Igcse Accounting 0452 draft theoretical

IGCSE Accounting OL – V 0.5 By Mohamed Abdou Etman –

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Introduction : Explain the reasons why businesses send statements of accounts to customers To notify the customer of the amount outstanding at the end of the month. To provide the customer with a summary of the month’s transactions. Introduction : Explain the reasons for maintaining a general journal Opening entries, purchases/sale of fixed asset on credit, correction of errors, writing off bad debt, year end adjustments, items which cannot be entered in other books of prime entry, or acceptable alternative. Introduction : Reason for using a purchases journal • fewer transactions recorded in the purchases account • bookkeeping can be spread between several people • can be analysed into products/areas etc.





• to identify credit purchases (can be useful for comparison purposes) • provides information for the purchases ledger control account. Introduction : Reasons for using a sales journal • fewer transactions recorded in the sales account • bookkeeping can be spread between several people • can be analysed into products/areas etc. • to identify credit sales (can be useful for comparison purposes) • provides information for the sales ledger control account. Introduction : Explain the reasons of the narrative in the journal entry A narrative explains the reasons for the entries which are to be made in the ledger. Introduction : The purposes of





preparing trial balance Used to prepare final accounts. Can trace or identify errors. Other sensible comment. Introduction :The purposes of preparing trial balance To prepare final account To check arithmetical accuracy of books To check accounts balance To locate errors Introduction : What is meant by trial balance List of balances in the general (nominal) ledger at a given date Introduction : Explain the purposes/advantages of maintaining a petty cash book To remove small cash payments from the main cash book. To reduce the number of entries in the main cash book and the expenses in





the ledger. To allow the chief cashier to delegate some of the work. Introduction : Explain what is meant by the imprest system The petty cashier starts each period with the same amount of money . At the end of the period the chief cashier will make up the cash remaining so that it is equal to the imprest amount. Introduction : What is the advantage of the imprest system for petty cash The chief cashier is aware of exactly how much is spent in each period. The cash remaining and the total of the vouchers received should always be equal to the imprest amount. Introduction : Give two reasons why it is important for a business to prepare final accounts or financial statements each year.





to calculate profit or loss, to know what assets and liabilities the business has, to compare with previous years, to compare with other businesses, to calculate accounting ratios, for use by other parties e.g. bank Introduction : Explain what is meant by the imprest system in relation to a petty cash book. At the end of the period the chief cashier will make up the cash remaining so that it is equal to the imprest amount

Introduction : Explain two advantages of maintaining accounting records using the double entry method. Less risk of errors

Less risk of fraud Easier to refer to previous transactions Financial position can be ascertained Easier to prepare financial statements





Easier to make business decisions Easier to calculate accounting ratios Introduction : Explain what is meant by capital expenditure Capital expenditure is money spent on acquiring, improving and installing fixed assets. Introduction : Explain what is meant by revenue expenditure Revenue expenditure is money spent on running a business on a day-to-day basis. Introduction : Explain what is meant by capital receipts Capital receipts are amounts received which do not form part of the day-to-day trading activities. Introduction : Explain what is meant by revenue receipts Revenue receipts are amounts received in the day-to-day trading





activities from revenue and other items of income. Introduction : Explain what is meant by debit note

A debit note may be issued by a customer to request a reduction in an invoice Introduction : Explain what is meant by credit note A credit note may be issued by a supplier to reduce an invoice for returns/overcharge Introduction : State the reasons why a business uses a purchases journal. Reason for using a purchases journal: • fewer transactions recorded in the purchases account • bookkeeping can be spread between several people • can be analysed into products/areas etc.





• to identify credit purchases (can be useful for comparison purposes) • provides information for the purchases ledger control account. Introduction : The advantage of dividing the ledger into three sections , sales ledger , purchases ledger and nominal ledger Work can be shared between several people. Easier for reference as same type of accounts are kept together. Easier to introduce checking procedures. Introduction : The reasons for the trade discount Customer is in same type of trade for bulk purchases To enable customer to make profit. Introduction : In connection with journal entries, explain what is meant by the term ‘narrative’.





A narrative is a brief explanation of why the entry is being made. Introduction : Explain why a narrative should be shown as part of a journal entry. A narrative is necessary because of the great variety of transactions which are recorded in the journal, so the reason for each entry can be understood in the future. Introduction : What is meant by working capital Current assets less current liabilities , it is the amount of capital needed for day to day running of business Introduction : Explain why businesses should record the financial transactions regularly To ensure no transactions are forgotten/overlooked (not relying on human memory) To enable profit to be calculated To enable the financial position of the





business to be ascertained Introduction : Explain the criteria that should be used when recording the accounting information Information must be - capable of being independently verified free from bias free from significant errors prepared with suitable caution being applied to any judgments and estimates which are necessary Introduction : How do the working capital is calculated Current assets less current liabilities Introduction : Explain what is meant by the contra entry in the cashbook A contra entry is where a transfer is made from an account of a person/business in the sales ledger to an account of the same person/business in the purchases





ledger. This may occur when a person/business is both a customer and a supplier





Ratios : Why do we need to calculate the rate of stock turnover Stock replacement Comparisons Identifying causes of fluctuations Remedial/corrective action Ratios : The Net Profit as percentage of capital employed is important to: - measures overall profitability of the business in relation to resources used - indicates adequacy of return on owner’s investment - enables comparisons to be made, e.g. against other investments, earlier years, similar firms - assists decision-making, e.g. in production, cost of borrowing or other acceptable points Ratios : Suggest two reasons for the increase in the percentage of gross profit to sales.





Selling goods at higher prices

Reducing the rate of trade discount Passing on increased costs to customers Buying goods at cheaper prices Ratios : State one reason why each of the following business people are interested in Susan Morgan’s financial statements. (i) Bank manager

Prospects of any requested loan/overdraft being repaid when due Prospects of any interest on loan/overdraft being paid when due Security available to cover any loan/overdraft (ii) Employee Ability of business to continue operating Prospects for jobs and wages (iii) Supplier of goods on credit Assessment of liquidity position Identifying how long it takes the business to pay creditors





Identifying future prospects of the business Establishing a credit limit (iv) Potential purchaser of the business Profitability of the business Value of the assets of the business Ratios : Suggest one other way in which Queresh may increase his profit for future years.

Increase revenue, increase prices, reduce cost of sales, reduce (control) expenses. Ratios : Limitations of financial statements : Non-financial aspects Accounts only record information which can be expressed in monetary terms. This means that there are many important factors which influence the performance of a business which will not appear in the





financial statements (final accounts) e.g. quality of management, goodwill, skill of workforce etc. Historical cost Transactions are always recorded at the actual cost. This means that it can be difficult to compare transactions which have taken place at different times because of the effect of inflation.

Ratios : Suggest three factors which a company should consider when comparing her business to other businesses. Should compare with a business of approximately the same size Should compare with a business of the same type (sole trader) Should compare with business selling same type of goods Should compare with a business with





approximately the same amount of capital The accounts may be for one year only which will not show trends and may not be a typical year The financial year may end at a different point in the trading cycle The businesses may operate different accounting policies There may be differences which affect profitability and the items on a balance sheet The financial statements do not show non-monetary items It is not always possible to obtain all the information about a business in order to make a true comparison Ratios : List three business people (excluding the owner) who would be interested in Business final accounts . Bank manager Assessment of prospects of any requested loan/overdraft repaid when





due Assessment of prospects of any interest on loan/overdraft being paid when due Assessment of the security available to cover any loan/overdraft Lenders Assessment of prospects of any requested loan when due Assessment of prospects of any interest on loan being paid when due Assessment of the security available to cover any loan Creditor for goods Assessment of the liquidity position Identifying how long the business takes to pay creditors Identifying future prospects of the business Identifying what credit limit is reasonable Managers (if any) Assessment of past performance Basis of future planning Control the activities of the business





Identifying areas where corrective action is required Ratios : State two disadvantages to a company of having insufficient working capital. May have problems paying debts as they fall due May not be able to take advantage of cash discounts Cannot make the most of opportunities as they occur Difficulties in obtaining further supplies Ratios : Percentage of gross profit to sales This measures the success in selling goods The ratio shows the gross profit earned per $100 of sales The ratio can be compared with previous years The ratio can be compared against other businesses





Ratios : Percentage of profit for the year (net profit) to sales This measures the overall success of the business The ratio shows the net profit earned per $100 of sales The ratio can be compared with previous years The ratio can be compared against other businesses The ratio indicates how well the business controls its expenses Ratios : Return on capital employed (ROCE) The ratio shows the profit earned per $100 employed in the business The ratio can be compared with previous years The ratio can be compared against other businesses The ratio measures the profitability of the investment in the business The ratio shows how efficiently the capital is being employed





Ratios : The disadvantages to a business of having insufficient working capital. May have problems paying debts as they fall due May not be able to take advantage of cash discounts Cannot make the most of opportunities as they occur Difficulties in obtaining further supplies Ratios : The ways in which a business could increase its working capital. Injection of more capital Long-term loans Sale of surplus fixed assets Reduce drawings Ratios : How to encourage Trade Recievable (Debtors) to pay amounts due on them Send statement of account Offer cash discount – not trade





discount Refuse further business Refer to debt collectors Charge interest Offer future incentives Ratios : Ways to improve working capital • injection of more capital • more long-term loans • sale of surplus fixed assets • reduction of drawing Ratios : Reasons why should not compare with other business • different type of business (sole trader/partnership) • different type of trade (manufacturing/foodstore) • one run by managers, one run by owner • one in its first year of trading, one in its fifth year • different type of sales (cash/credit) • different types of expenses (rent/cost





of maintaining premises) • different type of fixed assets (machinery/premises, fixtures). Ratios : What are the disadvantages of having insufficient working capital Cannot meet liabilities when they are due. May experience difficulties in obtaining further supplies on credit. Cannot take advantage of cash discounts. Cannot take advantage of business opportunities as they arise. Ratios : State and explain two limitations Lindum should be aware of when he is studying the set of final accounts Ebor and Olicana have provided. Reflect what has happened in the past – significant events may have taken place since the end of the financial year.





Transactions are recorded at their actual cost – inflation may affect these figures. Accounts only include information that can be expressed in monetary terms – and so many factors will not appear in the accounting statements. The accounts provided are for one year only – accounts for previous years would allow meaningful ratios to be prepared. Ratios : Ways to decrease Bank overdraft Overdraft may be reduced by collecting debtors, reducing stock, delaying payment of creditors, delaying drawings, increasing capital Ratios : Ways of improving the collection period for debtors

Offer cash discount for prompt payment Charge interest on overdue accounts Improve credit control





Refuse further supplies on credit until any outstanding balance is paid Ratios : Why do we use the quick ratio Stock is not regarded as a liquid asset – a buyer has to be found and then the money collected. Some stock may prove to be unsalable. The quick ratio shows whether the business would have any surplus liquid funds if all the current liabilities were paid immediately from the liquid assets. Ratios : How do we calculate the quick ratio Current assets less stock/current liabilities Ratios : State the reasons why the businesses need sufficient working capital A business needs sufficient working





capital for • the day-to-day running of the business • to pay expenses, liabilities, etc. as they fall due Ratios : Suggest two ways in which Solomon could reduce his loss or increase his profit. Increase sales buy more cheaply increase prices increase gross profit reduce expenses increase net profit Ratios : Suggest two ways in which Solomon could increase the credit balance on his capital account. Introduce more capital into the business, reduce drawings reduce net loss make or increase income or net profit take in a partner with capital





Ratios : The reasons for calculating the current ratio Shows whether the business has sufficient liquid assets to meet its current liabilities Ratios : The reasons why the businesses may attempt to pay earlier to creditors May be able to take advantage of cash discounts Improve the relationship with suppliers Ratios : Gross profit margin may fall due to Selling goods at lower prices Allowing higher rates of trade discount for bulk buying Not passing on increased costs to customers Buying more expensive goods Ratios : How Can we increase net profit margin





Reduce expenses e.g. reduce staffing levels, reduce advertising etc. Increase gross profit e.g. increase profit margin, increase selling prices etc. Increase other income e.g. rent out part of premises, earn more discount etc. Ratios : How to improve the collection period for debtors Offer cash discount for prompt payment Charge interest on overdue accounts Improve credit control Refuse further supplies on credit until outstanding balance paid Invoice discount and debt factoring Ratios : How to improve the debtors collection period Send statement Offer cash discount (not trade discount) Limit credit (no more credit sales)





Charge interest on overdue amounts Use debt collection methods Ratios : Suggest one way in which Ruth may reduce or avoid such transfers on the future sale of other non-current assets. Select a different rate of depreciation on the reducing balance method, or select a different method of providing for depreciation.

Ratios : Explain the benefits gained by the company if paying earlier to creditors May be able to take advantage of cash discounts Improve the relationship with suppliers Ratios : Possible disadvantage for paying credit suppliers before the due date. The business is deprived of the use of the money earlier than necessary





Ratios : What is meant by gross profit margin when the gross profit is expressed as a percentage of the selling price Ratios : Advantage of paying creditors before due date –

May be able to take advantage of cash discounts Improves the relationship with suppliers Ratios : Disadvantage of paying creditors before due date – The business is deprived of the use of the money earlier than necessary





Concepts : The going concern concept Accounts are prepared on the basis that the business will continue to operate for an indefinite period of time. Concepts : What is meant by the going concern concept Business will continue trading for the foreseeable future. Concepts : What is meant by matching concept Costs should be offset against revenues from the same accounting period Concepts : The error of original entry (revise) Use of incorrect figure in first place, with double entry carried out correctly for wrong amount.





Concepts : what is meant by business entity. The accounting records of a business are maintained from the viewpoint of the business. The business and the owner of the business are regarded as being separate entities. The personal transactions of the owner of the business are not recorded in the accounting records of the business. Concepts : Explain the meaning of the accounting term “reliability”. Information provided in financial statements must be reliable It must be capable of being depended upon as a faithful representation of the underlying transactions and events it represents It must be capable of being independently verified It must be free from bias It must be free from significant errors





It must be prepared with suitable caution being applied to any judgments and estimates Concepts : Matching concept To ensure that the amount of sales for the year which are unlikely to be paid are treated as an expense of that particular year. Concepts : Prudence concept To ensure that the profit is not overstated and that the asset of debtors in the Balance Sheet shows a more realistic amount. Concepts : Explain the money measurement concept Accounts only record information which can be expressed in monetary terms. This means that many factors which affect the performance of a business will not appear in the accounting records.





Concepts :Cost is the actual purchase price plus any additional costs incurred in bringing the inventory (stock) to its present condition and position

Net realisable value is the estimated receipts from the sale of the inventory (stock), less any costs of completing or selling the goods. Inventory (stock) should always be valued at the lowest of cost and net realisable value. This is an application of the principle of prudence. Over-valuing inventory (stock) causes both the profit for the year and the current assets to be incorrect. Concepts : The going concern concept Business will continue indefinitely (for the foreseeable future). Concepts : Explain how the principle of business entity has





been applied in recording this Transaction Goods for personal use have been removed from those for re-sale. This will reduce the amount owed by the business to the owner.





Partnership : Advantages of partnership Additional finance Additional knowledge and skills Sharing of responsibilities Sharing of risks Discussions can take place before taking decisions Partnership : Disadvantages of partnership Profits have to be shared Decisions have to be recognised by all partners/disagreements may arise Decisions may take longer to put into effect One partner’s actions are binding on all partners All partners are responsible for the debts of the business Partnership : Why do businesses prepare profit and loss appropriation accounts in





partnerships To show how the profit for the year is shared between the partners

Partnership : State one advantage of maintaining both a capital account and a current account for each partner. Easier to see the profit retained by each partner Easier to calculate the interest on capital

Partnership : Advantage of maintaining separate current accounts Easier to see profit retained by each partner Easier to calculate interest on capital (if allowed) Partnership : Name one other financial matter which might also be included in this document. Capital to be contributed, drawings





Profit sharing ratio Interest on capital Interest on drawings

Partnership : Why do businesses impose interest on drawings Interest on drawings discourages large or early cash withdrawals thus it could improve cash/working capital position, it also produces additional residual income/profits for division between partners

Partnership : Explain the reasons by which businesses charge interest on partners drawings To discourage the partners from making excessive drawings. Partnership : The Advantages of joining a partnership Will have a share in the profits Can take part in decision-making Prospects for the future





Partnership : The disadvantages of joining a partnership Will be personally liable for the debts of the firm Will have greater responsibility Will probably have to invest capital





Bad debts : Explain two ways in which Abdul Anwar could reduce the risk of bad debts. Obtain reference from new credit customers Fix a credit limit for each customer Issue invoices and statements promptly Follow up overdue accounts promptly Supply goods on a cash basis only Refuse further supplies until outstanding account is paid Bad debts : Reason for providing a provision for doubtful debts – Ensures that the profits are not overstated (prudence) Ensures that the debtors are shown in the Balance Sheet at a more realistic amount (prudence) Application of the matching principle as the amount of sales unlikely to be





paid for are treated as an expense of that particular year Bad debts : What is the provisions for doubtful debts A provision for doubtful debts is [an estimate of] the amount which a business may lose because of bad debts. Bad debts : Explain how Moloch will be able to decide in the future if the provision for doubtful debts is ade-quate

By comparing the amount of actual bad debts with the provision made.

Bad debts : Explain two ways in which Abdul Anwar could reduce the risk of bad debts. Obtain reference from new credit customers Fix a credit limit for each customer Issue invoices and statements promptly





Follow up overdue accounts promptly Supply goods on a cash basis only Refuse further supplies until outstanding account is paid Bad debts : Reason for providing a provision for doubtful debts – Ensures that the profits are not overstated (prudence) Ensures that the debtors are shown in the Balance Sheet at a more realistic amount (prudence) Application of the matching principle as the amount of sales unlikely to be paid for are treated as an expense of that particular year Bad debts : What is the provisions for doubtful debts A provision for doubtful debts is [an estimate of] the amount which a business may lose because of bad





debts. Bad debts : Explain how Moloch will be able to decide in the future if the provision for doubtful debts is ade-quate

By comparing the amount of actual bad debts with the provision made.

Bad debts : Why do we create a provisions for doubtful accounts Creating a provision for doubtful debts ensures that the profit is not overstated and the trade receivables are not overstated in the balance sheet Bad debts : Suggest two ways in which Tarek El Mekawi could reduce the risk of bad debts. Obtain references from new credit customers

Fix a credit limit for each customer Issue invoices and statements promptly Follow up overdue accounts promptly





Supply goods on a cash basis only Refuse further supplies until outstanding balance is paid Bad debts : How the organizations could reduce the risk of bad debts. Obtain references from new credit customers Fix a credit limit for each customer Issue invoices and statements promptly Follow up overdue accounts promptly Supply goods on a cash basis only Refuse further supplies until outstanding account is paid Bad debts : Reasons for providing a provision for doubtful debts Ensures that the profits are not overstated (prudence) Ensures that the debtors are shown in the Balance Sheet at a more realistic amount (prudence) Application of the matching principle as the amount of sales unlikely to be





paid for are treated as an expense of that particular year Bad debts : State one reason why Miriam Rajah should maintain a provision for doubtful debts. Ensures that profits are not overstated (prudence) Ensures that debtors are shown in balance sheet at more realistic amount (prudence) Application of matching principle as the amount of sales unlikely to be paid for are treated as an expense of that particular year Bad debts : What is meant by bad debts A bad debt is an amount owing to the business which the debtor is unable or unwilling to pay. Bad debts : What is meant by provisions for doubtful debts A provision for doubtful debts is an





estimate (not %) of the amount likely to be lost through bad debts.





Control : Advantages of control accounts: • provides instant totals of debtors and creditors • prove the arithmetical accuracy of the ledgers they control • enable the Balance Sheet to be prepared quickly • may be used to identify ledgers in which there are errors when a trial balance does not agree • provides a summary of the transactions relating to debtors/creditors for the period • provides an internal check on the appropriate ledgers – may reduce fraud Control : Reasons for a debit balance brought down in the creditor accounts Overpayment of amount due Cash discount not deducted before





payment made Returned goods after payment of amount due Payment made to creditor in advance Control : Why do businesses prepares purchases ledger control accout A purchases ledger control account acts as a check on the purchases ledger. If there is an error in the purchases ledger it will not be revealed by a control account prepared from the individual accounts in that ledger. Control : Explain the reason for having a credit balance in sales ledger control account Overpayment of amount due by a debtor Cash discount not deducted by debtor before payment made Goods returned by debtor after payment of amount due Payment made in advance by debtor





Control : The reasons for a credit balance in a debtor account Overpayment of amount due by debtor Cash discount not deducted by debtor before payment made Goods returned by debtor after payment of amount due Payment made in advance by debtor Control : Advantages of preparing a sales ledger control account Provides instant total of debtors Proves the arithmetical accuracy of sales ledger Enables the Balance Sheet to be prepared quickly Provides a summary of the transactions relating to debtors for the period Provides an internal check on the sales ledger – may reduce fraud Control : Advantages of preparing a purchases ledger control account Provides instant total of creditors





Proves the arithmetical accuracy of purchases ledger Enables the Balance Sheet to be prepared quickly Provides a summary of the transactions relating to creditors for the period Provides an internal check on the Purchases ledger – may reduce fraud Control : The purpose of preparing control accounts Assist in the location of errors Provide instant totals of debtors/creditors Proves the arithmetical accuracy of sales/purchases ledgers Enable the Balance Sheet to be prepared quickly Provide a summary of the transactions relating to debtors/creditors Provide an internal check on sales/purchases ledgers – may reduce fraud





Clubs - Ways to raise funds: • increase subscriptions • fund raising activities • obtain long-term loans • loan/mortgage Clubs : what is the income and expenditure account The Income and Expenditure Account is equivalent to a Profit and Loss Account of a trading organization,It is used to calculate the annual surplus or deficit. Clubs : Reasons why bank balance does not equal surplus/deficit – R & P A/c shows total money paid and received I & E A/c adjusts figures for accruals and prepayments I & E A/c includes non-monetary items such as depreciation I & E A/c includes only revenue items Clubs : What is meant by the





accumulated fund The accumulated fund is equivalent to the capital of a trading organisation, the difference between the assets and the liabilities. The annual surpluses (less any deficits) accumulate within a non-trading organisation to form the accumulated fund.





Limited : What are the main features of preference shares Preference shares: Receive a fixed rate of dividend. The dividend is paid before the ordinary share dividend. Preference shares do not usually carry voting rights. Capital is returned before the ordinary share capital in a winding up. Limited : What are the main features of the ordinary shares Ordinary shares: They are also known as equity shares. The dividend is paid after the preference share dividend. The dividend may vary according to profits. Ordinary shares usually carry voting rights. Ordinary shares are the last to be repaid in a winding up. Limited : What is meant by limited





liability The liability of the members (shareholders) of a company for the debts of the company is limited to the amount they agree to pay the company for their shares. Limited : What are the differences between preference shares and debentures Preference shares receive a fixed rate of dividend: debentures receive a fixed rate of interest. Preference shareholders are members of the company: debenture holders are not members of the company. Preference shares are part of the capital of the company: debentures are long term loans. Preference shareholders are repaid after the debenture holders in the event of the company being wound up. Limited : What is meant by Authorised share capital





Authorised capital is the maximum amount of share capital a company is allowed to issue Limited : What is meant by Called up capital Called-up capital is the total amount of capital a company has requested from its shareholders. Limited : Ordinary shares Dividends may vary Usually carry voting rights Dividend is paid after preference share dividend Are the last to be repaid in a winding up Limited : Explain the main features of debentures Debentures are long-term loans Debentures holders are not members of the company Debentures receive a fixed rate of interest





Debenture holders are repaid before shareholders in a winding-up Limited : Preference shares Receive a fixed rate of dividend Do not usually carry voting rights Dividend is paid before ordinary share dividend Capital is returned before ordinary share capital in a winding up Limited : What is meant by Paid up Capital Paid-up capital is that part of the called up capital for which a company has actually received the money from its shareholders. Limited : Instead of operating Aziz Stores as a partnership, Omar Aziz has suggested that they should form a limited company. Explain one reason why this may be of personal benefit to Omar and Fatima Aziz.





The members of a limited liability company have limited liability and their personal assets are not at risk is the business fails. Depreciation : Explain why Queresh should include the depreciation charge in his income statement.

Depreciation should be included as a charge to the income statement so that the cost of the non-current asset is spread over the life of the asset or he is following the matching principle and the profit is not overstated or he is fol-lowing the prudence principle.

Depreciation : The reasons for preparing depreciation To apply the prudence principle To avoid overstating the assets To avoid overstating the profit for the year Depreciation : Why do we calculate the depreciation for the fixed assets To spread the cost of fixed assets over





their useful lives. To apply the accruals principle – recognising the time difference between payment for the fixed asset and its loss in value. To provide a more realistic view of the fixed assets. To record the loss in value of fixed assets – the part of the cost of the fixed asset consumed during the period of use. The annual depreciation charge represents the cost of using the fixed asset to earn revenue. Depreciation : Explain the reasons why businesses may charge for depreciation To avoid overstating the profit To avoid overstating the assets To apply the principle of prudence Depreciation : Explain the reasons for which the company charges depreciation on fixed assets





To measure the use of a fixed asset over the period of its useful life Depreciation : Explain what is meant by depreciation Depreciation is an estimate of the loss in value of a non-current (fixed) asset over its expected working life. Depreciation : The main reasons for depreciation Physical deterioration Economic reasons Passage of time Depletion





Errors : The compensating error Two errors, being incorrect entries of equal amounts which cancel each other out Errors : Explain the reasons for why both sides of the trial balance may fail to agree Error of addition in trial balance or ledger account, single entry, entering item on wrong side entering transaction twice on same side of ledger, entering different credit and debit amounts. Errors : What is meant by error of omission A transaction completely omitted from the books e.g. cash sales not recorded Errors : When suspense account is required When a trial balance fails to balance





Errors : Why do businesses prepares suspense accounts To make the totals of the trial balance agree and so that draft final accounts may be prepared.





Reconciliation : Explain what is meant by a bank statement The bank statement is a copy of the account of the business as it appears in the books of the bank. This is from the viewpoint of the bank – the business depositing money is a creditor of the bank. The bank account in the cash book is prepared from the viewpoint of the business – the bank is a debtor of the business which has deposited the money. Reconciliation : What are the items included in the bank reconciliation statements that will be added to the balance per bank statements Outstanding lodgements, uncredited or unpresented cheques Items found in updating cash book, e.g. direct debits, bank interest, charges, dishonoured cheques, bank





or cash book errors Reconciliation : The purpose of preparing bank reconciliation statement (i) A statement prepared by the trader to explain why the balance on the bank column in the cash book differs from the balance on the bank statement (ii) Cheques received by the trader and recorded in the cash book but which have not yet been recorded as being received by the bank (iii) Cheques paid by the trader and recorded in the cash book but which have not yet been recorded as being paid by the bank Reconciliation : What is meant by a bank statement The bank statement is a copy of the account of the business as it appears in the books of the bank. This is from the viewpoint of the bank – the business depositing money





is a creditor of the bank, The bank account in the cash book is prepared from the viewpoint of the business – the bank is a debtor of the business which has deposited the money. Reconciliation : The purposes of preparing bank reconciliation statements Ascertain the true bank balance at a certain date Assist in detecting fraud and embezzlement Identify any “stale” cheques Demonstrate that any differences between the cash book balance and that on the statement are due to genuine reasons





Manufacturing : The Purpose of preparing the manufacturing account To calculate how much it has cost the business to manufacture the goods produced in the financial year. Adjustments : Explain what is meant by Accrued/Payable expenses Another payable (accrued expense) is an amount due and payable [in respect of expenses incurred in an accounting period] which remains unpaid at the end of that period. Adjustments : What is meant by an accrued expense An expense incurred in the accounting period but unpaid at the end of the period.





Incomplete : What is meant by markup when the gross profit is expressed as a percentage of the cost price

Igcse Accounting 0452 draft theoretical

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