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Accounting 0452Chapter 4 of 7
Accounting procedures
Cambridge IGCSE Accounting 0452 Chapter 4 revision notes covering syllabus topic 4, Accounting procedures, for the 2027, 2028 and 2029 examinations. The chapter teaches the five year-end adjustments that every financial statement in topics 5 and 6 depends on, and teaches each one in all three of the forms an examiner can ask for: the journal entry, the ledger account, and the two effects on the statement of profit or loss and the statement of financial position. Section 4.1 distinguishes capital expenditure, which acquires, improves or extends a non-current asset and includes every cost of bringing it into working condition, from revenue expenditure, which runs or maintains the business, and distinguishes capital receipts such as capital introduced, loans received and the proceeds of selling a non-current asset from revenue receipts such as sales, rent received and commission received; it then calculates the effect of each of the four possible wrong treatments on expenses, on profit for the year and on asset valuations, and includes a twenty-item classification drill. Section 4.2 explains what depreciation is, why it is provided, and why it is a book entry that moves no cash and creates no replacement fund; it works the straight-line, reducing balance and revaluation methods on the same asset, gives the reason each method suits a particular type of non-current asset, shows the depreciation journal and the provision for depreciation account which keeps the asset account at cost, and works a four-step disposal through a disposal account that closes, calculating the profit or loss on disposal as proceeds less carrying value, including part-exchange. Section 4.3 applies the matching or accruals concept through accrued expenses, prepaid expenses, accrued income and prepaid income, gives the expense formula, states the statement of financial position heading for each of the four cases as other payables or other receivables, and prepares four fully balanced ledger accounts showing which side each balance brought down sits on. Section 4.4 records irrecoverable debts written off, the two-step reinstatement and receipt of an irrecoverable debt recovered, and the creation of, increase in and decrease in an allowance for irrecoverable debts using the rule that only the change is charged or credited, with a two-year allowance account and the trade receivables less allowance presentation. Section 4.5 values inventory at the lower of cost and net realisable value item by item, defines cost and net realisable value, works a three-item valuation table, and traces the effect of an incorrect valuation through cost of sales, gross profit, profit for the year, equity, total assets and into the following year where the error reverses. Includes a classification clinic, a depreciation and disposal studio, an accruals laboratory with four prepared accounts, an allowance studio, an inventory valuation clinic, a complete five-adjustment summary matrix, a ten-error mistake clinic, twelve multiple-choice questions with reasons, a twenty-mark Paper 2 style challenge combining disposal, depreciation, accruals and the allowance, a mastery checklist and a day 1, day 7, day 30 spaced review plan.Show moreShow less
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Chapter overview
A summary of this Accounting chapter — open a section to read it. The full notes, worked examples and practice questions are in the study modules above.
Key ideas to remember
- Memory anchor. Classify, spread, shift, doubt, value. Five words for the five adjustments: classify capital against revenue, spread the cost of an asset over its life, shift expenses and income into the right year, doubt some of the trade receivables, and value inventory at the lower figure. Every question in topic 4 is asking which of those five you are doing.
What you need to be able to do
- Distinguish between capital expenditure and revenue expenditure, and say which costs of acquiring an asset are capital.
- Account for capital expenditure and for revenue expenditure, naming the account debited in each case.
- Distinguish between capital receipts and revenue receipts and account for each.
- Identify and calculate the effect of an incorrect treatment on profit for the year.
- Identify and calculate the effect of an incorrect treatment on asset valuations.
- Define depreciation and explain why it is provided, naming the causes and the concepts involved.
- Calculate depreciation by the straight-line, reducing balance and revaluation methods.
- Name an appropriate method for a given type of non-current asset and give the reason.
- Prepare the journal entry and the ledger accounts that record depreciation.
- Prepare the journal entries that record the purchase and the sale of a non-current asset.
- Prepare the non-current asset account, the provision for depreciation account and the disposal account.
- Calculate the profit or loss on disposal and transfer it to the statement of profit or loss.
- Explain the importance of matching costs and revenues.
- Apply the matching concept using accrued and prepaid expenses and accrued and prepaid income.
- Calculate the expense or income for the year from the cash figure and the opening and closing adjustments.
- Prepare the journal entries and ledger accounts for accrued and prepaid expenses.
- Prepare the journal entries and ledger accounts for accrued and prepaid income.
- State which side each balance brought down sits on, and the statement of financial position heading it takes.
- Explain the meaning of irrecoverable debts and of irrecoverable debts recovered.
- Prepare the journal entries and ledger accounts that record an irrecoverable debt.
- Prepare the journal entries and ledger accounts that record an irrecoverable debt recovered.
- Explain the need for maintaining an allowance for irrecoverable debts.
- Prepare the journal entries and ledger accounts for the creation of, and for an increase and a decrease in, an allowance for irrecoverable debts.
- Present trade receivables less the allowance in the statement of financial position.
- Explain and apply the rule that inventory is valued at the lower of cost and net realisable value.
- Define cost and define net realisable value, and calculate the value of inventory item by item.
- Explain the effect of an incorrect inventory valuation on gross profit, on profit for the year, on equity and on asset valuation.
- Explain how an inventory error reverses in the following year.
Common mistakes to avoid
- “Everything we spent on the machine goes to the machinery account.” Fix Only what brings the asset into working condition is capital: price, delivery, installation, legal fees on property. A service contract, fuel, insurance and a repair are revenue expenditure, charged in full against this year’s profit.
- “We sold the old van for $5 200, so sales go up by $5 200.” Fix Sale proceeds of a non-current asset are a capital receipt. They go to the disposal account, never to sales. Only the profit or loss on disposal reaches the statement of profit or loss.
- “Depreciation is money put aside to replace the asset.” Fix Depreciation is a book entry that allocates cost to the years that used the asset. No cash moves, no fund exists, and the bank balance is exactly the same after the entry as before it.
- “Credit the machinery account with the depreciation.” Fix The asset account stays at cost for the whole life of the asset. The credit goes to the provision for depreciation account, which accumulates. The statement of financial position then shows cost, accumulated depreciation and carrying value in three columns.
- “Reducing balance at 20% means 20% of $20 000 every year.” Fix Reducing balance is a percentage of the carrying value at the start of the year, so the charge falls every year: $4 000, then $3 200, then $2 560. Only the straight-line method uses cost.
- “A prepaid expense is a liability — we paid it, so we owe it.” Fix A prepayment is a current asset, other receivables: the business has paid for a benefit it has not yet had, so the supplier owes it something. The accrued expense is the liability, other payables.
- “The allowance is $2 000, so charge $2 000 to the statement of profit or loss.” Fix Only the change is charged or credited. The full amount is charged once, in the year the allowance is created. After that an increase is an expense and a decrease is an income, both for the difference only.
- “Work the allowance out on the trade receivables in the trial balance.” Fix Write off the irrecoverable debts first, then apply the percentage to what is left. An allowance calculated on the figure before write-offs is an allowance against debts that have already gone.
- “The inventory will sell for $15 each, so value it at $15.” Fix Inventory is the lower of cost and net realisable value, item by item. Selling price matters only through NRV, and only when NRV has fallen below cost. Valuing at selling price recognises a profit before the sale has happened.
How Accounting procedures is examined
- All candidates take both papers, and all candidates are eligible for grades A* to G. There is one route through this qualification and one entry: the two components below are sat by everyone, both examine the whole of the subject content, and the full range of grades is open to every candidate. Examinations are available in the June and November series, and also in the March series in India.
- Both papers examine all seven topics and every question is compulsory. Across the whole qualification the assessment objectives weigh AO1 66%, AO2 24% and AO3 10%.
- Multiple-choice items on the adjustments are short and decisive — one calculation or one classification. Typical demands:
- classify one item of spending or one receipt as capital or revenue;
- state the effect on profit, or on non-current assets, of one stated wrong treatment;
- calculate a year’s depreciation by the straight-line or reducing balance method, often for the second or third year;
Syllabus reference and sources
Written against: Cambridge IGCSE Accounting (0452). Syllabus for 2027, 2028 and 2029 (version 1). Topic 4: Accounting procedures.
Written by: Academiq Edu Instructor Panel
Source documents
- Cambridge IGCSE Accounting (0452), Syllabus for 2027, 2028 and 2029 (version 1)
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