Odisha CHSE +2 Vocational Accounting and Auditing cheat sheet

Accounting equation: Assets = Liabilities + Capital (owner's equity). Every transaction keeps it balanced.

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

Going concern, consistency, accrual and prudence are the four fundamental accounting assumptions/conventions most examined; materiality governs whether an item is separately disclosed.

Journal entry format: date, particulars (debit line first, credit line indented), L.F., debit amount, credit amount, narration.

Trial balance agreement proves only arithmetical accuracy; errors of principle, complete omission, compensating errors and wrong posting to the right side with the same amount do not affect it.

Suspense Account is opened for the difference in trial balance and closed when all one-sided errors are rectified.

Capital expenditure creates an asset or increases earning capacity; revenue expenditure is consumed within the period. Wrong classification distorts profit and the balance sheet.

Cash basis records only cash received/paid; accrual basis records income earned and expenses incurred regardless of cash flow.

Subsidiary books: Cash Book (single/double/triple column, petty cash), Purchases Book, Sales Book, Purchases Return, Sales Return, Bills Receivable and Bills Payable Books, Journal Proper.

Only credit transactions of goods are recorded in Purchases/Sales Books; cash transactions go to the Cash Book and asset purchases to the Journal Proper.

BRS starts from the Cash Book balance or the Pass Book balance. Rule: items already recorded in the book in hand need no adjustment; items recorded only in the other book are added or deducted opposite to their nature.

Cheques deposited but not yet credited and cheques issued but not yet presented are the two classic timing differences in a BRS.

Bank charges, interest allowed, direct deposits by customers and standing-order payments appear in the Pass Book first, so they are entered in the Cash Book before preparing the BRS.

Overdraft: a credit balance in the Cash Book and a debit balance in the Pass Book; the same adjustment logic applies but the starting sign is reversed.

Petty Cash Book works on the imprest system: the petty cashier is reimbursed exactly the amount spent to restore the fixed float.

Trade discount is deducted in the invoice and never recorded; cash discount is recorded in the Cash Book and in the customer's account.

Manufacturing Account gives Cost of Goods Produced = Opening WIP + Raw material consumed + Direct wages + Direct expenses + Factory overheads − Closing WIP.

Trading Account gives Gross Profit = Net Sales − Cost of Goods Sold, where COGS = Opening Stock + Net Purchases + Direct expenses − Closing Stock.

Profit & Loss Account gives Net Profit = Gross Profit + Other income − Indirect expenses; it is then transferred to Capital in the Balance Sheet.

Closing stock appears twice: on the credit of the Trading Account and as a current asset in the Balance Sheet.

Outstanding expenses are added to the related expense and shown as a current liability; prepaid expenses are deducted from the expense and shown as a current asset.

Accrued income is added to income and shown as a current asset; income received in advance is deducted from income and shown as a current liability.

Depreciation and Bad Debts are charged in the P&L; further, create Provision for Doubtful Debts on the remaining debtors and a Reserve for Discount on Debtors.

Interest on capital is a notional expense debited to P&L and credited to Capital; interest on drawings is income credited to P&L and deducted from Capital.

Goods drawn by the proprietor for personal use are deducted from purchases and from capital (drawings), not treated as sales.

Balance Sheet order: Assets and Liabilities arranged in order of liquidity or permanence; totals must agree.

Straight Line Method: Depreciation = (Cost − Scrap Value) ÷ Useful Life; equal charge each year, asset can be reduced to zero or scrap.

Written Down Value Method: Depreciation = Book value at start of year × fixed rate; charge declines each year and the asset is never fully written off.

Units of production: Depreciation = (Cost − Scrap) × Units used in the year ÷ Total estimated units.

Depreciation is a non-cash expense charged to P&L; the credit goes to the asset account (or to Accumulated Depreciation under the provision method).

Profit or loss on sale of an asset = Sale proceeds − Book value on the date of sale; the asset account is closed through the Asset Disposal Account.

Provision is a charge against profit for a known liability or expected loss whose amount is uncertain (e.g., provision for doubtful debts, depreciation).

Reserve is an appropriation of profit, created by debiting P&L Appropriation; it strengthens the financial position and is not meant for a specific known liability.

Capital Reserve arises from capital profits (e.g., profit on sale of fixed asset, premium on shares) and cannot be distributed as dividend.

Secret Reserve arises when assets are undervalued or liabilities overstated; it is not disclosed in the Balance Sheet.

Bill of Exchange: an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum to a certain person or bearer. Three parties: drawer, drawee, payee.

Promissory Note: an unconditional promise in writing, signed by the maker, to pay a certain sum to a specified person or bearer. Two parties: maker (promisor) and payee.

Inland bill is drawn and payable in the country; foreign bill is drawn in one country and payable in another.

Tenor: a bill at sight or on demand is payable immediately; after date/after sight bills run from the date of the bill or from the date of acceptance.

Days of grace: three days are added to the period of the bill to compute the due date; if the due date is a public holiday, the preceding working day applies.

Discounting: the holder receives the face value less discount; the discount is a charge to the P&L of the holder. If the drawer discounts, the acceptor's liability continues until payment.

Endorsement transfers the bill; the endorser becomes liable to subsequent holders. Noting charges on dishonour are borne by the drawer when the drawee dishonours.

Retirement of a bill before maturity gives the acceptor a rebate, which is income to the acceptor and an expense to the holder.

Renewal of a bill: the acceptor pays interest in cash or includes it in the new bill, and the old bill is cancelled.

Accommodation bill is drawn without consideration to help a party raise funds; it is not a trade bill.

Absence of a partnership deed: profits and losses shared equally, no interest on capital, no interest on drawings, interest on loan @ 6% p.a., and no salary to partners.

Admission of a partner: new partner brings capital and goodwill; sacrificing ratio = old ratio − new ratio; goodwill is credited to sacrificing partners' capital accounts.

Revaluation Account on admission/retirement records increases and decreases in assets and liabilities; the profit or loss is shared by the old partners in the old ratio.

Retirement: the retiring partner's capital account is settled with share of goodwill, revaluation profit, accumulated reserves and interest on capital; the gaining ratio = new ratio − old ratio.

Death of a partner: the deceased partner's share of profit up to the date of death is computed on time basis or turnover basis; the executor's loan account is opened for the unsettled balance.

Dissolution: Realisation Account is opened; all assets except cash are transferred to it at book value, liabilities are transferred, realisation expenses are borne by the firm.

On dissolution, the order of payment out of realisation is: realisation expenses, outside creditors, partners' loan, then partners' capitals.

Goodwill under the capitalisation method = Average Profit × Number of Years' Purchase; under the super-profit method it is Super Profit × Years' Purchase.

Partner's loan to the firm is paid before partners' capital but after outside liabilities; if the firm is insolvent, the Garner v. Murray rule applies among partners.

Share capital classes: Authorised (nominal), Issued, Subscribed, Called-up and Paid-up capital; Calls in Arrears and Calls in Advance are shown separately.

Issue of shares at par, at premium (Securities Premium Account, a capital reserve) or at discount (only allowed within the limits of the Companies Act).

Oversubscription: pro-rata allotment, refund of excess application money, or a combination; the excess application money can be adjusted towards allotment or calls.

Forfeiture of shares: Share Capital is debited with the called-up amount, Calls in Arrears is credited, and the amount already received is credited to Share Forfeiture Account.

Reissue of forfeited shares at a discount is allowed up to the amount in the Share Forfeiture Account; the balance of that account is a capital profit transferred to Capital Reserve.

Debentures: issue at par, at premium or at discount; interest is a charge against profit, not an appropriation; interest is payable even when there is no profit.

Debenture redemption reserve (DRR) and sinking fund are created out of profits for redemption; the debenture holders are creditors of the company.

Final accounts of a company: Manufacturing/Trading, Profit & Loss, Profit & Loss Appropriation (transfer to reserves, dividend) and Balance Sheet in Schedule III format.

Dividend is declared on paid-up capital; calls in advance carry interest and do not earn dividend until the call is made.

Preliminary expenses and discount on issue of shares are written off against Securities Premium or Profit & Loss.

Audit is the independent examination of financial statements and records to express an opinion on their truth and fairness; the primary objective is the expression of an opinion, and detection of fraud and error is a secondary objective.

Types by ownership: statutory audit (compulsory, e.g., companies under the Companies Act), private audit, government audit, and audit of cooperative societies.

Types by conduct: continuous audit (throughout the year), final/periodic audit (after year-end), interim audit (between two annual audits), and balance sheet audit.

Audit programme is a written list of audit procedures to be followed, arranged in a definite order, to ensure no item is omitted; it is prepared by the auditor before the audit starts.

Internal check is an arrangement of duties in the accounting routine so that the work of one person is automatically checked by another; it is part of internal control.

Internal control is the whole system of controls, financial and otherwise, established by management to safeguard assets, ensure accuracy and reliability of records, and promote operational efficiency.

Limitations of internal control: collusion between employees, management override, cost-benefit constraint, human error and unusual transactions.

Test checking examines a sample of transactions to draw a conclusion about the whole population; it is justified only where internal control is effective.

Audit sampling risk and the risk of material misstatement determine the nature, timing and extent of audit procedures.

Vouching is examining the documentary evidence (vouchers) supporting entries in the books to establish their authenticity and accuracy; it is the essence of auditing.

Vouching of cash receipts: check counterfoils of receipts, bank pay-in slips, and reconcile with the Cash Book; investigate unusual receipts and amounts written off.

Vouching of cash payments: check supporting invoices, bills, receipts, and the authority for payment; the auditor must examine the payment voucher and its acknowledgement.

Vouching of purchases: check purchase orders, goods received notes, supplier invoices and the Purchases Book; verify that goods received are actually recorded.

Vouching of sales: check sales invoices, dispatch records, sales orders and the Sales Book; verify cut-off to prevent window dressing.

Verification is proving the existence, ownership, valuation and disclosure of assets and liabilities at the balance sheet date; valuation is determining the correct amount at which an asset is carried.

Fixed assets are verified by physical inspection and title deeds; investments by share certificates and broker's advice; cash in hand by simultaneous counting and surprise checks.

Valuation rules: stock at lower of cost or net realisable value; fixed assets at cost less depreciation; investments at cost or market value, whichever is lower (unless long-term).

Contingent liabilities are not recorded but are disclosed in the notes to the accounts.

Appointment of a company auditor: by the members at the annual general meeting for five years, by the Board to fill a casual vacancy, or by the Comptroller and Auditor General in the case of a government company.

Qualifications: a chartered accountant in practice; a firm may be appointed in its firm name. Disqualifications include a body corporate, an officer or employee of the company, a debtor/creditor beyond the prescribed limit, and a relative holding a security.

Rights/powers: right of access to books and vouchers, right to obtain information and explanations, right to attend general meetings, right to receive remuneration and to be indemnified for bona fide acts.

Duties: report to members on the accounts, comply with auditing standards, report on fraud and irregularities noticed, sign the audit report and state the matters prescribed by the Companies Act.

Liabilities: liability for negligence (civil) to the client and to third parties who relied on the report; liability for misfeasance (breach of trust); criminal liability for knowingly false statements.

Audit evidence is the information used by the auditor to arrive at the audit conclusion; it must be sufficient and appropriate (relevant and reliable).

Reliability order: evidence from independent external sources > internal evidence; documentary > oral; original > photocopy; auditor's own inspection > management representation.

Audit report types: unmodified (clean) opinion, qualified opinion, adverse opinion and disclaimer of opinion.

Key elements of the audit report: title, addressee, opinion paragraph, basis for opinion, key audit matters (where applicable), responsibilities of management and the auditor, and signature with date and place.

An auditor must be independent in mind and appearance; an audit report is addressed to the members, not to the management.