Tamil Nadu HSE First Year Accountancy cheat sheet

Accounting is the process of identifying, measuring, recording, classifying, summarising and communicating economic information to permit informed judgements by users.

Book-keeping ends with recording and classifying; accounting continues through summarising, analysing, interpreting and communicating.

The accounting cycle: transaction → journal entry → ledger posting → trial balance → final accounts.

Objectives: maintaining systematic records, ascertaining profit or loss, showing financial position, providing information to users, assisting management decisions.

Users are internal (owners, management, employees) and external (investors, creditors, banks, government, consumers).

Branches: financial accounting, cost accounting, management accounting; specialised forms include tax, social and human resource accounting.

Limitations: records only monetary transactions, ignores price-level changes, based on historical cost, permits window-dressing through estimates, non-financial factors excluded.

Basis of accounting: cash basis records only cash receipts and payments; accrual basis records revenue when earned and expense when incurred.

Single entry records only cash and personal accounts; double entry records both aspects of every transaction, keeping the accounting equation in balance.

Concepts (assumptions) include business entity, money measurement, going concern, accounting period, cost, matching, accrual, dual aspect, realisation and consistency.

Business entity concept: owner and business are separate; drawings reduce capital and are not an expense of the business.

Money measurement concept: only transactions measurable in money are recorded, so employee skill and reputation stay out of the books.

Going concern concept: the business is assumed to continue indefinitely, justifying cost-based valuation and depreciation over useful life.

Accounting period concept: life of the business is divided into equal periods, usually one year, for reporting profit and position.

Matching concept: expenses of a period are matched against the revenue they helped earn, giving rise to outstanding and prepaid items.

Cost concept: assets are recorded at acquisition cost, not market value; realisation concept recognises revenue when the sale is complete.

Conventions: consistency, full disclosure, materiality and conservatism (prudence) guide presentation and estimation.

Accounting standards and the conceptual framework set qualitative characteristics: relevance, faithful representation, comparability, verifiability, timeliness and understandability.

Fundamental equation: Assets = Liabilities + Capital.

Expanded equation: Assets = Liabilities + Capital + Revenue − Expenses − Drawings.

Capital = Assets − Liabilities; a profit increases capital, a loss and drawings decrease it.

Every transaction changes at least two elements and the equation always remains balanced.

Purchase of goods for cash: one asset increases, another decreases; total assets unchanged.

Purchase of goods on credit: asset (stock) increases and liability (creditor) increases equally.

Sale of goods on credit: debtors increase and capital increases by the profit element through revenue.

Cash withdrawn by owner: asset decreases and capital decreases by the same amount.

Payment to a creditor reduces cash and reduces the liability equally; bad debt reduces debtors and reduces capital.

A transaction that increases an asset and increases a liability (loan taken) leaves capital untouched.

Journal is the book of original entry; each entry shows date, accounts debited and credited, narration and amount.

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

Compound entry debits one account and credits several, or the reverse; total debits must equal total credits.

Opening entry records brought-forward assets and liabilities against the Capital account.

Ledger is the book of final entry, containing all accounts; posting means transferring journal entries to ledger accounts.

A debit balance in a ledger account means the account has received more than it has given; a credit balance is the opposite.

Balancing an account: enter the smaller side total as 'Balance c/d', total both sides, then bring the balance down on the opposite side.

Trial balance is a statement of debit and credit balances at a date, prepared to test arithmetical accuracy - not proof of correctness.

Errors not disclosed by trial balance: omission, commission, principle, compensating errors and wrong narration.

Subsidiary books: purchases book, sales book, purchases returns book, sales returns book, cash book, bills receivable and bills payable books, journal proper.

Purchases book records only credit purchases of goods; cash purchases and asset purchases are excluded.

Sales book records only credit sales of goods; sales returns book records goods returned by customers.

Single-column cash book records cash receipts and payments only; contra entries do not appear in it.

Two-column cash book adds a bank column; three-column adds discount; a contra entry appears in both cash and bank columns and is marked 'C'.

Cash book with bank column is both a journal and a ledger account; the bank column shows a debit balance for money at bank.

Petty cash book under the imprest system: the petty cashier is reimbursed exactly the amount spent, restoring the fixed float.

Journal proper records opening entries, closing entries, rectification entries, credit purchases and sales of assets, and other transactions outside subsidiary books.

Posting from subsidiary books is done to individual ledger accounts, with the book total posted to the control account.

BRS reconciles the cash book bank balance with the bank statement (pass book) balance at a date and explains the difference.

Causes: cheques issued but not yet presented, cheques deposited but not yet collected, bank charges and interest without entry in cash book, direct deposits by customers, standing orders, dishonoured cheques, errors.

Starting from cash book debit balance: add cheques issued not presented and bank credits not in cash book; deduct cheques deposited not collected and bank debits not in cash book.

Starting from pass book credit balance, reverse every treatment used for the cash book balance.

Cheques issued but not presented make the pass book balance higher than the cash book balance.

Cheques deposited but not collected make the pass book balance lower than the cash book balance.

Overdraft is a credit balance in the cash book bank column and a debit balance in the pass book.

An amended cash book is prepared first when errors or omissions lie in the cash book; then the BRS starts from the corrected balance.

BRS is a statement, not a ledger account, and it is prepared on a particular date, not for a period.

Capital expenditure gives benefit beyond one accounting period: purchase or improvement of fixed assets, and installation or wages capitalised.

Revenue expenditure gives benefit within the current period: rent, salaries, wages, repairs, insurance, carriage on goods.

Capital receipts are not income: capital introduced, loans raised, proceeds from sale of fixed assets.

Revenue receipts arise in the ordinary course of business: sales, commission received, interest received.

Deferred revenue expenditure is revenue in nature but written off over several years, e.g. heavy advertisement or preliminary expenses.

Capital profit arises from sale of a fixed asset or a revaluation gain and is transferred to capital reserve, not credited to profit.

Revenue expense wrongly treated as capital overstates profit and assets; capital expense wrongly treated as revenue understates profit and assets.

Wages paid to install machinery are capital; wages paid to workers producing goods are revenue.

Legal expenses to acquire a building are capital; legal expenses in a lawsuit for damages are revenue.

Depreciation is the systematic allocation of the depreciable amount of a fixed asset over its useful life; it is a non-cash expense.

Causes: wear and tear, passage of time, obsolescence, depletion, and accident.

Straight line method: Depreciation = (Cost − Scrap value) ÷ Useful life; the amount is equal every year.

Written down value method: Depreciation = Book value at start of year × Rate; the amount falls each year.

Depreciation is charged to the asset account (or a provision for depreciation account) and debited to the Profit and Loss account.

Provision is a charge for a known liability whose amount is uncertain, e.g. provision for doubtful debts or for repairs.

Provision for doubtful debts is created on debtors; a further bad debt is written off before the provision is calculated.

Reserve is an appropriation of profit, not a charge against profit; provision for discount on debtors is calculated on debtors after deducting the bad debts provision.

Profit or loss on sale of an asset = Sale proceeds − Book value on the date of sale.

Trading account finds gross profit: Gross profit = Net sales − Cost of goods sold.

Cost of goods sold = Opening stock + Net purchases + Direct expenses − Closing stock.

Gross profit ratio = (Gross profit ÷ Net sales) × 100; net profit ratio = (Net profit ÷ Net sales) × 100.

Profit and Loss account finds net profit: Net profit = Gross profit + Indirect incomes − Indirect expenses.

Balance sheet lists assets and liabilities at a date; it is a statement, not an account, and shows the financial position.

Assets are current (cash, debtors, stock) or fixed (land, plant); liabilities are current (creditors, bills payable) or long-term (loan, capital).

Capital is shown on the liabilities side; drawings are deducted from capital; closing capital = opening capital + profit − drawings.

Carriage inwards is a direct expense in the trading account; carriage outwards is an indirect expense in the Profit and Loss account.

Discount allowed is a loss in the Profit and Loss account; discount received is a gain in the Profit and Loss account.

A bill of exchange is a written instrument containing an unconditional order, signed by the maker, directing a person to pay a sum of money to a specified person.

Drawer makes the bill, drawee accepts it, and payee receives the money; the drawee after acceptance is the acceptor.

Parties: drawer (creditor/seller), drawee (debtor/buyer), payee (person entitled to receive payment).

Terms: tenure or period, due date, days of grace (three days added), discounting, endorsement, retirement, noting, noting charges.

On acceptance, the drawer debits Bills Receivable and credits the debtor; the drawee debits the creditor and credits Bills Payable.

Discounting with a bank: Bank discount = Amount of bill × Rate × Unexpired period ÷ 12 (or 365).

Dishonour: the acceptor is liable for the bill amount plus noting charges; the drawer reverses the original entry.

Endorsement transfers the bill to a creditor; the endorsee gets the right to receive payment on the due date.

Retirement of a bill before due date earns a rebate for the acceptor; rebate = Amount × Rate × Unexpired period ÷ 12.

Bills sent for collection are debited to Bills Sent for Collection account until the proceeds are received.

Computerised accounting records transactions in a database; entries are made once and ledger, trial balance and reports are generated automatically.

Advantages: speed, accuracy, volume handling, instant reports, data security through access control, and easy backup.

Limitations: heavy setup cost, need for trained staff, risk of data corruption or loss, and dependence on hardware and power.

Components: hardware, software, data, people, procedures and connectivity.

Data is raw facts; information is processed data used for decisions; a database is an organised collection of related records.

Types of accounting software: ready-made (Tally, Busy), customised, and tailor-made; also spreadsheet-based systems.

Accounting software groups entries through vouchers: contra, payment, receipt, journal, sales, purchase, and their return vouchers.

Features to look for: double-entry validation, GST compliance, audit trail, user privileges, backup and restore, and report generation.

MIS reports from software include day book, ledger, trial balance, cash and bank books, profit and loss account and balance sheet.

Security controls: unique user IDs, passwords, restricted rights, periodic backup, and audit trail for every entry.