Accounting procedures: IGCSE Accounting Complete Notes

A single misclassification can wipe out your entire profit figure. Seriously.

Imagine a business buys a new delivery van for $15,000. If someone accidentally records that as a revenue expense instead of capital expenditure, the profit for the year drops by $15,000 in one stroke. The balance sheet is wrong. The depreciation schedule is wrong. And if this shows up in your IGCSE Accounting exam, you've just lost marks across multiple parts of the question.

That's why accounting procedures matter so much. They're the rules that keep everything in the right place. And once you understand the logic behind them, they're actually some of the most satisfying topics to get right.

Capital vs revenue: the distinction that changes everything

This is the foundation. Get this wrong and everything downstream falls apart.

Capital expenditure is money spent to buy or improve a non-current asset - something the business will use for more than one accounting period. Buying machinery, extending a building, or installing a new engine in the delivery van all count.

Revenue expenditure is money spent on the day-to-day running of the business. Wages, rent, electricity, fuel for that delivery van - these are consumed within the accounting period.

The same logic applies to receipts. A capital receipt comes from selling a non-current asset or introducing new capital. A revenue receipt comes from the normal trading activities of the business - sales revenue, commission earned, rent received.

Why examiners love this topic

Because the consequences of getting it wrong are dramatic. Misclassify capital expenditure as revenue, and you understate profit. Do the reverse, and you overstate it. IGCSE questions often give you a list of transactions and ask you to sort them, or they'll tell you an error was made and ask you to calculate the corrected profit.

Depreciation: spreading the cost over time

Non-current assets don't last forever. A machine wears out. A vehicle loses value. Depreciation is how accountants spread the cost of an asset over its useful life, rather than hitting the profit and loss account with the full amount in year one.

There are two methods you need to know for IGCSE Accounting.

Straight-line method

This is the simpler one. You subtract the residual value (what you expect to sell the asset for at the end) from the cost, then divide by the number of years of useful life.

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

Straight-line gives you the same charge every year. It's predictable, which is why many businesses prefer it for assets like buildings or office furniture that lose value steadily.

Reducing balance method

This front-loads the depreciation. You apply a fixed percentage to the net book value (not the original cost) each year. The charge gets smaller as the asset ages.

Formula: Net book value at start of year x Depreciation rate = Depreciation for that year

Vehicles and technology tend to use reducing balance because they lose value fastest in the early years. You know how a new car drops in value the moment you drive it off the lot? Same principle.

Disposal of non-current assets

When a business sells or scraps an asset, it rarely gets exactly the net book value back. That difference creates either a profit on disposal or a loss on disposal.

Here's the process, step by step:

1. Remove the original cost from the asset account
2. Remove the accumulated depreciation from the provision for depreciation account
3. Record whatever the business received for the asset (the disposal proceeds)
4. The balancing figure is your profit or loss on disposal

Other payables and other receivables

These are the adjustments that make sure income and expenses end up in the right accounting period. You might also hear them called accruals and prepayments.

Other payables (accruals) are expenses the business has used but hasn't paid for yet by the end of the period. Think of an electricity bill that covers December but doesn't arrive until January. The expense belongs in December's accounts.

Other receivables (prepayments) are expenses the business has already paid for but hasn't used yet. If you pay a full year's insurance in October, only three months belong in this year's accounts. The other nine months are a prepayment - essentially an asset.

The same idea works in reverse for income. Accrued income is money you've earned but haven't received. Prepaid income (deferred income) is money you've received but haven't earned yet.

Irrecoverable debts and the allowance

Not every customer pays. When a business decides a debt is genuinely uncollectable, it writes it off as an irrecoverable debt (you might see older textbooks call these "bad debts"). The double entry is straightforward: debit the irrecoverable debts account, credit the trade receivables account.

But what about debts that might not be paid? That's where the allowance for irrecoverable debts comes in. It's an estimate, usually a percentage of outstanding trade receivables, set aside to cover potential losses.

The three scenarios you'll see in exams

The key point examiners test: it's only the change in the allowance that affects the current year's profit, not the total allowance itself.

Valuation of inventory

At the end of the accounting period, you need to value closing inventory. Cambridge IGCSE expects you to know two methods.

FIFO (First In, First Out) assumes the oldest inventory is sold first. So closing inventory is valued at the most recent purchase prices. In times of rising prices, FIFO gives a higher closing inventory value and a higher profit.

AVCO (Weighted Average Cost) calculates a new average cost every time a purchase is made. All units in stock carry the same average value. It smooths out price fluctuations.

There's one more rule that applies regardless of method: the IAS 2 principle of valuing inventory at the lower of cost and net realisable value. If your inventory can only be sold for less than it cost (damaged goods, obsolete stock), you use the lower figure.

Common exam traps

• Mixing up capital and revenue: Delivery costs on a new machine are capital (they're part of getting the asset ready to use). Delivery costs for goods sold to customers are revenue.
• Forgetting residual value in straight-line: Students often depreciate the full cost. Always subtract the residual value first.
• Reducing balance on the wrong figure: Apply the percentage to the net book value at the start of each year, not the original cost.
• Calculating the full allowance instead of the change: If the allowance was $500 last year and is $700 this year, only $200 hits the income statement.
• Confusing FIFO with LIFO: LIFO isn't part of the IGCSE syllabus. If you see it, you only need FIFO and AVCO.

Self-check questions

1. A business pays $800 to repaint its office. Is this capital or revenue expenditure? Why?
2. Equipment costs $12,000, has a residual value of $1,500, and a useful life of 5 years. What is the annual depreciation using the straight-line method?
3. Using the same equipment, what would the net book value be after 3 years?
4. Trade receivables total $40,000. The allowance for irrecoverable debts was $1,600 last year and is now set at 5% of receivables. What amount appears as an expense in this year's income statement?
5. A business bought 100 units at $5 each, then 80 units at $6 each. It sold 120 units. What is the value of closing inventory using FIFO?

If you can answer all five confidently, you're in strong shape for this part of the exam. If any of them tripped you up, go back to the relevant section and work through the logic one more time. These procedures show up in almost every IGCSE Accounting paper, so the time you spend here pays off directly.