Cambridge IGCSE Accounting

ACCOUNTING NOTES
Chapters 1 – 3

Chapter 1 – Introduction to Accounting

Book-keeping: is the detailed recording of all financial transactions of a business. This is
necessary for all businesses. If records are not maintained transactions will be forgotten. The
double entry system is used for book-keeping.

Accounting: Accounting uses book-keeping records to prepare financial statements at regular

intervals. These financial statements assist in decision-making. The business owner uses
financial statements to know whether the business is making profit or loss.

Statement of Financial Position: shows the assets and liabilities of a business on a certain date.

Capital: is the total resources provided by the owner and represents what the business owes the
owner. Also called ‘owner’s equity’.

Assets: represent anything owned by or owing to the business from others.

Liabilities: represent anything owed by the business to others.

The Accounting Equation: Assets = Capital + Liabilities. This equation can be used to find out
any of the three elements if the other two are present. The assets represent how the resources of
the business are used by the business and the capital & liabilities represent where these resources
come from.

Inventory (goods): is the goods a business has available for resale.

Trade Payables: represent the amount the business owes to the credit suppliers of goods (trade
creditors).

Page 1|4
Cambridge IGCSE Accounting

Trade Receivables: represent the amount owed to the business by its credit customers (trade
debtors).

Chapter 2 – Double Entry Book-Keeping – Part A

Double Entry book-keeping: is the process of making a debit entry and a credit entry for each
transaction. The term double entry is used because the two effects of a transaction (a giving and a
receiving) are both recorded in the ledger.

Ledger: a ledger is traditionally a bound book where each account appears on a separate page.
Over the years, the ledger has developed into a loose-leaf folder with separate sheets, each
containing a ledger account. Recently, everything has been transferred to the computer.

Drawings: represent any value taken from the business by the owner of that business.

Balance: a balance on a ledger account is the difference between the debit side and the credit
side. At the end of each month, it is usual to balance any account of assets, liabilities, incomes
and expenses; which contain more than one entry.

Purchases Returns / Returns Outward: Sometimes goods that have been purchased have to be
returned to the supplier. They may be faulty, damaged or not what was ordered. These are known
as purchases returns or returns outward.

Sales Returns / Returns Inwards: A customer may return goods to the business. These goods are
known as sales returns or returns inwards.

Carriage: is the cost of transporting goods.

Carriage inwards: is the cost of bringing the goods to the business. This is an expense to the
business.

Carriage outwards: is the cost of delivering the goods to the customer. This is an expense to the
business.

Page 2|4
Cambridge IGCSE Accounting

Chapter 3 – The Trial Balance

Trial Balance: is a list of balances on the accounts in the ledger on a certain date. It will show if
the total of the debit balances is equal to the credit balances. It is important to remember that it is
not a part of the double entry system of book-keeping as it is simply a list of balances.

The Purpose of a Trial Balance: 1. The Trial Balance can help in locating arithmetical errors. 2.
A trial balance is useful in preparing financial statements.

The Trial Balance and errors

If the trial balance fails to balance then it is obvious that errors have been made somewhere.
Following might be the errors:
1. An error of addition within the trial balance.
2. An error of addition within one of the ledger accounts.
3. Entering a different figure on the credit to that entered on the debit when making a double
entry in the ledger.
4. Making a single entry for a transaction rather than a double entry.
5. Entering a transaction twice on the same side of the ledger.

When a trial balance balances, it simply means that the total of the debit balances is equal to the
total of the credit balances. It does not imply that the Trial Balance is error-free. The Trial
Balance will still balance even if it has the following errors:

NAME OF ERROR DESCRIPTION EXAMPLE

Error of Commission
Error of Complete Reversal
Error of Omission
This happens when a Cash received from Joy was
transaction is entered with the credited to Jay’s account.
correct amount, on the correct
side but entered in the wrong
account of the same class.
This happens when the Cash drawings debited to the
correct amount is entered in cash account and credited to
the correct accounts, but the the drawings account.
entry has been made on the
wrong sides of the accounts.
This happens when a Payment of rent not entered
transaction has been in the books at all.
completely omitted from the
accounting records.

Page 3|4
Cambridge IGCSE Accounting

Error of Original Entry This happens when an Inventory bought $100 on

incorrect figure is used when credit but recorded as $1000.
a transaction is first entered in
the accounting records. The
double will therefore use the
incorrect figure.
Error of Principle This happens when a Motor expenses debited to the
transaction is entered using motor vehicles account.
the correct amount and on the
correct side, but in the wrong
class of account.
Compensating Errors These occur when two or Purchases account under-
more errors cancel each other added by $100 and sales
out. returns account over-added
by $100.

---------------------------------------------------------------------------------------------------------------------

Page 4|4