1 The fundamentals of accounting

1.1 The purpose of accounting

• understand and explain the difference between book-keeping and accounting
• state the purposes of measuring business profit and loss
• explain the role of accounting in providing information for monitoring progress and decision-
making.

1.2 The accounting equation

• explain the meaning of assets, liabilities and owner’s equity
• explain and apply the accounting equation.

2 Sources and recording of data

2.1 The double entry system of book-keeping
• outline the double entry system of book-keeping
• process accounting data using the double entry system
• prepare ledger accounts
• post transactions to the ledger accounts
• balance ledger accounts as required and make transfers to financial statements
• interpret ledger accounts and their balances
• recognise the division of the ledger into the sales ledger, the purchases ledger and the
nominal (general) ledger.
Candidates do not need to explain or use folio columns.

Candidates do not need to explain or use three-column running-balance accounts.

2.2 Business documents

• recognise and understand the following business documents: invoice, debit note, credit note,
statement of account, cheque, receipt
• complete pro-forma business documents
• understand the use of business documents as sources of information: invoice, credit note,
cheque counterfoil, paying-in slip, receipt, bank statement.

2.3 Books of prime entry

• explain the advantage of using various books of prime entry
• explain the use of and process accounting data in the books of prime entry: cash book, petty
cash book, sales journal, purchases journal, sales returns journal, purchases returns journal and
the general journal
• post the ledger entries from the books of prime entry
• distinguish between and account for trade discount and cash discounts
• explain the dual function of the cash book as a book of prime entry and as a ledger account
for bank and cash
• explain the use of and record payments and receipts made by bank transfers and other
electronic means
• explain and apply the imprest system of petty cash.

3 Verification of accounting records

3.1 The trial balance
• understand that a trial balance is a statement of ledger balances on a particular date
• outline the uses and limitations of a trial balance
• prepare a trial balance from a given list of balances and amend a trial balance which contains
errors
• identify and explain those errors which do not affect the trial balance: commission,
compensating, complete reversal, omission, original entry, principle.

3.2 Correction of errors

• correct errors by means of journal entries
• explain the use of a suspense account as a temporary measure to balance the trial balance
• correct errors by means of suspense accounts
• adjust a profit or loss for an accounting period after the correction of errors
• understand the effect of correction of errors on a statement of financial position.
3.3 Bank reconciliation
• understand the use and purpose of a bank statement
• update the cash book for bank charges, bank interest paid and received, correction of errors,
credit transfers, direct debits, dividends, and standing orders
• understand the purpose of and prepare a bank reconciliation statement to include bank
errors, uncredited deposits and unpresented cheques.

3.4 Control accounts

• understand the purposes of purchases ledger and sales ledger control accounts
• identify the books of prime entry as sources of information for the control account entries
• prepare purchases ledger and sales ledger control accounts to include credit purchases and
sales, receipts and payments, cash discounts, returns, irrecoverable debts, dishonoured
cheques, interest on overdue accounts, contra entries, refunds, opening and closing balances
(debit and credit within each account).
Candidates do not need to prepare control accounts which are part of the double entry system.
Candidates do not need to reconcile control account balances with the sales and purchases
ledger balances.

4 Accounting procedures
4.1 Capital and revenue expenditure and receipts
• distinguish between and account for capital expenditure and revenue expenditure
• distinguish between and account for capital receipts and revenue receipts
• calculate and comment on the effect on profit of incorrect treatment
• calculate and comment on the effect on asset valuations of incorrect treatment.

4.2 Accounting for depreciation and disposal of non-current

assets
• define depreciation
• explain the reasons for accounting for depreciation
• name and describe the straight-line, reducing balance and revaluation methods of
depreciation
• prepare ledger accounts and journal entries for the provision of depreciation
• prepare ledger accounts and journal entries to record the sale of non-current assets, including
the use of disposal accounts.

4.3 Other payables and other receivables

• recognise the importance of matching costs and revenues
• prepare ledger accounts and journal entries to record accrued and prepaid expenses
• prepare ledger accounts and journal entries to record accrued and prepaid incomes.

4.4 Irrecoverable debts and provision for doubtful debts

• understand the meaning of irrecoverable debts and recovery of debts written off
• prepare ledger accounts and journal entries to record irrecoverable debts
• prepare ledger accounts and journal entries to record recovery of debts written off
• explain the reasons for maintaining a provision for doubtful debts
• prepare ledger accounts and journal entries to record the creation of, and adjustments to, a
provision for doubtful debts.

4.5 Valuation of inventory

• understand the basis of the valuation of inventory at the lower of cost and net realisable
value
• prepare simple inventory valuation statements
• recognise the importance of valuation of inventory and the effect of an incorrect valuation of
inventory on gross profit, profit for the year, equity and asset valuation.

5 Preparation of financial statements

5.1 Sole traders
• explain the advantages and disadvantages of operating as a sole trader
• explain the importance of preparing income statements and statements of financial position
• explain the difference between a trading business and a service business
• prepare income statements for trading businesses and for service businesses
• understand that statements of financial position record assets and liabilities on a specified
date
• recognise and define the content of a statement of financial position: non-current assets,
intangible assets, current assets, current liabilities, non-current liabilities and capital
• understand the inter-relationship of items in a statement of financial position
• prepare statements of financial position for trading businesses and service businesses
• make adjustments for provision for depreciation using the straight line, reducing balance and
revaluation methods
• make adjustments for accrued and prepaid expenses and accrued and prepaid income
• make adjustments for irrecoverable debts and provisions for doubtful debts
• make adjustments for goods taken by the owner for own use.

5.2 Partnerships
• explain the advantages and disadvantages of forming a partnership
• outline the importance and contents of a partnership agreement
• explain the purpose of an appropriation account
• prepare income statements, appropriation accounts and statements of financial position
• record interest on partners’ loans, interest on capital, interest on drawings, partners’ salaries
and the division of the balance of profit or loss
• make adjustments to financial statements as detailed in 5.1 (sole traders)
• explain the uses of and differences between capital and current accounts
• draw up partners’ capital and current accounts in ledger account form and as part of a
statement of financial position.
Candidates will not be required to answer questions on the admission/departure of a partner,
the dissolution of a partnership or changes to a profit sharing ratio.

5.3 Limited companies

• explain the advantages and disadvantages of operating as a limited company
• understand the meaning of the term limited liability
• understand the meaning of the term equity
• understand the capital structure of a limited company comprising preference share capital,
ordinary share capital, general reserve and retained earnings
• understand and distinguish between issued, called-up and paid-up share capital
• understand and distinguish between share capital (preference shares and ordinary shares)
and loan capital (debentures)
• prepare income statements, statements of changes in equity and statements of financial
position
• make adjustments to financial statements as detailed in 5.1 (sole traders).
Candidates will not be expected to understand cumulative and non-cumulative preference
shares, rights issues, share premium or capital redemption reserve. However, candidates should
understand the difference between redeemable and non-redeemable preference shares.

5.4 Clubs and societies

• distinguish between receipts and payments accounts and income and expenditure accounts
• prepare receipts and payments accounts
• prepare accounts for revenue-generating activities, e.g. refreshments, subscriptions
• prepare income and expenditure accounts and statements of financial position
• make adjustments to financial statements as detailed in 5.1 (sole traders)
• define and calculate the accumulated fund.

5.5 Manufacturing accounts

• distinguish between direct and indirect costs
• understand direct material, direct labour, prime cost and factory overheads
• understand and make adjustments for work in progress
• calculate factory cost of production
• prepare manufacturing accounts, income statements and statements of financial position
• make adjustments to financial statements as detailed in 5.1 (sole traders).

5.6 Incomplete records

• explain the disadvantages of not maintaining a full set of accounting records
• prepare opening and closing statements of affairs
• calculate profit or loss for the year from changes in capital over time
• calculate sales, purchases, gross profit, trade receivables and trade payables and other figures
from incomplete information
• prepare income statements and statements of financial position from incomplete records
• make adjustments to financial statements as detailed in 5.1 (sole traders)
• apply the techniques of mark-up, margin and inventory turnover to arrive at missing figures.
Candidates will only be asked questions on incomplete records in relation to sole trader
businesses.

6 Analysis and interpretation

6.1 Calculation and understanding of accounting ratios
Candidates should be able to understand, calculate and explain the importance of the following
accounting ratios:
• Gross margin
• Profit margin
• Return on capital employed (ROCE)
• Current ratio
• Liquid (acid test) ratio
• Rate of inventory turnover (times)
• Trade receivables turnover (days)
• Trade payables turnover (days)

6.2 Interpretation of accounting ratios

• prepare and comment on simple statements showing comparison of results for different
years
• make recommendations and suggestions for improving profitability and working capital
• understand the significance of the difference between the gross margin and the profit margin
as an indicator of a business’s efficiency
• explain the relationship of gross profit and profit for the year to the valuation of inventory,
rate of inventory turnover, revenue, expenses, and equity.
6.3 Inter-firm comparison
• understand the problems of inter-firm comparison
• apply accounting ratios to inter-firm comparison.

6.4 Interested parties

Candidates should be able to explain the uses of accounting information by the following
interested parties for decision-making:
• owners
• managers
• trade payables
• banks
• investors
• club members
• other interested parties such as governments, tax authorities, etc.

6.5 Limitations of accounting statements

Candidates should be able to recognise the limitations of accounting statements due to such
factors as:
• historic cost
• difficulties of definition
• non-financial aspects

7 Accounting principles and policies

7.1 Accounting principles
Candidates should be able to explain and recognise the application of the following accounting
principles:
• matching
• business entity
• consistency
• duality
• going concern
• historic cost
• materiality
• money measurement
• prudence
• realisation

7.2 Accounting policies

Candidates should be able to recognise the influence of international accounting standards and
understand the following objectives in selecting accounting policies:
• comparability
• relevance
• reliability
• understandability