Introduction to bookkeeping: Edexcel IGCSE Accounting Complete Notes

This is the section that makes or breaks your grade. Introduction to bookkeeping is the largest part of the Edexcel IGCSE Accounting specification, and if you get it right, everything else falls into place.

The Edexcel IGCSE Accounting introduction to bookkeeping section (4AC1) covers seven topic areas: business documentation, books of original entry, ledger accounting, capital and revenue expenditure, depreciation, irrecoverable debts, and other receivables and payables. These edexcel igcse accounting revision notes take you through each one with the worked examples and practical detail you need for the exam.

Business documentation

Every accounting transaction begins with a document. The exam tests whether you can explain the purpose of each document and, more importantly, prepare them accurately.

Books of original entry

Source documents are recorded first in the books of original entry before being posted to the ledger. You need to prepare all seven:

• Purchases day book: Records credit purchases from invoices received
• Sales day book: Records credit sales from invoices sent
• Purchases returns book: Records goods returned to suppliers (from credit notes received)
• Sales returns book: Records goods returned by customers (from credit notes issued)
• Three-column cash book: Records all cash and bank transactions, with a discount column
• Petty cash book: Records small cash payments, usually run on the imprest system
• The journal: Records non-routine transactions such as opening entries, correction of errors, purchase/sale of non-current assets on credit, and irrecoverable debts written off

Worked example: three-column cash book

A business has the following transactions in January:

• Jan 1: Balance brought forward: Cash 150, Bank 2,340
• Jan 5: Received cheque from J Smith for 500, allowing 2% discount
• Jan 12: Paid supplier K Ali by cheque 800, receiving 5% discount
• Jan 20: Cash sales banked 620

The discount allowed column (debit side) records the 10 discount given to J Smith (2% of 500 is 10, but the question says discount of 2%, so the customer pays 500 and gets 10 discount: total debt was 510). The discount received column (credit side) records the 40 discount from K Ali (5% of 800 is 40, meaning the total owed was 840). The contra entry (C) transfers cash to the bank account.

Ledger accounting

The igcse 4ac1 introduction to bookkeeping section devotes significant weight to ledger accounting. You need to understand the purpose of the nominal ledger, receivables ledger and payables ledger, and record transactions using double-entry principles.

Double-entry rules

Every transaction has two effects. The fundamental rule is:

• Debit the account that receives value or records an expense/asset increase
• Credit the account that gives value or records a liability/income increase

Worked example: posting a credit sale

A business sells goods on credit to M Patel for 1,200.

Trade receivables account (M Patel):

Sales account:

The receivable increases (debit) and revenue increases (credit). This is the foundation of every transaction you will record.

Capital expenditure and revenue expenditure

This distinction is critical. Getting it wrong changes both the income statement and the statement of financial position.

• Capital expenditure: Spending on non-current assets or improving existing ones. Examples: buying a delivery van, extending a building, installing new machinery. Recorded in the statement of financial position as a non-current asset.
• Revenue expenditure: Spending on the day-to-day running of the business. Examples: rent, wages, electricity, repairs. Recorded in the income statement as an expense.

Depreciation

Depreciation allocates the cost of a non-current asset over its useful life. The two methods you need are:

Straight-line method

Annual depreciation = (Cost - Residual value) / Useful life

Worked example: A machine costs 20,000 with a residual value of 2,000 and a useful life of 5 years.

Annual depreciation = (20,000 - 2,000) / 5 = 3,600 per year

Reducing balance method

Annual depreciation = Carrying amount at start of year x Depreciation rate

Worked example: The same machine at 20% reducing balance:

The straight-line method gives the same charge every year. The reducing balance method gives a higher charge in early years, which suits assets that lose value quickly.

Disposal of non-current assets

When an asset is sold, you need to calculate whether there is a profit or loss on disposal:

• Profit on disposal = Sale proceeds - Carrying amount (if proceeds are higher)
• Loss on disposal = Carrying amount - Sale proceeds (if carrying amount is higher)

Irrecoverable debts

An irrecoverable debt is an amount owed by a customer that the business does not expect to collect. The edexcel igcse accounting explained approach to this topic requires you to distinguish between writing off a specific debt and maintaining a general provision.

• Writing off an irrecoverable debt: Debit irrecoverable debts expense, credit trade receivables. The specific customer's balance is removed.
• Provision for irrecoverable debts: A percentage of total trade receivables set aside as an estimate of future losses. Debit irrecoverable debts expense (or credit if the provision decreases), credit provision for irrecoverable debts.

Worked example

Trade receivables total 40,000. The business maintains a 5% provision for irrecoverable debts. Last year's provision was 1,800.

New provision required: 40,000 x 5% = 2,000

Increase in provision: 2,000 - 1,800 = 200

The 200 increase is charged as an expense in the income statement.

Other receivables and payables

These are adjustments made at the end of the accounting period to ensure expenses and income are matched to the correct period (the accruals concept in action).

• Other receivables (prepayments): Amounts paid in advance for expenses not yet incurred. Example: rent paid for three months in advance at the year end. The unexpired portion is a current asset.
• Other payables (accruals): Expenses incurred but not yet paid. Example: electricity used in December but not billed until January. The amount owed is a current liability.

Worked example

A business has a year end of 31 December. On 1 November it paid 3,600 for six months' insurance (November to April). At year end:

• Insurance used (Nov-Dec): 2 months x 600 = 1,200 (expense in income statement)
• Insurance prepaid (Jan-Apr): 4 months x 600 = 2,400 (other receivable / current asset in statement of financial position)

Self-check questions

1. Name the document that a buyer sends to a seller to request goods.
2. In which book of original entry would you record a credit note received from a supplier?
3. Prepare the double entry for a credit purchase of goods from S Khan for 750.
4. State whether each of the following is capital or revenue expenditure: (a) painting the office, (b) buying a computer, (c) installing a new roof on the warehouse, (d) buying printer ink.
5. A vehicle costs 15,000 and has a residual value of 3,000 with a useful life of 4 years. Calculate the annual depreciation using the straight-line method.
6. Explain the difference between an irrecoverable debt and a provision for irrecoverable debts.
7. A business pays 4,800 rent on 1 October for 12 months. The year end is 31 December. Calculate the rent expense and the prepayment at year end.

The introduction to bookkeeping edexcel igcse section is where the practical skills live. Every question on Paper 1 that asks you to prepare a day book, post a ledger account, calculate depreciation or adjust for accruals draws on what you learn here. These are not abstract concepts. They are the techniques that make the edexcel igcse accounting practice questions answerable, and the more you practise them under timed conditions, the more automatic they become. Get the bookkeeping right, and the rest of the edexcel igcse accounting notes on control processes and financial statements will follow naturally.