of accounting in providing information for monitoring progress and decision-making

The accounting equation

The accounting equation shows that everything a business owns is either funded through borrowing money or bought by the owner.  For example, if someone begins a new small business and purchases a laptop with their own savings, the laptop becomes the business’s assets.  This equation helps owners record transactions and ensure financial records are balanced.  In this topic, you will cover:

• explain the meaning of assets, liabilities and owner’s equity
• explain and apply the accounting equation.

The double entry system of book-keeping

Within a business, financial transactions are carried out daily.  Everything from selling goods to paying suppliers must be recorded accurately which is why the double entry system of book-keeping exists. The system ensures that every transaction is recorded in two accounts, reflecting both sides of the transaction.  This keeps records balanced. In this topic, you will cover:

• outline the double entry system of book-keeping
• process accounting data using the double entry system
• prepare ledger accounts
• post transactions to the ledger accounts
• balance ledger accounts as required and make transfers to financial statements
• interpret ledger accounts and their balances
• recognise the division of the ledger into the sales ledger, the purchases ledger and the nominal (general) ledger

Business documents

Business documents provide evidence of financial transactions.  Invoices, receipts, cheques and debit/credit notes are used daily.  In this topic, you will cover:

• recognise and understand the following business documents: invoice, debit note, credit note, statement of account, cheque, receipt
• complete pro-forma business documents
• understand the use of business documents as sources of information: invoice, credit note, cheque counterfoil, paying-in slip, receipt, bank statement.

Books of prime entry

Businesses have to manage money in different ways.  For example a newsagent might receive cash from customers, pay suppliers by bank transfer and use petty cash to buy supplies.  To manage this efficiently, businesses use books of prime entry.  Books of prime entry record transactions in an organised way before they are posted to the ledger.  In this topic, you will cover:

• explain the advantage of using various books of prime entry
• explain the use of and process accounting data in the books of prime entry: cash book, petty cash book, sales journal, purchases journal, sales returns journal, purchases returns journal and the general journal
• post the ledger entries from the books of prime entry
• distinguish between and account for trade discount and cash discounts
• explain the dual function of the cash book as a book of prime entry and as a ledger account for bank and cash
• explain the use of and record payments and receipts made by bank transfers and other electronic means
• explain and apply the imprest system of petty cash.

The trial balance

A trial balance lists all ledger account balances on specific dates. It helps to double check the arithmetical accuracy of accounting records and prepare financial statements. The trial balance can help identify the errors but it doesn’t flag all mistakes. You will need to understand:

• understand that a trial balance is a statement of ledger balances on a particular date
• outline the uses and limitations of a trial balance
• prepare a trial balance from a given list of balances and amend a trial balance which contains errors
• identify and explain those errors which do not affect the trial balance: commission, compensating, complete reversal, omission, original entry, principle.

Correction of errors

Once the errors are discovered the accounting records must be corrected. The corrections may have to be made using journal entries and in some cases a suspense account is used temporarily. This helps to balance the trial balance before the error is found. When correcting errors, it can change the profit or loss for an accounting period. You will also need to understand:

• correct errors by means of journal entries
• explain the use of a suspense account as a temporary measure to balance the trial balance
• correct errors by means of suspense accounts
• adjust a profit or loss for an accounting period after the correction of errors
• understand the effect of correction of errors on a statement of financial position.

Bank reconciliation

Bank reconciliation is the process that helps check that cash records match a bank statement. A Bank statement will show the money paid in and out. This includes interest, direct debits, charges, credit transfers and standing orders. A Bank reconciliation statement is then made to prepare for the remaining differences. This helps prevent mistakes and detect fraud.

• understand the use and purpose of a bank statement
• update the cash book for bank charges, bank interest paid and received, correction of errors, credit transfers, direct debits, dividends, and standing orders
• understand the purpose of and prepare a bank reconciliation statement to include bank errors, uncredited deposits and unpresented cheques.

Control accounts

• understand the purposes of purchases ledger and sales ledger control accounts
• identify the books of prime entry as sources of information for the control account entries
• prepare purchases ledger and sales ledger control accounts to include credit purchases and sales, receipts and payments, cash discounts, returns, irrecoverable debts, dishonoured cheques, interest on overdue accounts, contra entries, refunds, opening and closing balances (debit and credit within each account).

Capital and revenue expenditure and receipts

Capital and revenue expenditure and receipts show how a business spends money and receives it. Capital expenditure is the long-term assets money has been spent on, this could be assets such as machinery or buildings. Revenue and expenditure is money spent on the day to day costs. This can be costs such as wages or repairs. Capital receipts are from selling long term assets and revenue receipts come from normal business activities. Classifying this correctly can help to ensure assets are properly valued, profits are accurate and financial statements can be used to make decisions. You will need to know how:

• distinguish between and account for capital expenditure and revenue expenditure
• distinguish between and account for capital receipts and revenue receipts
• calculate and comment on the effect on profit of incorrect treatment
• calculate and comment on the effect on asset valuations of incorrect treatment.

Accounting for depreciation and disposal of non-current assets

Depreciation is the way a business shows how noncurrent assets lose value over time; this could be assets such as machinery or vehicles. The cost of an asset is recorded over the years it is used to show the lost. Depreciation is noted in journal entries and ledger accounts. Once the asset is sold a disposal account is used to work out the profit or lose. You will need to learn how to:

• define depreciation
• explain the reasons for accounting for depreciation
• name and describe the straight-line, reducing balance and revaluation methods of depreciation
• prepare ledger accounts and journal entries for the provision of depreciation
• prepare ledger accounts and journal entries to record the sale of non-current assets, including the use of disposal accounts.

Other payables and other receivables

Other payables and other receivables are used to make sure incomes and costs are recorded in the correct accounting period. This matches expenses and revenues to the time they relate to not just when cash is paid. Accrued expenses are the costs that are owed but not paid yet. The accrued income is earned but not yet received. `this helps business to produce accurate profit figures for financial statements.

• recognise the importance of matching costs and revenues
• prepare ledger accounts and journal entries to record accrued and prepaid expenses
• prepare ledger accounts and journal entries to record accrued and prepaid incomes.

Irrecoverable debts and provision for doubtful debts

• understand the meaning of irrecoverable debts and recovery of debts written off
• prepare ledger accounts and journal entries to record irrecoverable debts
• prepare ledger accounts and journal entries to record recovery of debts written off
• explain the reasons for maintaining a provision for doubtful debts
• prepare ledger accounts and journal entries to record the creation of, and adjustments to, a provision for doubtful debts.

Valuation of inventory

• understand the basis of the valuation of inventory at the lower of cost and net realisable value
• prepare simple inventory valuation statements
• recognise the importance of valuation of inventory and the effect of an incorrect valuation of inventory on gross profit, profit for the year, equity and asset valuation.

Sole traders

• explain the advantages and disadvantages of operating as a sole trader
• explain the importance of preparing income statements and statements of financial position
• explain the difference between a trading business and a service business
• prepare income statements for trading businesses and for service businesses
• understand that statements of financial position record assets and liabilities on a specified date
• recognise and define the content of a statement of financial position: non-current assets, intangible assets, current assets, current liabilities, non-current liabilities and capital
• understand the inter-relationship of items in a statement of financial position
• prepare statements of financial position for trading businesses and service businesses
• make adjustments for provision for depreciation using the straight line, reducing balance and revaluation methods
• make adjustments for accrued and prepaid expenses and accrued and prepaid income
• make adjustments for irrecoverable debts and provisions for doubtful debts
• make adjustments for goods taken by the owner for own use.

Partnerships

• explain the advantages and disadvantages of forming a partnership
• outline the importance and contents of a partnership agreement
• explain the purpose of an appropriation account
• prepare income statements, appropriation accounts and statements of financial position
• record interest on partners’ loans, interest on capital, interest on drawings, partners’ salaries and the division of the balance of profit or loss
• make adjustments to financial statements
• explain the uses of and differences between capital and current accounts
• draw up partners’ capital and current accounts in ledger account form and as part of a statement of financial position.

Limited companies

• explain the advantages and disadvantages of operating as a limited company
• understand the meaning of the term limited liability
• understand the meaning of the term equity
• understand the capital structure of a limited company comprising preference share capital, ordinary share capital, general reserve and retained earnings
• understand and distinguish between issued, called-up and paid-up share capital
• prepare income statements, statements of changes in equity and statements of financial position
• make adjustments to financial statements.

Clubs and societies

• distinguish between receipts and payments accounts and income and expenditure accounts
• prepare receipts and payments accounts
• prepare accounts for revenue-generating activities, e.g. refreshments, subscriptions
• prepare accounts for revenue-generating activities, e.g. refreshments, subscriptions
• prepare income and expenditure accounts and statements of financial position
• make adjustments to financial statements
• define and calculate the accumulated fund.

Manufacturing accounts

• distinguish between direct and indirect costs
• understand direct material, direct labour, prime cost and factory overheads
• understand and make adjustments for work in progress
• calculate factory cost of production
• prepare manufacturing accounts, income statements and statements of financial position
• make adjustments to financial statements 

Incomplete records

• explain the disadvantages of not maintaining a full set of accounting records
• prepare opening and closing statements of affairs
• calculate profit or loss for the year from changes in capital over time
• calculate sales, purchases, gross profit, trade receivables and trade payables and other figures from incomplete information
• prepare income statements and statements of financial position from incomplete records
• make adjustments to financial statements
• apply the techniques of mark-up, margin and inventory turnover to arrive at missing figures.

Calculation and understanding of accounting ratios

• Gross margin
• Profit margin
• Return on capital employed (ROCE)
• Current ratio
• Liquid (acid test) ratio
• Rate of inventory turnover (times)
• Trade receivables turnover (days)
• Trade payables turnover (days)

Interpretation of accounting ratios

• prepare and comment on simple statements showing comparison of results for different years
• make recommendations and suggestions for improving profitability and working capital
• understand the significance of the difference between the gross margin and the profit margin as an indicator of a business’s efficiency
• explain the relationship of gross profit and profit for the year to the valuation of inventory, rate of inventory turnover, revenue, expenses, and equity.

Inter-firm comparison

• understand the problems of inter-firm comparison
• apply accounting ratios to inter-firm comparison

Interested parties

• owners
• managers
• trade payables
• banks
• investors
• club members
• other interested parties such as governments, tax authorities, etc.

Limitations of accounting statements

• historic cost
• difficulties of definition
• non-financial aspects

Accounting principles

• matching
• business entity
• consistency
• duality
• going concern
• historic cost
• materiality
• money measurement
• prudence
• realisation

Accounting policies

• comparability
• relevance
• reliability
• understandability