CMA Inter Paper 6 cheat sheet

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

Fundamental qualitative characteristics: relevance (predictive value, confirmatory value, materiality) and faithful representation (complete, neutral, free from error).

Enhancing characteristics: comparability, verifiability, timeliness and understandability; they cannot make irrelevant or unfaithful information useful.

Five elements: asset (present economic resource controlled from past events), liability (present obligation to transfer), equity (residual interest), income (increases in equity other than contributions), expenses (decreases other than distributions).

Recognition criteria: an item is recognised only if it meets the element definition and recognition gives relevant and faithful information; derecognition occurs when the element is lost.

Measurement bases: historical cost, current value (fair value, value in use/fulfilment value, current cost); mixed measurement is permitted and disclosed.

Going concern, accrual, consistency and prudence underpin preparation; prudence supports neutrality and does not permit deliberate understatement of assets or overstatement of liabilities.

Capital vs revenue: capital expenditure creates or enhances a non-current asset and is capitalised; revenue expenditure maintains earning capacity and is expensed.

Accounting cycle: journal, ledger, trial balance, adjustments, adjusted trial balance, financial statements, closing entries; a suspense account absorbs an unexplained trial balance difference.

Hire purchase: buyer records asset at cash price and a liability for the outstanding instalment balance; interest = total hire purchase price minus cash price, allocated over the term (sum of digits or actuarial).

Instalment sale: ownership transfers immediately, so the seller books a receivable and the buyer books the asset and a liability; unlike hire purchase, no separate interest element is legally embedded.

Consignment: consignor records goods sent at cost (or invoice price) in a consignment account; consignee is agent, remits sale proceeds less commission and expenses; unsold stock is valued at cost plus proportionate consignor expenses.

Joint venture (separate books): each venturer records its contribution, share of profit and drawings in a joint venture account; profit is shared in the agreed ratio.

Bills of exchange: drawer, drawee/acceptor, payee; discounting charges the discount as finance cost; endorsement transfers rights; dishonour reverses the original entry and may create a noting charge.

Average due date = base date plus (sum of products of each amount and its days from base date / total amount); used to settle mutual debts with one payment.

Account current: a running statement between parties, with interest computed on each balance for the days outstanding (product method), often using red ink for the other party's balance.

Royalty: minimum rent (dead rent) with short-working recoupment; short working recoverable is carried forward and written off against excess working in later years.

Investment accounts: cum-interest and ex-interest price treatment; accrued interest is separated from cost, and profit/loss on sale is computed on the net cost or carrying amount.

Manufacturing account converts raw material consumed (opening stock + purchases + direct expenses − closing stock) into cost of production, then transferred to trading account.

Trading account yields gross profit = net sales − cost of goods sold; profit and loss account yields net profit after operating, non-operating items and depreciation.

Balance sheet classification: non-current assets, current assets, equity, non-current liabilities, current liabilities; closing stock appears in trading account and under current assets.

Adjusting entries: outstanding expenses, prepaid expenses, accrued income, income received in advance, depreciation, bad debts, provision for doubtful debts, interest on capital and drawings.

Partnership profit sharing: interest on capital and drawings, salary/commission to partners, then residual profit in the agreed ratio; in absence of a deed, profits and losses are shared equally.

Absence of deed defaults: no interest on capital, no salary, interest on loan at 6% p.a., no interest on drawings; interest on partner's loan is a charge against profit.

Goodwill on admission: valued by average profit, super profit or capitalisation methods; brought in cash or adjusted through partners' capital accounts in sacrificing ratio.

Revaluation account on admission/retirement records changes in asset and liability values; resulting profit or loss is shared by old partners in old ratio.

Death of a partner: profit up to death estimated on time or turnover basis; share of goodwill, revalued assets and accumulated reserves are credited to the deceased partner's executor account.

Share issue: application, allotment and calls are recorded separately; calls in arrears is a contra to subscribed capital; calls in advance is a current liability.

Securities premium is credited to a separate reserve usable for bonus issue, buyback, preliminary expenses or premium on redemption of preference shares/debentures, not for dividends.

Forfeiture of shares: debit share capital with called-up amount, credit forfeited shares account with amounts received; reissue at discount is charged to forfeited shares account.

Bonus issue: made from free reserves, securities premium and capital redemption reserve; bonus shares must be fully paid and issued at par, no cash inflow.

Right issue: offered to existing shareholders in proportion to holding, usually below market price; no accounting entry until shares are allotted.

Debentures issued at discount or premium: discount/premium is written off or credited over the life of the debenture; interest is a charge against profit.

Redemption of preference shares: must be from fresh issue proceeds or out of divisible profits transferred to capital redemption reserve, keeping capital intact.

Profit prior to incorporation is separated by time ratio or sales ratio and credited to capital reserve, not to the profit and loss account.

Final dividend and interim dividend are appropriations; dividend declared after reporting date is a non-adjusting event requiring disclosure only.

Banking: revenue recognised on accrual for performing assets; interest on non-performing assets is recognised only on realisation, and NPAs are classified substandard, doubtful and loss assets.

Bank profit and loss account: interest earned, other income, interest expended, operating expenses, provisions and contingencies; balance sheet shows capital, reserves, deposits, borrowings, other liabilities and assets.

Cash reserve ratio and statutory liquidity ratio are maintained as balances with RBI and approved securities; they are disclosed separately.

Insurance: premium income for general insurance is recognised on accrual net of reinsurance; life insurance premium is recognised when due from policyholders.

General insurance provisions: unexpired risk reserve (usually 50% of net premium for fire/marine) and outstanding claims; life insurance uses actuarial valuation of liabilities.

Insurance regulatory accounting distinguishes shareholders' funds from policyholders' funds; surplus in policyholders' account is transferred as per regulatory norms.

Electricity companies: double-account system separates capital expenditure (capital account) from revenue (general balance sheet); capital account balances are shown as capital base.

Cooperative societies: profit is distributed as dividend after statutory reserve transfer; members' deposits and share capital are shown separately.

Non-profit organisations: receipts and payments account is a cash summary, income and expenditure account is accrual-based, and the balance sheet shows surplus or deficit as capital fund.

AS 1 Disclosure of Accounting Policies: fundamental assumptions are going concern, consistency and accrual; material departures must be disclosed with reasons and financial effect.

AS 2 Valuation of Inventories: lower of cost and net realisable value; cost includes purchase, conversion and other costs to bring inventory to present location; excludes abnormal wastage and selling costs.

AS 10 Property, Plant and Equipment: cost plus directly attributable costs; depreciation allocated over useful life; revaluation surplus credited to revaluation reserve.

AS 13 Accounting for Investments: current investments at lower of cost and fair value; long-term investments at cost less provision for other than temporary decline.

Ind AS 115 Revenue from Contracts with Customers: five steps - identify contract, identify performance obligations, determine transaction price, allocate price, recognise revenue on satisfaction.

Ind AS 116 Leases: lessee recognises right-of-use asset and lease liability at present value of lease payments; lessor classifies leases as finance or operating.

Ind AS 109 Financial Instruments: classification depends on business model and contractual cash flow characteristics; expected credit loss model applies to impairment.

Segment reporting: reportable segments meet the 10% threshold of revenue, profit/loss or assets; disclosure of segment revenue, results, assets and liabilities is required.

Related party disclosures (AS 18): disclose relationships, transactions, outstanding balances, and key management personnel compensation regardless of whether transactions occurred.