IGCSE Accounting — From Source Document to Interpreted Statements

Accounting's first exam skill is tracing a transaction through the books without losing it. A SOURCE DOCUMENT (invoice, credit note, receipt, cheque stub, payslip) is the evidence, and its details determine which book of prime entry the item goes to: the sales day book and purchases day book for credit invoices, the sales and purchases returns books for credit notes, the cash book for receipts and payments, and the general journal for anything the others cannot hold — opening entries, the correction of an error, and accruals, prepayments, depreciation and disposals. From the day books the TOTAL is posted to the sales ledger and purchases ledger control accounts; from the cash book to cash at bank and to the individual accounts; and each personal account is posted individually. The trial balance then lists every ledger balance, and its agreement proves only that debits equal credits — an error of principle, an omission, a compensating error, or a posting to the correct side of the wrong account leaves it in balance, which is why the question 'would the trial balance still agree?' is asked whenever an error is described. Gross and net profit follow one path, and the path is the mark: revenue (before VAT) less returns inwards less cost of sales (opening inventory plus purchases less returns outwards plus carriage inwards, less closing inventory) is gross profit; less expenses, with depreciation, accruals and prepayments adjusted, plus other income and less irrecoverable debts and the change in the allowance for receivables, is net profit. The statement of financial position then lists non-current assets at cost less accumulated depreciation, current assets, and the funding side — capital plus net profit less drawings, or share capital and reserves for a company — with gross profit and net profit shown as an appropriation in a company format. Control accounts are the internal check: the sales ledger control account's debit side is opened by debtors, increased by credit sales, and reduced by cash received, returns and discounts allowed, and the balance it leaves must equal the sum of the individual debtors' balances, which is what makes it worth preparing. The remaining topics are treatments, and each has a one-sentence reason. DEPRECIATION is the allocation of a depreciable amount over a useful life, so the straight-line method charges cost less residual value evenly, while the reducing-balance method applies a percentage to the carrying amount and matches a higher charge to the years of higher usefulness; both change the asset's book value, neither provides for its replacement, and the annual charge also reduces net profit. VALUATION OF INVENTORY is at the lower of cost and net realisable value, which is why a damaged or obsolete line is written down even though it was paid for. BAD AND DOUBTFUL DEBTS: an irrecoverable debt is written off, a doubtful one is provided for with an allowance carried into the next year, and the movement in the allowance — not the closing balance — is the expense. ACCRUALS AND PREPAYMENTS enforce the matching principle: an expense incurred belongs to the period whether or not it is paid, so an unpaid electricity bill is accrued and a prepaid insurance premium is carried forward. DISPOSALS remove cost and accumulated depreciation, with the difference between proceeds and carrying amount as a profit or loss on disposal in the income statement. Finally, the accounting equation, the incomplete-records question (using the mark-up and margin to recover sales or cost from whichever one figure is given), the distinction between capital and revenue expenditure, the treatment of partners' current and capital accounts with interest on drawings and on capital, and the analysis of the statements — all of which is one set of arithmetic.