This topic will be the first step in your IGCSE journey (^^)!
Here, you will be introduced to the Basics of Accounting!
Table Of Contents
Basic Accounting includes:
- recording
- analysing
- summarising
- interpreting
- communicating
Purpose of Accounting:
1) Book-keeping
Definition: The process of detailed recording of all the financial transactions of a business.
Double-entry book-keeping is the basis of maintaining detailed accounting records.
2) Accounting
Definition: Uses book-keeping records to prepare financial statements at regular intervals. This can also be used to assist in decision-making.
2 Main Roles in Accounting:
1) Trade Debtor
Definition: An individual or company that owes money to your business. It is also referred to as credit customer.
2) Trade Creditor
Definition: An individual or company whom you owe money to. It is also referred to as credit supplier.
What is an Accounting Period?
It is the division of the life of a business into equal time periods for accounting purposes. It is usually one year. For example: 1 January 2023 – 31 December 2023.
Here are 6 Basic Elements of Accounting!
What are Accounting Elements?
They are the classification of the transactions into types of accounts, i.e. assets, liabilities, owner’s equity, income and expenses.
1. Assets
Definition: Represents anything owed by or owing to the business. (owned by the owner)
Example:
- cash at hand
- cash at bank
- land and building (aka. premises)
- office equipment
- fixtures and fittings (aka. office AC, lights, fans, switches)
- furniture
- closing stock/stock unsold from previous year
- trade receivables/debtors
2. Capital
Definition: Total resources (money) provided by the owner and represents what the business owes the owner.
Example:
- Cash you put in a business’ bank account
- Anything provided for a business by the owner!
3. Liability
Definition: Represent anything owed/borrowed by the business.
Example:
- bank loans
- creditors
- trade payables/creditors
4. Income
Definition: The resources generated from the operation of a business.
Example:
- sales revenue
5. Expense
Definition: The resources used up in the process of operating a business in a given period of time to earn income.
Example:
- rent
- wages
- depreciation of assets
6. Drawings
Definition: The withdrawal of cash, goods or other assets including cash at bank from the business by its owners for his/her own use.
Example:
- owner took $100 cash from business bank account for his own use
The Accounting Equation!
Assets = Capital + Liabilities
From here, we can conclude that the accounting equation shows that assets are always equal to capital plus the liabilities of the business.
The assets represents how resources are used in the business and the liabilities and capital represents where these resources come from.
Here are other accounting equations that can help you out throughout your IGCSE:
Assets = Capital – Drawings + Liabilities
Assets = Capital – Drawings + (Income/Profit) – (Expenses/Loss) + Liabilities
What is the Purpose of Preparing Accounting Records?
Information recorded in the accounting records is used to make financial statements such as Income Statement and Statement Of Financial Position.
- Helps the owner monitor the progress of his/her business
- Allows the calculation of profit/loss
- Allows the owner to know the financial position of the business
- Helps owner plan for future developments of a business/decision-making
How can the Progress of the Business be Measured?
- By comparing the financial statements of one year with those of previous years
- Compare the financial statement of one business with that of other businesses operating in the same industry.
Remember These Useful Key Terms!
What is Financial Performance of a Business?
Definition: It refers to how well a business has performed for a given period of time. It is measured by calculating profit/loss made for the accounting period and preparing Income Statement (learn more in Topic 8!)
What is Financial Position of a Business?
Definition: It shows the claims of owner and non-owners on the assets of a business at a given date. It is usually done by preparing Statement of Financial Position (learn more in Topic 9!)
What are Transactions?
Definition: They are recorded in books of accounts of a business to inform some useful information about the business to the users.
What is Profit?
Definition: excess of total income earned for a time period over total expenses incurred by a business.
*if the business has earned profit, then the owner of the business will receive return on investment. The business will also be having some funds which can be used for expansion of business or to make improvements to business.
What is Loss?
Definition: excess of total expenses incurred by a business over total income earned for a time period
*if the business incurred a loss, the owner will not get any return on his investment and no funds for expansion/improvements, so the business may shut down overtime if this continues.
What is Inventory?
Definition: The goods a business has available for resale.
What is Opening inventory?
Definition: Goods unsold from the previous accounting period which are brought forward to the current accounting period.
What is Closing inventory?
Definition: Goods which are unsold at the end of an accounting period.
What is a Statement of Financial Position?
Definition: It is a financial document that shows the assets and liabilities of a business on a certain date. It is usually prepared at the last day of the business’ financial year. (We will further explore this in topic 9!)
Example: (referenced from: Cambridge IGCSE and O Level Accounting Coursebook)
The Dress Shop
Statement of Financial Position at 4 January 20-7
| Assets | $ | Liabilities | $ |
|---|---|---|---|
| Premises | 15 000 | Capital | 20 000 |
| Inventory | 2 000 | Trade Payable | 3 000 |
| Trade Receivable | 1 000 | ||
| Bank | 5 000 | ||
| ——- 23 000 ——- | ——- 23 000 ——- |
What are Trade Receivables?
Definition: It represents the amount owed to the business by its credit customers (debtors).
What is a Trade Payables?
Definition: It represents the amount the business owes to the credit suppliers of goods (creditors).
What are the 2 main Financial Statements prepared by businesses?
Definition: Income Statement and Statement of Financial Position.
Who are the Internal Users of Financial Statements?
Definition: owner, manager, employees.
Who are the External Users of Financial Statements?
Definition: banks, government, investors.
[Exam Tip!]
Keep in mind that when writing an IGCSE exam, you should avoid using short forms like SOFP or PNL! No scores will be given for your answers!
Other Short Forms You Should Avoid Using During An Exam:
| Short Form | Full Form |
|---|---|
| SOFP/BS | Statement of financial position/Balance Sheet |
| BRS | Bank Reconciliation Statement |
| PNL | Profit and Loss a/c |
| IS | Income Statement |
| Dep. | Depreciation |
| MCB | Main Cashbook |
| PCB | Petty Cashbook |
| TB | Trial Balance |
| SPOG | Selling price of goods |
| COS | Cost of Sales |
| P | Purchases |
Acceptable Short Forms:
| Short Form | Full Form |
|---|---|
| A/C | Account |
| b/d | Brought Down |
| c/d | Carried Down |
| C | Contra- only used in ledgers. Not structured answers in exams. |
Exam Style Questions
Referenced from: Cambridge IGCSE and O Level Accounting Coursebook
1. Which task is performed by a book-keeper?
a) analyzing the trading results
b) entering the transactions in the ledger
c) preparing year-end financial statements
d) providing information for decision-making
2. A trader provided the following information:
| Details | $ |
|---|---|
| Premises | 180 000 |
| Inventory | 23 420 |
| Trade Payables | 26 180 |
| Trade Receivables | 21 710 |
| Office fixtures and fittings | 32 600 |
| Loan from bank | 80 000 |
| Cash at bank | 2 550 |
| Motor vehicles | 15 900 |
a) Calculate the value of assets.
b) Calculate the value of liabilities.
c) Use the accounting equation to calculate the trader’s capital.
3. What is a statement of financial position?
a) a calculation of the amount owed to the owner of the business
b) a list of assets and liabilities of a business on a certain date
c) a list of everything owned by and owed to a business
d) a summary of money paid to and received by a business
4. A business had $9 420 in its bank account. The following transactions took place:
| Details | $ |
|---|---|
| Bought goods on credit | 250 |
| Sold goods on credit | 1100 |
| Repaid a loan by cheque | 5000 |
How much was there in the bank after these transactions?
a) $3 570
b) $4 420
c) $4 670
d) $5 270
5. Complete the following table to show the effect of each of the following transactions. The first one has been completed as an example.
a. Bought a motor vehicle and paid by cheque
b. Bought goods on credit from a credit supplier
c. Received a cheque from a credit customer
d. Sold goods on credit
e. Paid off a loan in cash
| No. | Effect on assets | $ | Effect on liabilities | $ |
|---|---|---|---|---|
| a | Motor vehicles Bank | Increase Decrease | No effect | |
| b | ||||
| c | ||||
| d | ||||
| e |
6. The Statement of Financial Position of Bharwani Traders on 31 October 20-4 is shown below.
Bharwani Traders
Statement of Financial Position at 31 October 20-4
| Assets | $ | Liabilities | $ |
|---|---|---|---|
| Machinery | 19 000 | Capital | 35 000 |
| Motor vehicles | 6 000 | Trade Payables | 8 000 |
| Inventory | 4 900 | ||
| Trade Receivables | 3 000 | ||
| Bank | 10 100 | ||
| ——- 43 000 ——- | ——- 43 000 ——- |
On 1 November 20-4 the following transactions took place:
- a cheque for $3 000 was paid to a credit supplier
- a credit customer paid $500 in cash
- a loan for $8 000 which was paid into the bank was received from Lenders Limited
- a cheque for $7 000 was paid for an additional machine
Prepare the Statement of Financial Position of Bharwani Traders on 1 November 20-4 after the above transactions have taken place.
Answer Key!
1. B
2. a) Assets: 180 000 + 23 240 + 32 600 + 2 550 + 15 900 = 254 290
b) Liabilities: 26 180 + 80 000 = 106 180
c) Capital: 254 290 – 106 180 = 148 110
3. B
4. D
5.
| No. | Effect on assets | $ | Effect on liabilities | $ |
|---|---|---|---|---|
| a | Motor vehicles Bank | Increase Decrease | No effect | |
| b | Purchases of Goods | Increase | Trade Payables/Creditors | Increase |
| c | Bank Debtor | Increase Decrease | No effect | |
| d | Trade Receivables/Debtors Sale of Goods | Increase Decrease | No effect | |
| e | Cash in Hand | Decrease | Loan | Decrease |
6.
Bharwani Traders
Statement of Financial Position at 1 November 20-4
| Assets | $ | Liabilities | $ |
|---|---|---|---|
| Machinery (19 000 + 7 000) | 26 000 | Capital | 35 000 |
| Motor vehicles | 6 000 | Loan -> Lenders Ltd | 8 000 |
| Inventory | 4 900 | Trade Payables (8 000 – 3 000) | 5 000 |
| Trade Receivables (3 000 – 500) | 2 500 | ||
| Bank (10 100 – 3 000 + 8 000 – 7 000) | 8 100 | ||
| Cash | 500 | ||
| ——- 48 000 ——- | ——- 48 000 ——- |
Have you read the previous blog on Secret Study Techniques To Help You Ace IGCSE Accounting 2023?
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