🎯 Introduction to Accounting
Accounting is the process of recording, classifying, and summarising financial
transactions to provide information that is useful for decision-making. It is often referred
to as the language of business because it communicates financial information to
stakeholders such as owners, managers, investors, and government agencies.
Accounting is the process of identifying, measuring, and communicating economic
information to permit informed judgements and decisions by users of the information.
🧾 Purpose of Accounting
The main purposes of accounting are:
To keep systematic records of financial transactions.
To calculate profit or loss over a period of time.
To ascertain the financial position of a business.
To provide information to stakeholders for decision-making.
To detect and prevent fraud and errors.
🧮 Users of Accounting Information
Different stakeholders use accounting information for various purposes:
User Purpose
Owners To assess profitability and financial health
of the business.
Managers To make informed operational and
strategic decisions.
Investors To decide whether to invest in the
business.
Lenders To evaluate the ability of the business to
repay loans.
Government To assess tax liabilities and ensure
compliance with regulations.
Employees To evaluate job security and potential for
wage increases.
📊 Types of Accounting
There are two main branches of accounting:
1. Financial Accounting
Focuses on preparing financial statements for external users.
Follows standardised rules (e.g., IGCSE/O Level principles).
2. Management Accounting
Provides internal reports for planning, controlling, and decision-
making.
Not governed by external rules; tailored to business needs.
📒 Accounting Records and Financial Statements
Accounting involves maintaining books of original entry and preparing financial
statements:
Books of Original Entry: Records where transactions are first recorded (e.g.,
cash book, sales journal).
Ledger Accounts: Classified summaries of transactions (e.g., sales ledger,
purchases ledger).
Trial Balance: A list of ledger balances to check arithmetical accuracy.
Financial Statements: Final reports including Income Statement and
Statement of Financial Position.
📈 The Accounting Equation
The accounting equation is the foundation of double-entry bookkeeping:
[ Assets = Capital + Liabilities ]
Assets: Resources owned by the business (e.g., cash, inventory, equipment).
Capital: Owner’s investment in the business.
Liabilities: Amounts owed to external parties (e.g., loans, creditors).
This equation must always remain in balance after every transaction.
🧠 Key Accounting Terms
Transaction: Any event that involves the exchange of money or value.
Double Entry: Every transaction affects at least two accounts.
Debit: Left side of an account; records increases in assets or expenses.
Credit: Right side of an account; records increases in capital, liabilities, or
income.
Balance: The difference between the total debits and credits in an account.
🧪 Test Yourself
1. What is the main purpose of accounting?
2. Who are the main users of accounting information?
3. What is the accounting equation?
4. Why must the accounting equation always balance?
✅ Summary
Accounting is essential for tracking financial performance and making informed
decisions. It involves recording transactions, preparing reports, and communicating
financial information to stakeholders. Understanding the accounting equation and
📑
basic terminology is the first step toward mastering accounting.## Petty Cash Book
Fundamentals
A petty cash book records low-value cash payments like postages, stationery, cleaning,
travel expenses, and small cash payments to creditors. It serves two key purposes:
tracking transactions for ledger transfers and acting as a standalone ledger account for
petty cash.
The petty cash book is both a book of prime entry and part of the double-entry
system, eliminating the need to record small payments individually in the main cash
book or ledger.
💰 The Imprest System Explained
Under the imprest system, the petty cashier starts each period with a fixed float
amount. After recording expenses, the chief cashier restores the exact amount spent,
bringing the balance back to the original float.
Key benefits:
Controls petty cash expenditure
Reduces fraud risk
Provides training for junior staff
Allows chief cashier to focus on major tasks
📝 Petty Cash Voucher Process
When staff need petty cash, they must submit a completed voucher showing:
Purpose of payment
Date
Signature of recipient
Voucher number
The petty cashier verifies vouchers against cash spent at regular intervals, with the chief
cashier performing periodic checks.
📊 Layout and Analysis Columns
The petty cash book resembles a ledger account with analysis columns on the credit side
to categorize expenses:
Column Type Purpose
Date/Details Record transaction info
Voucher No. Track voucher references
Total Paid Sum of all payments
Analysis Columns Categorize by expense type (cleaning,
stationery, travel, etc.)
🔄 Double Entry Process
During the period:
1. Money received: Debit total received column, label source in details
2. Money paid: Credit total paid column and corresponding analysis column
At period end:
1. Total all columns and verify arithmetic accuracy
2. Balance the total received/paid columns like any ledger account
3. Carry forward balance to start new period
4. Transfer analysis column totals to appropriate nominal ledger accounts
5. Post individual ledger account column entries to suppliers' personal accounts
📈 Practical Example Walkthrough
Maitreyi's petty cash book demonstrates the complete process:
Imprest amount: $150
Total expenses: $115 (cleaning $40, stationery $11, travel $12, suppliers $52)
Restoration amount: $115 to return to $150 float
The double entry shows expenses debited to respective accounts and supplier payments
reducing their ledger balances.
🧮 Common Petty Cash Categories
Typical analysis columns include:
Cleaning expenses
Stationery costs
Travel expenses
Postages
Ledger accounts (for supplier payments)
⚠️ Error Prevention Tips
Verify arithmetic: Analysis column totals must equal total paid column
Check vouchers: All payments require proper documentation
Regular reconciliation: Balance books frequently to catch discrepancies
Secure cash: Limit access and implement checks/balances
📝 Exam-Style Question Solutions
Question 1 Answer: $83 (Total payments $94 minus refund $11)
Question 2 Answer: D (Debit cleaning $250, office expenses $28, Thomas $33)
Question 3 Answer: C (Debit petty cash $63, Credit bank $63 - spent $83 minus received
$20)
The restoration equals the net amount needed to return to the imprest amount,
calculated as: Imprest - (Opening balance + Receipts - Payments).## Why 📋
Accounting Rules Matter
Accounting rules ensure consistency and comparability across all businesses. Without
them, financial statements would vary wildly, making it impossible for investors, lenders,
or managers to trust or compare reports.
Key Point: Rules standardize how capital vs. revenue items are recorded and how
inventory is valued.
🧩 Core Accounting Principles
Principle One-sentence takeaway Example
Business entity The business is legally Owner’s personal car
separate from its owner. insurance never appears in
the company books.
Consistency Once you pick a method Switching methods every
(e.g., depreciation), stick year would distort profit
with it. trends.
Duality Every transaction has two Buying office supplies:
equal sides (double- Debit supplies, Credit
entry). cash.
Going concern Assume the business will Assets stay at book value,
keep operating. not “fire-sale” price.
Historic cost Record assets at original A delivery van is booked at
purchase price. $25 000, even if it’s now
worth $30 000.
Matching (accruals) Match revenue with the December sales are
expenses that helped earn matched with December
it. cost of goods, even if
suppliers are paid in
January.
Materiality Ignore tiny items whose A $15 stapler is expensed
misstatement won’t immediately, not
mislead users. depreciated.
Money measurement Only record what can be Employee morale or brand
measured in dollars. reputation never hit the
ledger.
Prudence Never overstate profits or If a customer hasn’t paid in
assets; anticipate losses. 6 months, provide for
doubtful debt.
Realisation Revenue is recognised only An order on 2 Feb, delivery
when legal title passes. 16 Feb, cash 28 Feb →
revenue is 16 Feb.
🧮 Capital vs. Revenue Items
Type Definition Where it appears Example
Capital Money spent to Statement of Buying a new CNC
expenditure buy or improve financial position machine for $50
non-current assets. 000.
Revenue Day-to-day running Income statement Annual machine
expenditure costs. maintenance
contract $1 200.
Capital receipt Cash from non- Not in income Proceeds from
trading sources. statement selling an old
vehicle.
Revenue receipt Cash from normal Income statement Cash from selling
sales. inventory to
customers.
Mistake alert: Treating repairs as capital overstates assets and profit; treating asset
purchases as revenue understates both.
📦 Inventory Valuation Rule
Lower of cost or net realisable value (NRV) — always.
Term Meaning Includes…
Cost Purchase price + bringing- Invoice price, carriage
to-location costs inwards, import duties.
NRV Expected selling price – Estimated scrap value if
completion/selling costs damaged.
Quick Example
A box of 100 smartphones:
Cost $200 each
NRV $180 each (market dipped) → Value inventory at $18 000, not $20 000
(prudence).
🎯 Walkthrough Recap
Dhaval’s year-end figures:
Type A: 94 units, cost $21, NRV $17.50 → value at $17.50 → $1 645
Type B: 12 damaged units NRV $10, 26 good units cost $15 → $120 + $390 =
$510
Total closing inventory = $2 155 (lower of cost or NRV for each group).
📈 Effect of Inventory Errors
Over-value closing Year 1 Year 2
inventory by $50
Gross profit Overstated Understated
Current assets Overstated No effect
Capital Overstated Corrected
Opposite effects occur if inventory is under-valued.
🌍 International Standards Snapshot
Financial statements must be:
1. Comparable – same policies period-to-period.
2. Relevant – influence users’ decisions.
3. Reliable – free from material error & bias.
4. Understandable – clear to users with reasonable business knowledge.
📝 Quick-fire Answers
Q1: Accounting rules are necessary so that financial statements are consistent and
comparable between businesses and periods.
Q2: Business entity – keep personal and business transactions separate.
Q3: Consistency – ensures year-to-year profit comparisons are meaningful.
Q4: Duality – every debit has an equal credit; keeps the accounting equation balanced.
Q5: Going concern is not applied if the business expects to cease operations soon
(assets then valued at selling price, not depreciated cost).
Q6: Matching – record expenses in the same period as the revenues they help generate.
Q7: Materiality – the stapler’s cost is too low to justify separate depreciation; expense it
immediately.
Q8: Money measurement – the competitor’s price cut cannot be quantified in dollars,
so no entry.
Q9: Prudence – “if in doubt, understate profits and overstate losses.”
Q10: Realisation date – 16 Feb (delivery date) because legal title passes then.
🧠 Memory Nudge
Think of the gradient cubes as layers of accounting standards—each numbered block a
📚
rule that stacks consistently, building a reliable, comparable financial structure.##
Irrecoverable Debts & Doubtful Debts
Writing Off Irrecoverable Debts 🚫
Irrecoverable debts are amounts owed by customers that will never be collected. Writing
them off follows the principle of prudence, ensuring assets aren't overstated and profit
reflects reality.
Journal entries:
1. When writing off: Debit Irrecoverable Debts Account, Credit Customer's
Account
2. At year-end: Debit Income Statement, Credit Irrecoverable Debts Account
"If a debt cannot be regarded as an asset, it must be removed to prevent
overstatement of both assets and profit."
Recovery of Written-Off Debts 💰
When a previously written-off debt is recovered:
Method 1 - Direct approach:
Debit Cash Book, Credit Debts Recovered Account
Method 2 - Reinstatement approach:
1. Debit Customer Account, Credit Debts Recovered Account (reinstate debt)
2. Debit Cash Book, Credit Customer Account (record payment)
Both methods result in the same outcome - the recovered amount appears as income in
the income statement.
Reducing Irrecoverable Debts 🛡️
Key prevention strategies:
Obtain credit references from banks/suppliers
Set credit limits for each customer
Issue prompt invoices/statements
Monitor overdue accounts actively
Consider legal action when justified
📊 Provision for Doubtful Debts
Understanding Provisions 📈
A provision for doubtful debts is an estimate of potential losses from irrecoverable
debts, applying both prudence and matching principles.
Methods to estimate:
1. Review individual customer accounts
2. Use historical percentage of total receivables
3. Apply ageing schedule with higher percentages for older debts
Creating Provisions 📝
Year-end entries:
Debit Income Statement, Credit Provision for Doubtful Debts Account
In statement of financial position: Deduct provision from trade receivables
Example: Trade receivables $25,000 with 4% provision = $1,000 provision
Account Debit Credit
Income Statement $1,000
Provision for Doubtful $1,000
Debts
Adjusting Provisions ⚖️
Increasing provision:
Calculate new provision amount
Debit Income Statement with increase only
Credit Provision for Doubtful Debts Account
Decreasing provision:
Debit Provision for Doubtful Debts Account
Credit Income Statement with decrease amount
"Only the change in provision affects the income statement in subsequent years, not
the full provision amount."
Financial Statement Presentation 📋
Income Statement extracts:
Irrecoverable debts: Expense
Provision increase: Expense
Provision decrease: Added to gross profit
Statement of Financial Position: Trade receivables $XX,XXX Less: Provision for doubtful
📚
debts ($X,XXX) Net receivables $XX,XXX## Books of Prime Entry and Control
Accounts
Books of Prime Entry for Specific Transactions
Interest charged by credit supplier: General Journal
Purchases returns: Purchases Returns Journal
Discount received: General Journal
Purchases Ledger Control Account Entries
Entry in Purchases Ledger Control Source of Information
Account
Debit: Payments to credit suppliers Cash Book
Debit: Cheques paid to credit suppliers General Journal
later dishonoured
Debit: Credit purchases Purchases Journal
Debit: Contra entry to sales ledger General Journal
account
Credit: Discount received General Journal
Credit: Interest charged by supplier on General Journal
overdue account
Credit: Returns to credit suppliers Purchases Returns Journal
Why not use the purchases ledger?
The purchases ledger contains individual supplier accounts, not summary totals. A
control account needs totals from the books of prime entry, not individual entries.
Contra entry explanation:
A contra entry transfers a balance from the sales ledger to the purchases ledger
when a customer is also a supplier. It offsets amounts owed to and from the same
entity.
📊 Sales Ledger Control Account Example (Eva)
Given Data
Opening debit balance: $2,470
Opening credit balance: $110
Credit sales: $3,480
Cash sales: $1,950 (not in control account)
Returns by credit customers: $118
Cheques received: $3,403
Dishonoured cheque: $104
Discount allowed: $144
Discount received: $176 (not in control account)
Irrecoverable debts: $200
Contra entry: $240
Sales Ledger Control Account
Debit $ Credit $
Balance b/d 2,470 Returns 118
Credit sales 3,480 Bank 3,403
Dishonoured 104 Discount allowed 144
cheque
Irrecoverable debts 200
Contra entry 240
Balance c/d 949
Total 6,054 Total 6,054
Debit balance on 1 March: $949
Credit balance on 1 March: $95 (given)
Books of Prime Entry for Each Entry
Entry Book of Prime Entry
Credit sales Sales Journal
Returns Sales Returns Journal
Bank Cash Book
Discount allowed General Journal
Irrecoverable debts General Journal
Contra entry General Journal
Items Not in Sales Ledger Control Account
Cash sales: Recorded in cash book, not related to credit customers.
Discount received: Relates to purchases ledger, not sales ledger.
Reasons for Credit Balance
1. Overpayment by a customer.
2. Credit note issued but not yet offset by future sales.
📈 Incomplete Records: Statement of Affairs
Statement of Affairs: A snapshot of assets and liabilities when double-entry records
are missing. It works like a statement of financial position.
Profit Formula
$Profit = Closing\ capital - Opening\ capital + Drawings - Capital\ introduced$
Walkthrough Example (Vijay)
Item 1 May 20–8 30 April 20–9
Premises $30,000 $30,000
Equipment $9,000 $16,000 (+$7,000)
Motor vehicle $8,000 $8,000
Inventory $14,000 $16,000
Trade receivables $8,500 $9,400
Trade payables $8,000 $9,200
Bank $1,200 –
Bank overdraft – $900
Adjustments
Depreciation: Equipment 10%, Motor vehicle 25%
Provision for doubtful debts: 2% of trade receivables
Drawings: $5,000 cash + $3,000 goods
Capital introduced: $7,000 (equipment)
Profit Calculation
$Profit = 65,542 - 62,820 + 8,000 - 7,000 = 3,722$
🧮 Calculating Missing Figures
Credit Sales Formula
$Credit\ sales = Receipts\ from\ customers + Closing\ receivables - Opening\
receivables$
Credit Purchases Formula
$Credit\ purchases = Payments\ to\ suppliers + Closing\ payables - Opening\ payables$
Mark-up vs Margin
Term Formula
Mark-up $\frac{Gross\ profit}{Cost\ of\ sales}
\times 100$
Margin $\frac{Gross\ profit}{Sales} \times 100$
Inventory Turnover
$Rate = \frac{Cost\ of\ sales}{Average\ inventory}$## 💰 Share Capital Structure
Issued capital represents the total amount of shares a company has allocated to
shareholders. Called-up capital is the portion of issued capital for which payment has
been requested, while paid-up capital is the amount actually received from shareholders.
Capital Type Definition Example from Mishra
Limited
Issued Capital Total shares issued to $300,000 (300,000 shares ×
shareholders $1)
Called-up Capital Amount requested from $150,000 (50% of
shareholders $300,000)
Paid-up Capital Amount actually received $145,000 (290,000 shares ×
$0.50)
📊 Types of Shares
Preference Shares
Preference shareholders receive fixed dividends before ordinary shareholders and have
priority in repayment if the company is wound up. They typically lack voting rights.
Key distinction:
Redeemable preference shares must be bought back by the company and
appear as non-current liabilities
Non-redeemable preference shares remain as part of equity
Ordinary Shares
Ordinary shareholders receive variable dividends based on profits and have voting
rights. They bear higher risk but potential for greater returns.
🏦 Debentures vs Shares
Feature Debentures Ordinary Shares
Return Fixed interest rate Variable dividend
Voting Rights None Yes
Repayment Must be repaid No repayment
Risk Lower Higher
Financial Statement Finance cost in income Dividend in statement of
statement changes in equity
📈 Statement of Changes in Equity
This statement shows how profits are distributed and retained within the company. Key
components include:
Opening balances of share capital and reserves
Profit for the year (after preference dividends)
Dividends paid (both interim and final from previous year)
Transfers to reserves (like general reserve)
Closing balances carried forward
Important: Proposed dividends for the current year are not included until actually paid
in the following year.
💼 Financial Position Presentation
The equity section of a limited company's statement of financial position includes:
Ordinary share capital
Reserves (general reserve and retained earnings)
Non-redeemable preference share capital
Redeemable preference shares and debentures appear under non-current liabilities.
🧮 Key Calculations
Profit After Preference Dividend
For Anand Limited: $58,000 - $10,000 = $48,000
Dividend Calculations
Preference dividend: 5% × 200,000 shares × $1 = $10,000 annually
Interim ordinary dividend: Paid during the year
Final ordinary dividend: Proposed at year-end, paid next year
Transfer to General Reserve
Companies often transfer portions of profit to general reserve to retain earnings for
future growth rather than distributing all profits as dividends.
