Accounting IGCSE

• Accounting Concepts


  Assumptions used in preparing Income Statement and Statement of Financial Position (Balance Sheet)
• Business Entity (Accounting Entity) Concept

  • The owner and the business are considered as two different persons, distinct from each other
  • Transactions are recorded from the point of view of the business and not the owner
  • Any amount invested by the owner in the business is considered as a liability by the business
  • Only those transactions that concern the business are recorded
• Money Measurement Concept


  • Only those transactions that can be expressed in money terms (financial transactions) are recorded in the books
  • Non-financial transactions are therefore not recorded

  
• Accruals Concept


  • Revenues earned in a period need to be matched against expenses incurred for that same period
  • Adjustments are made in accounts for accrued and prepaid items so that accounts reflect revenue earned (not amount received) and expenses incurred (not amount paid for)
• Matching Principle


  Revenue - Expenses = Net Profit
• Prudence (Conservatism) Concept


  • Prevents the anticipation of future profits before they are realized but requires making provisions for losses as soon as they are recognized
  • Assets and revenue are not overstated while liabilities and losses are not understated
• Consistency Concept


  • All similar items need to be given the same accounting treatment in the same accounting period and from one period to another
  • No changes are allowed in the accounting policy chosen unless there is a valid reason
• Materiality Concept


  • Some items (stapler, paper clips etc.) are not considered non-current assets though they may be used by the business for a long period of time
  • Their costs are written off at once against profit in the period they are bought
• The preparation of Income Statement and Statement of Financial Position (Balance Sheet) of a business is based on certain assumptions called Accounting Concepts
• Accounting concepts are very helpful in applying commonly established procedures in preparing financial statements
• Bank Reconciliation


  1. Balance as per updated Cash Book

  2. Add: Un-presented Cheques

  3. Less: Bank lodgement / Un-credited Cheques

  4. Balance as per Bank Statement
• Cashbook


  Owner's record (Debit means + balance, Credit means - balance)

  
• Bank statement


  Bank's record (Credit means + balance, Debit means - balance)
• Entries recorded in bank statement but not in cashbook

  1. Credit transfer (Bank Giro)

  2. Standing orders

  3. Direct Debits

  4. Bank Charges/ Interest Charged

  5. Dishonored cheque

  6. Interest Received/ Dividends Received

  
• Entries recorded in cashbook but not on bank statement

  1. Unpresented Cheque

  2. Uncredited Cheque (Lodgments)

  
• Usefulness of regularly preparing a bank reconciliation statement


  • Provide an accurate and updated bank balance
  • Identification of errors made by the bank and notified to the bank for correction
  • Identification of errors in the cash book and easily be corrected
  • Assist in the prevention of fraud
  • Identification of bank charges
  • Payments made directly by customers
  • Payment of standing orders/direct debits
  • Identify returned cheques
• Trading business


  Involved with buying and selling goods
• Service business


  Provides services which benefits others
• Bookkeeping

  • The process of recording data
  • Preparing accounts from source documents or prime entry records
• Accounting

  • Provides information for decision making
  • Identifying, measuring and communicating financial information