One handout per topic, in plain English. Read the handout before the textbook, not after it — each one takes about five minutes and is designed to make the idea land first, so the formal version has somewhere to stick.
7 handoutsCambridge O LevelPrintableFree to copy and share
Accounting exists to answer two questions: what does the business own and owe, and did it make money?
Picture itImagine your friend runs a phone-repair stall. At the end of the year he says "business was good". Good how? He has a drawer of cash, a pile of unpaid customer bills, a shelf of spare parts he has not paid the supplier for yet, and a bench he bought in March. Accounting is the system that turns that mess into two clear statements: what he is worth, and what he earned.
Book-keeping is recording, accounting is interpreting
Book-keeping is the day-to-day job of writing every transaction down accurately. Accounting is what comes after: summarising those records into statements and drawing conclusions from them. You must do the first properly or the second is worthless.
The accounting equation is the spine of everything
Assets = Liabilities + Capital. Everything the business owns was paid for either by borrowing (liabilities) or by the owner (capital). This equation can never be out of balance — if yours is, you have made an error, not a discovery.
Assets and liabilities split by time
Non-current assets are kept for more than a year (premises, machinery, vehicles). Current assets turn into cash within a year (inventory, trade receivables, bank, cash). Non-current liabilities are repaid after more than a year (a long-term loan). Current liabilities are due within a year (trade payables, bank overdraft).
The business is separate from the owner
Under the business entity principle, the owner's personal money is not the business's money. When the owner takes cash out it is drawings, not an expense — it reduces capital, it does not reduce profit.
The bit that catches people outCapital is a liability from the business's point of view. That feels backwards until you accept the entity principle: the business owes the owner the money he put in. That is why capital sits on the same side of the equation as the loans.
The grown-up words
What it means
What it is called
Note
What the business owns
asset
Split into non-current and current
What the business owes to outsiders
liability
Split by whether due within a year
What the business owes the owner
capital
Increased by profit, reduced by drawings
Money the owner takes for personal use
drawings
Never an expense
Customers who owe the business money
trade receivables
A current asset
Suppliers the business owes money to
trade payables
A current liability
The business is separate from its owner
business entity principle
Underpins drawings
Check you have got it
A business has assets of $48 000 and liabilities of $17 000. What is the capital?
The owner takes $500 of goods home. How does this affect profit?
It does not reduce profit as an expense — it is drawings. Purchases are reduced by $500 and capital is reduced by $500.
Edvia Free Resources · Accounting 7707 · Topic 1 — free to copy and share
Topic 2
Sources and recording of data
Every entry in the books starts life as a piece of paper, and every transaction is recorded twice.
Picture itThink of double entry like a see-saw. Buy a laptop for cash and two things happen at once: you gain a laptop and you lose the cash. Recording only one half tells half the truth. Every business transaction has two sides, always.
Source documents come first
An invoice requests payment for goods sold on credit. A credit note reduces an invoice when goods are returned. A debit note is the buyer asking for that reduction. A receipt proves payment was made. A statement of account summarises a month's dealings with one customer. Nothing goes in the books without a document behind it.
Debit and credit, decided simply
Debit what comes in and what the business owns or spends; credit what goes out and what the business owes or earns. So: debit increases assets and expenses; credit increases liabilities, capital and income.
Books of prime entry sort the traffic
Before the ledger, transactions are listed in day books: the sales journal, purchases journal, sales returns and purchases returns journals, the cash book, the petty cash book and the general journal for everything unusual. This stops the ledger drowning in detail.
The cash book does two jobs
It is a book of prime entry and a ledger account for cash and bank at the same time. A three-column cash book adds a discount column: discount allowed (an expense, given to customers) on the debit side, discount received (income, given by suppliers) on the credit side.
Petty cash uses the imprest system
The petty cashier starts with a fixed float, spends some, and is topped back up to exactly that float at period end. The top-up therefore always equals what was spent — a built-in check.
The bit that catches people outTrade discount and cash discount are different animals. Trade discount is deducted before anything is recorded — the books only ever show the net figure. Cash discount is for paying quickly, and it is recorded, in the discount columns.
The grown-up words
What it means
What it is called
Note
Document requesting payment for credit goods
invoice
Basis of the sales/purchases journals
Document reducing a previous invoice
credit note
Issued by the seller on returns
Where a transaction is first listed
book of prime entry
Before the ledger
Discount for buying in bulk or in the trade
trade discount
Never appears in the ledger
Discount for paying within an agreed time
cash discount
Allowed = expense, received = income
Fixed float topped back up each period
imprest system
Used for petty cash
Entering every transaction twice
double entry
One debit, one credit, equal amounts
Check you have got it
A business sells goods on credit, list price $1 000, with 20% trade discount. What is recorded as the sale?
$800. Trade discount is deducted before recording — the $1 000 never appears anywhere in the books.
Which side of the cash book records discount allowed, and why?
The debit side, alongside money received from customers, because discount allowed is granted when a customer settles — it is an expense of the business.
Edvia Free Resources · Accounting 7707 · Topic 2 — free to copy and share
Topic 3
Verification of accounting records
Books can balance perfectly and still be wrong — so accountants build separate checks that catch what balancing cannot.
Picture itA trial balance is like counting that you have the same number of left shoes as right shoes. It proves nothing about whether they are the right shoes. Write $250 in both the debit and credit column when the real figure was $520, and the trial balance still agrees — happily, and wrongly.
The trial balance and its blind spots
A trial balance lists every ledger balance to check total debits equal total credits. Six errors slip straight past it. Omission — the transaction was left out entirely. Commission — right type of account, wrong person. Principle — wrong type of account altogether. Original entry — the wrong amount, entered on both sides. Complete reversal — debit and credit swapped. Compensating — two errors of equal size cancelling out.
The suspense account holds the difference
If the trial balance does not agree, the difference is parked in a suspense account so draft statements can be prepared. As each error is found, a journal entry clears part of it. When every error is corrected the suspense account is empty — if it is not, you have not found them all.
Bank reconciliation compares two records of the same money
The cash book is the business's record; the bank statement is the bank's. Differences come from unpresented cheques (written, not yet cashed), uncredited deposits (paid in, not yet cleared), and items the bank knew about first — charges, interest, direct debits and dishonoured cheques.
Reconciliation runs in a fixed order
First update the cash book for items the business did not know about. Then start from the updated cash book balance, add uncredited deposits, subtract unpresented cheques, and you should arrive at the bank statement balance.
Control accounts check a whole ledger at once
The sales ledger control account summarises every customer account; the purchases ledger control account summarises every supplier account. Its balance should equal the total of the individual accounts. Built from totals taken independently, it is a genuine check on the ledger's arithmetic.
The bit that catches people outBank charges and direct debits do not go in the reconciliation statement — they go in the cash book first, because the business genuinely had not recorded them yet. Only timing differences belong in the statement itself.
The grown-up words
What it means
What it is called
Note
List of ledger balances checking debits equal credits
trial balance
Cannot detect six error types
Transaction posted to the wrong class of account
error of principle
e.g. machinery to purchases
Right class of account, wrong individual
error of commission
e.g. wrong customer
Two errors that cancel each other out
compensating error
Trial balance still agrees
Temporary account holding a trial balance difference
suspense account
Cleared by journal entries
Cheque written but not yet cashed by the bank
unpresented cheque
A timing difference
Summary account checking a whole ledger
control account
Sales ledger and purchases ledger
Check you have got it
A payment for machinery repairs was debited to the machinery account. Name the error and say whether the trial balance still agrees.
An error of principle — a revenue expense recorded as a capital one. The trial balance still agrees, because a debit and a credit of equal size were still made.
The cash book shows $4 200; there are unpresented cheques of $650 and uncredited deposits of $300. What is the bank statement balance?
$4 550. Start at $4 200, add uncredited deposits $300, add back unpresented cheques $650 → the bank has not yet taken them off.
Edvia Free Resources · Accounting 7707 · Topic 3 — free to copy and share
Topic 4
Accounting procedures
Some spending buys the future and some buys today — and telling them apart changes both the profit and the balance sheet.
Picture itBuy a delivery van for $20 000 and it serves you for five years, so charging the whole $20 000 against this year's profit would be a lie about how the business performed. Put fuel in that van and the benefit is gone by Friday. One is capital expenditure, one is revenue expenditure.
Capital versus revenue
Capital expenditure buys or improves a non-current asset and appears in the statement of financial position. Revenue expenditure runs the business day to day and appears in the income statement. Getting this wrong misstates both profit and asset values — and the error carries into future years.
Depreciation spreads the cost, it does not save cash
Depreciation charges part of a non-current asset's cost to each year that benefits from it. Straight line: the same amount each year, using (cost − residual value) ÷ useful life. Reducing balance: a fixed percentage of the falling carrying amount, so bigger charges early on. Revaluation is used for items like loose tools, where you simply value what is left.
Accruals and prepayments put costs in the right year
Under the matching principle, expenses belong to the period they relate to, not the period they were paid in. An accrued expense is used but unpaid — a liability. A prepaid expense is paid in advance for next year — an asset. The same idea works in reverse for income.
Irrecoverable debts and the provision
An irrecoverable debt is a customer who definitely will not pay — written off as an expense. A provision for doubtful debts is an estimate covering customers who might not pay; only the increase or decrease in the provision goes to the income statement each year.
Inventory is valued at the lower of two figures
Closing inventory is valued at the lower of cost and net realisable value (selling price less costs to sell). This follows prudence: never record a profit before it is earned, but recognise a loss as soon as it is likely.
The bit that catches people outDepreciation is not a pot of money set aside. No cash moves. It is an accounting adjustment that reduces reported profit and reduces the asset's carrying amount — the business is not saving up for a replacement van unless it separately puts cash aside.
The grown-up words
What it means
What it is called
Note
Spending on acquiring or improving a non-current asset
capital expenditure
Goes to the balance sheet
Day-to-day running costs
revenue expenditure
Goes to the income statement
Spreading an asset's cost over its useful life
depreciation
No cash movement
Same charge every year
straight-line method
(Cost − residual) ÷ life
Fixed % of the falling carrying amount
reducing balance method
Larger charge in early years
Expense used but not yet paid
accrual
A current liability
Expense paid in advance
prepayment
A current asset
Selling price less costs to sell
net realisable value
Compare with cost, take the lower
Check you have got it
A machine costs $30 000, has a residual value of $5 000 and a five-year life. What is the annual straight-line depreciation?
$5 000 per year. (30 000 − 5 000) ÷ 5 = 5 000.
Rent of $12 000 was paid for the year to 31 March, and the financial year ends 31 December. What adjustment is needed?
Three months are prepaid: 12 000 × 3/12 = $3 000. Reduce the rent expense by $3 000 and show $3 000 as a prepayment (current asset).
Edvia Free Resources · Accounting 7707 · Topic 4 — free to copy and share
Topic 5
Preparation of financial statements
Two statements do all the work: one tells you how the year went, the other tells you where the business stands on the last day of it.
Picture itA film and a photograph. The income statement is the film — everything that happened over twelve months. The statement of financial position is the photograph taken the moment the film ends: what is owned and owed at that single instant.
The income statement has two profit lines
Gross profit = revenue − cost of sales, where cost of sales = opening inventory + purchases − closing inventory (adjusted for carriage inwards and returns). Profit for the year = gross profit + other income − expenses. Gross profit tests your trading; profit for the year tests the whole operation.
Carriage in and carriage out sit in different places
Carriage inwards is the cost of getting goods to you — part of cost of sales. Carriage outwards is delivering to customers — an expense below gross profit. The words look similar; the effect on gross profit is not.
The statement of financial position follows a fixed order
Non-current assets, then current assets, then capital (opening capital + profit − drawings), then non-current liabilities, then current liabilities. Assets must equal capital plus liabilities — the accounting equation, formally presented.
Different organisations, same skeleton
A partnership adds an appropriation account sharing profit, plus current and capital accounts for each partner. A limited company shows share capital, retained earnings and debentures. A club or society replaces the income statement with a receipts and payments account and an income and expenditure account, and calls its capital the accumulated fund.
Incomplete records means working backwards
When a trader keeps no proper books, profit can be found from the change in capital: profit = closing capital − opening capital + drawings − capital introduced. Missing figures for sales or purchases can be reconstructed from control accounts, and mark-up or margin can rebuild cost of sales.
The bit that catches people outMark-up is profit as a percentage of cost; margin is profit as a percentage of selling price. A 25% mark-up is the same as a 20% margin. Mixing them up is the single most common way to lose marks on incomplete records.
The grown-up words
What it means
What it is called
Note
Revenue minus cost of sales
gross profit
Tests trading performance
Gross profit plus other income minus expenses
profit for the year
Tests overall performance
Cost of bringing goods in
carriage inwards
Added to cost of sales
Cost of delivering to customers
carriage outwards
An expense, not cost of sales
Snapshot of assets, liabilities and capital
statement of financial position
At one date
Profit as a % of cost price
mark-up
Cost = 100%
Profit as a % of selling price
margin
Selling price = 100%
A club's equivalent of capital
accumulated fund
In a non-profit organisation
Check you have got it
Opening inventory $8 000, purchases $52 000, closing inventory $6 000. What is cost of sales?
$54 000. 8 000 + 52 000 − 6 000 = 54 000.
Goods cost $80 and are sold at a mark-up of 25%. What is the selling price and the margin?
Selling price $100 (80 × 1.25). Profit $20, so the margin is 20/100 = 20%.
Edvia Free Resources · Accounting 7707 · Topic 5 — free to copy and share
Topic 6
Analysis and interpretation
Ratios turn a page of numbers into a judgement — but only if you compare them with something.
Picture itA business made $50 000 profit. Impressive? You cannot say. If it used $100 000 of capital that is superb; if it used $5 million it is dreadful. Ratios exist because raw figures alone are meaningless — every one of them is a comparison.
Profitability ratios
Gross margin = gross profit ÷ revenue × 100. Profit margin = profit for the year ÷ revenue × 100. Return on capital employed (ROCE) = profit ÷ capital employed × 100 — the headline test of how hard the owner's money is working.
Liquidity ratios
Current ratio = current assets ÷ current liabilities, often quoted around 2:1. Quick (acid test) ratio = (current assets − inventory) ÷ current liabilities, around 1:1, because inventory is the slowest current asset to turn into cash.
Efficiency ratios measure speed
Rate of inventory turnover = cost of sales ÷ average inventory — how many times stock is sold and replaced. Trade receivables turnover (days) = receivables ÷ credit sales × 365 — how long customers take to pay. Trade payables turnover (days) works the same way for suppliers.
Interested parties want different answers
An owner wants ROCE. A bank wants liquidity and whether the loan can be repaid. A supplier wants payables days. An employee wants stability. A potential buyer wants all of it. Always name who is asking before you interpret.
Ratios have real limits
They ignore the quality of staff, the state of the economy, seasonal timing, changes in accounting policy and anything not measured in money. Comparing two businesses fairly requires the same industry, the same size and the same year.
The bit that catches people outA high current ratio is not automatically good news. It can mean cash sitting idle, inventory that will not sell, or customers who are not paying. "Higher is better" is not an argument — say why the movement happened and what the business should do about it.
The grown-up words
What it means
What it is called
Note
Gross profit ÷ revenue × 100
gross margin
Tests pricing and buying
Profit ÷ capital employed × 100
return on capital employed
The headline profitability test
Current assets ÷ current liabilities
current ratio
Short-term solvency
(Current assets − inventory) ÷ current liabilities
quick ratio
Also called acid test
Cost of sales ÷ average inventory
rate of inventory turnover
In times per year
Receivables ÷ credit sales × 365
trade receivables days
How fast customers pay
Anyone with an interest in the business
interested party
Owners, banks, suppliers, staff
Check you have got it
Current assets $60 000 (including inventory $30 000), current liabilities $30 000. Give both liquidity ratios.
Current ratio 2:1 (60 000 ÷ 30 000). Quick ratio 1:1 ((60 000 − 30 000) ÷ 30 000).
Receivables days rise from 30 to 55. Give one likely cause and one action.
Cause: credit control has weakened, or longer terms were offered to win sales. Action: chase overdue accounts, offer a cash discount for prompt payment, or tighten credit limits.
Edvia Free Resources · Accounting 7707 · Topic 6 — free to copy and share
Topic 7
Accounting principles, ethics and technology
The rules exist so that two accountants looking at the same business produce the same answer — and so that answer can be trusted.
Picture itIf every business chose its own way to value inventory or depreciate a van, no two sets of accounts could be compared, and no lender could believe any of them. The principles are the shared grammar. Ethics is the promise that the person writing the accounts is not bending them.
The principles you must be able to name
Business entity, consistency, duality (every transaction has two effects), going concern (the business will continue trading), historic cost, matching, materiality (trivial items need no special treatment), money measurement, prudence and realisation (revenue counts when the goods change hands, not when the cash arrives).
Principles often pull against each other
Prudence says understate; matching says spread costs fairly; consistency says do not keep changing method. When they conflict, exams want you to say which principle you applied and why — not just quote one.
The accountant's ethical duties
Integrity — be honest. Objectivity — no bias, no undue influence. Professional competence and due care — keep your knowledge current and work carefully. Confidentiality — do not disclose client information. Professional behaviour — obey the law and do not discredit the profession.
Computerised accounting changes the work, not the rules
Software gives speed, automatic double entry, instant reports and fewer arithmetic errors. Costs are the software, hardware, training and the risk of data loss or fraud. The underlying principles are identical — a computer just applies them faster, including applying a wrong instruction faster.
International standards give a common language
Financial statements are prepared under recognised international standards so that a lender in one country can read accounts prepared in another. That comparability is the whole point of standardising in the first place.
The bit that catches people out"The computer did it" is never a defence. Automated systems still need a human checking that the inputs were right and the outputs make sense — garbage in, garbage out is exactly as true in accounting as anywhere else.
A business changes from straight-line to reducing balance depreciation every other year. Which principle is broken?
Consistency. Changing method without good reason makes year-on-year comparison meaningless and can be used to manipulate reported profit.
A customer orders goods in December; they are delivered in January and paid for in February. In which month is the revenue recognised?
January — under the realisation principle, revenue is recognised when the goods change hands, not when the order is placed or the cash arrives.
Edvia Free Resources · Accounting 7707 · Topic 7 — free to copy and share
Like how this is taught?
Every handout starts with the idea in plain English and only then the formal version. That is how every class at Edvia College works — for two full years of Cambridge A Levels.