IGCSE Accounting: The Fundamentals of Accounting — Revision Notes

Condensed for the final weeks. For the full explanation, use the The Fundamentals of Accounting study guide.

The accounting equation

ASSETS  =  CAPITAL  +  LIABILITIES

Every transaction affects at least two items and the equation must always balance. That is the entire basis of double entry.

• Assets — resources owned: premises, equipment, inventory, trade receivables, bank, cash.
• Liabilities — amounts owed: loans, trade payables, bank overdraft.
• Capital — what the owner has invested; from the business’s point of view it is owed to the owner, which is why it appears with liabilities.

Capital is increased by profit and additional investment; reduced by losses and drawings.

Worked examples — tracing a transaction through the equation. A $5,000 bank loan received in cash: assets increase by $5,000 (the cash) and liabilities increase by $5,000 (the loan owed) — capital is untouched, and the equation stays balanced. $500 taken in drawings: assets decrease by $500 (cash leaving the business) and capital decreases by the same $500. Practising this two-sided trace for different transaction types — a cash purchase, a credit sale, drawings, a loan received — is what turns the equation from a memorised formula into a genuine checking tool.

Double entry

Every transaction has a debit and an equal credit.

Debit increases	Credit increases
Assets	Liabilities
Expenses	Income
Drawings	Capital

The memory hook: DEAD CLIC — Debit Expenses, Assets, Drawings; Credit Liabilities, Income, Capital.

Method that avoids errors: identify the two accounts affected, decide whether each is increasing or decreasing, then apply the rule. Debit the account that receives value; credit the account that gives it.

Books of prime entry

Transactions are recorded here first, then posted to the ledger.

Book	Records
Sales journal	Credit sales
Purchases journal	Credit purchases
Sales returns journal	Returns inwards
Purchases returns journal	Returns outwards
Cash book	All cash and bank transactions
Petty cash book	Small cash payments
General journal	Everything else — opening entries, corrections, purchase of non-current assets on credit

Credit transactions only go in the sales and purchases journals. Cash sales go straight to the cash book — putting them in the sales journal is a common error.

Ledger divisions

• Sales ledger — personal accounts of credit customers (trade receivables).
• Purchases ledger — personal accounts of credit suppliers (trade payables).
• General (nominal) ledger — all other accounts: assets, expenses, income, capital.

The trial balance

A list of all ledger balances at a date, checking that total debits equal total credits.

A balanced trial balance does not prove the books are correct. Six errors do not affect it, and naming them is a standard question:

Error	Meaning
Omission	Transaction left out entirely
Commission	Right type of account, wrong account — e.g. wrong customer
Principle	Wrong type of account — e.g. an asset posted to an expense
Original entry	Same wrong amount used for both entries
Complete reversal	Debit and credit the wrong way round
Compensating	Two separate errors of equal value cancel out

The distinction between commission and principle is the one most often lost: commission is the wrong account of the right kind; principle is the wrong kind of account.

Errors that do unbalance the trial balance — a single entry, two debits, or different amounts on the two sides — are held in a suspense account until corrected.

Capital and revenue

• Capital expenditure — buying or improving a non-current asset; shown in the statement of financial position.
• Revenue expenditure — running costs, including repairs; shown in the income statement.

Treating capital expenditure as revenue understates profit and understates non-current assets. Being able to state the effect on both statements is what earns full marks.

Accounting concepts

Prudence — do not overstate assets or profit, and do not understate liabilities or losses; recognise losses as soon as they are foreseen, but gains only once realised.

Matching (accruals) — revenues and the costs incurred in earning them are recorded in the same period, regardless of when cash actually moves.

Going concern — assume the business will continue trading for the foreseeable future, so assets are valued at cost rather than break-up (forced-sale) value.

Consistency — apply the same accounting treatment from one period to the next, so results remain comparable over time.

Book-keeping versus accounting: book-keeping is the routine, day-to-day recording of transactions; accounting is the broader, analytical activity of using those records to interpret performance, monitor progress and inform decisions. Accounting is not simply the mechanical act of writing entries down — this exact distinction is specifically tested.

Exam traps

• Recording cash sales in the sales journal.
• Treating drawings as an expense — they reduce capital, not profit.
• Assuming a balanced trial balance means no errors exist.
• Confusing errors of commission and principle.
• Debiting the giver instead of the receiver.
• Classifying delivery or installation costs of a new machine as revenue expenditure — they are part of its capital cost.

Self-test

1. State the accounting equation and explain why capital sits with liabilities.
2. What does DEAD CLIC stand for?
3. Which transactions go in the purchases journal?
4. Name three errors that do not affect trial balance agreement.
5. What is the effect of treating capital expenditure as revenue expenditure?

Answers: 1. Assets = Capital + Liabilities; from the business’s perspective capital is owed back to the owner, so it is treated as a liability of the business. 2. Debit Expenses, Assets, Drawings; Credit Liabilities, Income, Capital. 3. Credit purchases of goods for resale only — not cash purchases and not purchases of non-current assets. 4. Omission, commission, principle, original entry, complete reversal, compensating — any three. 5. Profit is understated and non-current assets are understated.