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 Cambridge

International AS and A Level

Accounting Second Edition

Ian Harrison

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 Get the most from this book
Everyone has to decide his or her own revision strategy, My revision planner
but it is essential to review your work, learn it and test your
understanding. This Revision Guide will help you to do AS topics
Financial accounting Revised Tested Exam
that in a planned way, topic by topic. Use this book as the 1
1
The accounting cycle
Double-entry book-keeping . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■
ready

cornerstone of your revision and don’t hesitate to write in it 2 Principles, concepts and conventions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■

— personalise your notes and check your progress by ticking

3 Reconciliation and verification
2
6
Accounting for non-current assets
The distinction between capital and revenue
incomes and expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■
8 The calculation of depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■
off each section as you revise. 11 Disposal of non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■
3 Reconciliation and verification
13 The trial balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■
The trial balance
15 Bank reconciliations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■
17 Control accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■
19 Reconciling control accounts with ledgers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■
What is a trial balance?
4 Preparation of financial statements Revised

Tick to track your progress 22 Adjustments to income statements and statements

At the end of an accounting
of financial position period,
balance is carried down to start the ‘new’ accounting period.
ledger accounts are balanced and the
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■

■ . . . . . . .tip
29 Sole traders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Expert . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■

Use the revision planner on pages iv–v to plan your revision, The
40 trialPartnerships
the
50ledgers
balance is a summary
. . . . . . . . . . .of
on thecompanies
Limited date that the
. . . all
. . . .the
. . . . .debit
. . . . . . .and
trial balance has been extracted. It checks the
. . . . . credit
. . . . . . . .balances
. . . . . . . . . . . shown . . . . . . . . . . . . . ■
. . . . . . . . .in A .debit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ■
side
. . . . . . .balance

. . . .of
. . .the
. ■ . . . .on
. . . . . . . . . appears

. . . . . . . ■
. . . . account at . the
. . . .the

. . . . .start
. . . . . . ■
. . . . debit

. . . . . . ■
. . . . . .of

topic by topic. Tick each box when you have: accuracy of all entries in the ledgers.
5 Analysis and communication of accounting
Even if ainformation
trial balance ‘balances’ to stakeholders and the debit column casts to the same
the new time period; a credit balance
is shown on the credit side of the
account at the start of the new time
amount
68 Users as theof credit column,statements
financial this is no guarantee . . . . . . . . . .that
. . . . . .the
. . . . .double-entry . . . . . . . . . . . . . ■
. . . . . . . . . . . . . . . . .system . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■
period.
l revised and understood a topic is69
free ofCalculation
errors. It merely
of ratios confirms that every debit entry in the ledgers has a
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■
corresponding credit entry. The trial balance has only one function: to test the
73 The limitations of accounting information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■
arithmetic accuracy of the whole double-entry system. It is also a convenient list Expert tip
l tested yourself Cost
from whichand management
financial statements canaccounting
6 Costing for materials and labour
be prepared. Most trial balances have more entries
in the debit column than in the credit
74 Cost classification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ■ column.
. . . . . . . . .Debit . . ■ . . . are
. . . . . . .balances . . . . . . . . . . ■
. . . . .either

l practised the exam-style questions

Casting: an accounting term for ‘adding’. Overcast means that a total is more
. . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■
76 assets or expenses. Credit balances are
than itValuation
ought to be; ofundercast
closing indicates inventory that— a total principles is lower and than itmethods ought to be. liabilities, incomes or benefits.
7 Traditional costing methods
81 Absorption costing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■

You can also keep track of your revision by ticking off each Now test yourself Tested
84 Marginal costing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■
8 Cost–volume–profit analysis
1 The debit side of an account totals $230 and the credit side totals $360. What is the amount shown in the trial balance and
■ ■ . . . . . . . . . . . . . . . . . . ■
topic heading in the book. You may find it helpful to add
87 is Methods
this a debit of
or adetermining
credit entry? break-even . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
88
2 WhatTheisadvantages
the main function of cost–volume–profit
of preparing a trial balance? analysis . . . . . . . . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■
88
3 On Costing
which sidesystems
of the trial . . . . . .balance
. . . . . . . . . would
. . . . . . . . you
. . . . . .expect
. . . . . . . .to
. . . find
. . . . . .the
. . . . following . . . . . . . . . ■
. . . . . . . . . . . .balances: motor
. . . . . .vehicles; . . ■ . . .outwards;
. . . . . . . . . . returns . . . . . . . . . . . . . . . ■

your own notes as you work through each topic. 9 carriage

Answers
91
inwards; carriage
The application
on p. 198
The purpose
ofoutwards; accounting sales; discounts to business received? planning
of budgeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■
91 Advantages and disadvantages of budgetary control . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■
93 AS questions and answers

Types of topics
A level error not revealed by the trial balance Revised

Six types of error are not revealed by extracting the trial balance: Revised Tested Exam
Financial accounting Revision activity
ready
● Commission — the correct amount is entered on the correct side of an
10 Preparation of financial statements Make up a mnemonic to remember
incorrect account of the same class: for example, rent debited to the local
98 Manufacturing accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ■ the . . .components ■debit
. . . . . . . . . . . . . . .of . . . . .and . . . . . . . . ■
. . . . .credit
taxes account. balances.
101 Not-for-profit organisations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■
● Reversal of entries — entries are made on the wrong side of both accounts:
107 Limitedcashcompanies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■
for example, sales debited to sales account and cash credited to cash
account.
● Omission — there is no record of a transaction in the system: for example,
iv Cambridge
goods are International
purchased and theAS supplier’sand Ainvoice Levelis mistakenly Accounting destroyed Revision beforeGuide
the transaction has been entered in the purchases book.
● Principle — a transaction is entered in the wrong class of account: for example,
vehicle repairs are entered as capital expenditure in a vehicles account.

Features to help you succeed

847677 CambIntAcc_RG_2e_FM_i-vi.indd 4 06/10/15 3:06 pm

The trial balance 13

847677_C03_CambIntAcc_RG_2e_013-021.indd 13 06/10/15 3:07 pm

Expert tips Exam-style questions

Throughout the book there are tips from the experts on Use the exam-style questions and answers to consolidate
how to maximise your chances. your revision and practise your exam skills.

Typical mistakes Now test yourself

Advice is given on how to avoid the typical mistakes These short, knowledge-based questions provide the first
students often make. step in testing your learning. Answers are at the back of
the book.

Definitions and key words

Revision activities
Clear, concise definitions of essential key terms are
provided on the page where they appear. These activities will help you to understand each topic in
an interactive way.
Key terms from the syllabus are highlighted in bold for
you throughout the book.

847677_Camb_Acc_RG_2e_FM_i-vi.indd 3 20/11/2015 20:10

 My revision planner

AS topics
Financial accounting Revised Tested Exam
ready
1 The accounting cycle
1 Double-entry book-keeping . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■
2 Principles, concepts and conventions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■
2 Accounting for non-current assets
6 The distinction between capital and revenue
incomes and expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ ������������������������������������ ■
8 The calculation of depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■
11 Disposal of non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■
3 Reconciliation and verification
13 The trial balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■
15 Bank reconciliations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■
17 Control accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■
19 Reconciling control accounts with ledgers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■
4 Preparation of financial statements
22 
Adjustments to income statements and statements
of financial position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■
29 Sole traders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■
40 Partnerships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■
50 Limited companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■
5 
Analysis and communication of accounting
information to stakeholders
68 Users of financial statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■
69 Calculation of ratios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■
73 The limitations of accounting information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■
Cost and management accounting
6 Costing for materials and labour
74 Cost classification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■
76 Valuation of closing inventory — principles and methods . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■
7 Traditional costing methods
81 Absorption costing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■
84 Marginal costing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■
8 Cost–volume–profit analysis
87 Methods of determining break-even . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■
88 The advantages of cost–volume–profit analysis . . . . . . . . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■
88 Costing systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■
9 The application of accounting to business planning
91 The purpose of budgeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■
91 Advantages and disadvantages of budgetary control . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■
93 AS questions and answers

A level topics
Financial accounting Revised Tested Exam
ready
10 Preparation of financial statements
98 Manufacturing accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■
101 Not-for-profit organisations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■
107 Limited companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■

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 122 International Accounting Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■
11 Auditing and stewardship of limited companies
130 The role of an auditor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■
132 The role of directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■
12 Business purchase and merger
133 
Purchase of an unincorporated business by
a limited company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■
134 
Merger of unincorporated businesses to
form a partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . . ■
136 Purchase of a partnership by a limited company . . . . . . . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■
Purchase of assets and assumption of liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■
139 
143 Evaluating a business with a view to acquiring it . . . . . . . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■
13 Consignment and joint venture accounts
148 Consignment accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■
151 Joint ventures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■
14 Computerised accounting systems
154 Information technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■
154 Spreadsheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■
155 Users of accounting information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■
156 
Advantages and disadvantages of introducing
a computerised accounting system . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■
157 The process of computerisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■
15 
Analysis and communication of
accounting information
158 Ratios to aid the appraisal of financial structure . . . . . . . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■
159 Gearing and capital structures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■
160 Stock exchange (investment) ratios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■
Cost and management accounting
16 Activity-based costing
162 Activity as a basis for apportioning overheads . . . . . . . . . . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■
163 Inventory valuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■
164 
Advantages and disadvantages of using
an activity-based costing system . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■
17 Budgeting and budgetary control
165 The preparation of budgets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■
169 Principal budget factors and the flexing of budgets . . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■
18 Standard costing
172 Cost standards for unit costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■
173 Variance analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■
19 Investment appraisal
182 The need for appraisal of capital projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■
183 Methods of appraisal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■
186 Other considerations affecting investment decisions . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■ . . . . . . . . . . . . . . . . . . ■
187 A level questions and answers

193 Now test yourself answers

My Revision Planner v

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 6–8 weeks to go 1 week to go
l Start by looking at the syllabus — make sure you l Try to fit in at least one more timed practice of
know exactly what material you need to revise an entire past paper and seek feedback from your
and the style of the examination. Use the revision teacher, comparing your work closely with the
planner on pages iv–v to familiarise yourself with mark scheme.
the topics. l Check the revision planner to make sure you
l Organise your notes, making sure you have haven’t missed out any topics. Brush up on any
covered everything on the syllabus. The revision areas of difficulty by talking them over with
planner will help you to group your notes into a friend or getting help from your teacher.
topics. l Attend any revision classes put on by your
l Work out a realistic revision plan that will allow teacher. Remember, he or she is an expert at
you time for relaxation. Set aside days and times preparing people for examinations.
for all the subjects that you need to study, and Revised
stick to your timetable.
l Set yourself sensible targets. Break your revision
down into focused sessions of around 40 minutes, The day before the examination
divided by breaks. This Revision Guide organises
the basic facts into short, memorable sections to l Flick through this Revision Guide for useful
make revising easier. reminders — e.g. the expert tips and key terms.
l Check the time and place of your examination.
Revised
l Make sure you have all you need — extra pens and
pencils, tissues, a watch, bottled water, sweets.
l Take time to relax and have an early night to
ensure you are fresh for the exams.
Revised
2–5 weeks to go
Read through the relevant sections of this book
l
and refer to the expert tips and key terms. Tick
My exams
off the topics as you feel confident about them.
Highlight those topics you find difficult and look Paper 1
at them again in detail. Date: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
l Test your understanding of each topic by working Time: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
through the ‘Now test yourself’ questions in the Location: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
book. Look up the answers at the back of the
book. Paper 2
Date: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
l Make a note of any problem areas as you revise,
and ask your teacher to go over these in class. Time: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
l Look at past papers. They are one of the best Location: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ways to revise and practise your exam skills. Write
or prepare planned answers to the exam-style Paper 3
questions provided in this book. Check your Date: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
answers with your teacher. Time: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
l Use the revision activities to try different revision Location: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
methods. For example, you can make notes using
mind maps, spider diagrams or flash cards.
l Track your progress using the revision planner and
give yourself a reward when you have achieved
your target.
Revised

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 1 The accounting cycle

Double-entry book-keeping
The double-entry system Revised

The AS and A level examinations do not generally examine basic double-entry Expert tip
book-keeping methods of recording financial transactions. It is assumed that Use basic double-entry techniques as
students sitting such examinations have already mastered these techniques. ‘workings’ when complex calculations
are needed. Not only will you find this
Most examination questions start after transactions using the double-entry
useful, but examiners can refer to your
system have been completed. However, some double-entry topics do workings if there are errors in your
occasionally appear in either AS or A level examinations. final answer and you may be able to
gain part marks.

Books of prime entry Revised

Transactions start their journey through the system with entries in one of the
books of prime entry shown in Table 1.1.
Table 1.1 Books of entry
Name Source documents Debit entry Credit entry
Purchases journal Purchases invoices Purchases account (GL) Credit supplier (PL)
Sales journal Copy sales invoices Credit customer (SL) Sales account (GL)
Returns purchase journal Debit notes received Credit supplier (PL) Purchase returns
account (GL)
Returns sales journal Copy credit notes Sales returns account (GL) Credit customer (SL)
General journal Purchases and sales invoices for entries Debit entries as shown in Credit entries as shown
relating to transactions involving non-current journal in journal
assets, managers’ memos, minutes of
meetings etc. authorising actions
Cash book Till rolls, receipts, paying-in slips, bank Cash/bank (monies Drawer
statements, cheque counterfoils etc. received)
Payee Cash/bank (monies paid)

Revision activity
Select a transaction from the following list, identify the source document and
identify all the entries made in the business books of account. Your list should
end with an entry in one of the financial statements.
l purchases for resale
l purchase of a non-current asset
l introduction of additional capital by the proprietor
l payment of wages by direct debit

Double-entry book-keeping 1

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 Now test yourself Tested
1 The accounting cycle

1 What is a personal account?

2 (a) Name two nominal accounts.
(b) In which ledger would you find nominal accounts?
3 (a) Explain why ledgers are divided into three parts.
(b) What are the names of each of the three parts?
4 Name a source document used to prepare a cash book.
5 List the books of prime entry.
6 Which book of prime entry is also part of the double-entry system?
Answers on p. 193

Expert tip
If you find the use of the general journal difficult, enter the data into ‘T’ accounts,
then ask which ‘T’ account has been debited, and which account has been credited.
Place the debit entry in the debit column of the journal and the credit entry in
the credit column. Don’t forget to include the description of the entries or a brief
narrative (description) of why the entries are necessary.

Principles, concepts and conventions

Our everyday life is governed by rules. All actions in accounting are also Expert tip
governed by rules. These rules are known as accounting concepts. The
It is important to learn the concepts
application of these basic rules ensures that a set of financial statements described. Learn an example of how
prepared in Segamat will be prepared using the same procedures as those each is applied when preparing a set of
used to prepare a set of statements in Shahcheng. Judgements and comparisons financial statements.
between sets of accounting statements can be made safe in the knowledge that
the same rules have been applied in their preparation. You will already
have applied some of these principles in your studies so far.

Business entity Revised

Only transactions involving the affairs of the business are recorded in the business
books of account. Private incomes and expenditure do not affect business profits.
The private affairs of a trader are not recorded as part of the business activity. Any
private incomes included in the business books of account are regarded as capital
introduced and any private expenditures are entered as drawings.

Historic cost Revised

All financial transactions are recorded using actual historic cost. The advantages
of using historic cost as a basis for the preparation of financial statements
include that it is:
l objective

l easily understood

l easily applied to the double-entry system of book-keeping

l fairly straightforward for auditors to verify transactions through source

documents
l recognised by most tax authorities

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 Money measurement

1 The accounting cycle

Revised

Only transactions that can be measured in monetary terms should be included

in the business books of account. The following would not be included in
financial statements even if they could be given a monetary value:
l managerial efficiency and expertise

l the skill and efficiency of the workforce

l good customer relations

l good after-sales service

Going concern Revised

When financial statements are prepared, there is an assumption that the

business will continue to operate in its present form for the foreseeable future.
This means that assets shown in a statement of financial position are valued at
cost, not at what they would fetch if they were to be sold. If the business is to
continue trading, the assets will be required and will not be sold. Therefore, the
sale value is of little interest as far as the preparation of a statement of financial
position is concerned.

Consistency Revised

When calculating provisions for doubtful debts or depreciation, or when valuing

inventories, a variety of methods may be used. Each time a different method is
used to calculate depreciation or a value for inventory, a different profit figure is
arrived at. This means that it is difficult to make comparisons between different
years or different businesses if different methods are used each year. It is also
difficult to determine whether profits have increased or decreased because of
the level of business activity or because of a change in methods of calculation.
Once a business adopts a way of recording financial transactions, it should
continue to use the same methods or policy in future years in order to allow
valid comparisons to be made.

Prudence Revised

Revenues and profits should only be included in financial statements when they
are realised or when realisation is reasonably certain. This prevents profits from
being overstated. If profits are overstated, a trader may make excessive drawings
or a limited company may pay excessive dividends, which deprives the business
of valuable resources. However, the concept does allow provisions to be made
for expenses or losses when they become known.

Realisation Revised

Profits are normally recognised when the title to the goods passes to the
customer, not necessarily when money changes hands. This concept is an Title: the legal term to describe
extension of the matching or accruals concept (see below). ownership, e.g. title deeds to premises
show that the holder of the deeds is
Dia is fairly certain that, in October, Zafar will sign a contract to purchase goods the owner of the premises.
valued at $12 000.
$12 000 should not be included in Dia’s income statement until the title to the
goods has passed to Zafar.

Principles, concepts and conventions 3

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 Goods sent to a customer on sale or return remain in the sender’s books of
1 The accounting cycle

account until the potential customer indicates that they wish to purchase
the goods.

Duality Revised

Duality ensures that the assets of a business are recorded, along with the claims Expert tip
against the business. This is manifested in the application of the double-entry Double-entry book-keeping involves
book-keeping system and the accounting equation. entering each financial transaction
twice; this recognises that a business
both gives and receives value.

Materiality Revised

A transaction is material if its inclusion or exclusion from a financial statement

would mislead one of the users of the accounting information. Materiality: where the inclusion
or exclusion of a transaction from a
Capital expenditure is spending on non-current assets or their improvement. financial statement would mislead
Revenue expenditure is spending on the everyday running costs of a business. one of the users of the accounting
Non-current assets will be used for more than one financial year. If the accruals information.
concept is applied rigidly, the cost of all non-current assets should be spread
over the time that the non-current asset is used to generate profits. However,
some items — which technically should be classified as non-current
assets — are treated as revenue expenditure.
For example, a calculator is purchased for use in an office. The calculator
cost $2.99 and it is estimated that it will be used for 5 years. The calculator
technically should appear in a statement of financial position as a non-current
asset. It should be depreciated; the depreciation should be charged each year
to an income statement. However, to do this would not be worth the time or
the effort involved. The $2.99 is therefore treated as revenue expenditure and
included as office expenses or sundry expenses in an income statement.

Matching Revised

Matching is sometimes referred to as the accruals concept. The value of

resources used to run a business is recorded rather than the cash paid to acquire
the resources. For example, raw materials used in June cost $4000. The materials
are paid for in August. The $4000 will feature in the financial statements for June.

Substance over form Revised

This principle ensures that financial statements are prepared using the substance
of transactions rather than their legal form. For example, a haulage business
acquires five new vehicles using hire purchase. Legally, the vehicles are owned by
the finance company; ownership passes to the haulage company only when the Revision activity
final instalment is paid. However, from a commercial point of view the vehicles Working with a partner, one person
have been purchased with a loan and this is how the transaction is recorded in should name an accounting concept.
the books of account. In a statement of financial position, the vehicles would The other gives an explanation of the
concept and an example of its use.
appear as non-current assets while the outstanding amount due to the finance
Change places and repeat until all
company would appear as a non-current liability (or a current liability if there concepts have been covered.
were less than 1 year’s repayments left to make).

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 Now test yourself Tested

1 The accounting cycle

7 Explain the term ‘going concern’.
8 After extracting a trial balance for the year ended 31 December 2014:
(a) There is a debit balance of $3500 on the telephone account and an unpaid bill covering the 3 months to 28 February
2015 of $600. How much should be entered on an income statement for this expense?
(b) There is a debit balance of $3000 on the insurance account. There is only one payment made during the year and it
covers the 15-month period ending on 31 March 2015. How much should be entered in an income statement for this
expense?
9 A business depreciates its non-current assets in year 1 using the straight-line method of depreciation. In year 2 it uses the
reducing balance method. It then starts to use to the straight-line method in year 3. Which accounting concept is being
ignored?
10 A business has trade receivables of $100 000 at its financial year end. There are no irrecoverable debts, but for the past
3 years 2% of its receivables have not been received. The statement of financial position includes $100 000 as a current asset.
(a) Which accounting concept is being ignored?
(b) State the correct amount.
11 What do you understand by the business entity concept?
12 Explain the term ‘historic cost’ and why it is widely used.
Answers on p. 193

Principles, concepts and conventions 5

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 2 Accounting for non-current
assets

The distinction between capital and

revenue incomes and expenditures
It is important that you can distinguish between capital and revenue
expenditures and between capital and revenue incomes. The distinction is
necessary to ensure the accuracy of different parts of financial statements.

Capital expenditure: money spent on the acquisition of non-current assets or Typical mistake
their improvement. Students often categorise the costs
of maintenance of a non-current
Revenue expenditure: money spent on the everyday running costs of a
asset as being capital expenditure.
business.
Maintenance costs are revenue
Capital income: derived from selling non-current assets or from an injection of expenditure, as are vehicle servicing
capital into the business by a provider of funds (e.g. a bank) or by the owner(s). costs. These costs do not improve the
Revenue income: monies received from the normal activities of the business. non-current asset; the servicing or
maintenance merely ensures that the
asset functions effectively.

Now test yourself Tested

1 (a) Explain the difference between capital expenditure and revenue expenditure.
(b) Why is it important to distinguish between capital expenditure and revenue expenditure?
2 Which of the following transactions is classified as capital income for a general store?
Monies received from:
● the sales of fruit
● a further injection of capital by the trader
● the sale of a delivery vehicle that is no longer needed
● the sale of flour

Answers on p. 193

Provisions and reserves Revised

Provisions and reserves are amounts set aside out of profits, at the discretion
of the directors of a limited company.

Expert tip
Provision: an amount set aside out of profits for a known expense, the amount
of which is uncertain. Increases to provisions are expenses
in an income statement. Decreases
Reserve: any amount set aside out of profits that is not a provision.
increase the gross profit of a business.
The balance on a provision account
reduces the value of an asset in a
statement of financial position. Transfers
to reserves do not affect the profit from
operations.

6 Cambridge International AS and A Level Accounting Revision Guide

847677_02_Camb_Acc_RG_2e_006-012.indd 6 20/11/2015 20:04

 Provision for depreciation of non-current assets

2 Accounting for non-current assets

Revised

The purchase of a non-current asset is capital expenditure. Its purchase is

Accruals concept: states that the
expected to yield benefits to the business over a number of years. The accruals
resources used to generate revenue
concept states that all expenses used in a particular time period should be
receipts are accounted for, rather than
matched with the revenues that the expenditure has helped to generate. the money spent to acquire those
A non-current asset will be used to generate profits over a number of years; the resources.
cost of that asset must be spread over the time that it is used (depreciation). Depreciation: the apportioning of
the cost of a non-current asset over its
All non-current assets, with the exception of freehold land, should be depreciated.
useful life.
You should be able to use the three methods of depreciating non-current
assets. These are dealt with in more detail on p. 8. All the methods use the same
method of recording in the financial statements of a business; only the amount
recorded will change. Typical mistake
Students sometimes state that
Example
depreciation is the decrease in the value
The cost of a non-current asset was $37 500; accumulated depreciation to of an asset. However, some assets may
go up in value over time; they must also
31 December 2013 was $14 000; depreciation for the year ended 31 December 2014
be depreciated, since they are used to
has been calculated at $2300. The entries shown in the financial statements would generate benefits to the business.
be as follows.

Income statement for the year ended 31 December 2014

$
Expenses
Provision for depreciation of non-current assets 2300

Statement of financial position at 31 December 2014

$ $
Non-current assets at cost 37 500
Less depreciation 16 300 21 200

Disposal and revaluation of non-current assets are dealt with later, on pp. 11–12.

Capital expenditure Revised

A business purchases resources to help generate profits. The purchase of

non-current assets is an example of capital expenditure that is used to generate
profits. Non-current assets are used for more than 1 financial year and yield
benefits over a prolonged period of time. Expenditure on the following items
provide examples of capital expenditure:
● business premises

● a delivery van

● machinery

The benefits derived from capital expenditure continue to be earned over a

number of years, so the cost of the non-current assets should be spread over
those years. The total cost of the non-current asset is never charged to the
income statement for the year in which it was purchased. The cost is spread
over the years that it is used in order to reflect in the income statement the cost
of using the asset during that particular financial year.
The Companies Act 1985 says that all assets with a finite life should be
depreciated, so freehold land is the only non-current asset that should not be Finite life: a limited life span.
depreciated because it has an infinite life. Machines will eventually cease to operate

The distinction between capital and revenue incomes and expenditures 7

847677_02_Camb_Acc_RG_2e_006-012.indd 7 20/11/2015 20:04

 and produce goods, and a vehicle will eventually cease to be useful for the delivery
2 Accounting for non-current assets

of goods. Non-current assets are recorded in real accounts in the general ledger.
When a non-current asset is purchased and later sold, the amount that is not
recovered is called depreciation. Actual depreciation can only be accurately
calculated when the non-current asset is no longer being used. The annual
depreciation charge is therefore an estimate based on experience. If we know the
cost and can make an estimate of how long the non-current asset will be useful
and how much it might be worth at the end of its life, we can estimate the
amount of depreciation that will take place over the non-current asset’s lifetime.
This lifetime cost needs to be apportioned into each of the years of use.

Revenue expenditure Revised

The benefits derived from revenue expenditure are earned in the year of the
expenditure and entered in the income statement for the year. Each of the
following items is an example of revenue expenditure:
● goods purchased for resale

● petrol purchased for a delivery vehicle

● work provided by staff

Revenues and expenses are recorded in nominal accounts.

There are many methods of dividing the lifetime depreciation charge. When
a method has been decided upon, it should be used consistently so that the
results shown in the financial statements of different years can be compared.

The causes of depreciation Revised

There are several causes of depreciation, including:

● deterioration based on expected wear and tear — this depends on the type
of use and how well the asset is maintained
● economic factors such as the necessary output and the potential capacity of
the asset
● the introduction of new technology, making the asset obsolete

● obsolescence caused by a change in demand for the product made

● a change in demand making the asset incapable of producing the quantity

(or quality) of product required
● the age of the asset
Lessor: the owner of the non-current
● legal or other limits placed on the asset, e.g. when an asset is acquired under asset.
a leasing agreement, the lessor may place restrictions on the use of the asset

The calculation of depreciation

The straight-line method Revised

The same amount is charged annually to the income statement over the lifetime
of the non-current asset. The formula is:
cost of non-current asset − any residual (scrap) value
estimate of number of years’ use Revision activity
The cost of an asset includes the purchase price, including any taxes, together List as many causes of depreciation as
with any other costs directly attributable to bring the asset to the location and you can.
condition ready for use such as:

8 Cambridge International AS and A Level Accounting Revision Guide

847677_02_Camb_Acc_RG_2e_006-012.indd 8 20/11/2015 20:04

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