Explain the difference between bookkeeping and accounting.

The purpose of bookkeeping is the recording of all financial data of a business that includes a
double entry system, preparation of ledger accounts while accounting includes the preparation
and interpretation of financial statements.
Explain the purpose of double entry system.
It helps in recording each effect of a transaction.

Debit means any item or money coming into the business. Money that will come into the
business or service taken by the business.

Credit means any item or money going out of the business. Money that will go out of the
business or service given by the business.

It assists in the preparation of financial statements.

It helps in maintaining the financial record of a business.
Accounting Equation: Total Assets= Liabilities + Capital
Net Assets is also known as capital.
Business Documents

Invoice: Used when assets or inventory is sold or bought on credit (issued by supplier).
Receipt: It is given by supplier as an acknowledgement of payment received.
Debit note: It is issued by customer when he returns goods to supplier or when customer is
being overcharged.
Credit Note: It is issued by the supplier when he accepts goods returned.
Important point: Books of prime entry is updated when credit note is issued. This is for both
purchase and sales return journal.
Cheque: Instrument used to pay through bank.

Pay in slip: It is used to deposit money into the bank.

Cheque counterfoil: It is our own data that records any cheque payments made during the
year.
Bank Statement: It is prepared by the bank showing our balance at the bank as per their own
records. It is unadjusted for unpresented and uncredited cheques.
Statement of Accounts: It is issued by supplier to customer providing details of all transactions
incurred over a course of period.
Books of Prime Entry:
Sales Journal: It records credit sales of inventory.

Sales Return Journal: It records any sales return of inventory.

Purchase Journal: It records credit purchases of inventory.
Purchase return Journal: It records any purchase return of inventory.
Cash Book: It records all cash and bank payments and receipts. It is a combined account of cash
and bank.
Petty Cash book: It records all small cash payments made during the year. It is a supporting
book to cash book. It records a complete double entry as entry is posted both on payment side
as well as in the ledger accounts.
Advantages of Petty Cash Book:
1. Reduces number of entries in the main cash book.
2. Helps chief accountant to delegate some of its tasks to junior accountant.
3. Provides training to junior accountant.
Imprest System: Maintaining a minimum cash balance at the start of a month to pay for petty
expenditures.
Advantages of maintaining Imprest system:

1. It controls/ limits petty cash expenditures.

2. It helps in reducing fraud as limited money is available with petty cash manager.

Double Entry to restore Imprest system:

Dr Petty Cash
Cr Bank/Cash
General Journal: It records transactions that cannot be recorded in any other books of prime
entry. It includes Irrecoverable debt, sales, or purchase of non-current asset on credit, contra
entry, Depreciation, doubtful debt etc.
Q Division of ledgers:
1. Customer account will be recorded sales ledger
2. Supplier account will be recorded on purchase ledger
3. All other accounts will be recorded on general ledger
Q Difference between trade and cash discount and their purpose.

O Levels Accounting- Prepared by Ahsan Zafar

0323-4367874
Trade discount: It is given by supplier to customers to
1. Attract customers.
2. Encourage bulk buying.
3. To sell less demanded items.
Sales and purchases are recorded after deducting the trade discount. If there are any items
purchased or sold will also be returned at a discounted amount. A trade discount, however, will
not be recorded in the ledger account. It is only used to calculate invoice value.
i.e List price – Trade discount = Invoice price.
Cash Discount: It is given to the customer to attract early payment and reduce the risk of
doubtful debts.
It will be deducted from payment made and recorded in the ledger accounts as discount
received or discount allowed.
Notes attached

Bank Transfer: Online transfer of money from one bank account to another bank account.
Trial Balance: A list of balances of all ledger accounts on a particular date.
It quantifies total bookkeeping record where debit side must equal to credit side.
Assets, expenses, purchases, sales return and drawings are recorded on debit side while
liabilities, capital, income, sales, purchase return and provision will be recorded on credit side.
Limitation of Trial Balance:
1. It does not identify errors that are recorded on the same side but in different accounts.
2. It does not quantify year-end adjustments.

Errors that are not shown by Trial Balance:

1. Error of Omission: Where a complete transaction is not recorded in the books of

accounts. No entry was made either on debit or credit side.
2. Error of Original entry: Where a transaction is recorded correctly but with wrong equal
amounts on both sides.
3. Error of Commission: Where one entry of a transaction is recorded on the correct side
of a similar nature account. e.g. Payment to Mr A was recorded in the Mr B account.
4. Error of Principle: Where one entry is recorded on the correct side of a different nature
account. e.g Motor vehicle expense or repair recorded in motor vehicle account.
5. Error of Complete reversal: Where debit is recorded as credit and credit is recorded as
debit. Both entries will be corrected by the double amount.

O Levels Accounting- Prepared by Ahsan Zafar

0323-4367874
 6. Compensating error: Where two or more errors on each side cancel out each other’s
effect resulting in same balance on debit and credit side.
Errors shown by trial balance: These errors result in trial balance being not balanced resulting
in the opening of suspense account.
This error can be identified if there is an issue with one entry only such as
1. Error of single entry: Where only one entry is recorded, and other entry is missed. Place
the missed entry on the correct side and the other side will be recorded by suspense
account.
2. Error of Transposition: Where one entry is recorded on correct amount while the other
is recorded on an incorrect amount. The difference will be adjusted on the correct side
while suspense account will be created on the opposite side.
3. Both entries are recorded on same side: Wrong entry will be corrected by putting it into
the correct side by double amount and on opposite side suspense account will be
created.
4. Under casting and overcasting errors
Suspense Account:

1. It is used to balance trial balance.

2. It is used to identify and correct errors.

Narratives or description of errors corrected may be required.

Bank Reconciliation Statement
Cash Book: Company owns record of their cash and bank balance. A debit balance represents a
positive balance.
Bank Statement: Bank record of company’s bank balance. A credit balance represents a
positive balance.
It is done when the bank column of cash book does not agree with the bank statement
balance.
The cash book shows business record of bank balance while bank statement shows when bank
balance as per bank. The difference is adjusted and corrected using bank reconciliation
statement as there can be errors in the cash book and bank statement.
Debit of a cash book is credit of bank statement and vice versa.
Cash book balance = +ve =dr

Bank statement balance = +ve = cr

Errors in Cash book:

O Levels Accounting- Prepared by Ahsan Zafar

0323-4367874
 1. Bank Charges (cr, -ve): Amount deducted by the bank not known to us such as sms
charges, debit, or credit card annual charges. It will be deducted from the cash book
balance.
2. Bank interest paid or received (cr, -ve or dr, +ve). Interest paid will be deducted while
interest received will be added.
3. Correction of errors
4. Credit transfers (dr +ve): Amount directly deposited in the bank by the customers not
known to us. It should be added to the cash book.
5. Direct Debits (cr -ve): Variable payments made by the bank with client permission such
as credit card bills. Timing of payment is not known to the client.
6. Standing order (cr -ve): Fixed payment is paid directly by the bank such as insurance or
rent payment. Timing of payment is not known to the client.
7. Dividends (dr +ve or cr -ve)
8. Dishonored cheque (cr -ve): Cheque returned by the bank due to error in cheque or
due to insufficient balance.

Errors in Bank Statement:

1. Unpresented cheques: Cheque paid to supplier, but supplier has not presented cheque
to the bank yet. This should be deducted from the bank statement.
2. Uncredited cheques/Lodgment: Cheque received by the bank from customers but not
yet processed. This amount should be added to the bank statement.
3. Bank errors

Bank statement balance differs due to timing difference since unpresented cheque are already
deducted from the cash book and uncredited cheques are already added to cash book, but
bank has not yet processed it.

Question
Cash book balance overdrawn = 700
Direct debit = 500
Unpresented cheque = 800
Uncredited cheque = 300

Bank charges = 200

Direct credit = 300
(I) Bank balance as per SOFP

O Levels Accounting- Prepared by Ahsan Zafar

0323-4367874
 (II) Bank balance as per bank statement

(I) (700) –(500) –(200) + 300 = (1100)

(II) X – 800 + 300 = -1100
X = -1100 +800 -300 = (600)

Control Accounts:
Uses:
1. Help to find total receivable and total payable balance at year end.
2. To check arithmetical accuracy of ledger accounts.
3. Helpful in identifying errors when compared with the total balance of individual
accounts.
4. Assist in the preparation of financial statements.
5. To calculate missing sales and purchase figure.
Control Accounts figures are taken from books of prime entry.
Sales/Receivable Ledger Control Accounts
Dr Cr

Balance b/d xx Sales Returns/Return Inwards xx

Credit Sales xx Receipts from credit customer xx

Interest on overdue debt xx Discount allowed xx

Dishonored Cheque xx Irrecoverable debt/Bad debt xx

Refunds xx Contra/Set off xx

Balance c/d (balancing figure) xx

The increase in trade receivable will be recorded on the debit side while a decrease in trade
receivable will be recorded on credit side.
When receivable ledger balance can be on credit side.
This could arise because of any of the following scenarios: customer overpayment (error in the
original invoice, duplication of payment).

O Levels Accounting- Prepared by Ahsan Zafar

0323-4367874
 Purchase/Payable Ledger Control Account
Dr Cr

Purchase Returns/Return Outwards xx Balance b/d xx

Payments to credit supplier xx Credit Purchases xx

Discount Received xx Refunds xx

Contra/Set off xx Interest charged by supplier xx

Balance c/d (balancing figure) xx

The increase in trade payable will be recorded on the credit side while a decrease in trade
payable will be recorded on the debit side.

Depreciation notes
Capital Expenditure:
These expenditures are incurred on the purchase of non-current assets or improvement of non-
current assets. All capital expenditures are added to the value of non-current assets and must
be depreciated. It includes the cost of non-current assets, installation, and delivery cost of non-
current assets.

Revenue Expenditure:
Revenue expenditures are incurred on the day-to-day running operations of the business or
maintaining non-current assets. It includes all expenses, maintenance cost or buying of
inventory.

Capital receipts:
Amount received from non-regular income or one-off income like proceeds from the sales of
non-current assets, additional capital invested, or loan been taken from bank.

O Levels Accounting- Prepared by Ahsan Zafar

0323-4367874
Revenue receipts:

Regular income earned from the sale of goods or other regular amounts of income earned by
the business-like rental income, interest income etc.

Depreciation:
Definition: It is a systematic allocation of cost of a non-current asset over its useful life.
Accounting Principles: Matching, Historic Cost, Going concern and Consistency (in case of
change in depreciation rate).
Reasons for Depreciation:
1. To spread cost of non-current asset to reduce burden of cost on one year.
2. To calculate net book value of non-current asset.
Causes of Depreciation:

1. Wear and Tear of Assets.

2. New Technology
3. Better substitutes.
4. Recession
Methods of Depreciation:

1. Straight Line Method: Each year same amount of depreciation is charged each year.
It is easier to calculate and time saving.
Formula: (Cost – Residual Value)/ Useful life or Cost * % depreciation rate.
This method is generally used on Buildings.
2. Reducing balance Method: Each year depreciation reduces than the previous year.
More realistic methods asset reduces more value initially than in later years.
Formula: (Cost- Provision for Depreciation) * % depreciation rate.
e.g. This method is generally used on Machinery and motor vehicles.
3. Revaluation Method: Change in value of a non-current assets during the year will be
recorded as depreciation. It is usually used on small items of non-current assets such as
loose tools.
Formula: Opening Value of non-current assets + Additions – Disposal (NBV) – Closing
value of non-current assets.
Depreciation policy:

O Levels Accounting- Prepared by Ahsan Zafar

0323-4367874
 1. Full in the year of purchase and none in the year of sales. It can also be written as
depreciation will be charged on all assets held at the end of the year.
2. Depreciation is charged according to months of ownership.
If question does not state accounting policy, then 2nd policy should be used.

Double entry for Depreciation:

Dr Income Statement – Record depreciation as an expense.

Cr Provision for Depreciation – Deducted from non current asset
Depreciation Ledger Accounts
Non-Current Assets Account

$ $

Balance B/d xx Disposal (Cost) xx

Additions (Bank) xx Balance c/d xx
Total xx Total xx
Balance b/d xx

All items in above account will be recorded on Cost (amount on which Non-Current Asset was
initially bought).

Provision for Depreciation Account

$ $

Disposals (Dep) xx Balance b/d xx

Balance c/d xx Income Statement xx
(Depreciation of the year)
Total xx Total xx
Balance b/d xx

O Levels Accounting- Prepared by Ahsan Zafar

0323-4367874
All items in the above account includes depreciation amounts.

Disposal Account

$ $

Non Current Assets(Cost) xx Provision for Depreciation xx

Income Statement (profit) xx Sales Proceeds xx
Income Statement(loss) xx

All items related to disposed assets are recorded in this account.

Profit or loss on Disposal can also be calculated if compare sales value of a Non Current
Assets with its net book value.
Sales Value – Net Book Value = Profit or (Loss)

Disposal Entries
1. Dr Disposal
Cr Non Current Asset( Cost)

2. Dr Provision for depreciation

Cr Disposal

3. Dr Bank/Cash/Mr X
Cr Disposal

4. Dr Income Statement(loss) or Dr Disposal

Cr Disposal Cr Income Statement (profit)

O Levels Accounting- Prepared by Ahsan Zafar

0323-4367874
Numerical Example:
Trial Balance at 1st January 2019 $
Motor Vehicles at Cost 50,000

Provision for Depreciation 10,000

During a year, a new motor vehicle was bought for $20,000 on 1st July 2019 and a motor
vehicle was sold for $8000 through cheque received on 30 th September 2019which was
originally bought for $15000 and had a provision for depreciation of $3000 on 1 st January
2019.

Depreciation is charged at 20% straight line basis and according to the months of ownership.
Prepare Ledger Accounts and journal entries of disposal.

Motor Vehicles Account

$ $

Balance B/d 50,000 Disposal(Cost) 15,000

Additions (Bank) 20,000 Balance c/d 55000
Total 70,000 Total 70,000
Balance b/d 55,000

Provision for Depreciation Account

$ $
Disposals 5250 Balance b/d 10,000
Balance c/d 16000 Income Statement 11.250

(Depreciation of the year)

Total 21,250 Total 21,250
Balance b/d 16000

Depreciation for the year:

O Levels Accounting- Prepared by Ahsan Zafar

0323-4367874
New Asset: 20000 * 20%* 6/12 = $2000
Old Asset: 15000 * 20% * 9/12 = $2250
Remaining Motor Vehicles: 35000 * 20% = $7000

Total Depreciation for the year = $11250

Depreciation of Disposed Asset:

3000 + 2250 = $5250

Disposal Account

$ $
Motor Vehicles(Cost) 15000 Provision for Depreciation 5250
Sales Proceeds 8000
Income Statement(loss) 1750

Total 15000 Total 15000

Disposal Entries

1 Dr Disposal $15000
Cr Non Current Asset $15000

2 Dr Provision for depreciation $5250

Cr Disposal $5250

3 Dr Bank $8000
Cr Disposal $8000

4 Dr Income Statement(loss) $1750

Cr Disposal $1750

O Levels Accounting- Prepared by Ahsan Zafar

0323-4367874
 Q) Reducing balance at 20%. According to months of ownership.
New Asset: 20000 *20% * 6/12 = 2000
Old Assets = (15000-3000) *20%*9/12 = 1800

Remaining Assets: (35000-7000) *20% = 5600

Depreciation for the year = 9400
Disposal = 3000+1800 = 4800

Q) Reducing balance at 20%. Full in the year of purchase and none in the year of sale.

New Asset = 20000*20% = 4000

Old Asset = 0
Remaining Assets = (35000-7000) * 20% = 5600
Total Depreciation = 9600
Disposal = 3000

Other Payables and Receivables:

1. Expense of the year = Expense Paid–opening accrual + closing accrual + opening prepaid -
closing prepaid.
2. Income for the year: Income Received –opening accrual + closing accrual + opening prepaid -
closing prepaid.
Very important point:
These complete formulas are used in incomplete records and club accounting whereas in
normal sole trader or partnership or manufacturing accounts, only closing prepaid and
accrual balance is to be adjusted as trial balance already adjust the opening balance figure.
3. Accrued income and prepaid expenses will be recorded as other receivables in current assets
while accrued expense and prepaid income will be recorded as other payables in current
liabilities.

O Levels Accounting- Prepared by Ahsan Zafar

0323-4367874
 Expense A/C
Opening prepaid xx Opening accrued xx

Bank xx Income Statement xx

Closing accrued xx Closing prepaid xx

Total xx Total xx

Dr Income statement
Cr Expense A/C

Income Account

Opening accrued xx Opening prepaid xx

Bank xx
Income statement xx

Closing accrual xx
Closing prepaid xx

Total xx
Total xx

Dr Income A/C

Cr Income Statement

Irrecoverable debt and provision for doubtful debt:

Irrecoverable debt: A customer that will not pay us money.

O Levels Accounting- Prepared by Ahsan Zafar

0323-4367874
 Double entry: Dr Income Statement – recorded as an expense in income statement.
Cr Trade Receivables – deducted from trade receivables.
Accounting Principle: Matching

Doubtful Debt: A customer who may or may not pay us.

Causes:
1. Difficult financial condition of a customer.
2. Old Age Debt
3. Customer has no contact in recent past with supplier.
Accounting Principles: Prudence, Matching, consistency (in case of % provision)
Why Provision for doubtful debt is created?
It is an estimated loss that a business anticipate in advance as prudence concept is applied.

Increase in Provision is recorded as an expense while decrease in provision is recorded as

income.

Opening provision will always be given in trial balance while closing provision will need to be
calculated using the formula stated below.

Closing provision will be calculated using the formula:

(Trade Receivables – Irrecoverable debt) * % closing provision

Provision for doubtful debts account

Date Details $ Date Details $

Balance b/d

b/f – income b/f - expense

Balance c/d

Double entry to record increase in provision.

Dr Income statement-- expense
Cr Provision for Doubtful debt
Double entry to record decrease in provision.

O Levels Accounting- Prepared by Ahsan Zafar

0323-4367874
Dr Provision for Doubtful debt
Cr Income statement – income
Trade Receivables will be recorded in S.O.F.P after deducting irrecoverable debt and closing
provision.
Double entry to record Provision for Doubtful debt.

Dr I/S
Cr Provision for doubtful debt

Inventory Valuation:
Inventory must be valued at lower cost and net realizable value.
Net realizable value: Amount earned from selling inventory in case of damaged inventory.
Formula: Selling Price – Cost to sell (Repair cost, selling cost)

If the net realizable value is lower than the cost than closing inventory must be readjusted.
From total cost of closing inventory – cost of damaged inventory + net realizable value of
damaged inventory.
Opening inventory is directly proportional to cost of sales and inversely proportional to gross
profit while closing inventory is inversely proportional to cost of sales while direct proportional
to gross profit.
Income Statement (Sole Trader):
A statement showing profit earned over the course of a period.
General Points
1. Trial balance items are always adjusted for opening accruals and prepayments so only
adjustment related to closing prepaid and accrued needs to be adjusted.
2. Irrecoverable debt will always be recorded as an expense.
3. Increase or decrease in provision for doubtful debt needs to be recorded as expense or
income.
4. Profit or loss on disposal will also be recorded as other income or expense.
5. If disposal is mentioned as debit in trial balance, it shows loss on disposal and vice versa.
6. Drawings of goods if mentioned will be given in additional information and should be
deducted from purchases in cost of sales and added to drawings.
7. Depreciation must always be calculated and charged as an expense.
8. Loan interest will calculate by multiplying loan interest rate% into loan amount.

O Levels Accounting- Prepared by Ahsan Zafar

0323-4367874
Statement of Financial Position (Sole Trader):
It shows the balances of assets, liabilities and capital on the last day of an accounting year.
Working Capital is the difference between current assets and current liabilities. It is the amount
required to meet day-to-day expenses of the business.
Capital Employed: Non-Current Liabilities + Capital OR Total Assets – Current Liabilities

Net Assets Or Capital = Total Assets – Total Liabilities

Non-Current Assets will be recorded on Net Book Value
[Adjusted Cost of Non-current Assets – (Provision for depreciation + Depreciation charged in
income statement)]
Adjusted cost of non-current assets means non-current assets adjusted for additions and
disposal (cost).
Non-Current Assets may include intangible Assets ‘Goodwill’ if given although no calculation is
required.
Current Assets will include other receivables (Accrued income and Prepaid expense)
Current Liabilities will include other payables (Accrued Expense and Prepaid income)

Inventory may require adjustment related to lower of cost and net realizable value.
Trade Receivables will be recorded after deducting irrecoverable debt and closing provision for
doubtful debts.
Service Business
The income statement of the service business will not include cost of sales or gross profit. There
will only be three items; Sales, Other income, and Profit for the year.
Statement of Financial Position will not include trade receivable, inventory, or trade payables.
Sole Trader:

Advantages:
1. All the profit belongs to one person.
2. Can take decisions as per own will.
Disadvantages.
1. Unlimited liability.
2. Limited ability to run the business.
3. Limited ideas

O Levels Accounting- Prepared by Ahsan Zafar

0323-4367874
 4. Overburdened.

Partnership Accounting:
Advantages:
1. Losses will be shared.
2. More ideas.
3. Burden will be shared.
Disadvantages.

1. Profits will be shared.

2. Conflicts over business decisions.

Appropriation A/C

Profit for the year xx

+Interest on Drawings
A (Drawings* Interest on Drawings) xx
B (Drawings* Interest on Drawings) xx xx

-Interest on Capital
A (Capital * Interest on Capital) xx
B (Capital * Interest on Capital) xx (xx)

-Salaries
A xx
B xx (xx)

Residual Profit xx

Share of Profit
A (Ratio* Residual Profit) xx
O Levels Accounting- Prepared by Ahsan Zafar
0323-4367874
B (Ratio* Residual Profit) xx

Interest on Drawings are charged to partners to discourage drawings.

Interest on capital are paid to partnership to encourage more capital investment.

If Capital is increased during the year, then, interest must be time apportioned.

Current Account:

It shows partner’s money left with the business. A credit current account balance indicates
positive balance while a debit balance indicates negative balance.

Current account credit side includes balance b/d if positive, interest on capital, salaries,
interest on partner’s loan and share of profit while debit balance includes drawings, interest
on drawings, salaries(paid) and share of loss.

Q When Current account balance be overdrawn?

1. Partner has withdrawn more money than earned.
2. Partnership is facing loss.
Dr Current A/c Cr

A B A B
Drawings xx xx Balance b/d xx xx
Interest on Drawings xx xx Interest on capital xx xx
Salaries(Paid) xx xx Salaries(Payable) xx xx
Balance c/d xx xx Interest on Partner loan xx xx
Share of Profit xx xx
Total xx xx Total xx xx

Total income of a partner: Interest on capital + Salaries + Interest on partner loan + Share of
profit – Interest on drawings.

SOFP
Financed By:

O Levels Accounting- Prepared by Ahsan Zafar

0323-4367874
Capital A/c Balances: xx
Current A/C balances: xx

If there is no Partnership Agreement:

 Profit and losses will be shared equally.

 No interest on capital
 No interest on drawings
 No Salaries
 Interest on partner loan to be 5%
Statement of financial Position:

‘Financed by’ section of sole trader is different to partnership accounting statement of financial position.

It includes capital account balance and current account balance added together in separate headings.

Capital balance must be adjusted for new capital introduced and current account balance c/d will be
recorded in S.O.F.P.

Limited Companies:
The word capital is replaced by equity.
Equity includes ordinary share capital, preference share capital, retained earnings and
general reserve.
Ordinary Share Capital includes the amount earned on selling shares. It can be calculated by
multiplying the total number of shares with the share price.
Income Statement - Format
Sales xx
Less cost of sales (xx)
Gross Profit xx
Less expenses (xx)
Operating Profit xx
Less Finance Cost (xx)
Profit for the year xx

Statement of Changes in Equity:

O Levels Accounting- Prepared by Ahsan Zafar

0323-4367874
 Ordinary Preference General Retained Total
Share Capital Share Capital Reserve Earnings

Opening xx Xx xx Xx Xx
balance

Profit for the Xx Xx

year

Preference
Dividend
-Interim (xx) (xx)
-Final (xx) (xx)

Ordinary
Dividend
-Interim (xx) (xx)
-Final (xx) (xx)

Transfer to Xx (xx) Nil

general reserve

Share Issue
-Ordinary xx Xx
-Preference Xx Xx

Closing balance xx Xx xx Xx xx

O Levels Accounting- Prepared by Ahsan Zafar

0323-4367874
Types of Ordinary Share Capital:
Issued Share Capital:
Amount earned on selling shares.

Called up Capital:
Amount earned not yet received by the business.
Paid up Capital:
Amount earned and received as well.
Authorized share capital is no more part of the syllabus.

Ordinary Shareholders:
They are owners of the business and face the highest risk. They receive fluctuating dividends
and can vote at the annual general meeting when hiring or firing directors. They are paid after
paying debenture interest and preference shareholders.
Preference Shareholders:
They are members of the company with no ownership rights. They cannot vote at the annual
general meeting and receive fixed amount of dividend on their share capital. They are paid
before ordinary shareholders and after debentures.
Types of Preference share capital:
1. Irredeemable Preference shares: These shares cannot be sold back to the company but
can be traded with other people.
2. Redeemable Preference shares: These shares can be bought back by the business if
preference shareholders wish to sell them.
Preference Dividend:
8% Preference Share Capital: $100,000
Total preference dividend will be $8000.
If interim dividend paid is $3000, then $5000 will be the remaining final dividend if question
states pay the remaining final dividend.

Debentures:
It is Loan Capital of the business and recorded as non-current liabilities.
Debentures are liabilities of the business. They receive fixed interest, and their capital is
repayable after specific years. They are paid before preference and ordinary shareholders.

O Levels Accounting- Prepared by Ahsan Zafar

0323-4367874
Retained Earnings:
It is the undistributed accumulated profit collected over the years.

Profit for the year will be added to retained earnings while dividends (interim and final) and
transfer to general reserve will be deducted from the retained earnings to calculate the
closing retained earnings of the business.

General Reserve:
It is funded from retained earnings and used in emergency situations.
Uses:
1. To buy non-current assets.
2. To pay back loan.
3. To use funds for expansion.
4. To avail good investment opportunities.
Dividend:
Amount paid to shareholders from the profit earned to shareholders.
Types of Dividends:

1. Interim: Dividend paid during the year.

2. Final: Remaining dividend paid at the end of the year.
3. Proposed: Dividend announced not yet finalized. It will not be recorded in financial
statements.
General Points:

1. If the dividend is given in %, then multiply the % with share capital.

2. If a dividend is given per share, then multiply it with the number of shares.
3. The number of shares may differ from share capital as share can be sold at a price
above 1 or below 1.
Non-Profit Organization

Difference in terms between non-profit organisation and Commercial business.

1. Surplus vs profit
2. Deficit vs loss
3. Accumulated fund vs Capital
4. Income and Expenditure A/c vs Income statement

O Levels Accounting- Prepared by Ahsan Zafar

0323-4367874
Things that will come in exam.
1. Receipt and Payment A/C- Same as Bank A/C
2. Subscription A/c
3. Income Statement of café/ restaurant etc
4. Income and Expenditure A/C
5. Statement of Financial Position
Question generally starts with a Receipt and Payment A/C

Balance b/d Payment to restaurant supplier

Subscriptions Wages of groundman
Donations Restaurant manager salary
Restaurant takings Purchase of equipment
Sales of equipment Admin expense
Balance c/d

1. Balances at
1st Jan 31st Dec
Equipment xx xx
Inventory of restaurant xx xx
Trade receivables xx xx
Trade Payable xx xx
Subscriptions in arrears xx xx
Subscription in advance xx xx
Wages prepaid xx xx
Admin expenses in arrears xx xx
Accumulated Fund xx ?

2. Only 70% of subscriptions were received from the arrears at the start of the year
and remaining was considered irrecoverable.
3. The equipment sold had a net book value of xxxx.

Required:

1. Subscription A/C
2. Profit from restaurant
3. Income and Expenditure A/c
4. Statement of financial position

O Levels Accounting- Prepared by Ahsan Zafar

0323-4367874
 Subscription A/C

Opening accrued(Balance b/d) Opening prepaid(balance b/d)

Income and Expenditure A/C Receipt and Payment A/C
Irrecoverable debt
Balance c/d(Closing prepaid) Balance c/d(Closing accrued)

Income Statement of restaurant:

Restaurant takings(receipt and payment – op trade receivables + cl trade receivable) xx
Less cost of sales

Opening inventory xx
Purchases xx
(receipt & payment – op trade payable + cl trade payable)
Closing inventory (xx) (xx)
Gross Profit xx

Café manager salary (xx)

Profit from café xx

Income & Expenditure A/C

Incomes:
Subscription(Subscription A/C) xx

Profit from restaurant xx

Donations xx
Profit on disposal(Sales – NBv) xx xx
Expenditure
Wages( R& P + op prepaid – cl prepaid) xx

Admin expenses(R & P – op accured + cl accrued) xx

Irrecoverable debt xx
Depreciation xx (xx)
(op NCA+ add(r&P) – disposal(nbv) – cl NCA)

O Levels Accounting- Prepared by Ahsan Zafar

0323-4367874
Surplus/(Deficit) xx

Statement of financial position:

Non Current Assets xx

Current Assets
Inventory xx
Trade Receivable xx
Bank (R& P c/d) xx
Other receivable xx xx

(Prepaid expense + accrued income)

Total Assets xx
Financed by:
OP Accumulated Fund xx
Surplus xx xx

Non Current liabilities xx

Current liabilities
Trade Payables xx
Bank overdraft xx
Other Payables xx xx

(Prepaid income + Accrued expense)

Total liabilities and Accumulated Fund xx

Incomplete Records

It includes calculation of
(I)Sales
(ii) Purchases
(iii) Capital
(iv)Depreciation.

O Levels Accounting- Prepared by Ahsan Zafar

0323-4367874
Sales include Credit Sales and Cash Sales.
Credit Sales will be calculated using Account/ Formula:
Sales/Receivable Ledger Control Accounts

Dr Cr

Balance b/d xx Sales Returns/Return Inwards xx

Credit Sales xx Receipts from credit customer xx
Interest on overdue debt xx Discount allowed xx

Dishonored Cheque xx Irrecoverable debt/Bad debt xx

Refunds xx Contra/Set off xx
Balance c/d (balancing figure) xx

Question may require students to prepare control accounts and calculate credit sales as
balancing figure.
OR
Receipt from credit customers (Bank A/c debit side) – opening trade receivables and plus
closing trade receivables.
If there is no trade receivable in a question, it means there will be no credit sales.
Cash Sales will be calculated using formula:

Cash sales Banked (Bank A/C debit side) + payment made from cash sales.
Purchases may include credit purchases and cash purchases(given).
Credit Purchases will be calculated using Account/ formula:

O Levels Accounting- Prepared by Ahsan Zafar

0323-4367874
 Purchase/Payable Ledger Control Account
Dr Cr

Purchase Returns/Return Outwards xx Balance b/d xx

Payments to credit supplier xx Credit Purchases xx
Discount Received xx Refunds xx
Contra/Set off xx Interest charged by supplier xx
Balance c/d (balancing figure) xx

Question may require students to prepare control accounts and calculate credit purchase as
balancing figure.
OR

Payment from credit suppliers (Bank A/c credit side) – opening trade payables and plus
closing payables.

Capital:
A question may require students to calculate opening capital or closing capital.
Capital is calculated by deducting total liabilities from total assets.
Don’t forget to adjust the bank balance which will be given in the bank account. For the
calculation of opening capital use balance b/d of bank account while for closing capital use
balance c/d figure of bank account.
Calculation of capital is also known as a statement of affairs.

Statement of affairs may also require students to calculate profit or drawing by manipulating
the financed by section i.e. opening capital + profit + additional capital – drawings = closing
capital.

Depreciation
Depreciation is normally calculated using a revaluation method.

O Levels Accounting- Prepared by Ahsan Zafar

0323-4367874
Opening NBV + Addition (bank credit side) – Disposal(NBV in additional information) – Closing
Net Book Value.
Manufacturing Accounts
It is used when company manufactures product and then sell it to customers.
Manufacturing account includes production cost (prime cost + Production overhead).

Prime Cost includes cost of direct material, direct labour and direct expenses.

 Direct Material cost includes opening inventory of raw material+ purchases of raw
material+ carriage inwards- closing inventory of raw material.
 Direct Labour can be given by the name of factory wages, manufacturing wages,
operator’s wages.
 Direct Expense will be given by the name of factory expenses or royalties.
All these costs will be added to calculate prime cost.
Production Overhead or indirect cost includes all cost incurred in the factory other than direct
cost.
It includes factory maintenance, factory rent, factory machinery depreciation, factory
manager/supervisor salary and all other factory related expenses.
All expenses other than factory will be recorded in the income statement.
Inventory in current assets will include closing inventory of (raw material + work in progress +
finished goods).

Manufacturing Accounts
Direct Cost:
It is a cost that is directly traceable to the manufactured products. It includes raw material cost,
manufacturing wages and royalties.
Indirect Cost:
It is a cost incurred in the course of making the product, but which cannot be directly traceable
to it. It includes production overhead such as rent, electricity cost etc.

O Levels Accounting- Prepared by Ahsan Zafar

0323-4367874
 $ $
Opening Inventory of Raw Material xx
Purchase of Raw Material xx
Carriage Inwards xx
-Purchase Return (xx)
-Closing Inventory of Raw Material (xx)
=Total Direct Raw Material Consumed xx
+ Direct Labour/Factory Wages/ Manufacturing Wages xx
+ Direct Expenses/ Factory Expenses/ Royalties xx
= Prime Cost xx
+Production Overhead/ Factory Overhead
Factory Rent xx
Factory Heating and Lighting xx
Factory Manager Salaries xx
Factory Building Maintenance xx
Factory Insurance xx
Depreciation of Factory Non-Current Assets xx
Indirect Wages xx
Indirect Material xx
Other Factory Cost xx xx
=Total Manufacturing Cost xx
+Opening Work in Progress xx
-Closing Work in Progress (xx) xx/(xx)
Production Cost Transferred to Income Statement xx

O Levels Accounting- Prepared by Ahsan Zafar

0323-4367874
Income Statement

Sales xx

-Return Inwards (xx) xx

Less Cost of Sales

Opening inventory of Finished goods xx

Production Cost Transferred to Income Statement xx

Purchase of Finished Goods xx

-Closing inventory of finished goods (xx) (xx)

=Gross Profit xx

+Other Income xx

Less Expense (xx)

Profit for the year xx

CURRENT ASSETS

Inventory (Raw Material + W.I.P + Finished Goods) xx

Ratios Analysis
1. Used to compare business performance with prior year or competitors.
2. Used to display business performance in front of investors.
Profitability Ratios
1. Gross Profit Margin:

Gross Profit/Sales * 100

2. Gross Profit Markup:
Gross Profit/Cost of Sales * 100
Performance: Higher the better
Reason for change: Changes in selling price and cost of sales (discounted material, wastages)

O Levels Accounting- Prepared by Ahsan Zafar

0323-4367874
 Adjustments: Denominator always represents 100% both in case of margin and markup.
In Margin, Sales will be equal to 100% while in markup cost of sales will be equal to 100%.
3. Profit Margin:
Profit after interest/Sales * 100
Performance: Higher is better.
Reason for change: Changes in gross profit ratio and changes in expenses to sales ratio.

4. Return on Capital Employed:

Profit before interest/Capital Employed * 100
How much return in % we can pay our investors annually.
Performance: Higher is better

Reason For change: Changes in profit or changes in capital employed (loan paid or
taken).

Capital Employed: Noncurrent liabilities + equity or Total Assets – Current Liabilities

Liquidity Ratios
1. Current Ratio/Working Capital Ratio
Current Assets/Current Liabilities
Answer given in ratio 1.
Performance- 2:1
Current assets must be enough to pay its current liabilities in the short run and operate
the business smoothly.
Reasons for change: Money invested in non-current assets, increase in cash expenses,
Loan taken or paid back.
2. Quick Ratio/Acid Test Ratio:
(Current Assets – Closing inventory)/Current Liabilities
It shows the company’s ability to pay its current liabilities on an immediate basis.
Performance: It should be above 1
Reasons for change: Changes in inventory levels with inventory sold too quickly or too
slowly.

O Levels Accounting- Prepared by Ahsan Zafar

0323-4367874
 General Point:
Quick ratio and Current Ratio can be improved if surplus non-current assets can be sold,
bank loan can be taken, inventory sold quickly on discount but above cost price.
3. Inventory Turnover(times)
Cost of Sales/ Average inventory
Average inventory: (Opening Inventory + Closing inventory)/2
It shows the speed at which inventory is being sold.
Performance: A greater inventory turnover means more sales will be earned and
holding costs will be reduced also. The risk of obsolete inventory will be reduced.
4. Trade Receivable days:
Trade Receivables/Credit Sales *365
It shows in how many days our customer will pay us.
Performance: Lower Trade Receivable days is better for business as the risk of doubtful
debt will reduce and cash balance will improve in lesser time, but cash discount may
require to be offered and lesser credit days offered can reduce sales as well.
5. Trade Payable days:
Trade Payables/Credit Purchases *365
It shows how many days we need to pay our supplier.
Performance: Higher trade payables days means the company will have more cash
available for longer times with the company, but cash discount offer will be missed and
can cause bad reputation with the supplier.

Limitation of Ratios:

1. Ratios have no value unless compared.

2. It shows historic business performance which is not an indicator of future business
performance.
3. It does not consider non-financial information.
4. Comparable companies may have used different accounting policies or have different
operations or focus on different market segments, hence comparison may not be fair.

O Levels Accounting- Prepared by Ahsan Zafar

0323-4367874
 User of Ratios:

Owners, Manager, Banks, Employees, Shareholder, Government and Trade Payables.

Accounting Principles:

1. Duality: Every transaction has two effects: one debit and other credit.
2. Business Entity: Owners and business is legally separate. Personal expenses of owners
will not be recorded in financial statements and if business money is used it will be
recorded as drawings.
3. Consistency: Business should follow the same accounting rate and policies each year for
better comparison of performance. Rates or methods of depreciation should not be
changed each year and provision for doubtful debt must remain constant unless there is
a correct logic behind it.
4. Going Concern: It is assumed business will run for the foreseeable future i.e. at least 12
months. Assets and liabilities are divided into current and non-current categories as the
business believes they will run for at least 12 months.
5. Money Measurement: Only information measured in monetary will be recorded in
financial statements. Employee morale, commitment or knowledge cannot be quantified
in monetary terms; hence, they will not be recorded in financial statements.
6. Historic Cost: Asset must be recorded on its initial purchase price.
7. Matching: Expense must be recorded in the period in which their benefits are realized.
Assets are depreciated using this principle as they provide benefit for more than one year
and hence their cost should be divided and then charged to income statement. Closing
Inventory is also deducted from cost of sales and recorded in the next year as it will
provide benefit next year when sold. Adjustments related to accruals and prepayments
will also be treated under this principle.
8. Prudence: Losses must be anticipated and recorded whereas profit will only be recorded
when they are actually earned. Asset must not be overstated whereas liabilities must not
be understated. Provision for doubtful debt is created using prudence principle as well as

O Levels Accounting- Prepared by Ahsan Zafar

0323-4367874
 inventory should be charged at lower of cost and net realizable value is also the concept
of prudence.
9. Materiality: Any non-current assets that does not have an insignificant value must be
recorded as an expense rather than recorded as non-current assets and then
depreciated. E.g. Stapler, Hammer etc.
10. Realisation: Under this principle, revenue is recognized by the seller when it is earned
irrespective of whether cash from the transaction has been received or not.

Accounting Policies:

1. Comparability: Financial statements must be produced using consistent accounting

policies so that they can be compared to one another.
2. Relevance: Information must be specific to the needs of user. Each adjustment in the
financial statement should follow its relevant accounting principles.
3. Reliability: Financial statements must be prepared in an unbiased and neutral manner.
The method or rate of depreciation when chosen should be fair rather than providing
benefit to company by lowering the expenses.
4. Understandability: Financial statements must be produced using the standard format
used internationally.

O Levels Accounting- Prepared by Ahsan Zafar

0323-4367874