Revision Checklist for O-Level Principle of Accounts 7110 Guide for Students
REVISION CHECKLIST for O Level Principle of Accounts 7110 A guide for students How to use this guide This revision guide is designed for you to work through at first with your tutor, who will help you to access papers and questions from previous Cambridge International Examinations (CIE). Each of the six themes is listed with their topic areas selected for revision purposes. Each topic will have references to either specific CIE practice questions, short multiple choice questions with answers or some brief written notes as guidance to what key points should be included in the solution. Detailed ‘Financial Statement’ questions that require large amounts of data cannot be included in this document, so you will need to refer to previous papers and your recommended texts for the necessary information and solutions. When you have completed all of the topics, it is recommended that you work through all the exercises again on your own. This will strengthen your knowledge and understanding in readiness for the examination. Section 1 - How will you be tested? You will be assessed by taking two examination papers: Paper 1
Is a One hour multiple choice paper consisting of 30 questions that tests your knowledge and understanding of the subject and it will also require you to use some analytical skills involved in the production of accounting statements used by business organisations. This Paper is worth 33.3% of the total marks available to you.
Paper 2
Is a Two Hour written paper that will ask you to answer between 4 and 6 questions related to the preparation of accounting statements for different types of business organisations. You will also be expected to evaluate the financial implications for businesses from the statements that you produce. Paper 2 is worth 66.6% of the total marks available to you. Note: Both papers must be taken and there are ‘NO’ choice of questions on either paper.
Section 2 - What will be tested?
Skill
Skill Area
You need to be able to demonstrate this skill
A
Knowledge with understanding of:
To explain: Facts , terminology, conventions, principles and techniques related to ‘Book-keeping and accounting’ To apply: Knowledge and information to various accounting / business situations and problems Key words are: State, define, identify, record, calculate, compute, explain
B
Analysis
Select and order information in written and numerical format: Present numerical information in standard accounting formats Analyse accounting information using the appropriate level of knowledge and understanding Key words are: Select, prepare, draw up
C
Evaluation
Interpret and evaluate accounting information that may be provided to you or produced previously by you in an analytical exercise. You will be asked to: draw up reasoned conclusions describe possible actions make recommendations that businesses
aid
problem
solving
Key words are: Explain, suggest, advise, comment on, discuss, compare
for
Section 3 - What you need to know This section covers the 6 themes that are detailed in the ‘Principles of Accounts’ syllabus. They are: 1. 2. 3. 4. 5. 6.
Basic Principles Accounting Procedures Final Accounts Preparation of Final Accounts Payroll Accounting Advanced Principles
Each theme covers a number of topics within its ranging from 2 to a maximum of 9 topic areas. The table indicates what YOU should be able to do in order to revise for this exam effectively. It does NOT cover every topic area but is designed to make you revise Key areas and become aware of how a topic could be examined in a number of ‘multi-choice’ questions in Paper 1, and then perhaps form part of a larger question in Paper 2.
Theme 1. Basic Principles
Topic 1.1
You should be able to: Explain the role of Accounting •
Book-keeping means keeping basic financial records, tracking and providing information used by a business. It may be used for internal and external agencies such as for VAT and income tax purposes. Accounting is the process of producing financial statements for a business. Examples would be: o The Trial Balance o The Profit and Loss Account o The Balance Sheet These statements enable owners and managers of the business to monitor progress and help decision making in the future. State the benefits of Information and Communications Technology (ICT) Specific examples would be: o Accuracy of calculations discounts and VAT o Speed of data entry is increased as ‘single entry’ is required o Data input is reduced and potential errors minimised o Software allows automatic calculation of final statements such as the Profit and Loss Account and Balance Sheet o Ease of storing large amounts of electronic data o Can reduce labour costs when recording financial information 1.2 & 1.7
•
Double Entry System of Book-Keeping The ledger
This is the basic system of manual record keeping that computerised accounting systems are based upon. You need to practice producing manual book-keeping exercises as this will help you to understand how information flows through the system. All recommended accounting text books have suitable practice exercises with solutions that you can work through. (Business Accounting 1 by Frank Wood & Alan Sangster ninth edition
Comments
Part 1). Check your answers carefully to ensure you can update ledger accounts under examination conditions. (CIE Paper 2 November 2005 Q1) 1.3 1.4 1.6
•
Documentary Records and Books of Prime Entry
You must be able state how the different types of business documents are used: Invoice, Credit Note, Debit Note, Cheque, Receipt, and Statement of Account You should know which source document is recorded in the appropriate book of ‘primeentry’ o o o o o o o
1.5
•
Sales Journal Purchased Journal Sales Returns Journal Purchase Returns Journal Cash Book General Journal The Cash Book
The Cash Book
You need to be able to explain and process transactions involving Current Accounts, Deposit Accounts and Bank Loans for example. Make sure you can record Discounts Received and Allowed and practice balancing-off the Cash Book in the correct way. A further activity that is a favourite topic for examinations is the ‘Bank reconciliation statement’. You will need to know the reasons why the Cash Book and the bank Statement will show different balances at a certain date such as the month or year end. Some examples are: o Cheques not yet presented o Bank Charges o Interest paid and received (CIE Paper 2 June 2008 Q1)
The following Topics are included in later sections of this revision guide: 1.8 1.9 2. Accounting Procedures
2.1
•
The Trial Balance Adjustments to Ledger Accounts
•
Capital and Revenue Expenditure and Receipts
•
This topic requires you to be able to identify between the two types of categories. This is covered regularly by multiple choice questions: Sulin sublets part of her premises to Mai. How will she classify the rent she receives? A. B. C. D.
Capital Expenditure Capital Income Revenue Expenditure Revenue Income
Answer D (CIE Paper 1 November 2007 Q12) You may also be asked to explain the difference with marks being awarded for key phrases in Part A and clear examples of each type in Part B (CIE Paper 2 June 2008 Q2) 2.2
•
Accounting for Depreciation
Give a written explanation of the term depreciation and this may be followed by an aspect of ledger accounting, either a journal entry or to complete a related ledger account such as the disposal of an asset. CIE Paper 2 June 2008 Q2 Part D)
Note how the marks are weighted: 1 mark - for a written explanation 2 marks - for a calculation of depreciation 4 marks - for the combination of knowledge and understanding and the correct accounting entries to show the disposal of an asset
2.3
•
Corrections of Errors
You need to be able to correct errors. This is tested easily in Paper 1 for example: The purchase of a motor vehicle was entered in the motor expenses account. What kind of error was this? A. B. C. D.
Commission Compensating Principle Reversal
Answer C Error in Principle Remember to revise the different types of errors that can be made and be prepared to give examples in your own words. The types of errors are: o Errors of omission o Errors of commission o Errors of principle o Compensating errors o Errors of original entry o Reversal of entries o Errors of transposition
2.4
•
Control Accounts
These accounts are used in book-keeping systems to check the accuracy of the purchase and sales ledgers. They help to locate errors and deter fraud. You will also be expected to use this technique when producing ‘purchases’ and ‘sales’ figures for final accounts from ‘Incomplete Records’. (See Topic 4 Preparation of Final Accounts) (Refer to CIE Specimen Paper 2 Q3) 3a - Requires you to calculate the total sales figure by constructing a Sales Ledger Control Account (Total Debtors Account). 3b – Requires you to calculate the Creditors balance using the same control account approach from a Purchase Ledger Control Account (Total Creditors Account). 3c – The information you have then produced in Part a and b is then used to construct the ‘Trading Account’ If you are able to construct control accounts correctly this shows that you also understand clearly the basic rules of ‘Double Entry’ and can apply them effectively.
3. Final Accounts
3.1 3.2
•
Trading Profit and Loss Accounts and Balance Sheets
This is an area of knowledge that you will need to have upon which you can produce detailed Financial Statements for a range of different types of businesses (see Topic 4). To demonstrate that you have this level of knowledge you need to be able to construct and explain the component parts of the financial statements common to businesses. Examples of component parts are assessed regularly in Paper 1. (CIE Specimen Paper 1) Q16 – Calculation of the gross profit
Q17 – Calculation of working capital Q20 – Recording goodwill in a partnership Q21 – Calculation of the accumulated fund for a sports club Q22 – Calculation of a traders net profit 4. Preparation of Final Accounts
4.1 4.6
•
Preparation of Final Accounts
This is a key area of the syllabus and represents the largest weighting of marks for Paper 2. The question is worth a third of the total marks for the paper. There are six types of organisational statements that you need to be able to produce and practice regularly. They are: o o o o o
o
4.1 Sole Trader (Q5 – June 2007) 4.2 Partnership (Q5 – June 2008) 4.3 Clubs and Societies (Q2 – November 2004) 4.4 Incomplete Records (Q3 – Specimen Paper) 4.5 Limited Liability Companies (Refer to recommended textbook for an example) 4.6 Manufacturing Accounts (Q6 – Specimen Paper)
Ensure you practice ALL types of statements, and this will immediately improve the probability of gaining a ‘High’ mark due to the weighting given to this topic.
5. Payroll Accounting
5.1
•
Payroll Records:
The key word is explain, which means that you are able to demonstrate in writing the type of information that is recorded by an organisation and also how this information will be used. Examples of the types of records are: Clock cards, time-sheets, payslips You may be asked to explain and calculate the following: o o
o
Different types of pay such as overtime, gross pay and net pay Voluntary deductions for pension contributions, subscriptions and charitable donations Legally required deductions for income tax, social security / national insurance
(CIE Specimen Paper 1 Q25 gives an example of the type of calculation required) 5.2
•
Book-keeping entries for payroll
This is a small but important area of book-keeping. You need to be able to prepare the journal entries for the payment of wages and salaries, legally required and voluntary deductions (CIE Specimen Paper 1 Q26) If you wish to read up on this topic then refer to: Foundation Accounting by David Cox & Michael Fardon (Osborne Books) Chapter 14.
6. Advanced Principles
6.1
•
Financial Relationships
The final topic areas are now asking you to combine your knowledge and understanding with your analytical skills in order to identify the impact that different financial relationships have upon organisations. These relationships are calculated as financial ratios that relate to profit and the use of resources such as working and long term capital. The more that you practice this topic, the deeper will be your understanding of potential problem areas for businesses. Common relationships to be considered are: o o o
o
Cash Flow problems (Acid Test Ratio) Debtors and Stock holding problems (Working Capital Ratio) Profitability Ratios (Gross Margin, Net Margin, Return on Capital Employed ratios) Activity Ratios (Return on Total Assets, Stock Turnover period, Debtors and Creditors payment period)
This is NOT a complete list. You must be able to calculate and explain your ratios and this topic is examined regularly in both papers. Refer to: (CIE Specimen Paper 1 Q 27) (CIE Specimen Paper 2 Q 4) (CIE June 2008Paper 1 Q 28) (CIE June 2008 Paper 2 Q 3)
6.2
•
Accounting Principles
You are expected to be able to explain the principles and concepts that are applied by accountants when producing final accounts. The concepts are: o o o o o o o o o o
Going concern historical concept accounting entity money measurement accounting period matching / accruals and prepayments prudence (conservatism) materiality consistency dual aspect
Two recent examples from Paper 1 June 2008: Q 29 A very large company has prepared final accounts without including very small items of furniture in its fixed assets. Which accounting principle has the company applied? A. B. C. D.
Accounting Entity Dual Aspect Going Concern Materiality
Answer – D
Q 30 What is the meaning of the accounting principle of prudence? A. B. C. D.
Accounts should only include items with a monetary value Accounts should provide for all probable losses and should not anticipate profit Accounts should provide for all the accruals and prepayments Accounts should use the same methods from year to year
Answer is B Although these are Paper 1 questions, you should be prepared to write a paragraph that explains the meaning of all of the principles to help develop your knowledge and understanding of the topic. The last part of this topic asks that you are able to: Explain the importance of professional ethics in accounting CIE Specimen Paper 2 Q4 parts C & D is an excellent test of your knowledge. Part C requires you to explain the concepts of Stock Valuation and Bad debts and Bad debt provision. Part D then asks you to ‘Explain two reasons why an accountant would consider it is professionally unethical to improve the financial results of a business by making the adjustments suggested’? There are five key points that you should consider from the model answer: o o
o o
o
Accountants work with generally accepted rules such as accounting standards Accountants are expected by profession and public to produce reliable financial information Professional standards are more important than individual organisations Preparing accounts for the temporary benefit of an individual or organisation, even an employer, is against these rules and training An accountant could be penalised legally or professionally for not following agreed practice
General Revision Tips • •
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Remember to revise ALL topics in the syllabus. Be systematic and work your way methodically through the six themes and practice the written explanations as well as producing the financial statements. Many students miss the opportunity of gaining high marks as they do NOT attempt the written part of questions. Attempt the ‘Highest’ weighted question (Paper 2) on producing Financial statements as your second or third question when you are at your best during the exam. Do not leave it to the end as you may run short of time! You do not have to attempt the questions in the order they appear in the paper, but remember to ensure you do not miss out on remaining questions. Finally if you have worked through the revision programme, and are well practised in all topics you will be successful in Papers 1 & 2 of the Principles of Accounts
