UPMSP Intermediate Accountancy cheat sheet

Accounting equation: Assets = Liabilities + Capital (owner's equity); it must hold after every transaction.

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

Dual aspect: every transaction affects at least two items, so total debits always equal total credits.

Capital = Assets − Liabilities (net worth); a negative result means liabilities exceed assets.

Drawings reduce capital; fresh capital introduced and net profit increase capital.

Revenue and expenses are nominal accounts closed to capital at period end; assets, liabilities and capital are real/personal accounts carried forward.

Rules of debit and credit: increase in asset or expense = debit; increase in liability, capital or revenue = debit is credit.

Transaction analysis order: identify accounts affected, classify each, then apply the debit/credit rule before recording.

Going concern assumes the entity will continue operating long enough to realise assets and settle liabilities in the normal course.

Accrual basis records revenue when earned and expense when incurred, regardless of cash movement; cash basis records only on receipt/payment.

Matching principle sets expenses of a period against revenue of the same period to compute profit.

Consistency requires the same accounting policies each period unless a change is justified and disclosed.

Prudence (conservatism) recognises anticipated losses but not anticipated profits; it supports provision for doubtful debts.

Money measurement, business entity, accounting period and full disclosure are the other core concepts tested.

Accounting Standards are issued in India by the ICAI; Ind AS apply to larger prescribed entities.

Fundamental accounting assumptions: going concern, consistency and accrual; going concern and consistency are also fundamental accounting assumptions under AS 1.

Journal format: Date | Particulars | L.F. | Debit (₹) | Credit (₹); narration follows each entry.

Compound entry debits one or more accounts and credits one or more accounts in a single journal entry.

Ledger posting: debit the account named on the debit side of the journal, credit the account named on the credit side.

Balancing rule: excess of debit side total over credit side = debit balance; the reverse = credit balance.

Trial balance lists debit and credit balances; total debits must equal total credits if the ledger is arithmetically correct.

A trial balance will not reveal errors of principle, complete omission, compensating errors, or wrong posting to the correct side.

Suspense account is opened when a trial balance disagrees; it is closed once all one-sided errors are rectified.

Contra entries (cash withdrawn for office use, cash deposited into bank) appear on both sides of the cash book and cancel in the trial balance.

BRS reconciles the cash book bank balance with the bank statement balance on a given date.

Starting from cash book balance: add cheques deposited but not yet credited, and bank interest/credits not recorded in cash book.

Starting from cash book balance: deduct cheques issued but not yet presented, and bank charges/debits not recorded in cash book.

Starting from pass book balance, reverse every treatment: add unpresented cheques, deduct uncredited deposits.

Debit balance in the cash book (bank column) = favourable balance = credit balance in the pass book.

Overdraft is a credit balance in the cash book bank column; it is shown as a negative/overdraft balance in the BRS.

Errors in the cash book are corrected in the cash book itself before preparing the BRS; errors by the bank are adjusted in the BRS.

Cheques dishonoured after deposit reduce the bank balance and must be deducted when starting from the cash book.

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

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

Straight line gives equal total depreciation plus repair cost each year; WDV gives a roughly constant total of depreciation plus repairs.

Profit or loss on sale = Sale proceeds − Book value on date of sale; book value = cost − accumulated depreciation.

Depreciation is a non-cash expense charged to the profit and loss account; accumulated depreciation is a contra-asset.

Provision is a charge against profit for a known liability of uncertain amount (e.g. doubtful debts, taxation); it is mandatory.

Reserve is an appropriation of profit, not a charge; it is created for strengthening the financial position.

Capital reserve arises from capital profits (e.g. premium on issue, profit on sale of fixed asset) and is not available for dividend.

Bill of exchange: unconditional written order by drawer directing drawee to pay a sum to drawer or bearer; three parties - drawer, drawee, payee.

Promissory note: unconditional written promise by maker to pay a sum to payee or bearer; two parties - maker and payee.

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

Tenor: a bill at sight or on demand is payable immediately; a bill after date/after sight is payable after the stated period.

Days of grace: 3 days are added to the period; the due date is the date of maturity.

Discounting charges the bank a discount for the unexpired period; endorsement transfers the bill to a creditor.

Dishonour: drawer debits drawee; noting charges paid by holder are recovered from the party liable.

Retirement of bill before maturity gives the acceptor a rebate, calculated on the unexpired period.

Trading account computes gross profit = Net sales − Cost of goods sold; COGS = Opening stock + Purchases + Direct expenses − Closing stock.

Profit and loss account starts with gross profit and deducts indirect expenses, adding indirect incomes, to give net profit.

Balance sheet is a statement of assets and liabilities on the closing date; it is not an account with debit/credit balances.

Adjusting entries follow the double-entry rule: every adjustment affects the profit and loss account and/or the balance sheet at two places.

Closing stock appears on the credit of trading account and as a current asset in the balance sheet.

Outstanding expense: add to the expense in P&L and show as a current liability.

Prepaid expense: deduct from the expense in P&L and show as a current asset.

Accrued income: add to income in P&L and show as a current asset; income received in advance: deduct from income and show as a liability.

Partnership deed governs profit-sharing ratio, capital, interest on capital, drawings, salary and loan terms; absent a deed, profits and losses are shared equally.

In the absence of a deed: no interest on capital, no interest on drawings, no salary to partners, 6% p.a. interest on partner's loan.

Partner's capital account is fixed or fluctuating; under the fixed method a separate current account records drawings, interest, salary and share of profit.

Interest on drawings = Total drawings × Rate × Average period ÷ 12; average period depends on whether drawings are at the beginning, middle or end of each month.

Interest on capital is allowed only out of profits; if profits are insufficient, the available profit is distributed in the profit-sharing ratio.

Profit and loss appropriation account distributes net profit: interest on capital, partner's salary/commission, interest on drawings, then divisible profit.

Goodwill is the value of a firm's reputation; methods include average profit, super profit and capitalisation of average profit.

Partner's loan to the firm is a liability, not capital, and earns interest even without a deed.

On admission, the new partner brings capital and usually a share of goodwill; sacrificing ratio = Old ratio − New ratio.

Goodwill brought by the new partner is credited to the sacrificing partners' capital accounts in their sacrificing ratio.

Revaluation account records the increase/decrease in assets and liabilities on reconstitution; profit on revaluation is credited to old partners in the old ratio.

Accumulated reserves and profits are distributed among old partners in the old ratio on admission.

Sacrificing ratio = Old ratio − New ratio; gaining ratio = New ratio − Old ratio.

On retirement, goodwill share of the retiring partner is compensated by the gaining partners in their gaining ratio.

Retiring partner's account is settled with capital, share of reserves, revaluation profit and goodwill, less drawings and interest.

On death, the deceased partner's share of profit to the date of death is computed on the basis of turnover, sales or time, using the last year's profit.

Reconstitution covers change in profit-sharing ratio, admission, retirement and death; assets and liabilities are revalued and goodwill adjusted.

Change in profit-sharing ratio: revaluation profit/loss and reserves are shared in the old ratio; goodwill is adjusted through partners' capital accounts.

Dissolution under the Indian Partnership Act, 1932 ends the firm; dissolution of partnership only changes the relationship among partners.

Realisation account records sale of assets and payment of liabilities; the balance is transferred to partners' capital accounts in the profit-sharing ratio.

Order of payment on dissolution: external liabilities, then partners' loans, then partners' capital.

Unrecorded assets when realised are credited to the realisation account; unrecorded liabilities paid are debited to it.

Insolvency of a partner: the deficiency is borne by the other partners in their profit-sharing ratio (Garner v. Murray rule where applicable).

Separate dissolution expenses, realisation expenses borne by a partner, and cash/bank balances are handled outside the realisation account.

Share capital is shown in the balance sheet as authorised, issued, subscribed and paid-up capital; calls in arrears and calls in advance are adjusted.

Issue of shares at premium: Securities Premium Account is credited and is a capital receipt, not available for dividend.

Calls in arrears are deducted from subscribed capital; calls in advance are added to paid-up capital and shown as a liability.

Forfeiture of shares: Share capital is debited with the called-up amount, calls in arrears credited, and the amount already received credited to Forfeited Shares Account.

Reissue of forfeited shares at a discount cannot exceed the amount forfeited; any balance in Forfeited Shares Account is transferred to Capital Reserve.

Debentures are long-term borrowings; interest is a charge against profit and is payable whether or not the company earns profit.

Issue of debentures at a discount: the discount is written off against securities premium or profit and loss account.

Debenture redemption reserve and debenture redemption investment are created to protect debenture holders; loss on issue of debentures is written off over the life of the debentures.

Current ratio = Current assets ÷ Current liabilities; ideal is about 2:1.

Quick ratio = (Current assets − Stock − Prepaid expenses) ÷ Current liabilities; ideal is about 1:1.

Debt-equity ratio = Long-term debt ÷ Shareholders' funds; ideal is 2:1 or lower.

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

Stock turnover = Cost of goods sold ÷ Average stock; debtors turnover = Credit sales ÷ Average debtors.

Return on investment = Net profit before interest and tax ÷ Capital employed × 100.

Cash flow statement classifies flows into operating, investing and financing activities; cash from operations is derived from net profit adjusted for non-cash items and working capital changes.

As per AS 3, cash equivalents are short-term, highly liquid investments with original maturity of three months or less.