Cambridge IGCSE & O Level Accounting Coursebook 2e PDF

Cambridge IGCSE® and O Level Accounting Coursebook Second edition Catherine Coucom Cambridge IGCSE® and O Level Accounting Coursebook Second edition University Printing House, Cambridge CB2 8BS, United Kingdom One Liberty Plaza, 20th Floor, New York, NY 10006, USA 477 Williamstown Road, Port Melbourne, VIC 3207, Australia 314–321, 3rd Floor, Plot 3, Splendor Forum, Jasola District Centre, New Delhi – 110025, India 79 Anson Road, #06 -04/06, Singapore 079906 Cambridge University Press is part of the University of Cambridge. It furthers the University’s mission by disseminating knowledge in the pursuit of education, learning and research at the highest international levels of excellence. Information on this title: www.cambridge.org © Cambridge University Press 2018 This publication is in copyright. Subject to statutory exception and to the provisions of relevant collective licensing agreements, no reproduction of any part may take place without the written permission of Cambridge University Press. First published 2018 20 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 Printed in Dubai by Oriental Press. A catalogue record for this publication is available from the British Library ISBN 978-1-316-50277-8 Paperback ISBN 978-1-108-43901-5 Cambridge Elevate enhanced edition (2 years) ISBN 978-1-108-33917-9 Paperback + Cambridge Elevate enhanced edition (2 years) Additional resources for this publication at cambridge.org/9781316502778 Cambridge University Press has no responsibility for the persistence or accuracy of URLs for external or third-party internet websites referred to in this publication, and does not guarantee that any content on such websites is, or will remain, accurate or appropriate. 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Example answers and all other end-of-chapter questions were written by the author. ®IGCSE is the registered trademark of Cambridge Assessment International Education. : Contents Introduction iv Where to find each section of the syllabus v How to use this book vi Acknowledgements iix Section 1 1 1 Introduction to accounting 2 2 Double entry book-keeping – Part A 10 3 The trial balance 29 4 Double entry book-keeping – Part B 38 5 Petty cash books 52 Section 1: Practice questions 61 Section 2 66 6 Business documents 67 7 Books of prime entry 78 Section 2: Practice questions 89 Section 3 93 iii 8 Financial statements – Part A 94 9 Financial statements – Part B 110 10 Accounting rules 120 11 Other payables and other receivables 132 12 Accounting for depreciation and disposal of non-current assets 153 13 Irrecoverable debts and provisions for doubtful debts 171 Section 3: Practice questions 185 Section 4 193 14 Bank reconciliation statements 194 15 Journal entries and correction of errors 206 16 Control accounts 228 17 Incomplete records 241 18 Accounts of clubs and societies 261 19 Partnerships 277 20 Manufacturing accounts 290 21 Limited companies 302 22 Analysis and interpretation 312 Section 4: Practice questions 331 Glossary 345 Index 349 Cambridge IGCSE and O Level Accounting Introduction The aim of this book is to provide an up-to-date text covering the Cambridge IGCSE and O Level Accounting syllabuses (0452 and 7707). This book covers all the topics included on the latest syllabuses for IGCSE Accounting and O Level Accounting. The topics are not necessarily included in the order in which they appear in the syllabus. They have been presented in what the author’s long teaching experience has shown to be a suitable order for an accounting student commencing a course at this level. However, there is some flexibility in the sequence in which the topics are studied. Whichever the order in which the topics are studied, it is essential that the whole of the syllabus is covered. The table on page v shows the chapter(s) of the book in which each section of the syllabus may be found. The learning objectives at the beginning of each chapter are exactly the same as the syllabus topics with the following exceptions. The syllabus topics (4.3) ‘prepare ledger accounts and journal entries to record accrued and prepaid expenses’ and ‘prepare ledger accounts and journal entries to record accrued and prepaid incomes’ have each been split into two learning objectives across two separate chapters. Chapter 11 contains ‘prepare ledger accounts to record accrued and prepaid expenses’ and ‘prepare ledger accounts to record accrued and prepaid incomes.’ Chapter 15 contains ‘prepare journal entries to record accrued and prepaid expenses’ and ‘prepare journal entries to record accrued and prepaid incomes.’ No prior knowledge of accounting is required as this book provides an introduction to accounting and covers all the topics on the syllabus. Each chapter is complete in itself and contains appropriate walkthroughs. There are also short-answer questions at regular intervals which students can use to test their understanding of each section. There are exam- iv style questions at the end of each chapter and also at the end of each section. Answers to all questions in this Coursebook are provided on the accompanying Teacher's Resource. In common with most accounting textbooks, dates used in the examples, walkthroughs and questions throughout this book are expressed as 20–0, 20–1, 20–2, and so on. Chapter Syllabus 1 2 3 4 5 6 7 1 2 1 2 3 1 2 3 4 1 2 3 4 5 1 2 3 4 5 6 1 2 3 4 5 1 2 One ✓ ✓ ✓ Two ✓ Three ✓ Four ✓ ✓ Five ✓ Six ✓ ✓ Seven ✓ ✓ Eight ✓ ✓ Nine ✓ Ten ✓ ✓ ✓ ✓ Eleven ✓ ✓ Where to find each section of the syllabus Twelve ✓ ✓ Thirteen ✓ ✓ Fourteen ✓ Fifteen ✓ ✓ ✓ ✓ ✓ Sixteen ✓ Seventeen ✓ ✓ Eighteen ✓ ✓ Nineteen ✓ ✓ Twenty ✓ ✓ Twenty one ✓ ✓ Twenty two ✓ ✓ ✓ ✓ ✓ : v Pg F Cambridge IGCSE and O Level Accounting How to use this book The book is designed to be a practical guide to help build knowledge and understanding of accounting terms, principles and procedures and assumes no prior knowledge of the topics. The book is aligned to the syllabus and will enable you to analyse and present information in the appropriate accounting form as well as interpret and evaluate accounting data so you Pg can draw reasoned conclusions. F Each chapter focuses on developing knowledge and understanding using easy-to-follow walkthroughs that explain accounting concepts. Key terms are highlighted and there are regular opportunities to check progress, test understanding and practice accounting skills. Learning objectives – Each chapter begins with the key accounting concepts that you will learn to help you navigate your way through the book and remind you what is important about each topic for your revision. The number after each learning objective refers to the topic number in the syllabus. LINK Walkthrough 22.9 vi You will learn more Link – Links show you where you Using the financial statements shown in Walkthrough 22.1, calculate (to the nearest whole about double entry day) Arun’s trade payables turnover. book-keeping in can find additional information Chapter 4. $12 500 _ __ 365 about related topics. $97 000 × 1 = 47.04 days = 48 days Walkthrough – Walkthroughs guide you step-by-step through TIP If you know two Tip – Tips provide additional different accounting processes, helping to build your knowledge elements of the accounting equation context, reminders and useful and skills. you can easily calculate the third element. information about key points. TEST YOURSELF 2.1 1 Explain why it is necessary to make a double entry in the ledger for each transaction. KEY TERMS 2 Explain the use of the folio column in a ledger account. Carriage is the cost of transporting goods. Key terms – Definitions help Carriage inwards is the cost of bringing you identify and understand the goods to the important accounting Test yourself – Test yourself questions aid self-assessment and business and carriage outwards is the cost terminology and concepts. reinforce knowledge and understanding. ount of delivering the goods to the customer. Revision checklist Revision checklist – Checklists at A trial balance is a list of the balances on the accounts in the ledger at a certain date. the end of each unit provide a useful A trial balance is prepared to check the arithmetical accuracy of the double entry book-keeping. If a trial balance fails to balance, it indicates that an error has been made. summary of the learning points There are six types of error which are not revealed by a trial balance. covered. : Exam-style questions 1 Which account will appear in the sales ledger? A Dan, a credit supplier B Gill, a credit customer C Sales D Sales returns Exam-style questions – Exam-style 2 Mariam is a trader. On 1 March 20–2 the balances in her cash book were: questions will help you familiarise Cash $100 debit yourself with the style of the questions Bank $494 credit seen in examination, and assess your own The following transactions took place in March 20–2: understanding and skills to answer them. March 4 7 Received a cheque from Nawaz, $110 11 Purchased motor vehicle paying by credit transfer, $5 130 13 Took $1 500 from the bank for personal use 19 Paid $286 to Anwar by credit transfer 21 27 Cash sales, $2 150 28 Paid wages in cash, $953 31 Paid all cash into bank except $150 a Prepare Mariam’s cash book for March 20–2. Balance the book and bring down the balances on 1 April 20–2. b Explain the significance of the credit balance on the bank column on 1 March 20–2. c Explain why it is not possible to have a credit balance on the cash column. d Explain the term ‘contra’. Illustrate your answer with reference to an appropriate entry in the cash book in a. 3 Raminder paid a cheque, $975, to Kumar in full settlement of a debt of $1 000. How did Kumar record this? Section 4: Practice questions Debit $ Credit $ 1 A trader’s cash book had a credit balance of $480. On the same date, his bank statement A bank 975 Raminder 1 000 discount allowed 25 charges, $25, which appeared only on the bank statement, and a cheque not yet presented. What was the amount of the unpresented cheque? B bank 975 Raminder 1 000 discount received 25 A $66 B $116 C $848 D $894 vii C Raminder 1 000 bank 975 2 Goods returned by Zeena, $100, were debited to her account as $1 000. discount allowed 25 What entries are required to correct this error? D Raminder 1 000 bank 975 discount received 25 Account to be debited $ Account to be credited $ A suspense 900 Zeena 900 B suspense 1 100 Zeena 1 100 C Zeena 900 suspense 900 D Zeena 1 100 suspense 1 100 3 Gary is both a customer and a supplier to Leroy. On 28 June Leroy’s account in Gary’s purchases ledger had a credit balance of $275, and his account in Gary’s sales ledger had a debit balance of $140. A contra entry was made to set the balance of one account against the balance of the other account. Practice questions – Additional What entry will be made in the control accounts prepared on 30 June? questions at the end of each section Debited $ Credited $ help to practice both multiple choice A purchases ledger control account 135 sales ledger control account 135 and structured questions relating to B purchases ledger control account 140 sales ledger control account 140 the section’s topics. C sales ledger control account 135 purchases ledger control account 135 D sales ledger control account 140 purchases ledger control account 140 4 A sports club provided the following information at the end of its first financial year: $ Subscriptions received for the current year 9 750 Subscriptions received in advance for the following year 150 Expenses of sports competition 2 040 Rates and insurance 1 986 General expenses 787 General expenses accrued at the end of the year 103 Balance at bank at the end of the year 7 403 Receipts from sports competition entry fees ? How much was received from the sports competition entry fees? A $2 316 B $2 466 C $3 103 D $3 253 Cambridge IGCSE and O Level Accounting Acknowledgements Thanks to the following for permission to reproduce images: Cover image: Sudarshan v/Getty Images Chapter Opener 1 Atomic Imagery/The Image Bank/Getty Images; Chapter Opener 2 Marekuliasz/iStock/Getty Images Plus; Chapter Opener 3 Vasily Nesterov/Hemera/Getty Images Plus; Chapter Opener 4 Peter Kirillov/Hemera/Getty Images Plus; Chapter Opener 5 Marina Datsenko/Hemera/Getty Images Plus; Chapter Opener 6 Lite Productions/Lite Productions/Getty Images Plus; Chapter Opener 7 Inok/iStock/Getty Images Plus; Chapter Opener 8 Deepblue4you/E+/Getty Images; Chapter Opener 9 Chris Cheadle/All Canada Photos/Getty Images; Chapter Opener 10 Pixel_dreams/iStock/Getty Images Plus; Chapter Opener 11 3dts/iStock /Getty Images Plus; Chapter Opener 12 Alzay/iStock/Getty Images Plus; Chapter Opener 13 Valeriya/iStock/Getty Images Plus; Chapter Opener 14 Ekapol/ iStock/Getty Images Plus; Chapter Opener 15 Aslan Alphan/iStock/Getty Images Plus; Chapter Opener 16 Maciek905/iStock/Getty Images Plus; Chapter Opener 17 Gam1983/ iStock/Getty Images Plus; Chapter Opener 18 Srisakorn/iStock/Getty Images Plus; Chapter Opener 19 Baona/iStock/Getty Images Plus; Chapter Opener 20 Monsitj/iStock/Getty Images Plus; Chapter Opener 21 Evgeny_Kozhevnikov/iStock/Getty Images Plus; Chapter Opener 22 Monsitj/iStock/Getty Images Plus. viii Section 1 1 2 Chapter 1 Introduction to accounting Learning objectives In this chapter you will learn to: u sa xplain the difference between book-keeping and accounting 1.1 state the purposes of measuring business profit and loss 1.1 explain the role of accounting in providing information for monitoring progress and decision-making 1.1 explain the meaning of assets, liabilities and owner’s equity 1.2 explain and apply the accounting equation 1.2 understand that statements of financial position record assets and liabilities on a specified date. 5.5 2 2 Chapter 1: Introduction to accounting 1.1 Introduction Accounting is regarded as the language of business. Accounting can be divided into two sections: KEY TERMS Book-keeping Book-keeping is a process of detailed recording of all the financial transactions of a Book-keeping is the business. It is necessary for even the smallest business to make a record of every transaction detailed recording of all the financial which affects the business. If the records are not maintained, it is likely that something transactions of a will be forgotten or overlooked. The basis of maintaining these detailed records is double business. entry book-keeping. The actual records maintained by one business may vary from those Accounting is using maintained by another business because each business is different. However, all businesses book-keeping records apply the same principles while maintaining double entry records. to prepare financial statements and to assist in decision-making. Accounting A statement of Accounting uses the book-keeping records to prepare financial statements at regular financial position intervals. The owner of a business needs to know whether the business is making a profit or shows the assets and a loss. Periodically (often at yearly intervals), an income statement is drawn up. This shows liabilities of a business the calculation of the profit or loss earned by the business. If the business has earned a profit on a certain date. then the owner is receiving a return on his investment and funds are available for expanding or improving the business. However, if the business has made a loss then it may eventually close down as the owner is not receiving any return on his investment and funds are not available for running or maintaining the business. You can now answer Question 1 at the end of this chapter. 3 LINK The owner of the business also needs to know the financial position at regular intervals so You will learn more a statement of financial position is prepared. This shows what the business owns and about financial what is owing to it, its assets; and what the business owes, its liabilities. The term financial statements in Chapters statements is often used as a collective name for an income statement and a statement of 8 and 9. financial position. The progress of the business can be measured by comparing the financial statements of one year with those of previous years, or with those of other similar businesses. The calculation of various accounting ratios is used to measure the relationship between figures within a set of financial statements. These are also useful for comparison purposes. The information provided by the financial statements shows the owner of the business what has happened during a certain period of time and helps in monitoring the progress of the business. The plans for the future development of the business are also based on these financial statements. TEST YOURSELF 1.1 1 Define the term book-keeping. 2 Define the term accounting. 3 State two reasons why it is necessary to prepare financial statements at regular intervals. 4 State what is included in the term financial statements. Cambridge IGCSE and O Level Accounting LINK 1.2 Assets, liabilities and capital You will learn more It is important to remember that the accounting records of a business relate only to the about assets and business. From an accounting viewpoint, the owner of that business is regarded as being liabilities in Chapter 9. completely separate from the business. KEY TERMS When a person decides to start a business he will have to provide the necessary funds (resources). This is often in the form of monetary funds, but may consist of buildings, motors, Capital is the total goods and so on. Any resources provided by the owner of the business are known as capital. resources provided This represents the amount owed by the business to the owner of that business. by the owner and represents what the Once the business is formed and capital introduced, the business will own the money or business owes the other items provided by the owner. Things owned by the business (or owed to the business) owner. are regarded as the resources of the business or the assets of the business. Assets represent owned anything owed by or In addition to the owner, other people may also provide assets to the business. The amount owing to the business. owed by the business to these people is known as liabilities. Liabilities represent anything owed by the business. TIP Anything provided for a business by the owner represents capital. This is not necessarily in the form of money. Many businesses are set up and operated by one person. These are known as sole traders. LINK The early chapters in this book cover accounts maintained by sole traders. 4 You will learn about TEST YOURSELF 1.2 the accounting records of partnerships and 1 Define each of the following terms. limited companies in Chapters 19 and 21. a assets b liabilities c capital 1.3 The accounting equation Like any other mathematical equation, the two sides of the equation will always be equal. The formula for this equation is: Assets = Capital + Liabilities. Capital is sometimes referred to as owner’s equity. So the previous equation can also be written as: Assets = Owner’s equity + Liabilities. TIP Like any mathematical equation, the accounting equation can be used to find any one of the If you know two three elements if the other two are present. elements of the This equation illustrates that the assets of a business (the resources used by a business) accounting equation you can easily calculate are always equal to the liabilities and capital of a business (the resources provided for the the third element. business by others). The assets represent how the resources are used by the business and the liabilities and capital represent where these resources come from. Chapter 1: Introduction to accounting Walkthrough 1.1 20–7 January 1 Leena set up a business to trade under the name of The Dress Shop. She opened a business bank account and paid in $20 000 as capital. 2 The business purchased premises, $15 000, and paid by cheque. 3 The business purchased goods, $3 000, on credit. 4 The business sold goods, at the cost price of $1 000, on credit. Show the accounting equation after each of the above transactions. LINK Date Assets = Capital + Liabilities You will learn more about buying and 1 January Bank $20 000 $20 000 Nil selling on credit in 2 January Premises 15 000 Chapter 2. Bank 5 000 $20 000 $20 000 Nil 3 January Premises 15 000 Inventory 3 000 Bank 5 000 $23 000 $20 000 Trade payable $3 000 4 January Premises 15 000 Inventory 2 000 Trade receivable 1 000 5 Bank 5 000 $23 000 $20 000 Trade payable $3 000 1 January The assets of the business are equal to the capital of the business. 2 January The money in the bank has decreased because a new asset has been KEY TERMS bought. The total assets are equal to the capital. 3 January Purchasing on credit means that the business does not pay immediately. Inventory is the goods a business has A new asset inventory has been acquired, but the business has also available for resale. acquired a liability as it owes money to the supplier (who is known as a Trade payables creditor). In a statement of financial position this is described as a trade represent the amount payable. The total assets are equal to the capital plus the liabilities. the business owes to 4 January Selling on credit means that the business does not immediately receive the the credit suppliers of goods (the trade money. The inventory has decreased but a new asset has been acquired in creditors). the form of money owing to the business by a customer (who is known as Trade receivables a debtor). In a statement of financial position this is described as a trade represent the amount receivable. The total assets are equal to the capital plus the liabilities. owed to the business (For the sake of simplicity, the goods were sold to the customer at cost by its credit customers price. In practice, they need to be sold at a price above cost price to enable (the trade debtors). the business to make a profit.) Cambridge IGCSE and O Level Accounting TEST YOURSELF 1.3 1 Fill in the missing figures in the following table. Assets Capital Liabilities $ $ $ a 35 000 ? 12 500 b ? 44 400 19 300 c 67 300 55 000 ? You can now answer Question 2 at the end of this chapter. 1.4 The statement of financial position The accounting equation may be shown in the form of a statement of financial position. This shows the three elements of the accounting equation – the assets, the capital and the liabilities. The statement of financial position will be affected every time the business makes changes to the assets, liabilities or capital. Walkthrough 1.2 Prepare the statement of financial position of The Dress Shop after each of the transactions shown in Walkthrough 1.1. 6 The Dress Shop Statement of financial position at 1 January 20–7 Assets $ Liabilities $ Bank 20 000 Capital 20 000 20 000 20 000 The Dress Shop Statement of financial position at 2 January 20–7 Assets $ Liabilities $ Premises 15 000 Capital 20 000 Bank 5 000 20 000 20 000 20 000 The Dress Shop Statement of financial position at 3 January 20–7 Assets $ Liabilities $ Premises 15 000 Capital 20 000 Inventory 3 000 Trade payable 3 000 Bank 5 000 20 000 23 000 23 000 Chapter 1: Introduction to accounting The Dress Shop Statement of financial position at 4 January 20–7 Assets $ Liabilities $ Premises 15 000 Capital 20 000 Inventory 2 000 Trade payable 3 000 Trade receivable 1 000 Bank 5 000 20 000 23 000 23 000 TEST YOURSELF 1.4 1 Give two examples of each of the following (excluding those shown in Walkthrough 1.1 and 1.2): a asset b liability. 2 Explain the meaning of each of the following terms: LINK a trade payable b trade receivable You will learn more about statements of financial position in The statements of financial position shown in Walkthrough 1.2 were presented in a Chapter 9. horizontal format. There are different ways to present a statement of financial position and these are explained in Chapter 9. A statement of financial position is also more useful if the 7 assets and liabilities are divided into different types (see Chapter 9 ). TIP Walkthrough 1.1 showed that every single transaction involves a change to the assets The totals of a and/or the liabilities and/or the capital. This means that it is necessary to prepare a statement of financial statement of financial position after every single transaction, as shown in Walkthrough position must always 1.2. However, this is not possible in practice as many transactions can take place every agree: if they do not you know that there is hour of each working day. In practice, the day-to-day business transactions are recorded an error. using double entry book-keeping and a statement of financial position is prepared only periodically. This is usually done at the closing of a business on the last day of the financial year as part of the financial statements. As the business can be started on any day of the LINK year, its financial year may not necessarily match the calendar year (i.e. from 1 January to You will learn more 31 December). The financial statements are prepared for 12 month periods from the date about double entry the business started. book-keeping in Chapters 2 and 4. You can now answer Questions 3–6 at the end of this chapter. Revision checklist Book-keeping is the detailed recording of all the financial transactions of a business. Accounting uses these book-keeping records to prepare financial statements. It is necessary to prepare financial statements to show the profit or loss of the business and the financial position of the business and to help in decision-making. The accounting equation shows that the assets are always equal to the capital plus the liabilities of the business. A statement of financial position shows the assets and liabilities of a business on a certain date. Cambridge IGCSE and O Level Accounting Exam-style questions 1 Which task is performed by a book-keeper? A analysing the trading results B entering transactions in the ledger C preparing year-end financial statements D providing information for decision-making 2 A trader provided the following information: $ Premises 180 000 Inventory 23 420 Trade payables 26 180 Trade receivables 21 710 Office fixtures and fittings 32 600 Loan from bank 80 000 Cash at bank 2 550 Motor vehicles 15 900 a Calculate the value of the assets. b Calculate the value of the liabilities. 8 c Use the accounting equation to calculate the trader’s capital. 3 What is a statement of financial position? A a calculation of the amount owed to the owner of the business B a list of assets and liabilities of a business on a certain date C a list of everything owned by and owed to a business D a summary of money paid to and received by a business 4 A business had $9 420 in its bank account. The following transactions took place: $ Bought goods on credit 250 Sold goods on credit 1 100 Repaid a loan by cheque 5 000 How much was there in the bank after these transactions? A $3 570 B $4 420 C $4 670 D $5 270 Chapter 1: Introduction to accounting 5 Complete the following table to show the effect of each of the following transactions. The first one has been completed as an example. a Bought a motor vehicle and paid by cheque b Bought goods on credit from a credit supplier c Received a cheque from a credit customer d Sold goods on credit e Paid off a loan in cash Effect on assets $ Effect on liabilities $ a Motor vehicles Increase No effect Bank Decrease b c d e 6 The statement of financial position of Bharwani Traders on 31 October 20–4 is shown below. 9 Bharwani Traders Statement of financial position at 31 October 20–4 Assets $ Liabilities $ Machinery 19 000 Capital 35 000 Motor vehicles 6 000 Trade payables 8 000 Inventory 4 900 Trade receivables 3 000 Bank 10 100 20 000 43 000 43 000 On 1 November 20–4 the following transactions took place: A cheque for $3 000 was paid to a credit supplier. A credit customer paid $500 in cash. A loan for $8 000, which was paid into the bank, was received from Lenders Limited. A cheque for $7 000 was paid for an additional machine. Prepare the statement of financial position of Bharwani Traders on 1 November 20–4 after the above transactions have taken place. 10 Chapter 2 Double entry book-keeping – Part A Learning objectives In this chapter you will learn to: o y !e" #$ %&'(-)*+,./0 123 p456789 :;c?@AB CDEF GHIJK LMN OPQRST UVWXY Z[\]^_ `bd fghijkl mnqrtv wxz{|}~ ¡¢£¤¥ ¦§¨ b©ª«¬® ¯°±²³´ µ¶·¸¹º»¼ ½¾ ¿ÀÁÂÃÄÅÆ ÇÈÉ ÊËÌÍÎÏÐÑÒ ÓÔÕÖ×Ø ÙÚÛÜÝÞßà áâã äåæçè éêëìíîïðñ òóô 10 2 Chapter 2: Double entry book-keeping – Part A 2.1 Introduction A business would find it impossible to prepare a statement of financial position after every KEY TERM single transaction. The day-to-day transactions are recorded in the books of a business using the double entry system of book-keeping. The term double entry is used because the two Double entry effects of a transaction (a giving and a receiving) are both recorded in the ledger. book-keeping is the process of making A business maintains a separate ledger account for each type of asset, expense, liability and a debit entry and a income and also for each individual debtor and creditor. Every transaction is recorded in the credit entry for each ledger account relating to that particular item or person. transaction. A ledger is traditionally a bound book where each account appears on a separate page. Over the years, the ledger has developed into a looseleaf folder with separate sheets, each containing a ledger account. Recent developments have seen the introduction of a computer file divided into separate ledger accounts. TIP The debit side of a The layout of a ledger account is as follows: ledger account is the side which is receiving or gaining value and Account name the credit side of a ledger account is the Debit Credit side which is giving Date Details Folio $ Date Details Folio $ value. Ledger accounts are divided into two sections, this can be shown by a central vertical line, in this text book the central vertical line is not shown. The left-hand-side is known as the debit side and the right-hand-side is known as the credit side. The term debit is usually 11 abbreviated to ‘dr’ and the term credit is usually abbreviated to ‘cr’. On either side of the account there are columns to record the date, details and amount of each transaction. A folio number column is used for reference purposes. The use of folio numbers is not required when answering questions. However, folio numbers have been included in examples present up to Chapter 7 so that you can appreciate their use and purpose. In order to record the two aspects of every transaction, every transaction is entered twice – on the debit side of one account and on the credit side of another account. The account which is receiving or gaining the value is debited and the account which is giving the value is credited. Walkthrough 2.1 20–7 January 1 Ajay began business. He opened a business bank account and invested $80 000 as capital a 2 Fixtures and equipment costing $30 000 were bought and paid for by cheque b Enter these transactions in Ajay’s ledger. Cambridge IGCSE and O Level Accounting Ajay Bank account Page 1 Date Details Folio $ Date Details Folio $ 20–7 20–7 Jan 1 a Capital 2 80 000 Jan 2 b Fixtures and 3 30 000 equipment Capital account Page 2 Date Details Folio $ Date Details Folio $ 20–7 Jan 1 a Bank 1 80 000 Fixtures and equipment account Page 3 Date Details Folio $ Date Details Folio $ 20–7 Jan 2 b Bank 1 30 000 The first transaction a is debited in the bank account, as this is the account which is receiving the money, and credited in the capital account, as this is where the money is 12 coming from. TIP The second transaction b is debited in the fixtures and equipment, to show the value being It is important to ensure that every received, and credited in the bank account, as this is where the money is coming from. transaction is entered In each transaction, the details column shows the name of the account in which the other twice, once on the half of the double entry is made. debit side and once on the credit side. The folio number is used for reference purposes and shows the page of the ledger on which the account named in the details column appears. It is important that a double entry is made for every transaction. LINK You will learn more In practice, the information entered in the accounting records is obtained from about business business documents. documents in Chapter 6. In practice, each ledger account has its own page or sheet. Chapter 2: Double entry book-keeping – Part A TEST YOURSELF 2.1 1 Explain why it is necessary to make a double entry in the ledger for each transaction. 2 Explain the use of the folio column in a ledger account. 2.2 Double entry records for assets and liabilities A ledger account is opened for each type of asset and liability. Applying the double entry principles, every transaction is entered twice. The account which is receiving the money is debited and the account which is giving the money is credited. Walkthrough 2.2 20–7 January 1 Ajay began business. He opened a business bank account and invested $80 000 as capital 2 Fixtures and equipment costing $30 000 were bought and paid for by cheque 3 A short-term loan of $10 000 was received from AB Loans 5 A motor vehicle costing $9 000 was bought and paid for by cheque 6 A long-term loan of $5 000 was received from Ajay’s sister Mallika Enter these transactions in Ajay’s ledger. 13 Ajay Bank account Page 1 Date Details Folio $ Date Details Folio $ 20–7 20–7 Jan 1 Capital 2 80 000 Jan 2 Fixtures and equipment 3 30 000 3 AB Loans 4 10 000 5 Motor vehicles 5 9 000 6 Mallika loan 6 5 000 Capital account Page 2 Date Details Folio $ Date Details Folio $ 20–7 Jan 1 Bank 1 80 000 Fixtures and equipment account Page 3 Date Details Folio $ Date Details Folio $ 20–7 Jan 2 Bank 1 30 000 Cambridge IGCSE and O Level Accounting AB Loans account Page 4 Date Details Folio $ Date Details Folio $ 20–7 Jan 3 Bank 1 10 000 Motor vehicles account Page 5 Date Details Folio $ Date Details Folio $ 20–7 Jan 5 Bank 1 9 000 Mallika loan account Page 6 Date Details Folio $ Date Details Folio $ 20–7 Jan 6 Bank 1 5 000 2.3 Double entry records for expenses and income 14 A ledger account is opened for each type of expense and income. The same double entry principles applied to assets and liabilities are applied to expenses and income. The account which is receiving the money is debited and the account which is giving the money is credited. Walkthrough 2.3 20–7 January 1 Ajay began business with a capital of $80 000 in the business bank account 1 He paid rent of premises, $400, by cheque 2 Fixtures and equipment costing $30 000 were bought and paid for by cheque 3 He paid insurance, $250, by cheque 3 A short-term loan of $10 000 was received from AB Loans 5 A motor vehicle costing $9 000 was bought and paid for by cheque 5 He paid motor expenses, $50, by cheque 6 A long-term loan of $5 000 was received from Ajay’s sister Mallika 7 Part of the premises were rented out to another business and a cheque for $95 was received Enter these transactions in Ajay’s ledger. Chapter 2: Double entry book-keeping – Part A Ajay Bank account Page 1 Date Details Folio $ Date Details Folio $ 20–7 20–7 Jan 1 Capital 2 80 000 Jan 1 Rent payable 7 400 3 AB Loans 4 10 000 2 Fixtures and equipment 3 30 000 6 Mallika loan 6 5 000 3 Insurance 8 250 7 Rent receivable 10 95 5 Motor vehicles 5 9 000 Motor expenses 9 50 Capital account Page 2 Date Details Folio $ Date Details Folio $ 20–7 Jan 1 Bank 1 80 000 Fixtures and equipment account Page 3 Date Details Folio $ Date Details Folio $ 20–7 15 Jan 2 Bank 1 30 000 AB Loans account Page 4 Date Details Folio $ Date Details Folio $ 20–7 Jan 3 Bank 1 10 000 Motor vehicles account Page 5 Date Details Folio $ Date Details Folio $ 20–7 Jan 5 Bank 1 9 000 Mallika loan account Page 6 Date Details Folio $ Date Details Folio $ 20–7 Jan 6 Bank 1 5 000 Cambridge IGCSE and O Level Accounting Rent payable account Page 7 Date Details Folio $ Date Details Folio $ 20–7 Jan 1 Bank 1 400 Insurance account Page 8 Date Details Folio $ Date Details Folio $ 20–7 Jan 3 Bank 1 250 Motor expenses account Page 9 Date Details Folio $ Date Details Folio $ 20–7 Jan 5 Bank 1 50 Rent receivable account Page 10 Date Details Folio $ Date Details Folio $ 16 20–7 Jan 7 Bank 1 95 The motor expenses such as fuel and repairs are shown in an expense account as they do not increase the value of the motor vehicle. TIP The rent received from a tenant is shown in an income account and is kept separate from When an item such as the expense of rent payable. rent is both paid and received by a business, No lines are left blank in the middle of ledger accounts as each entry is made on the next separate accounts are available line. maintained, one for rent payable and one In practice, for ease of reference, accounts of the same type (e.g. assets, expenses and so for rent receivable. on) are kept in the same area of the ledger. TEST YOURSELF 2.2 1 For each of the following transactions, state the name of the account which will be debited and the name of the account which will be credited. a Paid rates by cheque b Bought machinery and paid by cheque c Received commission by cheque for work done for another business d Repaid, by cheque, money borrowed from XYZ Loan Co Chapter 2: Double entry book-keeping – Part A 2.4 Double entry records for drawings KEY TERMS Whenever the owner of a business takes value from the business for his/her own use this is known as drawings. This value may be in the form of money, non-current assets or goods Drawings represent from the inventory held by the business. It is usual to open a drawings account to record any value taken these values so that the capital account does not have a large number of entries. from the business by the owner of that Any drawings are debited in the drawings account to show the value going into that account. business. The credit entry will be in the account giving the value. When money is withdrawn, either A balance on a the cash or bank account will be credited. When a non-current asset is withdrawn, the ledger account is the appropriate non-current asset account will be credited. When goods are withdrawn, the difference between the debit side and the purchases account will be credited. This is because these goods were originally purchased credit side. for resale and the amount of goods available for resale is reduced when goods are taken by the owner. At the end of the financial year, the total of the drawings account is transferred to the capital account. This reduces the amount owed by the business to the owner of the business. TEST YOURSELF 2.3 1 For each of the following transactions, state the name of the account which will be debited and the name of the account which will be credited. a The owner of a business invested more money in the business. b The owner of a business took an unused motor vehicle for personal use. c The owner of a business took goods for personal use. 17 2.5 Balancing ledger accounts At the end of each month, it is usual to balance any account of assets and liabilities which TIP contain more than one entry. The balance is the difference between the two sides of the When balancing an account, add up each account and represents the amount which is left in that account. side of the account The steps necessary to balance a ledger account are summarised as follows: and find the difference between them before On a calculator or a separate sheet of paper, add up each side of the account and find the drawing total lines difference between the two sides. and before writing the word ‘balance’. Enter this difference on the next available line on the side which is the smaller in money. Enter the date (usually the last day of the month) in the date column and the word ‘balance’ in the details column. It is usual to insert ‘c/d’ in the folio column. This is the abbreviation for ‘carried down’ and indicates where the double entry for this item will be made. Total each side of the account. This is done by drawing total lines and inserting the figure between these lines. It is usual to show a single line above the total and either a single or a double line below the total. The totals of an account must be on the same level and must be the same figure. Make the double entry for the balance carried down. On the line below the totals, write the amount of the balance on the opposite side to where the words ‘Balance c/d’ were written. Enter the date (usually the first day of the next month) in the date column and the word ‘balance’ in the details column. It is usual to insert ‘b/d’ in the folio column. This is the abbreviation for ‘brought down’ and indicates where the double entry for this item was made. Cambridge IGCSE and O Level Accounting Walkthrough 2.4 The bank account prepared in Walkthrough 2.3 shows the entries made by Ajay during the first week of trading. Balance the bank account in Ajay’s books on 7 January 20–7. Ajay Bank account Page 1 Date Details Folio $ Date Details Folio $ 20–7 20–7 Jan 1 Capital 2 80 000 Jan 1 Rent payable 7 400 3 AB Loans 4 10 000 2 Fixtures and equipment 3 30 000 6 Mallika loan 6 5 000 3 Insurance 8 250 7 Rent receivable 10 95 5 Motor vehicles 5 9 000 Motor expenses 9 50 95 095 7 Balance c/d 55 395 95 095 95 095 20–7 Jan 8 Balance b/d 55 395 You can now answer Question 1 at the end of this chapter. 18 2.6 Double entry records for sales, purchases and returns It is necessary to open an account to record goods which are purchased for resale and also an account to record goods which are sold by the business. Whilst these are actually the same goods coming into the business and going out of the business, it is necessary to record them in separate accounts as the purchases will be at cost price and the sales at selling price. A purchases account and a sales account are used rather than a goods account. An inventory account is only used to record the goods left at the end of the financial year and not for day-to-day transactions. The same double entry principles applied to assets and liabilities are applied to purchases, sales and returns. Purchases a Goods purchased for cash or cheque Whenever goods are purchased, the purchases account will be debited as the goods are coming into the business and the purchases account is receiving that value. The double entry will be a credit in either the cash account or the bank account depending on whether the amount was paid in cash or by cheque. b Goods purchased on credit It is common for businesses to buy on credit and pay for the goods at a later date rather than at the time of purchase. The purchases account will be debited in the usual way. Chapter 2: Double entry book-keeping – Part A The credit entry will be made in the account of the supplier of the goods to show the value coming from that person. The supplier of goods is known as a trade creditor. When payment is made to the supplier, the bank or cash account will be credited (to show value going out of that account) and the account of the supplier will be debited (to show value going into that account). Walkthrough 2.5 20–7 January 9 Ajay bought goods, $650, on credit from Kolkata & Co 10 Ajay bought goods, $150, and paid by cheque 13 Ajay paid the amount owing to Kolkata & Co by cheque Enter these transactions in Ajay’s ledger. Ajay Bank account Page 1 Date Details Folio $ Date Details Folio $ 20–7 Jan 10 Purchases 11 150 13 Kolkata & Co 12 650 19 Purchases account Page 11 Date Details Folio $ Date Details Folio $ 20–7 Jan 9 Kolkata & Co 12 650 10 Bank 1 150 Kolkata & Co account Page 12 Date Details Folio $ Date Details Folio $ 20–7 20–7 Jan 13 Bank 1 650 Jan 9 Purchases 11 650 650 650 The account of Kolkata & Co is ‘in balance’ as both sides equal $650. The account has been totalled to indicate that the account is now closed. TIP It is not necessary to write the month against each transaction, only when it is the first Only goods bought entry for the month. for resale are entered in the purchases If there is more than one entry on the same side of an account on the same date, it is not account. necessary to write the day of the month each time. Cambridge IGCSE and O Level Accounting Sales a Goods sold for cash or cheque Whenever goods are sold, the sales account will be credited as the goods are going out of the business and the sales account is giving out that value. The double entry will be a debit in either the cash account or the bank account depending on whether the amount was received in cash or by cheque. b Goods sold on credit Just as a business may purchase goods and pay for them at a later date, it may also sell goods on credit. The sales account will be credited in the usual way. The debit entry will be made in the account of the customer to whom the goods were sold to show the value going to that person. The customer who bought the goods on credit is known as a trade debtor. When payment is received from the debtor, the bank or cash account will be debited (to show value coming into that account) and the account of the debtor will be credited (to show value going out of that account). Walkthrough 2.6 20–7 January 16 Ajay sold goods, $175, for cash 17 Ajay sold goods, $770, on credit to Prerna 20 Prerna gave Ajay a cheque for $500 on account Enter these transactions in Ajay’s ledger. 20 Ajay Bank account Page 1 Date Details Folio $ Date Details Folio $ 20–7 Jan 20 Prerna 15 500 Cash account Page 13 Date Details Folio $ Date Details Folio $ 20–7 Jan 16 Sales 14 175 Sales account Page 14 Date Details Folio $ Date Details Folio $ 20–7 Jan 16 Cash 13 175 17 Prerna 15 770 Chapter 2: Double entry book-keeping – Part A Prerna account Page 15 Date Details Folio $ Date Details Folio $ 20–7 20–7 Jan 17 Sales 14 770 Jan 20 Bank 1 500 270 20 Balance c/d 270 770 770 20–7 Jan 21 Balance b/d 270 The term ‘on account’ indicates that only part of the amount outstanding is being paid. TIP The remainder will be paid at a later date. When goods Prerna’s account has been balanced following the stages mentioned previously in this (originally purchased chapter (though this is usually done at the end of the month). for resale) are sold they are recorded in On 21 January, Prerna is Ajay’s debtor as an amount of $270 is owing to Ajay. the sales account. Returns Sometimes goods which have been purchased have to be returned to the supplier. They may be faulty, damaged or not what was ordered. These goods are known as purchases returns or returns outward. A special account known as a purchases returns account (or returns 21 outward account) is opened and any returns are credited to this account to show the value going out. The debit entry will be made in the account of the supplier to whom the goods are being returned (to show the value going to that person). Similarly, a customer may return goods to the business. These goods are known as sales returns or returns inwards. An account known as the sales returns account (or returns inwards account) is opened and any returns are debited to this account to show the value coming in. The credit entry will be made in the account of the customer who returned the goods (to show the value coming from that person). Walkthrough 2.7 20–7 January 21 Ajay sold goods, $245, on credit to Xavier Traders 22 Xavier Traders returned damaged goods, $55, to Ajay 23 Ajay purchased goods, $820, on credit from Varun 25 Xavier Traders paid their account by cheque 27 Ajay returned faulty goods, $44, to Varun 30 Ajay gave Varun a cheque for $700 on account Enter these transactions in Ajay’s ledger. Cambridge IGCSE and O Level Accounting Ajay Bank account Page 1 Date Details Folio $ Date Details Folio $ 20–7 20–7 Jan 25 Xavier Traders 16 190 Jan 30 Varun 18 700 Purchases account Page 11 Date Details Folio $ Date Details Folio $ 20–7 Jan 23 Varun 18 820 Sales account Page 14 Date Details Folio $ Date Details Folio $ 20–7 Jan 21 Xavier Traders 16 245 Xavier Traders account Page 16 22 Date Details Folio $ Date Details Folio $ 20–7 20–7 Jan 21 Sales 14 245 Jan 22 Sales returns 17 55 270 25 Bank 1 190 245 245 Sales returns account Page 17 Date Details Folio $ Date Details Folio $ 20–7 Jan 22 Xavier Traders 16 55 Chapter 2: Double entry book-keeping – Part A Varun account Page 18 Date Details Folio $ Date Details Folio $ 20–7 20–7 Jan 27 Purchases returns 19 44 Jan 23 Purchases 11 820 30 Bank 1 700 31 Balance c/d 1 876 820 820 820 20–7 Jan 21 Balance b/d 76 Purchases returns account Page 19 Date Details Folio $ Date Details Folio $ 20–7 Jan 27 Varun 18 44 You can now answer Questions 2–4 at the end of this chapter. 2.7 Double entry records for carriage inwards and carriage outwards KEY TERMS 23 The term carriage refers to the cost of carrying or transporting goods. Carriage inwards Carriage is the cost of is part of the cost of purchasing goods as it occurs when a business has to pay for goods it transporting goods. has purchased to be delivered to its premises. Carriage outwards is a selling expense as Carriage inwards is it occurs when a business pays for goods to be delivered to the customer’s premises. It is the cost of bringing important that these two expenses are treated separately in the accounts. the goods to the business and carriage Applying the double entry principle to carriage inwards, the carriage inwards account is outwards is the cost debited as this is the account receiving the money and the cash account (or the bank account of delivering the goods if the money is paid by cheque) is credited as the money is coming from this account. to the customer. Similarly, if the payment relates to carriage outwards, the cash account or bank account is credited and the carriage outwards account is debited. If the carriage is not actually paid for at the time, the account of the supplier of the carriage service will be credited instead of the cash account or bank account. TEST YOURSELF 2.4 1 Explain how to balance a ledger account. LINK 2 Explain the meaning of the term credit purchases. You will learn more 3 State two reasons why it may be necessary to return goods to a supplier. about double entry 4 State an alternative name for sales returns. book-keeping in 5 Explain the difference between carriage inwards and carriage outwards. Chapter 4. You can now answer Question 5 at the end of this chapter. Cambridge IGCSE and O Level Accounting 2.8 Three column running balance accounts The ledger accounts presented so far have been in the traditional form. This form is also known as the ‘T’ account format. There is another method of presenting ledger accounts which is commonly used on computer-generated accounts which is known as the three column running balance format. This form of presentation uses only one column each for the date, details and folio and has three money columns side-by-side – one for debit, one for credit and one for balance after each transaction. The layout of a ledger account using this format is as follows: Date Details Folio Debit Credit Balance $ $ $ The advantage of this method is that it shows the balance of the account after every transaction. When the accounts are prepared manually, it involves extra calculations which may lead to errors. Walkthrough 2.8 20–7 January 1 Ajay began business. He opened a business bank account and invested $80 000 as capital 1 Paid rent of premises, $400, by cheque 2 Fixtures and equipment costing $30 000 were bought and paid for by cheque 24 3 Paid insurance, $250, by cheque 3 A short-term loan of $10 000 was received from AB Loans 5 A motor vehicle costing $9 000 was bought and paid for by cheque 5 Paid motor expenses, $50, by cheque 6 A long-term loan of $5 000 was received from Ajay’s sister Mallika 7 Part of the premises were rented out to another business and a cheque for $95 was received Enter these transactions in the bank account in Ajay’s ledger using the three column running balance format. Chapter 2: Double entry book-keeping – Part A Ajay Bank account Page 1 Date Details Folio Debit Credit Balance $ $ $ 20–7 Jan 1 Capital 80 000 80 000 dr Rent payable 400 79 600 dr 2 Fixtures and equipment 30 000 49 600 dr 3 Insurance 250 49 350 dr AB Loans 10 000 59 350 dr 5 Motor vehicles 9 000 50 350 dr Motor expenses 50 50 300 dr 6 Mallika loan 5 000 55 300 dr 7 Rent receivable 95 55 395 dr It is common for the abbreviation ‘dr’ or ‘cr’ to appear after the figure in the balance column to indicate the nature of the balance. 2.9 Interpreting ledger accounts and their balances 25 It is necessary to be able to understand the entries made in a ledger account and to be able to explain those entries. Walkthrough 2.9 The following account appeared in the ledger of Ajay.

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