CA Foundation Accounting cheat sheet

Accounting equation: Assets = Liabilities + Capital; every transaction preserves this equality, so each entry has equal debits and credits.

Golden rules: debit the receiver and credit the giver (personal accounts); debit what comes in and credit what goes out (real accounts); debit expenses/losses and credit incomes/gains (nominal accounts).

Accrual basis records revenue when earned and expense when incurred, regardless of cash movement; cash basis records only on receipt or payment.

Matching principle: expenses of a period are matched against the revenue they helped earn, producing accrual and adjustment entries.

Going concern assumes the entity continues in operation long enough to realise assets and settle liabilities in the normal course.

Accounting cycle order: journal, ledger posting, trial balance, adjustments, financial statements, closing entries.

Trial balance agreement proves only arithmetical accuracy; errors of principle, complete omission, compensating errors and wrong posting to a correct side do not disturb it.

Suspense account absorbs the difference in a trial balance and is cleared once errors are located and rectified by a journal entry.

AS 1 (Disclosure of Accounting Policies): choose policies on prudence, substance over form and materiality, and disclose all significant policies.

AS 2 (Valuation of Inventories): value at lower of cost and net realisable value; cost includes purchase, conversion and other costs to bring inventory to its present location and condition.

AS 6 (Depreciation): depreciable amount is cost less residual value, allocated systematically over useful life; a change in method is a change in accounting estimate applied prospectively with disclosure.

AS 9 (Revenue Recognition): recognise revenue when significant risks and rewards of ownership transfer, no effective control is retained, and consideration is reasonably determinable.

AS 10 (Property, Plant and Equipment): recognise at cost only if future economic benefits are probable and cost is measurable; subsequent cost model or revaluation model applies.

AS 13 (Investments): current investments are carried at lower of cost and fair value; long-term investments at cost, with provision for permanent diminution.

Substance over form and materiality are pervasive principles: transactions are accounted by their economic reality, and only material items need separate disclosure.

A change in accounting policy is applied retrospectively with disclosure; a change in estimate is applied prospectively, so the distinction determines the treatment.

Trading account derives gross profit: Gross Profit = Net Sales − Cost of Goods Sold, where COGS = Opening Inventory + Net Purchases + Direct Expenses − Closing Inventory.

Profit and Loss account starts with gross profit and deducts indirect expenses and losses, adding indirect incomes, to arrive at net profit.

Balance sheet format: sources of funds (capital, reserves, long-term liabilities) shown against application of funds (fixed assets, investments, current assets less current liabilities).

Closing stock appears as a credit in the trading account and as a current asset in the balance sheet; it is valued at lower of cost and net realisable value.

Adjusting entries before final accounts: outstanding expenses, prepaid expenses, accrued income, income received in advance, depreciation, and provision for doubtful debts.

Closing entries transfer nominal account balances to the trading and profit and loss account, leaving only real and personal balances for the balance sheet.

Capital expenditure creates or enhances earning capacity and is capitalised; revenue expenditure is charged to profit and loss, and wrong classification distorts both profit and assets.

Drawings are deducted from capital, not treated as an expense; goods taken by the owner are credited to purchases or sales at cost.

Absence of a partnership deed means profits and losses are shared equally, no interest on capital is allowed, and no interest on advances is charged beyond the statutory rate.

Interest on drawings is income to the firm and is credited to partners' capital or current accounts; interest on capital is an expense debited to profit and loss.

Goodwill on admission is credited to sacrificing partners in their sacrifice ratio, computed as old share minus new share.

Revaluation account on admission or retirement records increases and decreases in assets and liabilities; its balance is shared by old partners in the old ratio.

Gaining ratio on retirement equals new share minus old share; the retiring partner's share of goodwill is compensated by gaining partners.

Death of a partner: the executor is entitled to the capital balance, share of reserves, revaluation profit, interest on capital and share of goodwill up to the date of death.

Realisation account on dissolution records sale of assets and payment of liabilities; the resulting profit or loss is shared in the profit-sharing ratio.

Not-for-profit entities prepare a receipts and payments account (cash basis) and an income and expenditure account (accrual basis), with the surplus or deficit added to or deducted from the capital fund.