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.
8 handoutsCambridge AS & A LevelPrintableFree to copy and share
Accounting has rules so that two people looking at the same business produce the same answer — and so that answer can be compared with anyone else's.
Picture itIf every business chose its own way to value stock and depreciate machinery, no two sets of accounts could be compared and no lender could rely on any of them. The concepts are not bureaucracy. They are the shared grammar that makes the numbers mean something outside the firm that produced them.
The accounting equation and double entry
Assets = Liabilities + Capital, always. Every transaction has two equal and opposite effects — duality — so the equation holds after every entry. Debit what comes in and what is spent; credit what goes out and what is owed or earned.
The concepts that govern judgement
Business entity, going concern, accruals/matching, consistency, prudence, materiality, realisation, money measurement, historic cost, substance over form. Where two conflict, say which you applied and why — that reasoning is what is being marked.
Accruals and prepayments
Expenses belong to the period they relate to, not the period they were paid in. An accrual is incurred but unpaid — a current liability. A prepayment is paid in advance — a current asset. The same logic applies in reverse to income received in advance or owing.
Depreciation and non-current assets
Straight line: (cost − residual value) ÷ useful life. Reducing balance: a fixed percentage of the carrying amount, giving larger early charges. Revaluation for items like loose tools. Disposal is handled through a disposal account, and the profit or loss on disposal is really a correction of past depreciation estimates.
Inventory and irrecoverable debts
Inventory is valued at the lower of cost and net realisable value, following prudence. An irrecoverable debt is written off entirely; a provision for doubtful debts is an estimate, and only the movement in the provision goes to the income statement each year.
The bit that catches people outDepreciation moves no cash. It reduces reported profit and reduces the asset's carrying amount, but nothing is set aside for a replacement. Describing depreciation as 'saving up' for a new machine is one of the most persistent misconceptions in the subject.
The grown-up words
What it means
What it is called
Note
Every transaction has two equal effects
duality
The basis of double entry
Business is separate from its owner
business entity
Explains drawings
Costs matched to the period they relate to
accruals concept
Behind accruals and prepayments
Do not overstate profit or assets
prudence
Behind inventory valuation
Same policy applied year after year
consistency
Enables comparison
Selling price less costs to sell
net realisable value
Compared with cost
Estimate of debts that may not be paid
provision for doubtful debts
Only the movement hits profit
Check you have got it
A machine cost 80 000 with residual value 8 000 and an eight-year life. Give the annual straight-line charge.
(80 000 − 8 000) ÷ 8 = 9 000 per year.
Rent of 24 000 was paid for the year to 31 May; the year end is 31 December. What adjustment is needed?
Five months are prepaid: 24 000 × 5/12 = 10 000. Reduce the rent expense by 10 000 and show 10 000 as a prepayment.
Edvia Free Resources · Accounting 9706 · Topic 1 — free to copy and share
Topic 2
Financial statements for sole traders and partnerships (AS)
The same two statements serve every kind of business — what changes is how the profit gets divided up afterwards.
Picture itA sole trader's profit belongs to one person, so the income statement simply ends. A partnership has to decide who gets what, and that argument is settled in advance by a partnership agreement and recorded in an appropriation account. Same trading, different sharing.
The income statement
Revenue less cost of sales (opening inventory + purchases + carriage inwards − returns − closing inventory) gives gross profit. Add other income, subtract expenses, and you have profit for the year. Carriage inwards is in cost of sales; carriage outwards is an expense below gross profit.
The statement of financial position
Non-current assets at cost less accumulated depreciation, then current assets, then capital (opening + profit − drawings), non-current liabilities and current liabilities. It must balance, and a balance that does not is an error to be found, not a difference to be forced.
Partnership appropriation
After profit for the year: deduct partners' salaries and interest on capital, add back interest on drawings, then share the residue in the profit-sharing ratio. If there is no agreement, the Partnership Act default applies — equal shares and no salaries or interest.
Capital and current accounts
The capital account holds the fixed amount each partner invested. The current account records the moving items — share of profit, salary, interest, drawings. Keeping them separate makes it obvious whether a partner has drawn more than they earned.
Changes in partnership
Admission, retirement or a change in profit-sharing ratio requires goodwill to be valued and adjusted through the capital accounts, so that the partner who built the goodwill is credited for it. Revaluation of assets is handled through a revaluation account.
The bit that catches people outGoodwill is adjusted through the capital accounts in the old ratio and then written back in the new ratio. Doing it in one ratio only is the standard way this question goes wrong, and it produces a plausible-looking answer with the wrong figures.
Why are partners' capital and current accounts kept separate?
The capital account records the permanent investment, while the current account records the annually changing items — profit share, salary, interest and drawings — so it is immediately clear whether a partner has withdrawn more than they have earned.
Edvia Free Resources · Accounting 9706 · Topic 2 — free to copy and share
Topic 3
Limited companies and other organisations (AS)
A company is legally a person in its own right, and its accounts look different because its owners are separate from it.
Picture itA sole trader's business and a sole trader are the same thing in law. A company is not. It owns its own assets, owes its own debts, and pays its own tax. That legal separation is why a company's accounts have share capital and retained earnings instead of a single capital figure.
Share capital and reserves
Ordinary shares carry voting rights and a variable dividend; preference shares get a fixed dividend first and usually no vote. Share premium arises when shares are issued above nominal value. Retained earnings accumulate undistributed profit. Debentures are long-term loans, not equity — their interest is an expense, not an appropriation.
Company financial statements
The income statement runs to profit before tax, then tax, then profit for the year. The statement of changes in equity shows dividends and transfers to reserves. The statement of financial position shows equity as share capital plus reserves.
Rights and bonus issues
A rights issue offers new shares to existing shareholders, usually at a discount, and raises cash. A bonus issue converts reserves into shares, raises no cash, and simply changes the composition of equity. Confusing the two is a common and costly error.
Clubs and societies
Non-profit organisations use a receipts and payments account (a cash summary) and an income and expenditure account (the equivalent of an income statement, on the accruals basis). Capital is called the accumulated fund, and subscriptions in arrears and in advance are the usual adjustment.
Manufacturing accounts
A manufacturer prepares a manufacturing account before the income statement: direct materials, direct labour and direct expenses give prime cost; add factory overheads and adjust for work in progress to give the cost of production, which then replaces purchases in the trading section.
The bit that catches people outDebenture interest is an expense charged before profit is calculated; a dividend is an appropriation of profit already earned. Placing debenture interest below profit for the year is a structural error that affects every figure after it.
The grown-up words
What it means
What it is called
Note
Shares with voting rights and variable dividend
ordinary shares
Bear the residual risk
Shares with a fixed dividend and priority
preference shares
Usually no vote
Excess of issue price over nominal value
share premium
A capital reserve
Long-term loan to a company
debenture
Interest is an expense
New shares offered to existing shareholders
rights issue
Raises cash
Free shares from reserves
bonus issue
Raises no cash
Direct materials plus direct labour plus direct expenses
prime cost
In a manufacturing account
A club's equivalent of capital
accumulated fund
Non-profit organisation
Check you have got it
A company makes a 1-for-4 bonus issue. What happens to its total equity?
Nothing — total equity is unchanged. Reserves are reduced and share capital increased by the same amount; no cash is received.
Where does debenture interest appear, and why?
As an expense in the income statement before profit for the year, because it is a cost of borrowing that must be paid regardless of whether the company is profitable — unlike a dividend, which is a distribution of profit.
Edvia Free Resources · Accounting 9706 · Topic 3 — free to copy and share
Topic 4
Cost and management accounting (AS)
Financial accounting tells outsiders what happened; management accounting helps insiders decide what to do next.
Picture itThe published accounts are a report card, produced once a year for people outside the business. Management accounting is the dashboard — produced whenever it is needed, in whatever form is useful, for the people actually driving.
Cost classification
By behaviour: fixed, variable, semi-variable, stepped. By traceability: direct (traceable to a unit) and indirect (overheads). The same cost can be classified differently depending on the decision, which is why the phrase 'different costs for different purposes' matters.
Absorption costing
Overheads are allocated to cost centres where they belong entirely, apportioned where shared (on a fair basis such as floor area or number of employees), reapportioned from service to production centres, and then absorbed into units using a rate per labour hour or machine hour.
Over- and under-absorption
The absorption rate is set in advance using budgeted figures. If actual overheads or actual activity differ, overheads are over- or under-absorbed, and the difference is adjusted in the income statement. This is a consequence of budgeting, not a mistake.
Marginal costing and contribution
Only variable costs are charged to units; fixed costs are treated as period costs. Contribution = selling price − variable cost. This is the right basis for short-run decisions such as accepting a special order, because fixed costs will be incurred anyway.
Break-even and margin of safety
Break-even units = fixed costs ÷ contribution per unit. Target profit units = (fixed costs + target profit) ÷ contribution per unit. Margin of safety = (actual − break-even) ÷ actual × 100. The assumptions — constant price, constant unit variable cost, all output sold — should be stated when using it.
The bit that catches people outAbsorption and marginal costing give different profit figures whenever inventory changes, because absorption costing carries fixed overhead forward in the value of closing inventory and marginal costing does not. Neither is wrong; they answer different questions.
The grown-up words
What it means
What it is called
Note
Cost traceable directly to one unit
direct cost
Materials, labour
Shared cost not traceable to a unit
indirect cost
Also called overhead
Sharing an overhead on a fair basis
apportionment
Allocation is whole
Charging overheads into units of output
absorption
Per labour or machine hour
Actual overheads exceed those absorbed
under-absorption
Charged in the income statement
Selling price minus variable cost
contribution
Basis of short-run decisions
Output where total revenue equals total cost
break-even point
Fixed costs / contribution
Check you have got it
Fixed costs 120 000, selling price 40, variable cost 25. Find break-even output and output for a 45 000 profit.
Why is marginal costing the right basis for deciding on a one-off special order?
Fixed costs will be incurred whether or not the order is accepted, so they are irrelevant to the decision. If the price exceeds the variable cost, the order makes a positive contribution and increases total profit.
Edvia Free Resources · Accounting 9706 · Topic 4 — free to copy and share
Topic 5
Financial accounting: further issues (A2)
At A2 you prepare and interpret the statements a real company publishes, including the one that reconciles profit with cash.
Picture itA company reports record profit and its bank balance falls. Nothing dishonest has happened: profit is recognised when goods are sold, cash arrives later, and meanwhile the company bought a factory. The cash flow statement is the document that explains exactly where the money went.
The statement of cash flows
Three sections: operating (start from profit before tax, add back non-cash items such as depreciation, adjust for changes in inventory, receivables and payables), investing (buying and selling non-current assets), and financing (share issues, loans, dividends paid). The total change reconciles opening to closing cash.
Why the adjustments work
Depreciation is added back because it reduced profit without using cash. An increase in inventory or receivables uses cash; an increase in payables provides it. Working through why each adjustment goes the way it does is far more reliable than memorising the layout.
International standards
Financial statements are prepared under recognised international standards covering presentation, inventories, property plant and equipment, revenue and events after the reporting period. The purpose is comparability across companies and countries.
Non-current asset accounting
Revaluation increases the asset and creates a revaluation reserve; subsequent depreciation is based on the revalued amount. Disposal is recorded through a disposal account, with any profit or loss being a correction of accumulated depreciation estimates.
Business purchase and consolidation basics
When one business acquires another, the excess of the purchase price over the fair value of net assets acquired is goodwill. Understanding what goodwill represents — reputation, customer base, workforce — matters more than the mechanics of the entry.
The bit that catches people outDepreciation is added back in the cash flow statement not because it is unimportant, but because it never involved cash in the first place. It was subtracted in arriving at profit, so it must be added back to get to cash generated.
The grown-up words
What it means
What it is called
Note
Statement reconciling profit to cash movement
statement of cash flows
Three sections
Cash generated by the trading activities
operating activities
Starts from profit before tax
Buying and selling non-current assets
investing activities
Usually a cash outflow
Share issues, loans and dividends paid
financing activities
Funding the business
Expense reducing profit without using cash
non-cash expense
Added back, e.g. depreciation
Reserve created when an asset is revalued
revaluation reserve
Not distributable
Purchase price above fair value of net assets
goodwill
Reputation, customers, workforce
Check you have got it
Inventory rose by 20 000 during the year. How does this affect cash from operating activities?
It reduces it by 20 000 — cash has been spent building up inventory that has not yet been sold.
Why can a company with rising profit have falling cash?
Profit is recognised on sale, but customers may pay months later, while the company may simultaneously be buying inventory and non-current assets and repaying loans — all of which consume cash without reducing profit.
Edvia Free Resources · Accounting 9706 · Topic 5 — free to copy and share
Topic 6
Analysis and interpretation (A2)
A ratio is a question, not an answer — and the interpretation depends entirely on who is asking and what they intend to do.
Picture itA gearing ratio of 60% terrifies a lender and interests a shareholder in a boom. The number has not changed; the reader's exposure has. This is why every interpretation question begins by identifying the user, and why the same figures support opposite conclusions.
High gearing means fixed interest obligations that must be met from profit whatever happens. It magnifies returns to shareholders when trading is good and magnifies losses when it is not. Interest cover (profit before interest ÷ interest) shows how much cushion exists.
The working capital cycle
Inventory days + receivables days − payables days = the number of days cash is tied up in operations. Shortening it releases cash. A negative cycle — being paid before you pay suppliers — is a genuine competitive advantage, which is why supermarkets can operate with low current ratios.
Limitations of ratio analysis
Accounts are historic; accounting policies differ between firms; inflation distorts comparisons over time; a single date may not be typical; and much that matters — brand, staff, order book, management quality — is not in the numbers at all.
Answering interpretation questions well
Calculate, compare with a benchmark, explain what caused the change, say what it means for the specific user, and recommend an action. A calculation with no interpretation earns a fraction of the available marks.
The bit that catches people outHigher is not automatically better for any ratio. A high current ratio can mean idle cash or unsaleable inventory; high inventory turnover can mean stockouts. Every ratio has a bad reason for moving in the 'good' direction, and naming it is what distinguishes a strong answer.
The grown-up words
What it means
What it is called
Note
Profit before interest and tax over capital employed
ROCE
Headline profitability
Current assets less inventory over current liabilities
acid test ratio
Stricter liquidity test
Long-term debt as a share of capital employed
gearing
Measures financial risk
Profit before interest divided by interest
interest cover
Cushion for lenders
Inventory days plus receivables days less payables days
working capital cycle
Days cash is tied up
Profit after tax divided by shares issued
earnings per share
Investor ratio
Profit for the year divided by dividends paid
dividend cover
How safe the dividend is
Check you have got it
A firm's receivables days rise from 35 to 62. Give one cause and one consequence.
Cause: weakened credit control, or longer credit terms offered to win sales. Consequence: more cash tied up in receivables, increasing the risk of irrecoverable debts and possibly requiring an overdraft.
Why can a supermarket operate safely with a current ratio below 1?
It sells inventory for cash almost immediately and pays suppliers on extended credit, so cash comes in well before it goes out. Its working capital cycle is negative, so the usual liquidity benchmark does not apply.
Edvia Free Resources · Accounting 9706 · Topic 6 — free to copy and share
Topic 7
Costing for decision making (A2)
Deciding well means using the costs that will actually change — and ignoring the ones that will not, however large they look.
Picture itYou have already spent 5 million developing a product. That money is gone whatever you decide next, so it should play no part in the decision. Every instinct says otherwise. Learning to ignore sunk costs is one of the genuinely difficult things in this subject.
Relevant costing
A cost is relevant only if it is future, incremental and cash. Sunk costs are already incurred and irrelevant. Committed costs will occur regardless and are irrelevant. Opportunity cost — the benefit forgone from the next best use — is relevant even though no cash changes hands.
Make or buy, and special orders
Compare the relevant cost of making with the price of buying, including any opportunity cost of the capacity used. For a special order at below normal price, accept if it covers variable cost and makes a contribution, provided it does not displace full-price sales or damage the normal market.
Limiting factor analysis
When one resource is scarce, rank products by contribution per unit of the limiting factor, not by contribution per unit. Produce the highest-ranked first until the resource is exhausted. Ranking by contribution per unit is a very natural and completely wrong instinct.
Activity-based costing
Overheads are assigned to activities, each with a cost driver (number of setups, orders, inspections), and then to products according to how much of each activity they consume. It gives far more accurate product costs where overheads are large and diverse, at the cost of much more data collection.
Investment appraisal
Payback, ARR and NPV. NPV discounts future cash flows to present value and is the most complete method, but depends entirely on the forecast cash flows and the discount rate chosen. Sensitivity analysis tests how much those assumptions can change before the decision flips.
The bit that catches people outOpportunity cost is relevant even though no money moves. If using a machine for a new order means giving up 40 000 of existing contribution, that 40 000 is a real cost of the new order — leaving it out makes the order look better than it is.
The grown-up words
What it means
What it is called
Note
Cost already incurred and unavoidable
sunk cost
Never relevant
Future, incremental, cash cost
relevant cost
The only kind that matters
Benefit forgone from the next best use
opportunity cost
Relevant despite no cash flow
Scarce resource restricting output
limiting factor
Rank by contribution per unit of it
Factor causing an overhead to be incurred
cost driver
Basis of ABC
Discounted future cash flows less outlay
net present value
Depends on the discount rate
Testing how far assumptions can change
sensitivity analysis
Tests the robustness of a decision
Check you have got it
Product A has contribution 30 per unit using 3 machine hours; product B has 24 using 2 hours. Machine hours are scarce. Which is preferred?
B. Contribution per machine hour is 10 for A and 12 for B, so B generates more from the scarce resource despite lower contribution per unit.
Why should development costs already spent be excluded from a decision to continue a project?
They are sunk — they have been incurred and cannot be recovered whichever option is chosen, so they cannot differ between the alternatives and are therefore irrelevant to the choice.
Edvia Free Resources · Accounting 9706 · Topic 7 — free to copy and share
Topic 8
Budgeting and standard costing (A2)
A budget is a plan expressed in numbers, and its real value is in the conversation that happens when reality differs from it.
Picture itA variance report is not a scorecard. It is a list of questions: why did materials cost more, why did we use more hours, why did we sell fewer units? The number tells you where to look; it does not tell you what happened. Managers who treat variances as verdicts get gaming; managers who treat them as questions get information.
The budgeting process
From the principal budget factor (usually sales) flow the sales, production, materials, labour, overhead and cash budgets, ending in a budgeted income statement and statement of financial position. Each depends on the one before it, so an error early propagates through everything.
Budgeting approaches
Incremental budgeting adjusts last year — simple, but perpetuates waste. Zero-based budgeting justifies every item from nothing — thorough, very time-consuming. Flexed budgets restate the budget at the actual activity level, which is essential before any meaningful variance comparison.
Standard costing and variances
A standard cost is a predetermined cost per unit. Variances split into price and usage components. Material: price and usage. Labour: rate and efficiency. Overhead: expenditure and volume. Sales: price and volume. Each is favourable or adverse.
Interpreting variances together
Variances interconnect. Buying cheaper material gives a favourable price variance and often an adverse usage variance from waste, and an adverse labour efficiency variance from working with poor material. Reading them in isolation misses the story entirely.
Behavioural effects of budgeting
Budgets that are too tight demotivate; too loose and they achieve nothing. Participation improves acceptance and accuracy but invites budgetary slack — deliberately easy targets. This is a human system, not an arithmetic one.
The bit that catches people outA budget must be flexed to the actual activity level before variances mean anything. Comparing actual costs for 12 000 units against a budget for 10 000 units produces adverse variances that reveal nothing except that more was produced.
The grown-up words
What it means
What it is called
Note
Constraint the whole budget is built around
principal budget factor
Usually sales
Budget adjusted to the actual activity level
flexed budget
Essential before comparison
Justifying every item from nothing
zero-based budgeting
Thorough but slow
Predetermined cost per unit
standard cost
Basis of variance analysis
Difference caused by paying more or less per unit
price variance
Material or labour rate
Difference caused by using more or fewer units
usage variance
Material usage or labour efficiency
Deliberately easy targets built into a budget
budgetary slack
A behavioural risk
Check you have got it
A favourable material price variance appears alongside an adverse material usage variance. Suggest a cause.
Cheaper, lower-quality material was purchased. It cost less per unit (favourable price) but more was wasted or rejected in production (adverse usage) — and it may also have slowed the workers, causing an adverse labour efficiency variance.
Why must a budget be flexed before variances are calculated?
So that the comparison isolates differences in efficiency and price rather than differences in volume. Otherwise producing more than planned automatically shows adverse cost variances that carry no useful information.
Edvia Free Resources · Accounting 9706 · Topic 8 — 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.