FUNDAMENTALS OF ACCOUNTS

Book-keeping & Accounting (Cambridge (CIE) IGCSE

Accounting)
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Written by: Donna Simpson

Reviewed by: Dan Finlay

Updated on 12 June 2024

Book-keeping
What is book-keeping?

 Book-keeping is the process of keeping detailed records of financial

transactions
 Book-keeping is done by book-keepers
 They record the day-to-day transactions of the business
o The information is obtained from business documents
 Such as bank statements, receipts, invoices, cheques, etc
o The book-keeper makes the records using a system called double entry
book-keeping

Every business, no matter how small, must keep a record of every transaction
Case Study

A small business owner’s day-to-day activities usually involve managing their business
and carrying out the role of a book-keeper. As a book-keeper, the owner’s role would
involve the following tasks.

Collecting business
Recording data Posting data
documents
Including invoices, credit The documents collected will be recorded in relevant The data posted to the books
notes, cheques, receipts books of prime entry such as the sales journal, entry will then be posted to r
etc purchases journal and cash book ledger accounts
Accounting
What is accounting?

 Accounting uses the records of the book-keepers to prepare the financial

statements of the business
 Accountants provide information to owners and managers which is used to
o monitor progress of the business
o help with decision making about how to improve profit or reduce loss
 Accounting is the function carried out by accountants
o Accountants are primarily responsible for managing, updating, correcting,
and reporting the business' accounts

What is the difference between accounting and book-keeping?

 Accounting and book-keeping have distinct functions

 They support businesses at different stages of the financial cycle
o Book-keeping involves keeping records of the day-to-day financial data
of the business
o Accounting involves using the information recorded by the book-keeper
to provide information at regular intervals

Case Study

Barbara runs a burger bar called Barbara's Burger Bar. She hires Jack as an
accountant for her business. Jack runs his own accounting firm, 4J Accounting, with
three other partners: James, Jasmin and Junaid.

Jack visits Barbara's place of business and explains to her the types of financial
transactions he would like her to record as well as the rules and procedures for Barbara
to follow in recording these transactions.

Barbara carries out all of the book-keeping of the business.

After Barbara completes the book-keeping, Jack takes the records and puts them to
use. He transforms the records Barbara has collected in a way that can be used for
decision making. He creates financial statements which can be used to see where the
business is spending its money, where it is making money, and the financial health of
the burger bar. Jack will also conduct tax preparations and tax planning.
Examiner Tips and Tricks

The purpose of accounting and book-keeping will usually appear on Paper 1 as a

multiple-choice question. The options might all sound relevant but read the wording
carefully to identify the purpose of the role, not the advantages of accounting or book-
keeping.

Worked Example

Which statement is correct?

A Accounting is the process of entering details of transactions into the books of prime entry
B Accounting involves providing financial information for decision making
C Book-keeping involves creating the financial statements
D Book-keeping is only carried out once a year
Answer

 A is incorrect as book-keepers enter details of transactions into the books of

prime entry.
 C is incorrect as accountants create the financial statements, although book-
keepers might provide the information.
 D is incorrect as book-keeping is performed day-to-day.

The correct answer is B.

Profit or Loss & Financial
Position (Cambridge (CIE)
IGCSE Accounting)
Revision Note
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Written by: Donna Simpson

Reviewed by: Dan Finlay

Updated on 1 November 2024

Profit or Loss
How does a business measure profit or loss?

 An accountant prepares an income statement for a business to show if the

business is making a profit or a loss
 The profit or loss is the difference between the total income and the total
expenses
o A profit is made if the income is higher than the expenses
o A loss is made if the income is lower than the expenses

Why is it important to measure profit or loss?

 The information provided by financial statements shows the owner what has
happened to the business during a certain period of time
o This is usually a year
 It can be used to monitor the progress of the business
o If a profit is made, the owner is making money on their investment
o If a loss is made, the owner might have to make changes to the business
Assets, Liabilities & Capital
How does a business measure its financial position?

 An accountant prepares a statement of financial position to show:

o Assets
o Liabilities
o Capital

What are assets?

 Assets are things owned by the business

o Premises, inventory, motor vehicles, money in the bank, etc
 Assets also include amounts that are owed to the business by other people or
businesses
o Money owed to the business by credit customers
 These are called trade receivables
 Current assets are short-term assets that the business intends
to liquidate within a year
o Trade receivables, inventory, money in the bank, etc
 Non-current assets are long-term assets that the business intends to own for
more than a year and they are not easily liquated
o Premises, motor vehicles, etc

What are liabilities?

 Liabilities are the amounts that the business owes to other people or
businesses
o Bank loans, bank overdraft, etc
o Money owed to credit suppliers by the business
 These are called trade payables
 Current liabilities are short-term liabilities which the business intends to
pay within a year
o Trade payables, bank overdraft, etc
 Non-current liabilities are long-term liabilities which the business intends
to take longer than a year to repay
o Bank loans, etc

What is working capital?

 Working capital is the amount of money a business would have left if

it converted all of its current assets into cash and paid off its current liabilities
o Working capital = current assets - current liabilities
 Working capital can be thought of as the capital available for its day-to-day
trading activities
What is capital or owner’s equity?

 Capital is any resource provided by the owner to start up the

business or keep it going
o This is sometimes referred to as owner’s equity
 Capital is often in the form of money
o However, it may also consist of other assets
 Such as buildings, furniture, equipment, motor vehicles, goods, etc
 The owner invests capital into their business
o Technically the business owes these assets to the owner
 If a business makes a profit then its capital increases
 If a business makes a loss then its capital decreases

What are drawings?

 Drawings refer to when an owner takes assets from the business for personal
use
o This could be money, goods, motor vehicles, etc
 If the owner takes drawings from the business then the capital decreases
The Accounting
Equation (Cambridge (CIE)
IGCSE Accounting)
Revision Note
Download

Written by: Donna Simpson

Reviewed by: Dan Finlay

Updated on 3 June 2024

Exam board:
Cambridge (CIE)
The Accounting Equation
What is the formula for the accounting equation?

 The formula for the accounting equation is: Assets = Liabilities + Capital
 The equation states that the assets of a business are always equal to
the liabilities and capital of the business
 You can rearrange the equation so that you can find one of the three values if
the other two are known
o Liabilities = Assets - Capital
o Capital = Assets - Liabilities

The
accounting equation
Examiner Tips and Tricks

You may be given examples of assets and liabilities and asked to calculate the missing
figure for capital.

Worked Example

The assets and liabilities are listed below for a business.

 Premises
Equipment
Inventory
Trade receivables
Trade payables
Bank overdraft
Calculate the capital of the business.

Answer

Firstly, calculate the total assets:

Premises
Equipment
Inventory
Trade receivables
Total assets
Secondly, calculate the total liabilities:

Trade payables
Bank overdraft
Total liabilities
Finally, apply the formula Capital = Assets - Liabilities

$21 500 - $5 700 = $15 800

Why is the accounting equation important?

 The accounting equation may be shown in the form of a statement of financial

position
 The statement of financial position will be affected every time the business
makes changes to the assets, liabilities and capital
 Every single transaction will result in at least two changes which balance out
o Both sides of the equation could increase by the same amount
o Both sides of the equation could decrease by the same amount
o Both sides of the equation could stay the same

Case Study

Effects on liabilities or
Transaction Effects on assets
capital
A credit customer, Peter, pays the amount owed to Hannah Assets increase by $1 120 No change in liabilities or
 The money in the bank
increases

by cheque for $1 120 Assets decrease by $1 120 capital

The amount owed by Peter

decreases

Overall no change to assets

Liabilities decrease by
Assets decrease by $4 200
$4 200
Hannah pays the amount owed to a credit supplier, Rizwan,
by cheque for $4 200 The money in the bank
The amount owed to Rizwan
decreases
decreases
Assets increase by $5 500 Liabilities increase by $5 500
Hannah buys additional fixtures and fittings for $5 500 on
credit from FixFit Ltd The value of Hannah's assets The amount owed to FixFit
increases Ltd increases
Assets decrease by $500 Capital decreases by $500
Hannah takes goods worth $500 from the business for
personal use The amount of inventory Hannah takes drawings from
decreases the business
Assets increase by $1 000 Capital increases by $1 000
Hannah transfers $1 000 from her personal bank account into
the business bank account The money in the bank Hannah invests $1 000 into
increases the business
Assets increase by $50

The amount of cash

increases
Capital increases by $20
Hannah makes $20 profit by selling goods which cost $30 for Assets decrease by $30
$50 cash
A profit has been made
The amount of inventory
decreases

Overall assets increase by

$20
Hannah is the owner of a business. Some of her transactions are listed below. After
each transaction, the accounting equation still balances.

Worked Example
A business pays one of its trade payables by cheque. Identify the effects on the
business' assets and liabilities.

Effect on assets Effect on liabilities

A Reduce bank Reduce trade payables
B Increase bank Increase trade payables
C Reduce trade payables Reduce bank
D Increase trade payables Increase bank
Answer

Money in the bank is an asset and trade payables is a liability. A payment made by
cheque would reduce the money in the bank, therefore reducing the asset. Trade
payable is a liability. The business debt would be reduced when payment is made.

The answer is A.

SOURCES AND RECORDING OF DATA

Introduction to Business Documents (Cambridge (CIE)

IGCSE Accounting)
Revision Note
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Written by: Dan Finlay
Reviewed by: Lucy Kirkham

Updated on 26 March 2024

Exam board:
Cambridge (CIE)
Purpose of Business Documents
What are business documents?

 Business documents are used to keep records of all transactions

 They are used as sources of information
o The amounts are then entered into the books of prime entry
o They can be used to check potential errors

What business documents do I need to know?

 Invoices
 Debit notes
 Credit notes
 Statements of account
 Cheques
 Cheque counterfoils
 Receipts
 Paying-in slips
 Bank statements
 Petty cash vouchers

Trade Discount
What is a trade discount?

 A trade discount is a reduction in the selling price of goods or services

 Trade discount might be offered
o If the customer buys in bulk
o If the customer is a loyal and regular customer
 Trade discount is applied before a transaction takes place
 The discounted amount is the value that is entered into the books of prime
entry
o The value of the trade discount is not entered into the books of prime
entry
o Trade discount is not part of the double entry system
Cash Discount
What is a cash discount?

 A cash discount is offered to credit customers for early repayment of an

invoice
 The supplier will state the deadline for payment in order to claim the cash
discount
 The amount before the cash discount is entered into the books of prime entry
 When the customer pays early and claims the cash discount
o The amount of cash discount is recorded in the books of prime entry

Business Documents for Credit

Transactions (Cambridge (CIE)
IGCSE Accounting)
Revision Note
Download
Written by: Dan Finlay
Reviewed by: Lucy Kirkham

Updated on 22 May 2024

Exam board:
Cambridge (CIE)
Invoices
What is an invoice?

 An invoice is used as a record of a credit sale or credit purchase

 The supplier issues an invoice to the credit customer
o The customer might refer to this as a purchases invoice
o The supplier will keep a copy
 They might refer to it as a sales invoice
 An entry is made in the books of prime entry when an invoice is issued or
received for goods or services
o The customer enters the value in the purchases journal
o The supplier enters the value in the sales journal
 If the invoice is for a non-current asset then the book of original entry is
the journal

What information is contained in an invoice?

 The date of the transaction

 The details of the supplier
o Name and address
 The details of the customer
o Name and address
 The details of the goods or services
o The quantity
o The price of each item
 Trade discount
o This is deducted before the total amount is stated
 The total amount owed
 Terms for eligibility of cash discount
 Date payment is required by
o It might also state any interest or charges that will be applied after this
date
Example of an invoice
Examiner Tips and Tricks

You might be required to complete an invoice. This will usually involve the calculation of
percentages of an amount.

Worked Example

Complete the invoice below.

From:

T Payable Invoice

123 Supplier Street Invoice Number: 3141576

Newcastle, NE1 2BC Invoice Date: 21/3/24

Bill to:
 T Receivable

321 Customer Close

London, EC1 2XY

Unit Price Amount
QTY Description
$ $
50 Accounting flashcards 4 …
… Mark schemes 20 …
Subtotal 500
5% trade discount …
Total …
Answer

 Amount for accounting flashcards

o 50 ✕ $4 = $200
 Amount for mark schemes
o $500 - $200 = $300
 Quantity for mark schemes
o $300 ÷ $20 = 15
 Discount
o 5% ✕ $500 = $25
 Total
o $500 - $25 = $475

From:

T Payable

123 Supplier Street

Newcastle, NE1 2BC

Invoice

Invoice Number: 314156

Bill to:
Invoice Date: 14/3/24
T Receivable

321 Customer Close

London, EC1 2XY

Unit Price Amount
QTY Description
$ $
50 Accounting Flashcards 4 200
15 Mark schemes 20 300
Subtotal 500
5% trade discount 25
Total 475
Debit Notes & Credit Notes
What is a debit note?

 A credit customer issues a debit note to a supplier to request a reduction in

the balance of an invoice
 The customer could ask for a reduction if
o The goods are damaged or faulty
o They were sent the wrong items
o Goods are missing from their order
 No entries are recorded in the books of prime entry at this stage
o This is because the supplier has not yet authorised the reduction
o This is done when the customer receives a credit note from the supplier

What information is contained in a debit note?

 The date of the request

 The details of the supplier
o Name and address
 The details of the customer
o Name and address
 The reason for the request for a reduction
o Details of the goods that are being returned
o Details of the goods that were missing
 The total reduction that is being requested

What is a credit note?

 A supplier issues a credit note to a credit customer when the balance on an

invoice is reduced
o The customer uses the credit note received to record the return
 It will be matched and filed with the corresponding invoice and debit
note
o The supplier keeps a copy of the credit note issued to record the return
 It will be matched and filed with the corresponding invoice
 An entry is made in the books of prime entry when a credit note is issued or
received
o The customer enters the value in the purchases returns journal
o The supplier enters the value in the sales returns journal
 What information is contained in a credit note?

 The date of the reduction

 The details of the supplier
o Name and address
 The details of the customer
o Name and address
 The reason for the reduction
o Details of the goods that are being returned
o Details of the goods that were missing
 The total reduction that is being given

Worked Example

Samir sells pet food. Hashim is a credit customer. Three events take place during a
week between Samir and Hashim. Complete the table to identify the business document
that is issued and the name of the person who issues the document.

Business Person who issues the

Event
document document
Hashim buys pet food from Samir on credit
Hashim tells Samir that he wants to return some pet food
Samir receives the returned goods and reduces the balance on
Hashim’s account
Answer

Business Person who issues the

Event
document document
Hashim buys pet food from Samir on credit Invoice Samir
Hashim tells Samir that he wants to return some pet food Debit note Hashim
Samir receives the returned goods and reduces the balance on
Credit note Samir
Hashim’s account
Statements of Account
What is a statement of account?

 A statement of account is used to show all transactions between a credit

customer and a supplier within a given time frame
 A statement of account is issued on a regular basis by the supplier
 No entries are recorded in the books of prime entry when a statement of
account is issued or received
o This is because no new transactions have taken place
o The customer can check the balance on the statement with the balance
in their purchases ledger account
  There is usually a balance column which shows the balance after each
transaction
 The statement of account is written from the point of view of the supplier
o Transactions which increase the customer’s balance will be labelled as
a debit
o Transactions which decrease the customer’s balance will be labelled as
a credit

What information is contained in a statement of account?

 The date that the statement is issued

 The details of the supplier
o Name and address
 The details of the customer
o Name and address
 The opening balance
 The date and amount of any purchases by the customer
o These will correspond to invoices that were issued
 The date and amount of any returns by the customer
o These will correspond to credit notes that were issued
 Payments made by the customer
 Cash discounts received by the customer
 The closing balance

Worked Example

An incomplete statement of account is shown below for the month of April 2024.

From:

T Payable

123 Supplier Street

Newcastle, NE1 2BC Statement of Account

Statement Number: 123456

To: Statement Date: 30/4/24

T Receivable

321 Customer Close

London, EC1 2XY

Date Reference Debit Credit Balance
 $
$ $
2024

Apr 1 Opening balance 450

Apr 15 Payment 200 250
Apr 15 Discount 20 230
Apr 23 Goods purchased 300 …
Apr 28 Goods returned 180 …
Complete the table below to show the business document that T Receivable would use
as a record of each transaction and calculate the balance immediately after the
transaction took place.

Transaction Business document Balance

Apr 23 Goods purchased
Apr 28 Goods returned

Answer

Transaction Business document Balance

230 + 300
Apr 23 Goods purchased Sales invoice
530
530 - 180
Apr 28 Goods returned Credit note issued
350