BGCSE Accounting 0614 cheat sheet

Accounting is the process of identifying, recording, classifying, summarising and communicating financial information to users for decision-making.

Users of accounts are internal (owners, managers, employees) or external (banks, suppliers, tax authorities, investors, government); each has different information needs.

Business entity concept: the owner's private transactions are kept separate from the business's transactions, so drawings are recorded as a deduction from capital, not an expense.

Going concern concept: accounts are prepared assuming the business will continue operating in the foreseeable future, so assets are not valued at forced-sale prices.

Accrual (matching) concept: revenue and expenses are recognised in the period they are earned or incurred, not when cash changes hands.

Prudence concept: do not overstate assets or income; provide for foreseeable losses but do not anticipate unrealised profits.

Consistency concept: apply the same accounting methods each period so figures are comparable; a change of method must be disclosed.

Money measurement concept: only items capable of being expressed in monetary terms are recorded - staff skill and reputation are excluded.

Accounting equation: Assets = Capital + Liabilities; every transaction changes at least two elements while the equation stays balanced.

Invoice (sales/purchase): records credit sales and credit purchases; a credit note records returns inwards (sales returns) or returns outwards (purchases returns).

Debit note is issued by a buyer to the seller to request a credit note for goods returned or overcharges; it is not itself a book of entry.

Receipt is evidence of cash or cheque received; a petty cash voucher supports each small cash payment; a bank statement shows the bank's view of the account.

Books of original entry: sales journal (credit sales), purchases journal (credit purchases), sales returns journal, purchases returns journal, cash book, petty cash book, general journal.

Sales journal and purchases journal are written up from invoices; totals are posted monthly to the ledger, individual entries to debtors' and creditors' accounts.

Cash book is both a book of original entry and a ledger account; it records all receipts and payments, including contra entries between cash and bank.

General journal records transactions not recorded in other books: opening entries, purchase/sale of non-current assets on credit, corrections of errors, bad debts.

Posting rule: books of original entry record the transaction first; ledger accounts are then updated from those books, and the totals are used for the trial balance.

Petty cash book uses the imprest system: a fixed float is set, expenses are recorded, and the float is reimbursed by the exact amount spent.

Double-entry rule: every transaction has equal debits and credits; total debits always equal total credits.

DEAD CLIC: Debit Expenses, Assets, Drawings; Credit Liabilities, Income, Capital.

Assets and expenses increase on the debit side; liabilities, capital and income increase on the credit side.

Debtors (trade receivables) are assets: debit the debtor's account when a credit sale is made, credit it when payment is received.

Creditors (trade payables) are liabilities: credit the creditor's account for a credit purchase, debit it when payment is made.

Returns inwards (sales returns) are debited to the returns inwards account and credited to the debtor's account.

Drawings are debited to the drawings account and credited to cash/bank or purchases; drawings reduce capital.

Contra entry: when cash is deposited into the bank, debit bank and credit cash - no third account is involved.

Ledger divisions: sales ledger (debtors), purchases ledger (creditors), nominal/general ledger (expenses, income, assets, capital); control accounts summarise the subsidiary ledgers.

Trial balance is a list of ledger balances at a date; total debit balances must equal total credit balances if double entry is complete.

A trial balance may still balance when errors exist: errors of omission, commission, principle, original entry, reversal of entries, and compensating errors.

Error of omission: a transaction is completely left out of the books; the trial balance still balances.

Error of commission: correct amount posted to the wrong account of the same class (e.g., wrong debtor).

Error of principle: posted to the wrong class of account (e.g., motor vehicle repairs debited to motor vehicle asset account).

Error of original entry: wrong amount entered in the book of original entry and posted at that wrong amount throughout.

Suspense account is opened for the difference in a trial balance and cleared when errors are found and corrected.

Correcting errors: use the general journal with a narrative, then post to the ledger accounts; the correction must restore double entry.

If a trial balance difference is divisible by 9, suspect a transposition (e.g., 540 recorded as 450) or a slide error.

Two-column cash book records cash and bank; three-column cash book adds a discount column on each side.

Discount allowed is an expense (debit column of cash book); discount received is income (credit column of cash book).

Bank overdraft is a credit balance in the cash book (liability); a positive bank balance is a debit balance (asset).

Cash book balance and bank statement balance differ because of unpresented cheques, uncredited deposits, bank charges, interest, standing orders, direct debits and dishonoured cheques.

Bank reconciliation: adjusted cash book balance = bank statement balance + unpresented cheques − uncredited lodgements (after correcting errors).

Unpresented (outstanding) cheques are deducted from the bank statement balance; lodgements not yet credited are added.

Petty cash imprest system: float is fixed; at the end of the period the cashier reimburses the exact amount spent so the float returns to its original level.

Petty cash book is written up on the analysis (columnar) basis, with a total column and separate expense analysis columns.

Payments by cheque reduce the bank balance in the cash book; the bank records them only when the cheque is presented.

Trading account computes gross profit: Gross profit = Sales (net of returns) − Cost of goods sold.

Cost of goods sold = Opening inventory + Purchases (net of returns) + Carriage inwards − Closing inventory.

Gross profit margin = Gross profit ÷ Net sales × 100; measures profitability of trading before expenses.

Profit and loss account: Net profit = Gross profit + Other income − Expenses (excluding drawings and capital items).

Net profit margin = Net profit ÷ Net sales × 100; lower than gross margin because of operating expenses.

Mark-up = Gross profit ÷ Cost of goods sold × 100; margin = Gross profit ÷ Sales × 100; margin = mark-up ÷ (100 + mark-up) × 100.

Carriage inwards is added to purchases (cost of sales); carriage outwards is a selling expense in the profit and loss account.

Drawings are not an expense; they are deducted from capital in the balance sheet.

Balance sheet (statement of financial position) lists non-current assets, current assets, capital, non-current liabilities and current liabilities at a date.

Accrued expense: expense incurred but unpaid; add to the expense in the profit and loss and show as a current liability.

Prepaid expense: expense paid in advance; deduct from the expense in the profit and loss and show as a current asset.

Accrued income: income earned but not received; add to income and show as a current asset (receivable).

Income received in advance: deduct from income and show as a current liability.

Bad debts are written off as an expense; a provision for doubtful debts is created as a percentage of remaining debtors and shown as an expense (increase) or income (decrease).

Provision for doubtful debts is deducted from debtors in the balance sheet; it is an estimate, not a write-off of a specific debt.

Depreciation for the year is an expense in the profit and loss account and is added to accumulated depreciation in the balance sheet.

Closing inventory adjustment: closing inventory is credited to the trading account (reducing cost of sales) and shown as a current asset.

Goods taken by the owner for private use are drawings; they are deducted from purchases and added to drawings, not treated as sales.

Non-current (fixed) assets are held for use in the business, not for resale, and are expected to be used for more than one accounting period.

Depreciation is the systematic allocation of the cost of a non-current asset over its useful life; it is not a fund for replacement.

Straight-line method: Annual depreciation = (Cost − Residual value) ÷ Useful life; equal charge each year.

Reducing-balance method: Depreciation = Net book value at start of year × fixed percentage; charge falls each year.

Net book value = Cost − Accumulated depreciation; also called carrying amount.

Accumulated depreciation is a provision (contra-asset) deducted from cost in the balance sheet; it is not an expense account.

Disposal account: debit with cost, credit with accumulated depreciation and proceeds; the balance is profit (credit) or loss (debit) on disposal, transferred to profit and loss.

Profit on disposal = Proceeds − Net book value at date of sale; loss arises when proceeds are below net book value.

Depreciation is charged from the date the asset is brought into use; a part-year charge is common in exam questions.

Gross profit margin = Gross profit ÷ Sales × 100; a fall may indicate higher purchase costs, lower selling prices or stock losses.

Net profit margin = Net profit ÷ Sales × 100; a fall with stable gross margin suggests rising expenses.

Return on capital employed (ROCE) = Net profit ÷ Capital employed × 100; measures efficiency of capital use.

Current ratio = Current assets ÷ Current liabilities; a ratio near 2:1 is often considered healthy, but industry matters.

Liquidity (acid test) ratio = (Current assets − Inventory) ÷ Current liabilities; a ratio near 1:1 indicates ability to meet short-term debts without selling stock.

Rate of inventory turnover = Cost of goods sold ÷ Average inventory; higher turnover means faster stock movement, but too high may mean understocking.

Trade receivables collection period = Debtors ÷ Credit sales × 365 days; trade payables payment period = Creditors ÷ Credit purchases × 365 days.

Limitations of ratio analysis: different accounting policies, historical cost figures, no adjustment for inflation, and ignoring non-financial factors.

Interested parties: owners compare profitability, lenders check liquidity and gearing, suppliers check ability to pay, employees check job security.