Accounting o'level CIE IGCSE

Bookkeeping

Bookkeeping is the recording of the financial transactions of a business. Accounting uses those bookkeeping records to prepare financial statements.

Why is it necessary to prepare financial statements?

It is necessary to show the financial statements to show the profit and loss of the business and the financial position of the business and it will help in decision making.

Accounting Equation

Assets = Capital + Liability

Balance Sheet

A balance sheet is the statement of the financial position of a business on a certain date.

How should every transaction must be entered?

Every transaction must be entered twice - on the debit side of one account and on the credit side of another account.

Debit entry

Debit entry is made in a account which is receiving the value.

Credit entry

Credit entry is made in a account which is giving the value.

Which have their own ledger account?

Each type of assets, liability, expense and income has its own ledger account.

Drawing

Any value taken from the business by the owner of the business is known as drawings.

At the end of the period, which accounts should be balanced?

At the end of the period, the accounts of assets and liabilities which contain more than one entry should be balanced.

Which entries are recorded in separate accounts?

Entries for purchases and sales, and purchase returns and sales returns are recorded in separate accounts.

What is carriage?

Carriage is the cost of transporting goods.

Trial balance

A trial balance is a list of the purchases on the accounts in the ledger at a certain date.

Why is a trial balance prepared?

Trial balance is prepared to check the arithmetical accuracy of the double entry bookkeeping.

Why does trial balance fails to balance?

If a trial balance fails to balance, it indicates that an error has been made.

Types of error which are not revealed by trial balance.

Error of Principle

Error of Omission

Error of Original Entry

Error of Reversal

Error of Commission

Error of Compensating

In short (POOR CC)

The ledger is usually divided into three specialist areas, which are?

Sales Ledger

Purchase Ledger

Nominal Ledger

How are cash book and bank account usually kept?

Side by side in cash book

Where does Contra Entry appears?

On both side of a cash book

What does the credit balance brought down in the bank column of a cash book indicate?

Bank overdraft

Why is cash discount given?

It is given to encourage customers to pay their accounts within a set time limit.

Where does the totals of discount columns in the cash book transferred to?

Discount accounts in a ledger.

Petty Cash book usage

It is used to record small cash payments (and occasionally small cash receipts)

Imprest System

The imprest system of petty cash means that the petty cashier starts each period with the same amount.

Petty Cash book

Petty cash book is a book of prime entry and also a ledger account.

Where does the total of analysis columns posted at the end of the period?

Appropriate nominal ledger accounts

How are payments to trade creditors posted?

Individually to purchase ledger account of the creditor to whom the payments was made.

Supplier of goods on credit

issues an invoice to the customer.

When will a supplier allow customer a trade discount?

If a business are in the same trade and also buying in bulk.

What can customer do if the goods are returned or there is an overcharge.

A customer may issue a debit note to the supplier asking for a reduction in the invoice.

What does suppliers do to notify the customer of any reduction in the total of invoice?

Issues a credit note

Why does supplier issues a statement of account at the end of each month?

To notify the customer of the amount owning and provide the summary of the account.

If accounts are paid by cheque

It is not necessary to issue a receipt as a proof of payment.

Where should all transactions be entered before they are entered in a ledger?

Book of prime entry.

Sales journal is written up from?

Copies of invoices sent to customers

Sales return journal written up from?

Copies of credit notes sent to customers.

Purchase journal written up from?

invoices received from suppliers

Purchase return journal written up from?

Credit notes received from suppliers

At the end of each month the

total of sales

purchases

return journals

are transferred to?

Sales

Purchases

Return accounts

Difference between selling price and cost price

Gross profit

( is calculated in the trading account section of the income statement)

The difference between gross profit plus other income less expenses

Net Profit

( is calculated in the profit and loss account section of the income statement.)

All items appearing in the income statement are transferred from

the ledger accounts to complete the double entry.

Profit for the year is transferred to

credit of capital account

Loss of the year is transferred to

Debit of the capital account

a business which provides services only prepares

profit and loss account section of the income statement.

Balance Sheet

is a statement of financial position of a business on a certain date.

non current assets

are long term assets. In a balance sheet the most permanent are shown first.

Current assets

are short term assets and their values are constantly changing. In a balance sheet the furthest away from cash are shown first.

Non-current liabilities

are amounts which are not due for repayment within the next 12 months.

Current Liabilities

are amounts which are due for repayment within the next 12 months.

Where does the accounting sets of principal applied to

preparation of accounting statements

Main accounting principles

business entity, duality ,money measurement, realization, consistency, matching , prudence, going concern, materiality, historical cost and accounting period.

Quantity of information contained in financial statements can be measured in terms of four factors

relevance, reliability comparability, understandability,

Why is it important to distinguish between capital and revenue expenditure and also between capital and revenue receipts.

If these terms are treated incorrectly the financial statements will also be inaccurate.

What should be valued at the end of financial year.

Inventory.

( it is always valued at the lower of cost or net realizable value.)

The expenses for an accounting period must be matched against the income of that particular period.

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Accrual

is an amount due in the accounting period which remains unpaid at the end of that period

Prepayment

is an amount that have been paid or received in one accounting period which relates to the future period.

In an income statement an accrued expenses is added to

Total paid

( accrued amount is the current liabilities in the balance sheet)

In a income statement a prepaid expense is deducted from

Total paid

(the prepaid amount is the current assets in the balance sheet)

In an income statement accrued income is added to

Total received

(the accrued amount is the current asset in a balance sheet)

In the income statement income received in advance is deducted from

Total received

(The amount received in advance is a current liability in the balance sheet)

Depreciation

is an estimate of the loss in value of a non current asset over its expected working life. ( is shown as expense in income statement)

The main causes of depreciation

physical deterioration

economic reasons

passage of time and depletion

Three main methods of calculating depreciation

Straight line

Reducing balance

Revaluation

In a balanced sheet the total depreciation to date is deducted from

the cost of the asset

When a non current asset is sold

it is removed from the ledger records by transfer to a disposal of non current asset account.

Bad debt

is a amount owing to a business which will not be paid by the debtor. bad debts are shown as an expense in the income statement.

Bad debt recover

occurs when the debtors pay some, or all, or the debt after it has been written off. Bad debts recovered are added to the gross profit in the income statement.

a provision for doubtful debts

is an estimate of the amount which a business will lose in a financial year because of bad debts. The amount required to create or increase in provision for doubtful debts is shown as an expense in income statement. Any surplus provision is added to the gross profit in the income statement.

Where is provision for doubtful debts deducted from

trade receivables in the balance sheet.

Journal entries

are made to open accounting records, to record the purchase and sale of non current assets, to record non regular transactions, and to correct errors.

Suspense account

it is opened if the trial balance fails to balance. This means that the draft financial statements can be prepared.