Kerala Plus Two Accountancy with AFS (DHSE) cheat sheet

Receipts and Payments Account is a summary of cash and bank receipts and payments, including capital and revenue items; it starts with opening cash/bank balance and ends with closing cash/bank balance.

Income and Expenditure Account is a nominal account prepared on accrual basis; it records only revenue income and expenses of the current period and shows surplus or deficit.

Subscription income for the year = subscriptions received + outstanding at end − outstanding at beginning − advance at end + advance at beginning.

General donations are revenue receipts; specific donations for capital purposes are capital receipts and are credited to the specific fund or capital fund, not to Income and Expenditure Account.

Consumable expenses = opening stock + purchases − closing stock; the consumed amount is charged to Income and Expenditure Account.

Life membership fees are normally capitalised and shown as a liability/fund, rather than credited to Income and Expenditure Account.

Capital fund at the beginning = total assets − total liabilities; closing capital fund = opening capital fund + surplus + capitalised receipts − deficit.

Depreciation and provisions relating to the current year are debited to Income and Expenditure Account even though they are non-cash expenses.

In absence of a partnership deed, profits and losses are shared equally, interest on capital and drawings is not allowed, and partners are not entitled to salary.

Interest on capital is an appropriation of profit and is allowed only when the deed provides for it; interest on drawings is income to the firm and is credited to Profit and Loss Appropriation Account.

Profit and Loss Appropriation Account: debit interest on capital, partner salary/commission and reserves; credit net profit and interest on drawings; balance is divisible profit.

Sacrificing ratio = old profit-sharing ratio − new profit-sharing ratio; gaining ratio = new profit-sharing ratio − old profit-sharing ratio.

Fixed capital method uses partners' capital accounts for original capital and current accounts for drawings, interest, salary, commission and share of profit; fluctuating method records all in capital accounts.

Goodwill under super profit method = super profit × number of years' purchase; super profit = average profit − normal profit; normal profit = capital employed × normal rate of return.

Partner's loan in absence of deed carries interest at 6% per annum; it is a liability of the firm and is not part of partner's capital.

Commission on profit after charging commission = rate × profit before commission / (100 + rate) when the rate is a percentage of profit after commission.

On admission, the new partner's share is acquired from old partners; sacrificing ratio = old ratio − new ratio and goodwill brought by the new partner is credited to sacrificing partners in sacrificing ratio.

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

Accumulated reserves and accumulated losses appearing in the old balance sheet are distributed among old partners in old ratio unless the deed says otherwise.

At retirement, gaining ratio = new ratio − old ratio of continuing partners; retiring partner's share of goodwill is compensated by gaining partners in gaining ratio.

Amount due to retiring partner is transferred to his loan account if not paid immediately; interest is payable at the agreed rate or 6% p.a. if silent.

On death, deceased partner's share of profit till death is based on time or turnover; share of goodwill and revaluation profit/loss are credited/debited to his capital account.

Capital adjustment on admission: new partner's capital may be based on adjusted capitals of old partners; excess or deficiency is brought in or withdrawn in cash.

Revaluation profit/loss on retirement or death belongs to all old partners, including the retiring/deceased partner, in old ratio.

Realisation Account is prepared to record sale of assets and settlement of liabilities on dissolution; it is closed by transferring profit or loss to partners' capital accounts in profit-sharing ratio.

Cash and bank balances are not transferred to Realisation Account; actual cash receipts and payments are recorded in Bank Account.

Assets taken over by a partner are credited to Realisation Account and debited to that partner's capital account at agreed value.

Liabilities assumed by a partner are debited to Realisation Account and credited to that partner's capital account.

Realisation expenses paid by the firm are debited to Realisation Account; if a partner pays them on behalf of the firm, debit Realisation Account and credit that partner's capital account.

Unrecorded assets when realised are credited to Realisation Account; unrecorded liabilities paid are debited to Realisation Account.

On insolvency of a partner, deficiency is borne by solvent partners in their capital ratio, subject to the Garner v. Murray rule, unless the deed provides otherwise.

Dissolution of partnership changes the relationship among partners; dissolution of firm closes the business and requires preparation of Realisation Account.

Share capital in balance sheet: authorised, issued, subscribed, called-up and paid-up; calls in arrears are deducted from called-up capital to arrive at paid-up capital.

Securities premium is a capital receipt credited to Securities Premium Account; it cannot be used to pay dividends.

Forfeiture entry: debit Share Capital with called-up amount, credit Calls in Arrears with unpaid amount, credit Forfeited Shares Account with amount already received.

On reissue of forfeited shares at discount, debit Forfeited Shares Account with discount; the balance left in Forfeited Shares Account is transferred to Capital Reserve.

Excess application money on oversubscription is adjusted against allotment or calls; if not adjustable, it is refunded.

Shares cannot normally be issued at a discount; issue at premium credits Securities Premium Account.

Calls in advance are received before due; they are shown as a current liability and may carry interest if articles provide.

Forfeited Shares Account is shown as an addition to paid-up share capital until the forfeited shares are reissued.

Debentures are long-term borrowings and appear under non-current liabilities; interest on debentures is a charge against profit and is payable even if the company incurs a loss.

Issue at discount: debit Bank and Discount on Issue of Debentures, credit Debentures; the discount is a capital loss written off against securities premium or statement of profit and loss.

Issue at premium: debit Bank, credit Debentures at face value and credit Securities Premium; premium on redemption is a liability provided at issue.

Redemption may be by lump sum payment, annual instalments, purchase of own debentures in open market, conversion into shares/debentures, or sinking fund.

Redemption out of profits may require creation of Debenture Redemption Reserve; redemption out of capital does not require DRR.

Interest on debentures = face value × rate × time; for half-yearly interest, time is 6/12.

Own debentures purchased as investment are shown as investment; when cancelled, the difference between purchase price and face value is profit/loss on redemption.

Debenture holders are creditors, not owners; they have no voting rights and receive interest before shareholders.

A company's financial statements include Balance Sheet, Statement of Profit and Loss, Cash Flow Statement and notes; Schedule III prescribes the format.

Balance Sheet heads: shareholders' funds, non-current liabilities, current liabilities, non-current assets and current assets.

Current assets/liabilities are expected to be realised/settled within 12 months or the operating cycle, whichever is longer.

Statement of Profit and Loss shows revenue from operations, other income, expenses, finance costs, tax and profit after tax.

Property, plant and equipment are shown net of accumulated depreciation; intangible assets are shown separately.

Calls in arrears are deducted from share capital; calls in advance are shown as a current liability.

Contingent liabilities and commitments are disclosed in notes, not recognised as liabilities unless probable and measurable.

Finance costs include interest on borrowings and other borrowing costs; they are charged to Statement of Profit and Loss.

Current ratio = current assets / current liabilities; quick ratio = (current assets − inventory − prepaid expenses) / current liabilities.

Debt-equity ratio = long-term debt / shareholders' funds; proprietary ratio = shareholders' funds / total assets.

Inventory turnover = cost of goods sold / average inventory; debtors turnover = credit sales / average trade receivables.

Gross profit ratio = gross profit / revenue from operations × 100; net profit ratio = net profit / revenue from operations × 100.

Return on capital employed = EBIT / capital employed × 100; capital employed = shareholders' funds + long-term debt (or total assets − current liabilities).

Operating ratio = (cost of goods sold + operating expenses) / revenue from operations × 100; lower ratio indicates better operating efficiency.

Interest coverage ratio = EBIT / interest on long-term debt; it measures ability to meet interest obligations.

Dividend payout ratio = dividend per share / earnings per share × 100; earnings per share = profit after tax / number of equity shares.

Cash flow statement classifies cash flows into operating, investing and financing activities and reconciles opening and closing cash and cash equivalents.

Operating activities include cash from sale of goods/services, payments to suppliers/employees, taxes paid; interest paid is generally financing for non-financial companies.

Investing activities include purchase/sale of property, plant and equipment, investments, and interest/dividend received by non-financial companies.

Financing activities include issue/redemption of shares and debentures, borrowings/repayments, interest paid and dividends paid.

Indirect method: start with net profit before tax; add depreciation and other non-cash expenses; deduct non-operating incomes; adjust changes in working capital; deduct tax paid.

Increase in current assets reduces operating cash flow; increase in current liabilities increases operating cash flow.

Cash and cash equivalents include cash in hand, bank balances and short-term highly liquid investments with original maturity of three months or less.

Net increase/decrease in cash = net cash from operating + investing + financing; add opening cash to get closing cash.