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Course Overview (as per the Cambridge International)

Aims

The aims describe the purposes of a course based on this syllabus.

The aims are to enable students to:

• understand the role of accounting as an information system for monitoring, problem-solving and decision-making

• appreciate the ethical issues that underpin the practice of accounting and their impact on the behaviour ofthe accountant and of businesses

• appreciate the place of accounting in managing business change in response to economic, social andtechnological developments

• develop the ability to apply and evaluate accounting concepts, principles, policies and practices

• develop skills of communication, analysis, interpretation and presentation of both qualitative and quantitative accounting information

• develop skills and knowledge needed for further study or employment in accounting or business.

AS Level content

1 Financial accounting (AS Level)

1.1 Types of business entity

Candidates will explore the various ways in which a business may be structured with reference to legal form, ownership, management and control. Candidates will investigate the benefits and drawbacks of each type of entity from the point of view of owners and other stakeholders which will provide a context for the preparation of financial statements.

1.1.1 Types of business entity

Candidates should have an understanding of:

• the different types of business entity:

– sole trader

– partnership

– limited company (including public limited company (plc))

• the advantages and disadvantages of these types of business entity

• sources of finance and methods of funding for these types of business entity including:

– loans (secured and unsecured)

– bank overdrafts

– payment by instalments

– rental/leasing as an alternative to purchase

– trade credit

– sources of finance for limited companies

Candidates are expected to use their understanding of types of business entity to take relevant decisions.

Note: Questions on Limited Liability Partnerships will not be set.

1.2 The accounting system

Candidates will examine the need for the systematic recording of business transactions and explore how the double entry system can be used to achieve this aim both in manual and computerised accounting systems.

Additionally, candidates will consider the accounting theories and concepts which form the basis of financial accounting.

1.2.1 The accounting system

Candidates should have an understanding of:

• the principles of the double entry system to record business transactions

• the accounting equation

• the role of books of prime entry in the recording of business transactions

– sales journal

– sales returns journal

– purchases journal

– purchases returns journal

– cash book

– general journal

• preparation of ledger accounts

• the purpose of a trial balance

• the advantages and disadvantages of maintaining full accounting records

• the accounting concepts underpinning the preparation of accounts: business entity, historic cost, money measurement, going concern, consistency, prudence, realisation, duality, materiality, objectivity, matching /accruals and substance over form

• the use of computerised accounting systems in recording financial transactions

• the advantages and disadvantages of introducing a computerised accounting system

• the ways in which the security of data can be ensured within a computerised accounting system

Candidates are expected to use their understanding of the accounting system to evaluate relevant information and make informed business decisions.

Note: Knowledge of specific applications or software is not required.

1.3 Accounting for non-current assets

Candidates will look at the classification of business expenditure with particular reference to the treatment of assets used in the longer term in a business. Candidates will also consider the purpose and methods of

recording the cost of using those assets over time and the subsequent change in value.

1.3.1 Capital and revenue income and expenditure

Candidates should have an understanding of:

• the difference between the treatment of capital and revenue income and capital and revenue expenditure

• the effect on profit/loss and asset value of the incorrect treatment of capital and revenue expenditure

1.3.2 Changing asset values

Candidates should have an understanding of:

• factors that cause the value of non-current assets to depreciate

• the purpose of accounting for depreciation of non-current assets and the associated application of relevant accounting concepts

• how to calculate depreciation using the reducing balance and straight-line methods

• the most appropriate method of calculating depreciation

• how to measure the value of non-current assets by the cost model or the revaluation model

• how to prepare ledger accounts and journal entries for:

– non-current assets (acquisition and revaluation)

– depreciation and disposal (including entries for part exchange)

• how to calculate profit or loss on disposal of a non-current asset

• how to record the effect of a charge for depreciation in the statement of profit or loss and statement of fifinancial position

1.4 Reconciliation and verification

Candidates will assess the importance of being able to prepare complete and accurate financial statements

from underlying business records. In doing so candidates will consider the various methods available to identify and rectify errors and omissions using internal procedures and third-party documentation, as well as exploring possible limitations of such measures.

1.4.1 Reconciliation and verification

Candidates should have an understanding of:

• the need to reconcile and verify ledger accounts using documentation from internal and external sources

• the benefits and limitations of reconciliation and verification procedures

1.4.2 Trial balance

Candidates should have an understanding of:

• errors which affect the trial balance

• errors which do not affect the trial balance:

– omission

– commission

– principle

– original entry

– reversal

– compensating

• how to prepare ledger accounts and journal entries to correct errors using a suspense account

• the effect on the financial statements of the correction of errors

• the benefits and limitations of a trial balance

1.4.3 Bank reconciliation statements

Candidates should have an understanding of:

• updating of cash books

• how to prepare bank reconciliation statements

• the benefits and limitations of preparing a bank reconciliation statement

1.4.4 Control accounts

Candidates should have an understanding of:

• entries in control accounts

• sales ledger control accounts and purchases ledger control accounts

• reconciliation statements between control account balances and ledger balances

• the effects on financial statements of the correction of errors

• the benefits and limitations of control accounts

Candidates are expected to use their understanding of reconciliation and verification to evaluate relevant information and make informed business decisions.

1.5 Preparation of financial statements

Candidates will consider how figures in a trial balance need to be adjusted in order to prepare a complete set of financial statements in accordance with the matching/accruals concept and other fundamental accounting concepts. In particular, candidates will examine the differing formats of financial statements necessary for sole traders, partnerships and limited companies. Candidates will address specific aspects relating to how

partnerships account for individual partners’ shares of profits and losses, and study the characteristics of limited company financial statements, particularly share capital and reserves. This gives an opportunity to build on the background information relating to types of business entity introduced in 1.1.

Note: For the expected formats for the standard financial statements, see the document Teacher Guidance for 9706 Accounting which accompanies this syllabus.

1.5.1 Adjustments to draft financial statements

Candidates should have an understanding of:

• how to calculate and record the adjustments needed and the effect on financial statements in respect of:

– accruals and prepayments of income and expenses

– irrecoverable debts, irrecoverable debts recovered and allowance for irrecoverable debts

– depreciation

– inventory valuation

– correction of errors

1.5.2 Sole traders

Candidates should have an understanding of:

• how to prepare a statement of profit or loss and statement of financial position for a sole trader from full or incomplete accounting records. The business may be a trading or a service business

1.5.3 Partnerships

Candidates should have an understanding of:

• how to prepare a statement of profit or loss, appropriation account and statement of financial position for a partnership from full or incomplete accounting records. The business may be a trading or a service business

• why partners may maintain separate capital accounts and current accounts

• how to prepare partners’ capital and current accounts

• the contents of a partnership agreement

• the advantages and disadvantages to partners of maintaining a partnership agreement

• the provisions of the Partnership Act 1890 in respect of partners’ salaries, division of profit or loss, interest on partners’ loans, interest on capital and interest on drawings

1.5.4 Limited companies

Candidates should have an understanding of:

• the features and accounting treatment of ordinary shares, bonus issues, rights issues, debentures, dividends and reserves

Note: Questions will not be set on preference shares.

• the advantages and disadvantages to the company and to the shareholders of a company making a bonus issue of shares and a rights issue of shares

• the advantages and disadvantages to the company and to the shareholders of a company issuing shares and issuing debentures

• the distinction between capital reserves (share premium and revaluation reserve) and revenue reserves

(retained earnings and general reserve)

• how to prepare ledger accounts to record:

– an issue of ordinary shares at par or at a premium

– a rights issue of shares at par or at a premium

– a bonus issue of shares

Note: For the purpose of a bonus issue of shares, the revaluation reserve is not to be used.

• how to prepare a statement of profit or loss, statement of financial position and statement of changes in equity for a limited company. The business may be a trading or a service business

• sources of finance for specified purposes

Candidates are expected to use their understanding of financial accounts of sole traders, partnerships and limited companies to evaluate relevant information and make informed business decisions.

1.6 Analysis and communication of accounting information

Candidates will evaluate the diverse interests and range of information needs of parties who may have an interest in a business. Candidates will assess how financial information can be analysed and interpreted using a range of financial ratios in order to allow users of financial statements to gain an understanding of the

business performance. They will explore the use of such ratios in comparison with other similar businesses and industry benchmarks, including having an appreciation of problems which may limit the usefulness of such an analysis.

1.6.1 Users of accounting information

Candidates should have an understanding of:

• the differing requirements for information of stakeholders including:

– owners

– managers

– employees

– investors

– lenders

– suppliers

– customers

– government

– public and environmental bodies

• how to communicate and analyse the information required by these different stakeholders

1.6.2 Calculation and evaluation of ratios

Candidates should have an understanding of:

• how to calculate key accounting ratios to measure profitability, liquidity and efficiency:

– profitability ratios: gross profit margin, mark-up, profit margin, return on capital employed, expenses to revenue ratio (operating expenses to revenue ratio)

– liquidity ratios: current ratio, acid test ratio

– efficiency ratios: non-current asset turnover, trade receivables turnover (days), trade payables turnover (days), inventory turnover (days), rate of inventory turnover (times)

Note: Candidates must use the formulae given in the appendix to section 3. These are the only formulae accepted in candidate responses.

• how to evaluate the profitability, liquidity and efficiency of an organisation by interpreting ratios

• possible measures to improve the profitability, liquidity and efficiency of an organisation

• the limitations of accounting information

Candidates are expected to use their understanding of the calculation and evaluation of ratios to make informed business decisions using relevant information.

2 Cost and management accounting (AS Level)

2.1 Costs and cost behaviour

Candidates will examine the classification of costs and the need to distinguish between the ways in which costs may be treated in terms of traceability and behaviour. This will be explored within the context of why businesses need to understand the nature of costs for the purposes of pricing and decision-making, serving as an introduction to examining traditional costing methods (as defined in 2.2).

2.1.1 Materials and labour

Candidates should have an understanding of:

• accounting for material and labour costs

• how to identify and calculate fixed costs, variable costs, semi-variable costs and stepped costs

• how to identify and calculate the elements of direct and indirect costs

• how to calculate the value of closing inventory using the first in first out (FIFO) and weighted average cost

(AVCO) methods (perpetual and periodic)

• the principles of just in time (JIT) management of inventory

Candidates are expected to use their understanding of accounting for materials and labour to evaluate relevant information and make informed business decisions.

2.2 Traditional costing methods

Candidates will consider how to account for costs using absorption and marginal costing systems, as well as exploring the impact of changes in business activity. In so doing, candidates will evaluate the benefits and limitations of the contrasting approaches and examine how these tools may be used in determining the cost and the selling price of a product or service, and for management decision-making and determining business opportunities.

2.2.1 Costing applications

Candidates should have an understanding of:

• how to apply traditional costing methods to prepare costing statements using unit, job and batch costing principles in both manufacturing and service businesses as applicable

2.2.2 Absorption costing

Candidates should have an understanding of:

• the difference between a cost centre and a cost unit

• how to allocate and apportion overhead expenditure between production and service departments

• how to calculate overhead absorption rates using an appropriate basis

• the causes and the calculation of under absorption and over absorption of overheads

• how to prepare costing and profit statements using absorption costing

• the uses and limitations of absorption costing

• the usefulness of absorption cost data as a support for management decision-making

• non-financial factors and their significance

2.2.3 Marginal costing

Candidates should have an understanding of:

• how to calculate the contribution of a product

• how to interpret a break-even chart

Note: Candidates will not be asked to prepare a break-even chart.

• how to calculate the break-even point, contribution to sales ratio, level of output or sales to achieve a target profit, and margin of safety

• the use and limitations of break-even analysis

• how to prepare costing and profit statements using marginal costing

• how to prepare a statement reconciling the reported profits using marginal costing and absorption costing

• the uses and limitations of marginal costing

• the usefulness of marginal costing data as a support for management decision-making, including make or - buy, special orders, closure of business unit, limiting factors, target profit

• non-financial factors and their significance