ICAEW ACA Accounting (ICAEW) cheat sheet

Every transaction affects at least two accounts and the accounting equation (Assets = Liabilities + Equity) must remain in balance after each entry.

Debit rules: increases in assets and expenses are debits; increases in liabilities, equity and income are credits. Decreases are the reverse.

Journal entry sequence: identify accounts, determine direction of movement, apply debit/credit rules, record narratively, then post to the nominal ledger.

Books of prime entry: sales day book, purchase day book, sales returns day book, purchase returns day book, cash book, and general journal; totals are posted to the nominal ledger, individual entries to the receivables/payables ledgers.

Trial balance lists closing debit and credit balances; it proves arithmetic equality of debits and credits, not the absence of errors.

Errors not revealed by a trial balance: error of omission, commission, principle, original entry, reversal, and compensating errors. Errors of transposition and single-sided entries usually are revealed.

Suspense account is opened for the difference on the trial balance and cleared once errors are corrected; corrections may increase or decrease profit.

Extended trial balance columns: trial balance, adjustments (accruals, prepayments, depreciation, inventory), adjusted trial balance, then statement of profit or loss and statement of financial position.

Accruals concept: income and expenses are recognised when earned or incurred, not when cash moves, so period-end adjustments are required.

Accrued expense: debit expense, credit accrual (current liability). Reverses in the next period when the invoice is received.

Prepaid expense: debit prepayment (current asset), credit expense. Only the expired portion is charged to profit or loss.

Accrued income: debit accrued income (current asset), credit income. Deferred/unearned income: debit income, credit deferred income (current liability).

Depreciation allocates the depreciable amount (cost less residual value) over useful life. Straight line = (cost - residual)/life; reducing balance = carrying amount x rate.

Inventory is measured at the lower of cost and net realisable value; NRV = estimated selling price less costs to complete and sell.

Irrecoverable debts are written off (debit irrecoverable debts expense, credit receivables); a doubtful debts allowance is an estimate charged to profit or loss and netted against receivables.

Closing inventory reduces cost of sales: opening inventory + purchases - closing inventory = cost of sales.

Statement of profit or loss structure: revenue - cost of sales = gross profit; less operating expenses = operating profit; add finance income, less finance costs = profit before tax; less tax = profit for the year.

Statement of financial position: non-current assets (tangible and intangible), current assets, current liabilities, non-current liabilities, then equity (share capital, share premium, retained earnings).

Retained earnings roll-forward: opening retained earnings + profit for the year - dividends declared = closing retained earnings.

Cost of sales = opening inventory + purchases (less returns) + carriage inwards - closing inventory. Carriage outwards is a distribution cost, not cost of sales.

Gross profit margin = gross profit/revenue; operating margin = operating profit/revenue; mark-up = gross profit/cost of sales.

ROCE = operating profit / (total equity + non-current liabilities); asset turnover = revenue / capital employed.

Current ratio = current assets/current liabilities; quick ratio = (current assets - inventory)/current liabilities.

Inventory days = inventory/cost of sales x 365; receivables days = trade receivables/revenue x 365; payables days = trade payables/purchases x 365.

Working capital cycle = inventory days + receivables days - payables days; a shorter cycle releases cash.

Receivables ledger control account: debit opening balance, credit sales; credit cash received, discounts allowed, irrecoverable debts, returns; closing debit balance equals total ledger balances.

Payables ledger control account mirrors this: credit opening balance and credit purchases; debit payments, discounts received, returns and debit notes; closing credit balance equals total ledger balances.

Contra between ledgers: debit payables control, credit receivables control for the same customer/supplier netting off.

Bank reconciliation: adjusted cash book balance (for unrecorded bank charges, interest, standing orders, dishonoured cheques) then reconcile to bank statement using unpresented cheques and uncredited lodgements.

Bank statement credit balance means the bank owes the business (asset); a debit balance on the statement is an overdraft.

Error of principle: wrong class of account (e.g. revenue expenditure capitalised, or asset posted to an expense). Error of commission: right class, wrong individual account.

Reversal of entries doubles the error in the affected account; a compensating error set nets to zero in the trial balance and hides two mistakes.

Correction of errors affecting profit requires adjustment to retained earnings if the error is in a prior period and material.

Source documents: invoice (credit sale/purchase), credit note (returns), debit note, goods received note, remittance advice, petty cash voucher, bank statement.

Credit note issued reduces receivables (credit receivables, debit sales returns); credit note received reduces payables (debit payables, credit purchase returns).

Trade discount reduces the list price before invoicing and is not recorded separately; settlement (cash) discount is recorded in the cash book and as a discount allowed/received.

Petty cash imprest system: top-up equals the total of vouchers reimbursed, restoring the float to its fixed amount.

Cash book is both a book of prime entry and a ledger account; the bank column is the ledger record of the bank balance.

Nominal ledger holds expense, income, asset and liability accounts; memorandum ledgers hold individual customer and supplier balances only.

Capital expenditure is capitalised as a non-current asset; revenue expenditure is expensed. Subsequent costs are capitalised only if they enhance the asset.

IAS 16: initial measurement at cost including directly attributable costs; subsequent measurement by cost or revaluation model, applied consistently to a class.

Share issue: debit cash for proceeds; credit share capital at nominal value; credit share premium with the excess. Issue costs are usually deducted from share premium.

Dividends are recognised when declared/approved, not when paid; they reduce retained earnings and are not an expense in profit or loss.

Loan notes and debentures: interest is a finance cost; any premium on redemption is accrued over the term.

Tax: current tax charge is an expense in profit or loss with a corresponding tax liability; unpaid tax is a current liability.

Incomplete records: use the accounting equation and mark-ups/margins to derive missing figures. If mark-up is on cost, cost of sales = sales/(1 + mark-up); if margin is on sales, cost of sales = sales x (1 - margin).

Missing purchases = cost of sales + closing inventory - opening inventory; missing sales = cost of sales x (1 + mark-up).

Statement of affairs computes capital as assets less liabilities; profit = closing capital + drawings - opening capital (adjusting for capital introduced).

Cash stolen or missing is found by reconstructing the cash account and comparing expected with actual closing cash.

Objective of general purpose financial statements: provide financial information useful to existing and potential investors, lenders and other creditors in making decisions about providing resources.

Qualitative characteristics: relevance (including materiality) and faithful representation are fundamental; comparability, verifiability, timeliness and understandability are enhancing.

Elements: asset (present economic resource controlled as a result of past events), liability (present obligation to transfer an economic resource), equity, income and expenses.

Recognition requires relevance and faithful representation; measurement bases include historical cost, fair value, value in use and current cost.

Going concern: financial statements prepared assuming the entity continues in operation for the foreseeable future unless liquidation is intended.

Prudence supports neutrality by exercising caution under uncertainty; it does not permit deliberate understatement of assets or overstatement of liabilities.

Materiality: information is material if omitting or misstating it could influence users' decisions; materiality is entity-specific and quantitative and qualitative.

Substance over form: transactions are accounted for in accordance with their economic substance, not merely their legal form (e.g. leases, consignment inventory).