IGCSE Accounting: Sources and Recording of Data — Revision Notes

Condensed for the final weeks. For the full explanation, use the Sources and Recording of Data study guide.

The accounting equation

ASSETS = CAPITAL + LIABILITIES

Every transaction affects at least two items, and the equation always balances. That is the whole basis of double entry.

Capital appears alongside liabilities because, from the business’s point of view, it is owed back to the owner — the business entity concept, which treats owner and business as separate.

Capital increases with profit and further investment; it decreases with losses and drawings. Drawings are not an expense.

Double entry

DEAD CLIC — Debit Expenses, Assets, Drawings; Credit Liabilities, Income, Capital.

The reliable method: identify the two accounts affected, decide whether each increases or decreases, then apply the rule. Debit the account that receives value; credit the one that gives it.

Worked example. A business buys goods on credit from Khan for $500, then returns $80 of them. The purchase: debit Purchases $500, credit Khan (payable) $500. The return: debit Khan (payable) $80, credit Purchases returns $80 — never credit Purchases itself, since the original purchase and the return are recorded in separate accounts. Khan’s account balance is then 500 − 80 = $420 credit, the amount still owed.

Source documents

Document	Records
Invoice	A credit sale or purchase
Credit note	Goods returned
Debit note	Request for a credit note
Receipt	Payment made or received
Cheque counterfoil	Payment by cheque
Paying-in slip	Money banked
Statement of account	Summary sent to a credit customer

Source documents are the evidence for entries, and are the starting point of the audit trail.

Books of prime entry

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, non-current assets bought on credit

Only credit transactions go in the sales and purchases journals. Cash sales go straight to the cash book. Putting cash sales in the sales journal is the standard error.

The petty cash book usually runs on the imprest system: a fixed float is restored at the end of each period by reimbursing exactly what was spent, so the amount claimed always equals the total of the vouchers — which is itself a control.

Ledgers

• 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 ledger balances checking that total debits equal total credits.

A balanced trial balance does not prove the books are correct. Six error types leave it balanced:

Error	Meaning
Omission	The transaction was left out entirely
Commission	Right type of account, wrong account — e.g. the wrong customer
Principle	Wrong type of account — e.g. an asset posted to an expense
Original entry	The same wrong figure used on both sides
Complete reversal	Debit and credit the wrong way round
Compensating	Two separate errors of equal value cancel out

Commission versus principle is the distinction most often lost. Commission is the wrong account of the right kind; principle is the wrong kind of account entirely.

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, including delivery and installation.
• Revenue expenditure — running costs, including repairs.

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

Exam traps

• Recording cash sales in the sales journal.
• Treating drawings as an expense.
• Assuming a balanced trial balance means no errors.
• Confusing errors of commission and principle.
• Debiting the giver instead of the receiver.
• Classifying delivery or installation of a new machine as revenue expenditure.

Self-test

1. State the accounting equation and explain why capital sits with liabilities.
2. What goes in the sales journal, and what does not?
3. Explain the imprest system and why it acts as a control.
4. Distinguish an error of commission from an error of principle.
5. What is the effect of treating capital expenditure as revenue expenditure?

Answers: 1. Assets = Capital + Liabilities; under the business entity concept the business is separate from its owner, so capital is money the business owes back to the owner. 2. Credit sales of goods only; cash sales go to the cash book, and sales of non-current assets go to the general journal. 3. A fixed float is restored each period by reimbursing exactly the amount spent, so the reimbursement must equal the total of the vouchers — a discrepancy immediately signals an error or a missing voucher. 4. Commission is posting to the wrong account of the correct type, such as the wrong customer; principle is posting to an entirely wrong type of account, such as an asset recorded as an expense. 5. Profit is understated and non-current assets are understated.