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.
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
sales account
several people
etc.
• to identify credit sales (can be useful
for comparison purposes)
• provides information for the sales
ledger control account.
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
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
by capital expenditure
Capital expenditure is money spent on
acquiring, improving and installing
fixed assets.
by revenue expenditure
Revenue expenditure is money spent
on running a business on a day-to-day
basis.
by capital receipts
Capital receipts are amounts received
which do not form part of the day-to-
day trading activities.
by revenue receipts
Revenue receipts are amounts
received in the day-to-day trading

activities from revenue and other items
of income.
by debit note
A debit note may be issued by a
customer to request a reduction in an
invoice
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:
purchases account
several people
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
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
interest on loan/overdraft being paid
when due
Assessment of the security available to
cover any loan/overdraft
Lenders
requested loan when due
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
previous years
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
previous years
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
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 –
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
Obtain reference from new credit
customers
promptly

Bad debts : Reason for providing a
provision for doubtful debts –
amount
(prudence)
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
Obtain references from new credit
customers
promptly

outstanding balance is paid
Bad debts : How the organizations
could reduce the risk of bad debts.
Obtain references from new credit
customers
promptly
Bad debts : Reasons for providing a
provision for doubtful debts
amount (prudence)

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

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
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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Igcse Accounting 0452 draft theoretical