Short theoretical Qs And Ans on IGCSE and O level Accounting

1. Muhammad Talha
MS (Finance) , CA (Inter)
O level Accounting Notes

2. 1
Contents
Accounting Basics.............................................................................................................................................................................. 2
Ratio Analysis .................................................................................................................................................................................... 5
Accounting Concepts....................................................................................................................................................................... 10
Partnership...................................................................................................................................................................................... 12
Bad Debts/Provision for Doubtful Debts......................................................................................................................................... 13
Control Accounts............................................................................................................................................................................. 14
Clubs / Non trading Organization.................................................................................................................................................... 15
Company ......................................................................................................................................................................................... 16
Depreciation.................................................................................................................................................................................... 17
Errors............................................................................................................................................................................................... 18
Bank Reconciliation......................................................................................................................................................................... 18
Manufacturing................................................................................................................................................................................. 20
Prepaid/Accrued ............................................................................................................................................................................. 21
Payroll Accounting........................................................................................................................................................................... 22
Information And Communication Technology................................................................................................................................ 26

3. Accounting Basics
Q1 Explain the reasons why businesses send statements of accounts to customers
o To notify the customer of the amount outstanding at the end of the month.
o To provide the customer with a summary of the month’s transactions.
Q2 Explain the reasons for maintaining a general journal
o Opening entries,
o Closing entries
o purchases/sale of fixed asset on credit,
o correction of errors,
o writing off bad debt,
o year-end adjustments,
o items which cannot be entered in other books of prime entry,
o Or acceptable alternative.
Q3 Reason for using a purchases journal
o fewer transactions recorded in the purchases account
o bookkeeping can be spread between several people
o Can be analyzed into products/areas etc.
o to identify credit purchases (can be useful for comparison purposes)
o Provides information for the purchases ledger control account.
Q4 Reasons for using a sales journal
o Fewer transactions recorded in the sales account
o Bookkeeping can be spread between several people
o Can be analyzed into products/areas etc.
o To identify credit sales (can be useful for comparison purposes)
o Provides information for the sales ledger control account.
Q5 Explain the reasons of the narrative in the journal entry
A narrative explains the reasons for the entries which are to be made in the ledger.
Q6 The purposes of preparing trial balance
o To prepare final account
o To check arithmetical accuracy of books
o To check accounts balance
o To locate errors
Q7 What is meant by trial balance?
List of balances in the general (nominal) ledger at a given date
(Note: it is not the part of double entry book keeping)

4. 3
Q8 Explain the purposes/advantages of maintaining a petty cash book
o To remove small cash payments from the main cash book.
o To reduce the number of entries in the main cash book and the expenses in the ledger.
o To allow the chief cashier to delegate some of the work.
o The chief cashier is aware of exactly how much is spent in each period.
o The cash remaining and the total of the vouchers received should always be equal to the imprest
amount (detect fraud).
Q9 Explain what is meant by the Imprest system
The petty cashier starts each period with the same amount of money .At the end of the period the chief
cashier will make up the cash remaining so that it is equal to the Imprest amount.
Q10 Give two reasons why it is important for a business to prepare final accounts or financial statements each
year.
o to calculate profit or loss,
o to know what assets and liabilities the business has,
o to compare with previous years,
o to compare with other businesses,
o to calculate accounting ratios,
o for use by other parties e.g. bank
Q11 Explain two advantages of maintaining accounting records using the double entry method.
o Less risk of errors
o Less risk of fraud
o Easier to refer to previous transactions
o Financial position can be ascertained
o Easier to prepare financial statements
o Easier to make business decisions
o Easier to calculate accounting ratios
Q12 Explain what is meant by capital expenditure
Capital expenditure is money spent on acquiring, improving and installing fixed assets.
Q13 Explain what is meant by revenue expenditure
Revenue expenditure is money spent on running a business on a day-to-day basis.
Q14 Explain what is meant by capital receipts
Capital receipts are amounts received which do not form part of the day-today trading activities.
Q15 Explain what is meant by revenue receipts
Revenue receipts are amounts received in the day-to-day trading activities from revenue and other items of
income.
Q16 Explain what is meant by debit note
A debit note may be issued by a customer to request a reduction in an invoice

5. 4
Q17 Explain what is meant by credit note
A credit note may be issued by a supplier to reduce an invoice for returns/overcharge
Q18 The advantage of dividing the ledger into three sections , sales ledger , purchases Ledger cash book ledger
and nominal ledger
o Work can be shared between several people
o Easier for reference as same type of accounts are kept together.
o Easier to introduce checking procedures.
Q19 The reasons for the trade discount
o Customer is in same type of trade for bulk purchases.
o To enable customer to make profit.
Q20 In connection with journal entries, explain what is meant by the term ‘narrative’.
A narrative is a brief explanation of why the entry is being made.
Q21 Explain why a narrative should be shown as part of a journal entry.
A narrative is necessary because of the great variety of transactions which are recorded in the journal, so the
reason for each entry can be understood in the future.
Q22 What is meant by working capital/ Net Current Assets
o Current assets less current liabilities
o It is the amount of capital needed for day to day running of business
Q23 Explain why businesses should record the financial transactions regularly
o To ensure no transactions are forgotten/overlooked (not relying on human memory)
o To enable profit to be calculated
o To enable the financial position of the business to be ascertained
Q24 Explain what is meant by the contra entry in the cashbook
A contra entry is where a transfer is made from an account of a person/business in the sales ledger to an
account of the same person/business in the purchases ledger. This may occur when a person/business is
both a customer and a supplier
Q25 Differentiate between Trial Balance and Statement of financial position

6. 5
Ratio Analysis
Q1 Why do we need to calculate the rate of stock turnover
o Stock replacement
o Comparisons
o Identifying causes of fluctuations
o Remedial/corrective action
Q2 The Net Profit as percentage of capital employed is important to:
o measures overall profitability of the business in relation to resources used
o indicates adequacy of return on owner’s investment
o enables comparisons to be made, e.g. against other investments, earlier years, similar firms
o assists decision-making, e.g. in production, cost of borrowing or other acceptable points
Q3 Suggest two reasons for the increase in the percentage of gross profit to sales.
o Selling goods at higher prices
o Reducing the rate of trade discount
o Passing on increased costs to customers
o Buying goods at cheaper prices
o Using different sales mix
o Valuation of inventory
Q4 State one reason why each of the following business people are interested in entity financial statements.
Bank manager
o Prospects of any requested loan/overdraft being repaid when due

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o Prospects of any interest on loan/overdraft being paid when due
o Security available to cover any loan/overdraft
(ii) Employee
o Ability of business to continue operating
o Prospects for jobs and wages
(iii) Supplier of goods on credit
o Assessment of liquidity position
o Identifying how long it takes the business to pay creditors
o Identifying future prospects of the business
o Establishing a credit limit
(iv) Potential purchaser of the business
o Profitability of the business
o Value of the assets of the business
Q5 Suggest one other way in which entity may increase his profit for future years.
o Increase revenue,
o increase prices,
o reduce cost of sales,
o reduce (control)expenses.
Q6 Limitations of financial statements
1. Non-financial aspects
Accounts only record information which can be expressed in monetary terms.
This means that there are many important factors which influence the performance of a business which
will not appear in the financial statements (final accounts) e.g. quality of management, goodwill, skill of
workforce etc.
2. Historical cost
Transactions are always recorded at the actual cost.
This means that it can be difficult to compare transactions which have taken place at different times
because of the effect of inflation.
Q7 Suggest three factors which a company should consider when comparing her business to other businesses.
3. Should compare with a business of approximately the same size
4. Should compare with a business of the same type (sole trader)
5. Should compare with business selling same type of goods
6. Should compare with a business with approximately the same amount of capital
7. The accounts may be for one year only which will not show trends and may not be a typical year.
8. The financial year may end at a different point in the trading cycle
9. The businesses may operate different accounting policies
10. There may be differences which affect profitability and the items on a balance sheet
11. The financial statements do not show non-monetary items
12. It is not always possible to obtain all the information about a business in order to make a true
comparison
Q8 List three business people (excluding the owner) who would be interested in Business final accounts.
1. Bank manager
o Assessment of prospects of any requested loan/overdraft repaid when due

8. 7
o Assessment of prospects of any interest on loan/overdraft being paid when due
o Assessment of the security available to cover any loan/overdraft
2. Lenders
o Assessment of prospects of any requested loan when due
o Assessment of prospects of any interest on loan being paid when due
o Assessment of the security available to cover any loan
3. Creditor for goods
o Assessment of the liquidity position
o Identifying how long the business takes to pay creditors
o Identifying future prospects of the business
o Identifying what credit limit is reasonable
4. Managers (if any)
o Assessment of past performance
o Basis of future planning
o Control the activities of the business
o Identifying areas where corrective action is required
Q9 State two disadvantages to a company of having insufficient working capital.
o May have problems paying debts as they fall due
o May not be able to take advantage of cash discounts
o Cannot make the most of opportunities as they occur
o Difficulties in obtaining further supplies
Q10 Percentage of gross profit to sales
o This measures the success in selling goods
o The ratio shows the gross profit earned per $100 of sales
o The ratio can be compared with previous years
o The ratio can be compared against other businesses.
Q11 Percentage of profit for the year (net profit) to sales
o This measures the overall success of the business
o The ratio shows the net profit earned per $100 of sales
o The ratio can be compared with previous years
o The ratio can be compared against other businesses
o The ratio indicates how well the business controls its expenses
Q12 Return on capital employed (ROCE)
o The ratio shows the profit earned per $100 employed in the business
o The ratio can be compared with previous years
o The ratio can be compared against other businesses
o The ratio measures the profitability of the investment in the business
o The ratio shows how efficiently the capital is being employed
Q13 The disadvantages to a business of having insufficient working capital.
o May have problems paying debts as they fall due
o May not be able to take advantage of cash discounts
o Cannot make the most of opportunities as they occur

9. 8
o Difficulties in obtaining further supplies
Q14 The ways in which a business could increase its working capital.
o Injection of more capital
o Long-term loans
o Sale of surplus fixed assets (not new)
o Reduce drawings( not for company)
Q15 How to encourage Trade Receivable (Debtors) to pay amounts due on them
o Send statement of account
o Offer cash discount for prompt payment
o Refuse further supplies on credit until any outstanding balance is paid
o Refer to debt collectors
o Charge interest on overdue accounts Improve credit control
o Offer future incentives
Q16 Reasons why should not compare with other business
o Different type of business (sole trader/partnership)
o Different type of trade (manufacturing/foodstore)
o One run by managers, one run by owner
o One in its first year of trading, one in its fifth year
o Different type of sales (cash/credit)
o Different types of expenses (rent/cost of maintaining premises)
o Different type of fixed assets (machinery/premises, fixtures).
Q17 State and explain two limitations stakeholder should be aware of when he is studying the set of final
accounts entity have provided.
1. Reflect what has happened in the past but significant events may have taken place since the end of
the financial year.
2. Transactions are recorded at their actual cost – inflation may affect these figures.
3. Accounts only include information that can be expressed in monetary terms – and so many factors
will not appear in the accounting statements (non-Financial Matters).
4. The accounts provided are for one year only – accounts for previous years would allow meaningful
ratios to be prepared.
Q18 Ways to decrease Bank overdraft
Overdraft may be reduced by collecting debtors, reducing stock, delaying payment of creditors, delaying
drawings, increasing capital
Q19 Why do we use the quick ratio
Stock is not regarded as a liquid asset – a buyer has to be found and then the money collected. Some stock
may prove to be unsalable.
The quick ratio shows whether the business would have any surplus liquid funds if all the current liabilities
were paid immediately from the liquid assets.
Q21 How do we calculate the quick ratio
Current assets less stock/current liabilities
Q22 State the reasons why the businesses need sufficient working capital

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A business needs sufficient working capital for the day-to-day running of the business to pay expenses,
liabilities, etc. as they fall due
Q23 Suggest two ways in which entity could reduce his loss or increase his profit.
o Increase sales
o buy more cheaply
o increase prices
o increase gross profit
o reduce expenses
Q24 Suggest two ways in which entity could increase the credit balance on his capital account.
o Introduce more capital into the business,
o reduce drawings
o reduce net loss
o make or increase income or net profit
o take in a partner with capital
Q25 The reasons for calculating the current ratio
Shows whether the business has sufficient liquid assets to meet its current liabilities
Q26 The reasons why the businesses may attempt to pay earlier to creditors
o May be able to take advantage of cash discounts
o Improve the relationship with suppliers
Q27 Gross profit margin may fall due to
o Selling goods at lower prices
o Allowing higher rates of trade discount for bulk buying
o Not passing on increased costs to customers
o Buying more expensive goods
Q28 How Can we increase net profit margin
o Reduce expenses e.g. reduce staffing levels, reduce advertising etc.
o Increase gross profit e.g. increase profit margin, increase selling prices etc.
o Increase other income e.g. rent out part of premises, earn more discount etc.
Q29 Explain the benefits gained by the company if paying earlier to creditors
o May be able to take advantage of cash discounts
o Improve the relationship with suppliers
Q30 Possible disadvantage for paying credit suppliers before the due date.
The business is deprived of the use of the money earlier than necessary
Q31 What is meant by gross profit margin?
When the gross profit is expressed as a percentage of the selling price
Q32 Disadvantage of paying creditors before due date –
The business is deprived of the use of the money earlier than necessary
Q33 Why inventory is excluded from quick ratio

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Accounting Concepts
Q1 The going concern concept
Accounts are prepared on the basis that the business will continue to operate for an indefinite period of
time.
Q2 What is meant by the going concern concept
Business will continue trading for the foreseeable future.
Q3 What is meant by matching concept
Costs should be offset against revenues from the same accounting period
Q4 The error of original entry (revise)
Use of incorrect figure in first place, with double entry carried out correctly for wrong amount.
Q5 what is meant by business entity.
The accounting records of a business are maintained from the viewpoint of the business.
The business and the owner of the business are regarded as being separate entities.
The personal transactions of the owner of the business are not recorded in the accounting records of the
business.
Q6 Explain the meaning of the accounting term “reliability”.
Information provided in financial statements must be reliable
1. It must be capable of being depended upon as a faithful representation of the underlying transactions
and events it represents
2. It must be capable of being independently verified
3. It must be free from bias
4. It must be free from significant errors
5. It must be prepared with suitable caution being applied to any judgments and estimates
Q7 Prudence concept
To ensure that the profit is not overstated and that the asset of debtors in the Balance Sheet shows a more
realistic amount.
Q8 Explain the money measurement concept
Accounts only record information which can be expressed in monetary terms. This means that many factors
which affect the performance of a business will not appear in the accounting records.
Q9 Why inventory should be recorded at lower of cost or NRV
Cost is the actual purchase price plus any additional costs incurred in bringing the inventory (stock) to its
present condition and position
Net realizable value is the estimated receipts from the sale of the inventory (stock), less any costs of
completing or selling the goods.

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Inventory (stock) should always be valued at the lowest of cost and net realizable value. This is an application
of the principle of prudence.
Over-valuing inventory (stock) causes both the profit for the year and the current assets to be incorrect.
Q10 Explain the criteria that should be used when recording the accounting information
o Information must be -capable of being independently verified
o free from bias
o free from significant errors
o prepared with suitable caution being
o applied to any judgments and estimates which are necessary

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Partnership
Q1 Advantages of partnership
1. Additional finance
2. Additional knowledge and skills
3. Sharing of responsibilities
4. Sharing of risks
5. Discussions can take place before taking decisions
Q2 Disadvantages of partnership
1. Profits have to be shared
2. Decisions have to be recognized by all
3. Partners/disagreements may arise
4. Decisions may take longer to put into effect
5. One partner’s actions are binding on all partners
6. All partners are responsible for the debts of the business
Q3 Why do businesses prepare profit and loss appropriation accounts in partnerships
To show how the profit for the year is shared between the partners
Q4 State one advantage of maintaining both a capital account and a current account for each partner.
o Easier to see the profit retained by each partner
o Easier to calculate the interest on capital (if allowed)
Q5 Advantage of maintaining separate current accounts
o Easier to see profit retained by each partner
o Easier to calculate interest on capital (if allowed)
Q6 Name one other financial matter which might also be included in this document.
1. Capital to be contributed, drawings
2. Profit sharing ratio

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3. Interest on capital
4. Interest on drawings
Q7 Why do businesses impose interest on drawings
1. Interest on drawings discourages large or early cash withdrawals thus it could improve cash/working
capital position,
2. it also produces additional residual income/profits for division between partners
Q8 Explain the reasons by which businesses charge interest on partners drawings
To discourage the partners from making excessive drawings.
Bad Debts/Provision for Doubtful Debts
Q1 Explain two ways in which Abdul Anwar could reduce the risk of bad debts.
1. Obtain reference from new credit customers
2. Fix a credit limit for each customer
3. Issue invoices and statements promptly
4. Follow up overdue accounts promptly
5. Supply goods on a cash basis only
6. Refuse further supplies until outstanding account is paid
Q2 Reason for providing a provision for doubtful debts
1. Ensures that the profits are not overstated (prudence)
2. Ensures that the debtors are shown in the Balance Sheet at a more realistic amount (prudence)
3. Application of the matching principle as the amount of sales unlikely to be paid for are treated as an
expense of that particular year
Q3 What is the provisions for doubtful debts
A provision for doubtful debts is [an estimate of] the amount which a business may lose because of bad
debts.
Q4 Explain how Moloch will be able to decide in the future if the provision for doubtful debts is adequate
By comparing the amount of actual bad debts with the provision made.
Q5 Why do we create a provisions for doubtful accounts
Creating a provision for doubtful debts ensures that the profit is not overstated and the trade receivables are
not overstated in the balance sheet
Q6 What is meant by bad debts
A bad debt is an amount owing to the business which the debtor is unable or unwilling to pay.

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Control Accounts
Q1 Advantages of control accounts:
1. provides instant totals of debtors and creditors
2. prove the arithmetical accuracy of the ledgers they control
3. enable the Balance Sheet to be prepared quickly
4. may be used to identify ledgers in which there are errors when a trial balance does not agree
5. provides a summary of the transactions relating to debtors/creditors for the period
6. provides an internal check on the appropriate ledgers – may reduce fraud
Q2 Reasons for a debit balance brought down in the creditor accounts
1. Overpayment of amount due
2. Cash discount not deducted before payment made
3. Returned goods after payment of amount due
4. Payment made to creditor in advance
Q3 Why do businesses prepares purchases ledger control account
A purchases ledger control account acts as a check on the purchases ledger. If there is an error in the
purchases ledger it will not be revealed by a control account prepared from the individual accounts in that
ledger.
Q4 Explain the reason for having a credit balance in sales ledger control account
1. Overpayment of amount due by a debtor
2. Cash discount not deducted by debtor before payment made
3. Goods returned by debtor after payment of amount due
4. Payment made in advance by debtor
Q5 Advantages of preparing a sales ledger control account
1. Provides instant total of debtors
2. Proves the arithmetical accuracy of sales ledger
3. Enables the Balance Sheet to be prepared quickly
4. Provides a summary of the transactions relating to debtors for the period
5. Provides an internal check on the sales ledger – may reduce fraud
Q6 The purpose of preparing control accounts
1. Assist in the location of errors
2. Provide instant totals of debtors/creditors
3. Proves the arithmetical accuracy of sales/purchases ledgers
4. Enable the Balance Sheet to be prepared quickly
5. Provide a summary of the transactions relating to debtors/creditors
6. Provide an internal check on sales/purchases ledgers – may reduce fraud

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Clubs / Non trading Organization
Q1 Ways to raise funds:
1. increase subscriptions
2. fund raising activities
3. obtain long-term loans
4. loan/mortgage
Q2 what is the income and expenditure account
The Income and Expenditure Account is equivalent to a Profit and Loss Account of a trading organization, It is
used to calculate the annual surplus or deficit.
Q3 Reasons why bank balance does not equal surplus/deficit –
1. R & P A/c shows total money paid and received
2. I & E A/c adjusts figures for accruals and prepayments
3. I & E A/c includes non-monetary items such as depreciation
4. I & E A/c includes only revenue items
Q4 What is meant by the accumulated fund
The accumulated fund is equivalent to the capital of a trading organization; it is the difference between the
assets and the liabilities. The annual surpluses (less any deficits) accumulate within a non-trading
organization to form the accumulated fund.
Q5 Differentiate between Receipts & payments Account and Income and expenditure account

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Company
Q1 What are the main features of preference shares
Preference shares:
1. Receive a fixed rate of dividend.
2. The dividend is paid before the ordinary share dividend.
3. Preference shares do not usually carry voting rights.
4. Capital is returned before the ordinary share capital in a winding up.
Q2 What are the main features of the ordinary shares
Ordinary shares:
1. They are also known as equity shares.
2. The dividend is paid after the preference share dividend.
3. The dividend may vary according to profits.
4. Ordinary shares usually carry voting rights.
5. Ordinary shares are the last to be repaid in a winding up.
Q3 What is meant by limited liability
The liability of the members (shareholders) of a company for the debts of the company is limited to the
amount they agree to pay the company for their shares.
Q4 What are the differences between preference shares and debentures
Preference shares receive a fixed rate of dividend Debentures receive a fixed rate of interest.
Preference shareholders are members of the
company
Debenture holders are not members of the company.
Preference shares are part of the capital of the
company
Debentures are long term loans.
Preference shareholders are repaid after the
debenture holders in the event of the company being
wound up.
debenture holders are paid before the preference
shareholders in the event of the company being
wound up.
Q5 What is meant by Authorized share capital
Authorized capital is the maximum amount of share capital a company is allowed to issue
Q6 What is meant by Called up capital
Called-up capital is the total amount of capital a company has requested from its shareholders.
Q7 Explain the main features of debentures
1. Debentures are long-term loans
2. Debentures holders are not members of the company
3. Debentures receive a fixed rate of interest
4. Debenture holders are repaid before shareholders in a winding-up
Q8 What is meant by Paid up Capital

18. 17
Paid-up capital is that part of the called up capital for which a company has actually received the money from
its shareholders.
Q9 Instead of operating Aziz Stores as a partnership, Omar Aziz has suggested that they should form a limited
company. Explain one reason why this may be of personal benefit to Omar and Fatima Aziz.
The members of a limited liability company have limited liability and their personal assets are not at risk is
the business fails.
Q10 What is purpose of general reserve
Depreciation
Q1 Explain why one should include the depreciation charge in his income statement.
Depreciation should be included as a charge to the income statement so that the cost of the non-current
asset is spread over the life of the asset (matching principle) and the profit is not overstated (prudence).
Q2 The reasons for preparing depreciation
1. To apply the prudence principle
2. To avoid overstating the assets
3. To avoid overstating the profit for the year
Q3 Why do we calculate the depreciation for the fixed assets
1. To spread the cost of fixed assets over their useful lives.
2. To apply the accruals principle – recognizing the time difference between payment for the fixed asset
and its loss in value.
3. To provide a more realistic view of the fixed assets.
4. To record the loss in value of fixed assets – the part of the cost of the fixed asset consumed during the
period of use.
5. The annual depreciation charge represents the cost of using the fixed asset to earn revenue.
Q4 Explain the reasons for which the company charges depreciation on fixed assets
To measure the use of a fixed asset over the period of its useful life
Q5 Explain what is meant by depreciation
Depreciation is an estimate of the loss in value of a non-current (fixed) asset over its expected useful life.
Q6 The main reasons for depreciation
1. Physical deterioration
2. Economic reasons
3. Passage of time
4. Depletion

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Errors
Q1 The compensating error
Two errors, being incorrect entries of equal amounts which cancel each other out
Q2 Explain the reasons for why both sides of the trial balance may fail to agree
1. Error of addition in trial balance or ledger account
2. single entry
3. entering item on wrong side
4. entering transaction twice on same side of ledger
5. entering different credit and debit amounts.
Q3 What is meant by error of omission
A transaction completely omitted from the books e.g. cash sales not recorded
Q4 When suspense account is required
When a trial balance fails to balance
Q5 Why businesses do prepares suspense accounts
To make the totals of the trial balance agree and so that draft final accounts may be prepared.
Bank Reconciliation
Q1 Explain what is meant by a bank statement
The bank statement is a copy of the account of the business as it appears in the books of the bank. This is
from the viewpoint of the bank – the business depositing money is a creditor of
the bank, The bank account in the cash book is prepared from the viewpoint of the business – the bank is a
debtor of the business which has deposited the money.
Q2 What are the items included in the bank reconciliation statements that will be added to the balance per
bank statements
Outstanding lodgments, uncredited or unpresented cheques
Items found in updating cash book, e.g. direct debits, bank interest, charges, dishonored cheques, bank or
cash book errors
Q3 The purposes of preparing bank reconciliation statements
Ascertain the true bank balance at a certain date
Assist in detecting fraud and embezzlement
Identify any “stale” cheques
Demonstrate that any differences between the cash book balance and that on the statement are due to
genuine reasons

20. 19

21. 20
Manufacturing
Q1 The Purpose of preparing the manufacturing account
To calculate how much it has cost the business to manufacture the goods produced in the financial year.
Notes About Manufacturing Account
Manufacturing Account
o It shows the production cost or transfer price of goods completed during the accounting period.
1. Direct materials
2. Direct labour
3. Direct expenses
4. Factory overhead expenses
5. Work in progress
6. Manufacturing profit / loss
Production cost = Prime cost / Direct cost + Factory overhead expenses / Indirect cost
Prime Cost
Cost incurred in the manufacturing process, which can be traced directly to the goods being produced
Example: direct material , direct labour and direct expenses
o Direct materials
• Costs of the materials used during the period.
• Include the purchase price of the raw materials and the acquisition costs related to the purchase.
• Examples: Purchase of raw material , Carriage inwards / freight charges on raw materials
o Direct labour
 Wages paid to the people who are directly involved in the manufacturing process.
 Example: Direct labour, Direct wages, Factory wages, Production wages ,Manufacturing wages
o Direct expenses
 They refer to the expenses paid according to each unit of production.
 Examples: Royalties
o Indirect expenses / Factory overhead
Cost incurred in the manufacturing process, but they cannot be traced directly to the goods being produced.
Include indirect materials, indirect labour and indirect expenses.
Examples:
 Indirect materials
1. Lubricants
2. Loose tools (opening balance + purchase – closing balance)
 Indirect labour
Wages, salaries, bonus or commission to cleaners, crane drivers, foremen, supervisors and production
 Indirect expenses related to the factory, machinery and vehicles

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 Rent and rates
 Depreciation
 Insurance
 Repairs and maintenance
 Factory power / electricity
 Internal transport
 Loss on disposal
Prepaid/Accrued
Q1 Explain what is meant by Accrued/Payable expenses
Another payable (accrued expense) is an amount due and payable [in respect
of expenses incurred in an accounting period] which remains unpaid at the end of that period.
Q2 What is meant by an accrued expense
An expense incurred in the accounting period but unpaid at the end of the period.
Q3 What is meant by markup
When the gross profit is expressed as a percentage of the cost price

23. 22
Payroll Accounting

24. 23

25. 24
Tool for payroll accounting
A variety of tools/ worksheets are used for payroll accounting. Among them are : Clock cards, time sheet, payslip.
Payroll register and wages sheet.
Clock cards
This is a card or a sheet that each employee has. The card is inserted in a machine called the clock card machine. The
machine punches in or prints the time the employee attends work (time in) and leaves work (time out) for each day.

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The clock card is an official document and is used by the payroll department to calculate hours worked (including
overtime) by an employee and gross pay.
Time sheet
This is a sheet that an employee fills in everyday about details of hours worked. Therefore, the time sheet is used to
calculate number of hours an employee has worked for each day. The payroll department uses the time sheet to
calculate number of overtime hours and gross pay.
Payslip
This is a document that the law requires all employers to give to their employees on pay day. It is used to inform the
employee about his basic wages/ salaries, overtime, gross pay, statutory and non-statutory deductions and net pay.
It also contains identifications of the employee like his name, national insurance number etc.
Payroll register
Contains a list of all employees and details like employee number, job title, national insurance number, tax account
number, payment mode, bank account number, contact details (address and telephone number) and date on which
the employee joined the business.
Wages sheet
Prepared on each pay day. It contains a list of all employees and details about their respective payroll: wages/
salaries, overtime, gross pay, statutory and non-statutory deductions and net pay.
Deductions
Statutory Deduction:
These are required by law and mandatory (Income tax and Social security and national insurance contribution).
Voluntary Deduction:
These are the deductions which an employee chooses to have deducted from his/her gross wage.
1. Contribution to a pension scheme (private)
2. Subscription to a trade union
3. Subscription to a social club
4. Donation to charities
Payroll Accounting Ledger Entries
Debit Credit
Wages xxx
Employee payable/cash (net pay) xxx
Income tax xxx
National insurance xxx
Trade union xxx
Note: Wages account will be debited with gross pay + employer contribution to national insurance.

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Information And Communication Technology
Q1 What are benefits of ICT

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