IGCSE Accounting
Benefits of a petty cash book
-More experience to juniors -Less entries in the main cash book
Book keeping
A process of detailed recording of all the financial transactions of a business.
Realisation
A profit should not be recorded before it is earned, i.e. Profit is only recorded when the legal title of goods or services passes on from the seller to the buyer (who is obliged to pay for them). The confirmation of the buying of goods doesn't really mean anything as the legal title of the goods hasn't yet changed from the seller to the buyer (No transfer of goods)
Going concern
A profit should not be recorded before it is earned, i.e. Profit is only recorded when the legal title of goods or services passes on from the seller to the buyer (who is obliged to pay for them). The confirmation of the buying of goods doesn't really mean anything as the legal title of the goods hasn't yet changed from the seller to the buyer (No transfer of goods).
Imprest System
A way to account for petty cash by maintaining a constant balance in the petty cash account. At any time, cash plus petty cash tickets must total the amount allocated to the petty cash fund.
Accounting
Accounting uses the bookkeeping records to prepare financial statements at regular intervals.
Work in progress
Add opening WIP and deduct closing WIP after factory overheads
Difference in definition
Adjustments in profit from year to year and firm to firm vary, thus one should ensure only an apples to apples comparison is made
Contents of Partnership Agreement
Amt of capital invested by each partner If partners are gonna be paid salaries, if so what amt How are profits/losses going to be shared If interest on drawings is to be placed, and what amt
A trial balance will not balance if
An error of addition within the TB An error of addition in the ledger A/C s Double entry figures differ Only single entry made instead of a double entry Both entries made in the same side of the ledger
Explain the accounting equation
An increase in liabilities results in an increase in assets, for example if you borrow cash, cash in hand increases but so does liability
Accounting equation
Assets = Liabilities + Capital
Accounting Equation
Assets = Liabilities + Owner's Equity
Analysis of acid test/quick ratio
Availability of liquid assets to pay for immediate liabilities Benchmark- 1:1 if <1: means that business does not have enough liquid assets to pay for immediate liabilities if >1: Too much cash is being tied up in the debtors a/c Poor management of liquid assets (too high balance of bank current a/c)
Bank Reconciliation Statement format
Balance on bank statement Add items on Dr side of cash book not on the statement Less items Cr side of cash book not on statement Updated cash book balance
Books of prime entry
Cash book Petty cash book Sales journal Purchases journal Sales return journal Purchases returns journals General journals
Importance of valuation of inventory
Closing inventory becomes opening inventory of next year if incorrect value placed it will affect gp and profit for the year for both the current and following financial year Wrong assets valuation
Accounting policies
Comparability Relevance Reliability Understandability
Historic cost as a limitation of accounting statements
Comparing transactions at different times can be difficult because of the effect of inflation
Why do government departments use accounting statement?
Compiling business statistics and/or checking if correct tax is paid
Entries to be made on the date of disposal
Cr asset a/c and do corresponding dr to disposal a/c with OG value, to remove asset Dr provision for depreciation a/c and do corresponding cr to disposal a/c of total dep. of NCA Cr disposal a/c and corresponding dr in either cash or debtor a/c (if balance was dr, sale was profit) Depending on profit/loss, balance disposal a/c and post to income statement
recording depreciation using the revaluation method
Cr asset a/c with value of asset at EOY and carry it down as a debit balance Transfer difference to income statement
Problems of inter-firm comparison
Different accounting policies (eg different methods of depreciation) May apply different operating policies, which will affect profit for the year and sfp Non monetary info (eg staff expertise) do not appear on records, but is important Not all info can be found on financial statements (eg NCA, avg inventory), these can also be used for comparison Trends in patterns of other business may not be observable, as financial statements may not be available for those years Not all accounting years are typical Year end dates vary, so influenced factors may be different (low inventories of air conditioners in the winter) Records based on historic cost and not altered with inflation
Prime cost
Direct Materials + Direct Labor + direct expenses
Duality
Every (financial) transaction has 2 aspects- a giving and a receiving Applied in the double entry system of bookkeeping
Direct Costs
Expenses related to the product being manufactured; royalty, the cost of hiring a special piece of equipment to do a certain job
Gross Profit Margin
Gross profit/sales revenue x 100
Limitations of the accounting statement
Historic costs Different definition Money measurement
Reasons for preparing a bank reconciliation statement
Identify unpresented cheque Identify amounts not credited To correct cash book
How are accounts recorded in the trial balance
If the debit side of an A/C has greater value than the credit side, then the difference is recorded as a debit balance If the credit side of an A/C has greater value than the debit side, then the difference is recorded as a credit balance
Ways to improve current ratio and quick ratio
Injection of more capital by owner Reduce drawings Sale of surplus non current assets Obtain long term loans
Why could a cheque be dishonored
No signature, Amount In words & in numbers don't match or there is an insufficient balance in the debtor's A/C
Preference share capital
No voting rights Fixed rate of dividend Paid before ordinary shares Temporary capital, as the amt has to be repaid after agreed period Capital is paid before ordinary shares when company is being liquidated
Loan from a partner
Not part of capital When obtained: -Dr bank a/c -Cr partner a/c When loan paid: -Cr bank a/c -Dr partner a/c
Money measurement
Only info. Which can be expressed in terms of money can be recorded in the accounting records Several aspects of a business such as staff expertise, the morale of the workforce, the release of a competitor product etc Will not be shown in the accounting records as its value cannot be given a concrete monetary value
Users of accounting statements
Owners Managers Trade payables Banks Investors Club members Government Tax authorities
Which errors do not affect the trial balance?
POOR CC
imprest system
Petty cash expenditure is made from the float/imprest amt The imprest amount stays constant (but can be altered) After the balancing of the petty cash book, the chief cashier will restore the imprest This enables the chief cashier to know exactly how much petty cash has been spent
POOR CC
Principle Omission Original entry Reversal Commission Compensating
ROCE
Profit for the year (before interest)/Capital employed x 100
Reasons for maintaining a provision for doubtful debts
Prudence (try to anticipate amount which will be lost, ensuring profit is not overstated and TR are not overstated) Matching (amt of sales for which the business is unlikely to be paid is regarded as an expense of the year in which those sales were made)
Explain the relationship between gross profit and profit for the year to the rate of inventory turnover
Rate of inventory turnover can affect the business If business activity slows down both gross profit and profit of the year will be adversely affected
Analysis of net profit margin and ways to improve
Shows profit earned for every $100 Higher margin means more profitable business Can be improved by: -Increasing gp margin -Controlling expenses -Increasing other incomes (like rent) Can decrease by: -A decrease in gp -An increase in expenses -A decrease in other income -A change in the type of expense (commision paid)
Analysis of ROCE and ways to improve
Shows profit earned for every $100 invested The higher the return, the more efficiently the capital is being employed in the business Ways to improve: -Increase net profit by reducing operating expenses -Reduce capital employed by paying long term loans
Current a/c section of a partnership
Start with capital a/c balance balance b/d on current a/c (if Dr then -) add interest on capital, salary, profit share, int. drawings less drawings
Significance of the difference between the gross margin and profit margin
The difference between the gross margin and the profit margin is the percentage of the expenses to the revenue. This indicates the ability if the business to control its expenses
Revenue receipt
The income from the running of the business, such as commission received, rent received, sales, etc
Business entity
The owner of a business is regarded as being completely separate from the business and vice versa The personal assets, spending, liabilities etc. Of the owner do not appear in the accounting records of the business and vice versa. Every (financial) transaction is recorded from the view point of the business
debit note
This is a document sent by the buyer to request a reduction in the invoice received Not entered in accounting records
Why do creditors use accounting information?
To determine the credit limit allowed and the length of credit allowed To know the liquidity position and the trade payables collection period
Why do club members use accounting statements?
To know if the club can continue to operate
Why do potential buyers use accounting statements?
To know the profitability of the business and market value of the assets
Why do banks use accounting statements?
To know whether loans or overdrafts can be granted, to see if the business has enough funds to pay up
reasons for depreciation
Wear and tear Economic reasons (has become obsolete) Passage of time (lease) Depletion
recovery of debts written off
a debt written off may be recovered when a credit customer pays some, or all, of the amount owed, after the amount was written off
statement of account
a document issued by the sellers of goods on credit to summarise the transactions for the month Never entered in the accounting records
invoice
a document issued by the supplier of goods showing details, quanties and value of goods supplied
Comparability
a financial report can only be effectively compared with reports for other periods of the same or similar businesses if similarities and differences can be identified The differences in policies must be identified to make valid comparisons
sales journal
a list of the names of businesses to which credit sales have been made, the value of the goods sold and the date on which the sales were made
Trade discount
a reduction in the price of goods: the rate often increases according to quantities of goods purchased Shown in the invoice
credit note
a source document issued by a seller of goods on credit to notify a reduction in an invoice previously issued
use of suspense account
a temporary measure to balance the trial balance
receipt
a written acknowledgment of money received and acts as a proof of payment
cheque
a written order to pay a stated sum of money to the person or business named on the order
Money measurement as a limitation of accounting statements
a/c only record info which can be expressed in monetary terms means that important factors that help the business succeed do not appear
credit transfer, standing orders and direct debits
amounts paid directly into the bank
irrecoverable debt
an amount owing to a business which will not be paid by the credit customer application of prudence
provision for doubtful debts
an estimate of the amount which a business will lose in a financial year because of irrecoverable debts balance c/d in a/c is deducted from trade receivables in SFP added as other income in IS if reduced from previous years
current accounts
anything to which the partner becomes entitled with throughout the year is entered here shows profit share, salary,
Which errors affect the trial balance?
arithmetical errors
What do managers use accounting statements for?
asses past performance plan for future take remedial action
Purpose of control accounts
assist in locating errors when the trial balance fails to balance proof of arithmetical accuracy draft financial statements can be made quickly help reduce fraud
Difference between bookkeeping and accounting
book keeping is the process of recording financial transactions whereas accounting involves the preparation of financial summaries and statements from bookkeeping
Importance of a partnership agreement
can avoid misunderstandings and arguments in the future
Uncredited amounts/cheques
cash/cheques that have been paid into the bank and entered on the Dr side of cash book, but do not appear in statement usually takes a few days before money paid enters customer's a/c
Unpresented cheques
cheques that have been paid by business and entered on the Cr side of cash book, but do not appear on statement Payee has not cashed the check
Use of financial statements
compare progress with previous years or other businesses helps owner monitor business helpsn plan for the future
Error of commision
correct amt wrong a/c (C Green instead of C Greene)
Error of complete reversal
correct amts but each item is shown on the wrong side of the account
Revenue expenditure
cost incurred by running the business on a day-to-day basis (repair to a NCA)
at the end of the month (sales journal entry)
credit sales a/c in nominal ledger w sales journal total narrative: transfer to sales account
Accounting rule for a nominal accounts
debit all expenses credit all incomes (sales a/c, purchase a/c)
drawings entry
debit drawings credit other account
Accounting rule for a personal a/c
debit the receiver, credit the giver
Accounting rule for an impersonal accounting
debit what comes in credit what comes out (vehicle a/c, cash a/c)
recovery of debts written off ledger entry (when amount is received)
dr cash book cr customer a/c dr customer a/c cr debts recovered a/c
Why do customers use accounting statement?
ensuring the continuity of the supply of goods
when goods are sold on credit (sales journal entry)
enter date, customer name and invoice number dr customer's a/c in sales ledger with invoice total
Net Realisable Value (NRV)
estimated receipt from the sale of stock/inventory NRV>cost
income statement of a limited liability company
everything same debenture interest dividend on redeemable preference shares interim dividend on ordinary shares
Relevance
financial information is relevant only if it affects the business decisions, as they are the base of further decisions that will be taken Information in financial statements can be used to alter or reconfirm future expectations, set future goals etc and thus must be relevant
Reliability
financial information is reliable only if it can be depended upon to represent actual events and is free from error and bias Financial statements must be capable of being independently verifiable and free from any significant errors Whenever judgments or estimates are being made, suitable caution must be taken
Understandability
financial reports must be capable of being understood by the users of that report (who are assumed to have basic accounting knowledge). No information should be omitted from the financial statements because it is thought to be too difficult to understand
Partner's salary
goes in appropriation a/c and sfp
Capital receipt
income from sales of NCA/other than normal trading activities Profit/loss on NCA should be included in income statement
Source documents
invoices credit note cheque counterfoil paying-in slip receipt bank statement
Trial balance
is a statement of ledger balances on a particular date
Depreciation
is an estimate of the loss in value of s NCA over its expected working life
Why is the cash book a book of prime entry and a ledger
it follows the rule of double entry and is the first place where transactions are recorded
Debentures
long term loan which is tradable on stock market receive a fixed rate of interest can be pledged against company assets
Inventory Valuation
lower of cost and NRV application of prudence
Accounting principles
matching business entity consistency duality going concern historic cost materiality money measurement prudence realisation
Analysis of current ratio
measures the ability of a business to settle their long term debts using their current assets Benchmark- 2:1 If <2: -the business will have problems paying debts when they fall due -difficult in buying more goods on credit If >2: -Too much capital is tied up in cash/debtors/stock (poor management) -business losing out on opportunity cost of this cash (like cash discounts and seizing opportunities when they arise)
role of accounting
monitor financial progress Help in budgeting
What do owners use statements for?
monitor performance and progress Gauge profitability Prospective shareholders will look at investment ratios
Profit margin
net profit/sales x 100
Statement of changes in equity
no dividend on preference shares include interim ordinary shares
Capital employed
owners equity + long term borrowing
Appropriation account
part of year-end financial statements shows division of profit and loss between partners
Cost of production
prime cost + factory overheads
Advantage of using various books of prime entry
provide a backup to info contained in ledger accounts. Useful when records are missing detail removed from ledger so easier to read bookkeeping can be split
Capital expenditure
purchase of NCA; its cost is not recorded in ledger but in NCA a/c Includes the cost of NCA, legal costs incurred for its purchase, carriage and installation fees matching principle Disposal is regarded as capital receipt
The use of books of prime entry
record goods sold on credit, goods purchased on credit, sales returns and purchases returns
Effect on profit of recording capital expenditure
recording capital expenditure as revenue expenditure will understate the profit and understate the NCA (thus giving effect to the accounting equation) and vice versa
Assets
represent anything owned or owed to by the business
Analysis of gross profit margin and ways to improve
shows GP earned for every $100 of sales higher the gp, the more profitable the business Can increase margin by: -Buy cheaper supplies -Increase selling price -Increase no. of product lines Can decrease margin by: -Increasing rate of trade discount -Selling goods at cheaper prices -Not passing on increased costs to customers
Statement of financial position
shows the assets and liabilities of a business on a certain date
Owner's equity
the amount the business owes to its owner
double entry system
the process of making a debit entry and a credit entry for each transaction
How to show that a cheque has been dishonored
the reverse entry of that has to be made when the cheque was deposited & the debtor or payee will have to be informed that the amount is unpaid.
Liability
things/resources that a business owes
What is the purpose of measuring business profit and loss?
to check if the owner is
Why do employees and trade unions use accounting statements?
to know if the business can continue to operate, thus providing jobs, paying adequate wages and possibly contributing to pension schemes
purpose of a statement of account
to remind buyers of any due amount to make sure both parties have the same amounts due
Why do other lenders use accounting statements?
to see if repayment can be made
Why might you want to know cost of production?
to set prices to compare the cost of manufacturing with the cost of buying the goods in
Equity
total funds provided by the shareholders of the company
Profit equals
total revenue - total expenses
Trade payables turnover (days)
trade payables/credit purchases x 365
Trade receivables turnover (days)
trade receivables/credit sales x 365
Capital accounts (partnerships)
used to record permanent increases and decreases in capital having both makes it easier to calculate interest on capital
Uses of the Trial Balance
useful in preparing financial statements help find arithmetical errors
Ordinary share capital
voting rights receive a varying rate of dividend dividend is paid after preference share permanent as it is not paid back last to be repaid in the event of closure
Error of original entry
when original entry was incorrect, but double entry for wrong figure is correct
Error of omission
when the transaction is completely omitted from the books
compensating errors
where errors cancel each other out
Contra entry
withdrawal of cash/deposition of cash
Error of principle
wrong class of account
