IGCSE Accounting: Preparation of Financial Statements (Cambridge 0452)

Syllabus edition note. This resource follows the Cambridge IGCSE Accounting 0452 syllabus for exams in 2027, 2028 and 2029 (version 1), first examined in the March 2027 series in India and the June 2027 series elsewhere. If you sit 0452 in November 2026, you sit the 2026 syllabus (version 2), which differs: Paper 1 has 35 multiple-choice marks in 1 hour 15 minutes, not 40 marks in 1 hour 30 minutes; Topic 7 is “Accounting principles and policies”, without 7.2 Ethical considerations or 7.3 Technology and sustainability; 4.4 is “Irrecoverable debts and provision for doubtful debts”; income statements are named instead of statements of profit or loss; three-column running balance accounts are not required; Clubs and societies is 5.4 and Manufacturing accounts 5.5; and 6.3 is “Inter-firm comparison”. For this topic, the 2026 syllabus covers only trading and service businesses in 5.1 and limits drawings adjustments to goods taken by the owner for own use; for limited companies it excludes cumulative and non-cumulative preference shares, rights issues, share premium and capital redemption reserve but requires the difference between redeemable and non-redeemable preference shares (the 2027-2029 syllabus lists none of these); and for incomplete records it does not ask why businesses keep them or what their advantages are. If you sit in November 2026, work from the 2026 syllabus on the Cambridge International website.

This guide covers Topic 5 Preparation of financial statements, for Cambridge IGCSE Accounting 0452, syllabus for exams in 2027, 2028 and 2029 (Version 1). It is the fifth of seven topics and the largest: six sub-topics that all end in the same two statements — a statement of profit or loss and a statement of financial position — prepared for different kinds of organisation and from different kinds of starting information.

Where this fits in 0452

Topic 5 is where everything before it comes together. The ledger balances come from Topic 2’s Sources and Recording of Data, checked by the trial balance and corrections in Topic 3’s Verification of Accounting Records. The year-end adjustments — depreciation, other payables and other receivables, irrecoverable debts and the allowance for irrecoverable debts — are recorded in the ledger in Topic 4, Accounting Procedures; this topic shows where each one lands in the financial statements. The statements you prepare here are then the raw material for the ratios and comparisons of Topic 6, Analysis and Interpretation.

Syllabus coverage

CAMBRIDGE IGCSE ACCOUNTING (0452) — TOPIC 5: PREPARATION OF FINANCIAL STATEMENTS

• 5.1 Sole traders — the advantages and disadvantages of operating as a sole trader; how a sole trader can be a trading, service or manufacturing business, or a combination of these; the importance of preparing statements of profit or loss and statements of financial position; preparing statements of profit or loss for trading, service and manufacturing businesses and combinations of them; the importance of producing a statement of financial position to record assets and liabilities on a specified date; defining the content of a statement of financial position: non-current assets, intangible assets, current assets, current liabilities, non-current liabilities and capital; the effect of a change in one account balance on other account balances in the financial statements; preparing statements of financial position for each type of business; and adjustments for accumulated depreciation (straight line, reducing balance and revaluation methods), accrued and prepaid expenses and income, irrecoverable debts and the allowance for irrecoverable debts, and drawings (goods and other assets taken by the owner, and the owner’s private expenses paid by the business).
• 5.2 Partnerships — how a partnership can be a trading, service or manufacturing business, or a combination; the advantages and disadvantages of forming a partnership; the importance and contents of a partnership agreement; the purpose of an appropriation account; preparing statements of profit or loss, appropriation accounts and statements of financial position; recording interest on partners’ loans, interest on capital, interest on drawings, partners’ salaries and the division of the balance of profit or loss; the adjustments detailed in 5.1; the uses of and differences between partners’ capital and current accounts; and preparing capital and current accounts in ledger account form and as part of a statement of financial position. The syllabus Note reads: “Candidates will not be required to answer questions on the dissolution of a partnership, changes to a profit-sharing ratio or a limited liability partnership. Candidates will not be required to prepare financial statements on the admission/departure of a partner.”
• 5.3 Limited companies — how a limited company can be a trading, service or manufacturing business, or a combination; the advantages and disadvantages of operating as a limited company; the terms “limited liability” and “equity”; the capital structure of a limited company: preference share capital, ordinary share capital, general reserve and retained earnings; the features of ordinary share capital and loan capital (debentures); share capital that is issued, called-up and paid-up; preparing statements of profit or loss, statements of changes in equity and statements of financial position; and the adjustments detailed in 5.1.
• 5.4 Manufacturing accounts — direct and indirect costs; direct material, direct labour, prime cost and factory overheads; adjustments for work in progress; calculating factory cost of production; preparing manufacturing accounts, statements of profit or loss and statements of financial position; and the adjustments detailed in 5.1.
• 5.5 Clubs and societies — receipts and payments accounts and income and expenditure accounts; preparing receipts and payments accounts; preparing accounts for revenue-generating activities, such as refreshments and subscriptions; preparing income and expenditure accounts and statements of financial position; the adjustments detailed in 5.1; and defining and calculating the accumulated fund.
• 5.6 Incomplete records — why businesses keep different types of accounting records rather than using the full double entry system; the advantages and disadvantages of not maintaining a full set of accounting records; preparing opening and closing statements of affairs; calculating profit or loss for the year from changes in capital over time; calculating sales, purchases, gross profit, trade receivables, trade payables and other figures from incomplete information; preparing statements of profit or loss and statements of financial position from incomplete records; the adjustments detailed in 5.1; and applying mark-up, margin and inventory turnover to arrive at missing figures. The syllabus Note reads: “Candidates will only be asked questions on incomplete records in relation to sole trader businesses. Candidates will not be asked questions on incomplete records for service or manufacturing businesses.”

How to approach it

Learn the sole trader statements (5.1) first and learn them thoroughly, because every other sub-topic is a variation on them. A partnership adds an appropriation account and capital and current accounts; a limited company replaces the capital section with equity and adds a statement of changes in equity; a manufacturing business adds a manufacturing account in front of the statement of profit or loss; a club renames the statements and the capital; and incomplete records make you reconstruct the missing figures before you can start. The adjustments in 5.1 are listed again under 5.2, 5.3, 5.4, 5.5 and 5.6, so an adjustment you can handle for a sole trader is one you can handle everywhere.

For every adjustment, train yourself to ask two questions: where does it go in the statement of profit or loss, and where does it go in the statement of financial position? Almost every adjustment has a home in both, and forgetting the second half is the most common way to end up with a statement of financial position that does not balance.

5.1 Sole traders

Operating as a sole trader

A sole trader is a business owned by one person, who may still employ other people.

Advantages	Disadvantages
The owner keeps all the profit	Unlimited liability: the owner’s private possessions can be used to pay business debts
The owner has full control and can make decisions quickly	Capital is limited to what one person can provide or borrow
Easy and cheap to set up	The owner bears all losses and carries a heavy workload
Financial affairs can be kept private	The business may not continue if the owner is ill or dies

A sole trader can be a trading business (buys and sells goods, so it has cost of sales and gross profit), a service business (sells its skills or time, such as a hairdresser, so it has no cost of sales and no gross profit — revenue from fees less expenses gives profit for the year), a manufacturing business (makes the goods it sells, so it prepares a manufacturing account — see 5.4) or a combination, such as a shop that also earns fees from repairs. In a combination, gross profit is found for the trading side and the service income is added after gross profit.

Why prepare the two statements

The statement of profit or loss shows the profit or loss for a period, so the owner can measure performance, compare it with earlier periods, decide on drawings and future plans, and give information to lenders and tax authorities. The statement of financial position records the assets, liabilities and capital on a specified date — it is a snapshot of what the business owns and owes at the end of the period, not a record of what happened during it.

Content of the statement of financial position

Heading	Meaning	Examples
Non-current assets	Resources owned and used in the business for more than one year	Premises, fixtures and fittings, motor vehicles, loose tools
Intangible assets	Non-current assets with no physical form	Goodwill
Current assets	Short-term assets expected to be used or turned into cash within twelve months	Inventory, trade receivables, other receivables, bank, cash
Current liabilities	Amounts due for payment within twelve months	Trade payables, other payables, bank overdraft
Non-current liabilities	Amounts due for payment after more than twelve months	Long-term bank loan
Capital	The owner’s equity: what the business owes the owner	Opening capital + capital introduced + profit for the year – drawings

The adjustments and where they go

The ledger entries for each adjustment are taught in Topic 4, Accounting Procedures. In the financial statements:

Adjustment	Statement of profit or loss	Statement of financial position
Depreciation — straight line (a fixed amount or percentage of cost each year)	Expense: this year’s charge	Non-current asset shown at cost less accumulated depreciation (the provision for depreciation)
Depreciation — reducing balance (a fixed percentage of the carrying value at the start of the year)	Expense: this year’s charge	Cost less accumulated depreciation
Depreciation — revaluation (value at start + additions – value at end)	Expense: the fall in value	Asset shown at its end-of-year valuation
Accrued expense	Add to the expense	Other payables (current liability)
Prepaid expense	Deduct from the expense	Other receivables (current asset)
Accrued income (earned, not yet received)	Add to the income	Other receivables (current asset)
Income received in advance	Deduct from the income	Other payables (current liability)
Irrecoverable debt written off	Expense	Deduct from trade receivables
Creating or increasing the allowance for irrecoverable debts	Only the increase is an expense	Full allowance deducted from trade receivables
Reducing the allowance	The decrease is added to income	Full (lower) allowance deducted from trade receivables
Goods taken by the owner for own use (at cost)	Deduct from purchases	Add to drawings
Other assets taken by the owner	—	Deduct from that asset; add to drawings
Owner’s private expense paid by the business	Remove from the expense	Add to drawings

Worked example: sole trader statements with adjustments

Kofi Mensah runs a shop that also carries out repairs for a fee, so his business is a combination of trading and service. His trial balance at 31 December 2027 contained the following balances.

                                                   Debit $    Credit $
Premises (cost)                                     60,000
Fixtures and fittings (cost)                        12,000
Provision for depreciation: fixtures and fittings               4,800
Motor vehicle (cost)                                20,000
Provision for depreciation: motor vehicle                       7,200
Goodwill                                             5,000
Loose tools (valuation 1 January 2027)               1,500
Loose tools purchased during the year                  400
Inventory 1 January 2027                             8,000
Revenue                                                        96,000
Service fees                                                   14,000
Rent received                                                   3,000
Purchases                                           55,000
Sales returns                                        1,000
Purchases returns                                               1,500
Carriage inwards                                       700
Wages                                               18,000
Insurance                                            2,400
General expenses                                     3,100
Electricity                                          1,800
Loan interest                                          600
Trade receivables                                    9,000
Allowance for irrecoverable debts                                 300
Trade payables                                                  6,200
Bank                                                 4,300
Cash                                                   200
Drawings                                            12,000
Bank loan (repayable 2032)                                     10,000
Capital 1 January 2027                                         72,000
                                                   215,000    215,000

Additional information at 31 December 2027:

1. Inventory was valued at $9,400.
2. Kofi took goods costing $500 for his own use. This has not been recorded.
3. Insurance includes $600 paid in advance for 2028.
4. Electricity of $300 is owing.
5. General expenses include $250 for Kofi’s private telephone bill.
6. Service fees of $800 for repairs completed in December have not yet been received.
7. Rent received includes $500 received in advance for January 2028.
8. A debt of $500 is irrecoverable and is to be written off. The allowance for irrecoverable debts is to be 4% of the remaining trade receivables.
9. Depreciation: fixtures and fittings 10% per year on cost (straight line); motor vehicle 25% per year (reducing balance); loose tools were valued at $1,300 (revaluation). No depreciation is charged on premises in this example.
10. The loan interest of $600 is the full year’s interest (6% on $10,000).

Workings

Depreciation: fixtures (straight line)  10% x 12,000              = 1,200
Depreciation: motor vehicle (reducing)  25% x (20,000 - 7,200)    = 3,200
Depreciation: loose tools (revaluation) 1,500 + 400 - 1,300       =   600
Trade receivables after write-off       9,000 - 500               = 8,500
New allowance                           4% x 8,500                =   340
Increase in allowance (SoPL expense)    340 - 300                 =    40
Other receivables                       600 prepaid + 800 accrued = 1,400
Other payables                          300 accrued + 500 advance =   800
Drawings                                12,000 + 500 + 250        = 12,750

Kofi Mensah
Statement of profit or loss for the year ended 31 December 2027
                                                $         $         $
Revenue                                                        96,000
Less Sales returns                                              1,000
                                                               95,000
Less Cost of sales
  Inventory 1 January 2027                               8,000
  Purchases                                   55,000
  Less Purchases returns                       1,500
                                              53,500
  Carriage inwards                               700
  Less Goods taken for own use                   500
                                                        53,700
                                                        61,700
  Less Inventory 31 December 2027                        9,400
                                                               52,300
Gross profit                                                   42,700
Add Service fees (14,000 + 800)                         14,800
    Rent received (3,000 - 500)                          2,500
                                                               17,300
                                                               60,000
Less Expenses
  Wages                                                 18,000
  Insurance (2,400 - 600)                                1,800
  General expenses (3,100 - 250)                         2,850
  Electricity (1,800 + 300)                              2,100
  Loan interest                                            600
  Irrecoverable debts                                      500
  Increase in allowance for irrecoverable debts             40
  Depreciation: fixtures and fittings                    1,200
  Depreciation: motor vehicle                            3,200
  Depreciation: loose tools                                600
                                                               30,890
Profit for the year                                            29,110

Kofi Mensah
Statement of financial position at 31 December 2027
                                        Cost or   Accumulated   Carrying
                                      valuation  depreciation      value
                                              $             $          $
Non-current assets
Tangible assets
  Premises                               60,000             -     60,000
  Fixtures and fittings                  12,000         6,000      6,000
  Motor vehicle                          20,000        10,400      9,600
  Loose tools (at valuation)                                       1,300
                                                                  76,900
Intangible assets
  Goodwill                                                         5,000
                                                                  81,900
Current assets
  Inventory                                             9,400
  Trade receivables                           8,500
  Less Allowance for irrecoverable debts        340
                                                        8,160
  Other receivables                                     1,400
  Bank                                                  4,300
  Cash                                                    200
                                                                  23,460
Total assets                                                     105,360

Capital and liabilities
Capital
  Opening balance                                                 72,000
  Add Profit for the year                                         29,110
                                                                 101,110
  Less Drawings                                                   12,750
                                                                  88,360
Non-current liabilities
  Bank loan (repayable 2032)                                      10,000
Current liabilities
  Trade payables                                        6,200
  Other payables                                          800
                                                                   7,000
Total capital and liabilities                                    105,360

Both totals are $105,360. Notice that every adjustment appears twice: the $600 prepaid insurance reduces an expense and becomes an other receivable; the $500 of goods taken reduces purchases and increases drawings; the $500 irrecoverable debt is an expense and reduces trade receivables.

The effect of a change in one balance on others

Because every entry has two sides, changing one balance in the financial statements always changes at least one other. Trace each change through both statements:

Change	Effect on profit for the year	Effect on the statement of financial position
Closing inventory increased by $400	Cost of sales down $400, so gross profit and profit up $400	Current assets up $400; capital up $400
An accrued expense of $300 is recorded	Expenses up $300, so profit down $300	Other payables up $300; capital down $300
Depreciation increased by $1,000	Profit down $1,000	Carrying value of non-current assets down $1,000; capital down $1,000
An irrecoverable debt of $200 is written off	Profit down $200	Trade receivables down $200; capital down $200
Goods costing $500 taken for own use are recorded	Purchases down $500, so gross profit and profit up $500	Drawings up $500, so closing capital is unchanged

In each row the statement of financial position still balances, because the change to assets or liabilities equals the change to capital.

5.2 Partnerships

Forming a partnership

A partnership is two or more people carrying on a business together with a view to profit. Like a sole trader, it can be a trading, service or manufacturing business, or a combination.

Advantages	Disadvantages
More capital can be raised from several owners	Unlimited liability for the partners
Partners bring different skills and share the workload	Profits must be shared
Losses are shared	Partners may disagree, and each is bound by the business decisions of the others
Cover for illness and holidays	Decisions can take longer than for a sole trader

The partnership agreement

The partnership agreement sets out how the partners will run the business and share its results. It is important because it reduces the risk of disputes. It usually contains: the capital each partner is to contribute; the ratio in which profits and losses are shared; whether interest is allowed on capital and at what rate; whether interest is charged on drawings; any salaries paid to partners; the rate of interest on any loans made by partners to the business; and any limits on drawings.

The appropriation account

The statement of profit or loss of a partnership is prepared exactly as for a sole trader, down to profit for the year. The appropriation account then shows how that profit is shared between the partners. Its purpose is to apply the partnership agreement, so each partner’s share is shown clearly.

• Interest on a partner’s loan is not an appropriation. A loan is a liability of the business, so the interest is an expense in the statement of profit or loss, charged before profit for the year is found. It is paid to the partner or credited to their current account.
• Interest on drawings is charged to partners, so it is added in the appropriation account and debited to each partner’s current account.
• Interest on capital and partners’ salaries are appropriations: deducted in the appropriation account and credited to the current accounts.
• The balance of profit or loss left over is divided in the profit-sharing ratio. If the appropriations exceed the profit, the balance is a loss and is shared in the same ratio.

Capital accounts and current accounts

Capital account	Current account
Records the long-term capital each partner has invested	Records the partner’s day-to-day share of the results
Usually stays the same from year to year (fixed)	Changes every year
Credited with capital introduced	Credited with interest on capital, salary, share of profit (and interest on a loan if not paid)
—	Debited with drawings, interest on drawings and share of a loss
Normally a credit balance	Can be a credit balance or a debit balance (the partner has taken out more than they are entitled to)

In the statement of financial position both appear under capital; a debit balance on a current account is shown in brackets and deducted.

Worked example: partnership appropriation and current accounts

Amir and Bea are in partnership. Their agreement provides:

• Capital accounts (fixed): Amir $60,000; Bea $40,000.
• Interest on capital at 5% per year.
• Bea is paid a salary of $8,000 per year.
• Interest on drawings for the year: Amir $600; Bea $300.
• Remaining profits and losses shared Amir 3 : Bea 2.
• Bea has lent the partnership $10,000 at 5% per year. The interest is credited to her current account.

Profit for the year ended 31 December 2027, after charging the loan interest of $500 (5% x $10,000) in the statement of profit or loss, was $48,000. On 1 January 2027 Amir’s current account had a credit balance of $1,200 and Bea’s a debit balance of $800. Drawings for the year were Amir $26,000 and Bea $18,000.

Amir and Bea
Appropriation account for the year ended 31 December 2027
                                               $          $
Profit for the year                                   48,000
Add Interest on drawings
  Amir                                       600
  Bea                                        300
                                                         900
                                                      48,900
Less Interest on capital
  Amir (5% x 60,000)                       3,000
  Bea (5% x 40,000)                        2,000
                                           5,000
Less Partner's salary
  Bea                                      8,000
                                                      13,000
                                                      35,900
Balance of profit shared
  Amir (3/5 x 35,900)                     21,540
  Bea (2/5 x 35,900)                      14,360
                                                      35,900

Current accounts
                        Amir      Bea                              Amir      Bea
2027                       $        $    2027                         $        $
1 Jan  Balance b/d         -      800    1 Jan  Balance b/d       1,200        -
31 Dec Drawings       26,000   18,000    31 Dec Loan interest         -      500
31 Dec Interest on                       31 Dec Interest on
       drawings          600      300           capital           3,000    2,000
31 Dec Balance c/d         -    5,760    31 Dec Salary                -    8,000
                                         31 Dec Share of profit  21,540   14,360
                                         31 Dec Balance c/d         860        -
                      26,600   24,860                            26,600   24,860
2028                                     2028
1 Jan  Balance b/d       860        -    1 Jan  Balance b/d           -    5,760

Capital accounts
                        Amir      Bea                              Amir      Bea
2027                       $        $    2027                         $        $
31 Dec Balance c/d    60,000   40,000    1 Jan  Balance b/d      60,000   40,000
                      60,000   40,000                            60,000   40,000
2028                                     2028
                                         1 Jan  Balance b/d      60,000   40,000

Because the capital accounts are fixed, nothing is posted to them during the year: drawings, interest, salary and the share of profit all go to the current accounts. Capital introduced would be the only entry, credited to the capital account.

Statement of financial position at 31 December 2027 (extract)
                                    Amir        Bea      Total
                                       $          $          $
Capital accounts                  60,000     40,000    100,000
Current accounts                    (860)     5,760      4,900
                                                       104,900
Non-current liabilities
  Loan from Bea                                         10,000

Amir’s current account has a debit balance of $860 because his drawings and interest on drawings ($26,600) exceeded everything credited to him ($25,740). The loan from Bea is a non-current liability, not part of her capital.

5.3 Limited companies

Operating as a limited company

A limited company is owned by its shareholders and is a separate legal entity from them. It can be a trading, service or manufacturing business, or a combination.

• Limited liability means that if the company cannot pay its debts, a shareholder can lose only the amount they have paid, or agreed to pay, for their shares; their private possessions are not at risk.
• Equity is the shareholders’ interest in the company: share capital plus reserves (general reserve and retained earnings). It equals total assets less total liabilities.

Advantages	Disadvantages
Limited liability for shareholders	More legal requirements and higher costs to set up and run
Large amounts of capital can be raised by issuing shares	Profits are shared among many shareholders as dividends
The company continues if a shareholder dies or sells their shares	Financial information may have to be made available to the public
Easier to borrow, for example by issuing debentures	Shareholders who own the company may not be the people who run it

Capital structure

Part of equity	What it is
Ordinary share capital	Shares carrying the main ownership of the company; ordinary shareholders receive a dividend that varies with profits and is paid only after preference dividends
Preference share capital	Shares carrying a fixed rate of dividend, paid before any ordinary dividend
General reserve	Profits transferred out of retained earnings and kept in the business rather than paid out
Retained earnings	Accumulated profits not yet paid out as dividends or transferred to the general reserve

Ordinary shares and debentures

Ordinary share capital	Loan capital (debentures)
Shareholders are owners of the company	Debenture holders are lenders to the company
Rewarded by dividends, which vary and need not be paid	Rewarded by interest at a fixed rate, which must be paid whether or not there is a profit
Dividends are shown in the statement of changes in equity	Debenture interest is a finance cost in the statement of profit or loss
Part of equity	A non-current liability (until it is due for repayment)
Not normally repaid while the company continues	Repaid on an agreed date
Ordinary shareholders usually have voting rights	Debenture holders do not vote

Issued, called-up and paid-up share capital

• Issued share capital is the value of the shares the company has actually issued to shareholders.
• Called-up share capital is the part of the issued share value that the company has asked shareholders to pay so far.
• Paid-up share capital is the part of the called-up amount that shareholders have actually paid.

For example, a company issues 100,000 ordinary shares of $1 each and calls up $0.80 per share. All calls are paid except $0.20 per share on 5,000 shares. Issued share capital is $100,000; called-up share capital is 100,000 x $0.80 = $80,000; paid-up share capital is $80,000 – (5,000 x $0.20) = $79,000.

The three statements

• Statement of profit or loss: prepared as for a sole trader down to profit from operations; debenture interest is then deducted as a finance cost to give profit for the year. Dividends do not appear here.
• Statement of changes in equity: shows how each part of equity changed during the year — new shares issued, profit for the year, transfers to the general reserve and dividends paid.
• Statement of financial position: assets as for a sole trader; the capital section becomes equity (share capital and reserves, taken from the closing line of the statement of changes in equity); debentures are shown under non-current liabilities.

Worked example: statement of changes in equity

Harbour Tiles Ltd provides the following for the year ended 31 December 2027.

• At 1 January 2027: ordinary shares of $1 each, fully paid, $150,000; 6% preference shares of $1 each, fully paid, $50,000; general reserve $30,000; retained earnings $45,000.
• On 1 March 2027 a further 50,000 ordinary shares of $1 each were issued at $1 each and fully paid.
• Profit from operations was $65,200. The company has $40,000 of 8% debentures (repayable 2035); the full year’s interest was paid.
• $10,000 was transferred to the general reserve.
• Dividends paid: the preference dividend for the year; an ordinary dividend of $0.10 per share on all 200,000 ordinary shares.

Workings: debenture interest 8% x $40,000 = $3,200, so profit for the year = $65,200 – $3,200 = $62,000. Preference dividend 6% x $50,000 = $3,000. Ordinary dividend 200,000 x $0.10 = $20,000.

Harbour Tiles Ltd
Statement of profit or loss for the year ended 31 December 2027 (extract)
                                                    $
Profit from operations                         65,200
Less Finance costs: debenture interest          3,200
Profit for the year                            62,000

Harbour Tiles Ltd
Statement of changes in equity for the year ended 31 December 2027
                          Ordinary  Preference   General   Retained     Total
                             share       share   reserve   earnings
                           capital     capital
                                 $           $         $          $         $
At 1 January 2027          150,000      50,000    30,000     45,000   275,000
Ordinary shares issued      50,000                                     50,000
Profit for the year                                          62,000    62,000
Transfer to general reserve                       10,000    (10,000)        -
Preference dividend paid                                     (3,000)   (3,000)
Ordinary dividend paid                                      (20,000)  (20,000)
At 31 December 2027        200,000      50,000    40,000     74,000   364,000

Harbour Tiles Ltd
Statement of financial position at 31 December 2027 (extract)
                                                    $
Equity
  Ordinary shares of $1 each                  200,000
  6% preference shares of $1 each              50,000
  General reserve                              40,000
  Retained earnings                            74,000
                                              364,000
Non-current liabilities
  8% debentures (repayable 2035)               40,000

Check across and down: the total column (275,000 + 50,000 + 62,000 – 3,000 – 20,000 = 364,000) agrees with the sum of the closing balances (200,000 + 50,000 + 40,000 + 74,000 = 364,000). The transfer to the general reserve moves profit from one reserve to another, so it does not change total equity.

5.4 Manufacturing accounts

A manufacturing business prepares a manufacturing account to find the cost of the goods it has made in the year. That figure replaces (or is added to) purchases of finished goods in the cost of sales section of the statement of profit or loss.

• Direct costs can be traced directly to the goods being made: direct material (raw materials that become part of the product) and direct labour (wages of the workers who make the product).
• Prime cost = direct material + direct labour.
• Indirect costs are factory costs that cannot be traced to particular units: these are the factory overheads, such as supervisors’ and other indirect factory wages, factory rent, factory power and depreciation of factory machinery.
• Work in progress is partly finished goods. Add the opening work in progress and deduct the closing work in progress, because goods finished this year include last year’s part-finished goods but exclude this year’s.
• Factory cost of production = prime cost + factory overheads + opening work in progress – closing work in progress.

Office and selling costs are not factory costs: they stay in the statement of profit or loss. The statement of financial position shows three inventories under current assets — raw materials, work in progress and finished goods.

Worked example: manufacturing account

Delta Furniture, a sole trader, provides the following for the year ended 31 December 2027: inventory of raw materials 1 January $6,000, 31 December $7,000; purchases of raw materials $42,000; carriage inwards on raw materials $1,000; direct factory wages $35,000; indirect factory wages $12,000; factory rent $8,000; factory power $4,500; factory machinery cost $60,000, depreciated at 10% per year straight line; loose tools valued at $1,200 on 1 January, $500 bought in the year, and valued at $1,100 on 31 December; work in progress 1 January $5,000, 31 December $6,100; inventory of finished goods 1 January $9,000, 31 December $11,000; revenue $160,000.

Delta Furniture
Manufacturing account for the year ended 31 December 2027
                                                         $          $
Direct material
  Inventory of raw materials 1 January 2027          6,000
  Purchases of raw materials                        42,000
  Carriage inwards on raw materials                  1,000
                                                    49,000
  Less Inventory of raw materials 31 December 2027   7,000
  Cost of raw materials consumed                               42,000
Direct labour                                                  35,000
Prime cost                                                     77,000
Add Factory overheads
  Indirect factory wages                            12,000
  Factory rent                                       8,000
  Factory power                                      4,500
  Depreciation: factory machinery (10% x 60,000)     6,000
  Depreciation: loose tools (1,200 + 500 - 1,100)      600
                                                               31,100
                                                              108,100
Add Work in progress 1 January 2027                             5,000
                                                              113,100
Less Work in progress 31 December 2027                          6,100
Factory cost of production                                    107,000

Delta Furniture
Statement of profit or loss for the year ended 31 December 2027 (extract)
                                                         $          $
Revenue                                                       160,000
Less Cost of sales
  Inventory of finished goods 1 January 2027         9,000
  Factory cost of production                       107,000
                                                   116,000
  Less Inventory of finished goods 31 December 2027 11,000
                                                              105,000
Gross profit                                                   55,000

In the statement of financial position at 31 December 2027, inventory under current assets is raw materials $7,000 + work in progress $6,100

• finished goods $11,000 = $24,100.

5.5 Clubs and societies

A club exists to provide activities for its members, not to make a profit, so its statements use different names.

Receipts and payments account	Income and expenditure account
A summary of the cash book: all cash and bank receipts and payments	The club’s equivalent of a statement of profit or loss
Starts and ends with the cash and bank balance	Ends with a surplus (income greater than expenditure) or a deficit
Includes capital items, such as buying equipment	Includes only revenue items for the period
No adjustments for amounts owing or prepaid, or depreciation	Adjusted for accruals, prepayments, subscriptions in arrears and in advance, and depreciation

• Revenue-generating activities, such as refreshments, are summarised in a separate account (sales less cost of sales and the activity’s direct expenses); only the resulting profit or loss is carried to the income and expenditure account.
• A subscriptions account finds the subscription income for the year. Subscriptions in arrears (owed by members) are an other receivable; subscriptions in advance (paid early for next year) are an other payable.
• The accumulated fund is the club’s equivalent of capital: total assets less total liabilities. Closing accumulated fund = opening accumulated fund + surplus (or – deficit).

Worked example: club accounts

Riverside Chess Club provides this receipts and payments account for the year ended 31 December 2027.

Riverside Chess Club
Receipts and payments account for the year ended 31 December 2027
Receipts                       $     Payments                         $
Balance b/d (bank)         1,150     Refreshment purchases        2,600
Subscriptions              6,300     Refreshment helper's wages     500
Refreshment sales          4,200     Hall rent                    3,600
Competition entry fees       900     Competition prizes             700
                                     New chess sets (equipment)   1,200
                                     General expenses               850
                                     Balance c/d (bank)           3,100
                          12,550                                 12,550

Other information:

	1 January 2027	31 December 2027
Equipment (valuation)	$4,000	$4,700
Refreshment inventory	$300	$400
Subscriptions in arrears	$240	$180
Subscriptions in advance	$160	$300
Hall rent owing	—	$300

Subscriptions account
2027                           $     2027                             $
1 Jan  Balance b/d           240     1 Jan  Balance b/d             160
31 Dec Income and                    31 Dec Bank                  6,300
       expenditure         6,100     31 Dec Balance c/d             180
31 Dec Balance c/d           300
                           6,640                                  6,640
2028                                 2028
1 Jan  Balance b/d           180     1 Jan  Balance b/d             300

The opening debit balance is the arrears owed by members; the opening credit balance is last year’s payments in advance. The $6,100 transferred is the subscription income that belongs to 2027.

Riverside Chess Club
Refreshments account for the year ended 31 December 2027
                                                        $          $
Sales                                                          4,200
Less Cost of sales
  Opening inventory                                   300
  Purchases                                         2,600
                                                    2,900
  Less Closing inventory                              400
                                                               2,500
                                                               1,700
Less Helper's wages                                              500
Profit on refreshments                                         1,200

Accumulated fund 1 January 2027:
  equipment 4,000 + refreshment inventory 300 + subscriptions in arrears 240
  + bank 1,150 - subscriptions in advance 160 = 5,530
Depreciation of equipment (revaluation): 4,000 + 1,200 - 4,700 = 500

Riverside Chess Club
Income and expenditure account for the year ended 31 December 2027
                                                        $          $
Income
  Subscriptions                                               6,100
  Profit on refreshments                                      1,200
  Competition entry fees                              900
  Less Competition prizes                             700
                                                                200
                                                              7,500
Less Expenditure
  Hall rent (3,600 + 300)                           3,900
  General expenses                                    850
  Depreciation of equipment                           500
                                                              5,250
Surplus for the year                                          2,250

Riverside Chess Club
Statement of financial position at 31 December 2027
                                                        $          $
Non-current assets
  Equipment (at valuation)                                    4,700
Current assets
  Refreshment inventory                               400
  Other receivables: subscriptions in arrears         180
  Bank                                              3,100
                                                              3,680
Total assets                                                  8,380

Accumulated fund and liabilities
Accumulated fund
  Balance at 1 January 2027                                   5,530
  Add Surplus for the year                                    2,250
                                                              7,780
Current liabilities
  Other payables: subscriptions in advance            300
  Other payables: hall rent owing                     300
                                                                600
Total accumulated fund and liabilities                        8,380

Both totals are $8,380. The $1,200 spent on chess sets is in the receipts and payments account but not in the income and expenditure account, because it is capital expenditure; it appears in the statement of financial position instead.

5.6 Incomplete records

Why some businesses do not keep full double entry records

Many small sole traders keep only a cash book or bank records, plus files of invoices, rather than the full double entry system. The owner may not have the accounting knowledge, may not be able to afford the time or the cost of a bookkeeper, and may feel that knowing the cash position is enough for a small business.

Advantages of not keeping full records	Disadvantages
Cheaper: no bookkeeper or software needed	No trial balance, so errors are not detected
Simpler and quicker to keep	Fraud and theft are harder to detect
Needs little accounting knowledge	Profit cannot be found accurately without reconstructing the figures
	Amounts owed by customers and to suppliers are hard to control
	Lenders and tax authorities may not accept the figures, and there is less information for decisions

Statements of affairs and profit from changes in capital

A statement of affairs lists the assets and liabilities of a business on a particular date, to find its capital (capital = assets – liabilities). An opening statement of affairs gives opening capital and a closing statement gives closing capital. If no other information is available:

Profit for the year = closing capital - opening capital
                      + drawings - capital introduced

Drawings are added back because they reduced capital without being a loss; capital introduced is deducted because it increased capital without being a profit. A negative answer is a loss for the year.

Finding missing figures

Sales and purchases are rebuilt in the same way as the control accounts of Topic 3:

Credit sales     = receipts from credit customers + closing trade receivables
                   - opening trade receivables
Credit purchases = payments to credit suppliers + closing trade payables
                   - opening trade payables
Total sales      = credit sales + cash sales

Any of these figures can be found from the others, so the same working gives a missing trade receivables or trade payables figure. The ratio formulas are those of the syllabus’s Accounting ratios list (Topic 6), which the syllabus says are the only formulas accepted in candidate responses:

Mark-up (%)             = Gross profit / Cost of sales x 100
Gross profit margin (%) = Gross profit / Revenue x 100
Rate of inventory turnover (times) = Cost of sales / Average inventory

Rearranged, they find missing figures: if the mark-up and cost of sales are known, gross profit = cost of sales x mark-up %; if the rate of inventory turnover and average inventory are known, cost of sales = rate x average inventory. A mark-up of 50% means gross profit is 50/150 of revenue, a gross profit margin of 33⅓%.

Worked example: incomplete records

Lina Park is a sole trader who buys and sells goods. She keeps only bank records.

                                  1 January 2027   31 December 2027
                                               $                  $
Equipment                                  8,000              7,200
Inventory                                  4,600              5,400
Trade receivables                          3,800              4,500
Bank                                       2,100              3,400
Trade payables                             2,900              3,300
Expenses owing                                 -                200

Bank summary for 2027: receipts from credit customers $56,300; cash sales banked $3,000; additional capital introduced $2,000; payments to credit suppliers $40,400; expenses paid $10,600; drawings $9,000. The equipment fell in value by $800 through depreciation; no equipment was bought or sold.

Step 1 — statements of affairs

                                  1 January 2027   31 December 2027
                                               $                  $
Assets
  Equipment                                8,000              7,200
  Inventory                                4,600              5,400
  Trade receivables                        3,800              4,500
  Bank                                     2,100              3,400
                                          18,500             20,500
Less Liabilities
  Trade payables                           2,900              3,300
  Other payables (expenses owing)              -                200
                                           2,900              3,500
Capital                                   15,600             17,000

Step 2 — profit from the change in capital

Closing capital 17,000 - opening capital 15,600 + drawings 9,000
- capital introduced 2,000 = profit for the year 8,400

Step 3 — missing figures and the statement of profit or loss

Credit sales    = 56,300 + 4,500 - 3,800  = 57,000
Revenue         = 57,000 + 3,000 cash      = 60,000
Purchases       = 40,400 + 3,300 - 2,900  = 40,800
Cost of sales   = 4,600 + 40,800 - 5,400  = 40,000
Expenses        = 10,600 paid + 200 owing  = 10,800

Lina Park
Statement of profit or loss for the year ended 31 December 2027
                                                $          $
Revenue                                               60,000
Less Cost of sales
  Inventory 1 January 2027                  4,600
  Purchases                                40,800
                                           45,400
  Less Inventory 31 December 2027           5,400
                                                      40,000
Gross profit                                          20,000
Less Expenses
  General expenses                         10,800
  Depreciation of equipment                   800
                                                      11,600
Profit for the year                                    8,400

The statement of profit or loss and the change in capital give the same $8,400, which confirms both. The closing statement of affairs is, in effect, Lina’s statement of financial position at 31 December 2027.

Step 4 — the ratios. Mark-up = 20,000 / 40,000 x 100 = 50%. Gross profit margin = 20,000 / 60,000 x 100 = 33.33%. Average inventory = (4,600 + 5,400) / 2 = 5,000, so rate of inventory turnover = 40,000 / 5,000 = 8 times. Working backwards, had only the mark-up of 50%, the rate of inventory turnover of 8 times and the inventories been known, cost of sales = 8 x 5,000 = $40,000, gross profit = 50% x 40,000 = $20,000 and revenue = $60,000.

Common mistakes

• Adjusting only one statement: an accrual added to the expense but not shown as an other payable, or goods for own use deducted from purchases but not added to drawings.
• Charging the whole allowance for irrecoverable debts as an expense, instead of only the increase (a decrease in the allowance is added to income).
• Calculating reducing balance depreciation on cost instead of on the carrying value at the start of the year.
• Putting interest on a partner’s loan in the appropriation account instead of the statement of profit or loss, or deducting interest on drawings instead of adding it.
• Showing a partner’s loan as part of capital instead of as a liability.
• Putting dividends in a company’s statement of profit or loss, or showing debentures as part of equity.
• Treating subscriptions in arrears as a liability or subscriptions in advance as an asset — the other way round is correct.
• Including capital items, such as new equipment, in an income and expenditure account.
• Forgetting to add back drawings and deduct capital introduced when finding profit from changes in capital.
• Confusing mark-up (gross profit / cost of sales) with gross profit margin (gross profit / revenue).

Quick revision checklist

• State the advantages and disadvantages of sole traders, partnerships and limited companies.
• Prepare a statement of profit or loss for a trading, service, manufacturing or combined business, and a statement of financial position with every heading from 5.1, including intangible assets.
• Make every 5.1 adjustment and say where it goes in both statements.
• Trace the effect of a change in one balance through both statements.
• Prepare a partnership appropriation account, and capital and current accounts in ledger form and in the statement of financial position.
• Explain limited liability, equity, the capital structure, ordinary shares versus debentures, and issued, called-up and paid-up capital.
• Prepare a company statement of profit or loss, statement of changes in equity and statement of financial position.
• Prepare a manufacturing account to factory cost of production, with work in progress adjustments.
• Prepare a receipts and payments account, a subscriptions or refreshments account, an income and expenditure account, and calculate the accumulated fund.
• Prepare statements of affairs, find profit from changes in capital, rebuild sales and purchases, and use mark-up, margin and inventory turnover to find missing figures.

Official syllabus

Cambridge IGCSE Accounting 0452 syllabus for 2027, 2028 and 2029 (Version 1, September 2024) — cambridgeinternational.org, verified 2026-09-16.