LC Accounting cheat sheet

Assets = Capital (Owner's Equity) + Liabilities; every transaction preserves this equality.

Asset: a present right to future economic benefit controlled by the entity; liability: a present obligation to transfer economic benefit; capital: the residual interest.

Expanded equation: Assets = Capital + Profit − Drawings + Liabilities, where Profit = Income − Expenses.

Capital introduced increases assets and capital equally; drawings reduce both assets and capital.

Revenue recognition follows the accrual basis: income is recorded when earned, not when cash is received.

Purchases of non-current assets are capital expenditure (statement of financial position); repairs, wages and fuel are revenue expenditure (profit or loss).

Capital expenditure wrongly treated as revenue understates profit and non-current assets; the reverse overstates both.

The statement of financial position is a position at a date; the statement of profit or loss covers a period.

Every transaction: total debits equal total credits; debit entries increase assets and expenses, credit entries increase liabilities, capital and income.

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

Sales day book totals are posted: Dr Trade receivables, Cr Sales; the individual invoices go to the receivables ledger, a memorandum ledger not part of double entry.

Purchases returns are recorded as Dr Trade payables, Cr Purchases returns (or purchases).

Cash book receipts are debits (cash/bank increases); payments are credits; the cash book is both a book of prime entry and part of the double-entry ledger.

Imprest petty cash: the reimbursement equals the total of vouchers paid, restoring the float; Dr expenses, Cr cash (or bank).

Journal entries correct errors, record opening entries, depreciation, bad debts and year-end adjustments, each with a narration.

Contra entry: Dr Trade payables, Cr Trade receivables, used when the same party is both customer and supplier.

A trial balance lists closing ledger balances at a date; total debit balances must equal total credit balances.

Extraction errors it will not reveal: complete omission of a transaction, a single entry, compensating errors, and errors of principle.

Errors it will reveal: one-sided postings, addition errors in the trial balance, transposition of figures in one ledger only, and unequal debits/credits.

A suspense account is opened for the difference and closed once errors are found and corrected.

Transposition example: 4,500 recorded as 5,400 gives a difference of 900, divisible by 9, so suspect a transposition.

A trial balance is not proof of accuracy; it only proves arithmetical equality of debits and credits.

Closing inventory, accruals, prepayments and depreciation adjustments are made before the trial balance is extracted.

Error of principle: a transaction recorded in the wrong class of account (e.g. vehicle purchase debited to motor expenses).

Error of commission: correct class, wrong personal account; error of original entry: wrong amount in both accounts, so the trial balance still balances.

Error of omission: transaction left out entirely; error of reversal: debit and credit entered the wrong way round.

Compensating errors: two independent errors whose effects cancel in the trial balance.

Suspense account rule: if the correcting entry needs an extra debit or credit not matched in the ledger, the opposite entry goes to suspense.

Correction of a one-sided error: post the missing half to the account that is short, with suspense as the counter-entry.

If the suspense account has a credit balance before correction, the original difference was excess debits.

Errors that do not affect the trial balance are corrected by journal between the two real accounts; profit changes only if a profit or loss account is involved.

Bank statement balance is reconciled to the cash book bank balance; the cash book is the ledger record, the statement is the bank's record.

Items on the statement but not in the cash book (bank charges, interest, standing orders, direct debits, dishonoured cheques, direct credits) are entered in the cash book.

Items in the cash book but not on the statement (unpresented cheques, uncredited lodgements) are adjusting items in the reconciliation statement.

Updated cash book balance = bank statement balance + unpresented cheques − uncredited lodgements, after cash book corrections.

Trade receivables control account: opening balance + credit sales − sales returns − receipts − discounts allowed − bad debts = closing balance.

Trade payables control account: opening balance + credit purchases − purchases returns − payments − discounts received = closing balance.

A contra against the payables ledger reduces both the receivables control account and the payables control account.

Differences between control account and ledger balances indicate missing entries, wrong postings or arithmetic errors, which are listed as reconciling items.

Accrual (expense incurred, not yet paid): Dr Expense, Cr Accruals; it increases the expense and creates a current liability.

Prepayment (paid in advance): Dr Prepayments, Cr Expense; it reduces the expense and creates a current asset.

Accrued income: Dr Accrued income (current asset), Cr Income; income received in advance: Dr Income, Cr Income received in advance (liability).

Straight-line depreciation = (Cost − Residual value) ÷ Useful life; reducing balance = Carrying amount × rate.

Depreciation is an application of the matching principle and an allocation of cost, not a fund set aside for replacement.

Disposal: Dr Disposals at carrying amount, Dr Accumulated depreciation, Cr Asset at cost; proceeds go Dr Bank, Cr Disposals; the balance is profit or loss on disposal.

Bad debt written off: Dr Bad debts, Cr Trade receivables; a recovery later: Dr Bank, Cr Bad debts recovered (income).

Allowance for receivables: increase is Dr Irrecoverable debts expense, Cr Allowance; it is deducted from receivables in the statement of financial position.

Inventory is measured at the lower of cost and net realisable value, applied item by item.

Cost includes purchase price, import duties and carriage inwards; it excludes trade discounts, carriage outwards and abnormal wastage.

Net realisable value = estimated selling price − costs to complete − costs to sell.

FIFO: issues are priced at the oldest remaining cost, so closing inventory reflects recent prices; AVCO uses a weighted average after each receipt.

Cost of sales = Opening inventory + Purchases + Carriage inwards − Purchases returns − Closing inventory.

Gross profit = Revenue − Cost of sales; gross profit margin = Gross profit ÷ Revenue × 100.

If closing inventory is overstated, cost of sales is understated and profit overstated in that year, and the next year's profit is understated.

Inventory is a current asset in the statement of financial position; the write-down to NRV is an expense in profit or loss.

Order of preparation: adjustments and extended trial balance, statement of profit or loss, then statement of financial position.

Statement of profit or loss: Revenue − Cost of sales = Gross profit; less operating expenses (including depreciation and irrecoverable debts) = Net profit.

Statement of financial position: Non-current assets at carrying amount + current assets (inventory, receivables net of allowance, prepayments, bank, cash) − current liabilities (payables, accruals, bank overdraft) − non-current liabilities = Capital.

Closing capital = Opening capital + Capital introduced + Net profit − Drawings.

Drawings are not an expense; they reduce capital and are shown in the statement of changes in capital.

A bank overdraft is a current liability, never a current asset; a credit balance in the cash book is an overdraft.

Cost of sales includes carriage inwards and deducts purchases returns; carriage outwards is a distribution expense.

Partnership appropriation: net profit is shared by salary, interest on capital, interest on drawings (a deduction), then the residual profit in the profit-sharing ratio.

Interest on drawings is income to the partnership: Dr Current account of partner, Cr Appropriation account.

Fixed capital accounts move only on capital introduced or withdrawn; current accounts absorb profit shares, drawings, salaries and interest.

In the absence of a partnership agreement, profits and losses are shared equally and no salaries or interest are allowed.

Incomplete records: use the accounting equation or a statement of affairs to derive capital, and control accounts to derive sales and purchases.

Mark-up = Gross profit ÷ Cost of sales; margin = Gross profit ÷ Revenue; Revenue = Cost of sales × (1 + mark-up).

Opening capital from a statement of affairs = Assets − Liabilities at the start; profit = Closing capital + Drawings − Capital introduced − Opening capital.

Share capital is recorded at nominal value; the excess over nominal value on issue is share premium, part of equity.

Equity = Share capital + Share premium + Retained earnings + Revaluation reserve − (Treasury shares if any).

Dividends are a distribution of retained earnings, not an expense in profit or loss.

Corporation tax is an expense in profit or loss and a current liability until paid.

Statement of financial position format: non-current assets, current assets, total assets, equity, non-current liabilities, current liabilities.

Statement of cash flows: operating activities (indirect method starts with profit before tax, adjusts for depreciation and working capital), investing, financing.

A bonus (capitalisation) issue converts reserves into share capital, increasing the number of shares without raising cash.

Published statements include the statement of changes in equity, showing profit, dividends paid and transfers to reserves.

Return on capital employed = Operating profit ÷ (Total assets − Current liabilities) × 100; it measures the efficiency of capital use.

Gross profit margin = Gross profit ÷ Revenue × 100; net profit margin = Net profit ÷ Revenue × 100.

Current ratio = Current assets ÷ Current liabilities; quick ratio = (Current assets − Inventory) ÷ Current liabilities.

Inventory turnover = Cost of sales ÷ Average inventory (times); receivables collection period = Trade receivables ÷ Credit sales × 365 days.

Payables payment period = Trade payables ÷ Credit purchases × 365; a lengthening period can signal liquidity strain.

Gearing = Non-current liabilities ÷ (Non-current liabilities + Equity) × 100; higher gearing means greater financial risk.

Dividend cover = Profit after tax ÷ Dividends; dividend payout = Dividends ÷ Profit after tax × 100.

Ratios are only meaningful against prior years, budgets or industry peers, and must be read alongside qualitative factors.

Limitations of ratio analysis: historic cost figures, differing accounting policies, inflation, seasonality and window dressing.

Window dressing: delaying purchases or accelerating sales near year end to flatter the current ratio.

Asset turnover = Revenue ÷ Total assets; a fall indicates assets generating less revenue.

A high gross margin with a low net margin suggests operating expenses are disproportionate.

Profit is a measure of performance, not cash; a profitable business can fail through poor liquidity.

Operating cycle = Inventory days + Receivables days − Payables days; a shorter cycle reduces working capital needs.

Comparing a sole trader with a company requires care: drawings versus dividends and differing capital structures distort ratios.

Trend analysis over three to five years is more reliable than a single year's figures.

Business entity concept: the owner's personal transactions are excluded from the entity's records.

Going concern: statements are prepared assuming the entity continues in operation for the foreseeable future.

Prudence: do not anticipate income but provide for all known liabilities and losses.

Consistency: apply the same accounting policies each period to keep figures comparable.

Materiality: items significant enough to influence decisions are disclosed or treated separately.

Realisation: revenue is recognised when the significant risks and rewards of ownership pass to the buyer.

Money measurement: only items capable of monetary measurement are recorded.

Depreciation charge appears in profit or loss as an expense; accumulated depreciation is a credit balance deducted from asset cost.

Carrying amount = Cost − Accumulated depreciation.

A change in useful life is applied prospectively to the remaining carrying amount, not retrospectively.

Allowance for receivables is a percentage of remaining receivables after bad debts are written off.

Doubtful debt allowance reduces profit in the year it is created or increased; a decrease is income.

Prepaid expenses at year end reverse in the next period, reducing the following year's expense.

If an accrual is not recorded, profit and liabilities are both overstated/understated accordingly: profit overstated, liabilities understated.

A cheque paid into the bank and later dishonoured is removed from the cash book and restored to the customer's account in the receivables ledger.

Bank errors are corrected by the bank, not the business; they appear only in the reconciliation statement.

A credit balance in the cash book means an overdraft and appears as a current liability.

Discounts allowed reduce receivables; discounts received reduce payables; neither appears in the bank statement until settlement.

The receivables ledger balance plus or minus reconciling items must equal the control account balance.

A contra entry is made when a customer is also a supplier and balances are offset.

Standing orders and direct debits appear on the bank statement before the cash book and must be entered in the cash book.

FIFO and AVCO are permitted under IAS 2; LIFO is not permitted.

Goods on sale or return are excluded from inventory until the buyer accepts them.

Goods in transit are included in inventory if the entity bears the risk of loss (FOB shipping point).

An inventory write-down is recognised as an expense in the period the loss occurs.

Carriage inwards is added to purchases; carriage outwards is a selling expense.

Trade discounts are deducted before recording purchases; cash discounts are recorded only on settlement.

Inventory days = Average inventory ÷ Cost of sales × 365.

Extended trial balance columns: trial balance, adjustments, profit or loss, statement of financial position.

Accruals and prepayments are adjusted in the profit or loss column and carried to the statement of financial position column.

Depreciation is charged to profit or loss and accumulated depreciation to the statement of financial position.

Net profit is transferred to capital; drawings are deducted from capital.

Closing inventory is a credit in the profit or loss column and a debit in the statement of financial position column.

The statement of financial position must balance after all adjustments are posted.

Revenue is shown net of sales returns and VAT (if registered).

On admission of a partner, goodwill may be raised and written off among old partners in the old ratio.

On dissolution, assets are realised, liabilities paid, and the residual cash distributed in the profit-sharing ratio.

A partner's loan to the partnership earns interest, which is an appropriation, not an expense.

Profit-sharing ratio changes require revaluation of assets and goodwill adjustments.

Single-entry records: derive cash sales from bankings and cash receipts; derive credit sales from the receivables control account.

Missing figures can be found using the accounting equation: Assets − Liabilities = Capital.

Statement of affairs lists estimated asset and liability values to derive opening capital.

Issued share capital = number of shares issued × nominal value.

Share premium arises only on issue above nominal value; subsequent trading in shares does not affect the company.

Retained earnings = opening retained earnings + profit after tax − dividends.

Revaluation surplus goes to other comprehensive income and a revaluation reserve, not profit or loss.

Finance costs are deducted before tax in profit or loss.

Current tax and deferred tax are presented separately in profit or loss.

Earnings per share = Profit attributable to ordinary shareholders ÷ Weighted average number of ordinary shares.

Discounts allowed: Dr Discounts allowed, Cr Trade receivables; discounts received: Dr Trade payables, Cr Discounts received.

Returns inwards: Dr Sales returns, Cr Trade receivables; returns outwards: Dr Trade payables, Cr Purchases returns.

A credit note reduces the amount owed by a customer; a debit note reduces the amount owed to a supplier.

The general journal records adjustments not covered by other prime entry books.

Ledger accounts are classified as personal (receivables/payables) or impersonal (real and nominal).

The petty cash imprest system keeps the float constant; vouchers support each payment.

Posting from the sales day book is monthly; individual invoices go to the receivables ledger.

A difference divisible by 9 suggests transposition; a difference of 1 or a round number suggests addition error.

If the trial balance debit total exceeds credits, the suspense account has a credit balance.

Correction of an error of principle between capital and revenue accounts changes profit.

Correction of a personal account error does not change profit.

Suspense account balance is cleared to zero once all errors are corrected.

Errors found after the statement of financial position is prepared require correction of prior figures.

A one-sided entry can be corrected by posting the missing amount to the correct account and the opposite to suspense.

Return on equity = Profit after tax ÷ Equity × 100.

Interest cover = Operating profit ÷ Finance costs; a low cover signals risk.

Asset turnover and profit margin combine to give ROCE: ROCE = Net profit margin × Asset turnover.

A rising receivables collection period may indicate poor credit control or increased risk of bad debts.

High inventory days may indicate slow-moving or obsolete stock.

Comparing ratios across industries is unreliable because of differing capital intensity and margins.

Non-financial factors include market share, staff turnover, customer satisfaction and regulatory change.

Owner's equity in a sole trader is capital; in a company it is share capital plus reserves.

Drawings reduce capital and are not an expense.

Profit increases capital; a loss decreases it.

Assets are classified as current if expected to be realised within 12 months.

Liabilities are classified as current if due within 12 months.

The accounting equation can be rearranged to find any missing element.

Transactions are recorded at historical cost unless a revaluation policy is applied.

Depreciation methods: straight line (equal charge), reducing balance (higher early charge), units of production (based on usage).

A change in method is a change in accounting estimate, applied prospectively.

Allowance for receivables is based on past experience and current economic conditions.

Bad debts recovered are credited to an income account, not to receivables.

An accrued expense is a liability; a prepaid expense is an asset.

Depreciation does not provide cash for replacement; it allocates cost over useful life.

Profit on disposal = Proceeds − Carrying amount at disposal date.

Cost of goods available for sale = Opening inventory + Purchases.

Cost of sales = Cost of goods available for sale − Closing inventory.

Gross profit percentage can be used to estimate inventory lost in a fire.

Inventory should be counted at least annually and valued consistently.

Obsolete inventory should be written down to NRV.

Goods held on consignment are not inventory of the consignee.

Inventory turnover measures how many times inventory is sold and replaced in a period.

The statement of profit or loss shows revenue, cost of sales, gross profit, expenses and net profit.

The statement of financial position shows assets, liabilities and capital.

Accruals and prepayments adjust the expense accounts at year end.

Depreciation is charged on non-current assets and accumulated in a separate account.

Drawings are deducted from capital, not shown as an expense.

Net profit is added to capital in the statement of financial position.

The statement of financial position must always balance after adjustments.

Partnership profit-sharing ratio determines distribution of residual profit.

Interest on capital is an appropriation, not an expense.

Interest on drawings is deducted from the partner's share.

Current accounts record profit shares, drawings and interest.

Capital accounts record permanent capital contributions.

Incomplete records use control accounts and the accounting equation to derive missing figures.

Statement of affairs derives opening capital from assets minus liabilities.

Share capital is nominal value; share premium is excess over nominal.

Retained earnings accumulate profits not distributed as dividends.

Dividends are distributions of profit, not expenses.

Corporation tax is an expense and a liability until paid.

Statement of cash flows classifies cash flows into operating, investing and financing activities.

Bonus issues convert reserves into share capital without raising cash.

Statement of changes in equity reconciles opening and closing equity.

ROCE = Operating profit ÷ Capital employed × 100.

Gross margin = Gross profit ÷ Revenue × 100.

Net margin = Net profit ÷ Revenue × 100.

Current ratio = Current assets ÷ Current liabilities.

Quick ratio = (Current assets − Inventory) ÷ Current liabilities.

Inventory days = Average inventory ÷ Cost of sales × 365.

Receivables days = Trade receivables ÷ Credit sales × 365.

A trial balance is extracted from ledger balances at a reporting date.

Total debits must equal total credits.

Errors of omission and compensating errors do not affect the trial balance.

Suspense accounts are used to balance the trial balance temporarily.

Transposition errors produce differences divisible by 9.

Correction of errors requires journal entries.

A trial balance is not proof of accuracy.

Bank statement balance is reconciled to cash book balance.

Unpresented cheques reduce the bank statement balance.

Uncredited lodgements increase the bank statement balance.

Bank charges and interest are entered in the cash book.

Dishonoured cheques are removed from the cash book.

Standing orders and direct debits are entered in the cash book.

Bank errors are corrected by the bank, not the business.

Debit entries increase assets and expenses.

Credit entries increase liabilities, capital and income.

Every transaction has equal debits and credits.

Books of prime entry record transactions before posting to ledgers.

The sales day book records credit sales.

The purchases day book records credit purchases.

The cash book records cash and bank transactions.

Assets = Capital + Liabilities.

Capital increases with profit and capital introduced.

Capital decreases with losses and drawings.

Assets are resources controlled by the entity.

Liabilities are obligations to transfer resources.

Equity is the residual interest in assets after liabilities.

The accounting equation must always balance.

Inventory is valued at the lower of cost and NRV.

FIFO and AVCO are permitted; LIFO is not.

Cost includes purchase price and carriage inwards.

NRV = Selling price − costs to complete − costs to sell.

Inventory write-downs are expenses.

Inventory days measure how long inventory is held.

Closing inventory affects cost of sales and profit.

Accruals are expenses incurred but not yet paid.

Prepayments are expenses paid in advance.

Accruals increase expenses and liabilities.

Prepayments reduce expenses and create assets.

Accrued income is an asset.

Income received in advance is a liability.

Adjustments are made at year end.

Share capital is recorded at nominal value.

Share premium is excess over nominal value.

Retained earnings are accumulated profits.

Dividends are distributions of profit.

Corporation tax is an expense.

Statement of cash flows has three sections.

EPS = Profit attributable to ordinary shareholders ÷ weighted average shares.