UPMSP Vocational Accountancy & Auditing cheat sheet

Accounting equation: Assets = Liabilities + Capital; every transaction keeps it balanced.

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

Journal entry format: date, particulars with Dr./Cr. narration, L.F., debit amount, credit amount; narration begins 'Being...'.

Modern classification: assets and expenses are debited on increase; liabilities, capital and income are credited on increase.

Accrual concept records income when earned and expense when incurred, regardless of cash movement.

Going concern assumes the entity continues in operation long enough to realise assets and settle liabilities.

Money measurement records only transactions expressible in monetary units; qualitative items are excluded.

Dual aspect: each transaction has two effects of equal amount, forming the basis of double-entry bookkeeping.

Ledger posting: debit the account named in the journal's credit column and credit the account named in the debit column.

Balancing rule: total the larger side, insert the difference on the shorter side as 'Balance c/d', then bring it forward as 'Balance b/d' on the opposite side.

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

A trial balance does not detect errors of principle, compensating errors, complete omission of a transaction, or wrong entry in both accounts.

Suspense Account absorbs the difference in a trial balance and is cleared when errors are located and rectified.

Errors of principle: capital expenditure recorded as revenue (or the reverse), e.g. machinery purchase debited to Purchases.

Closing entries transfer nominal accounts to Trading and Profit & Loss Account; real and personal accounts are carried forward.

Contra entries occur in the same account set (cash withdrawn for office use): debit Cash, credit Bank, no net trial-balance effect.

Subsidiary books: Cash Book, Purchases Book, Sales Book, Purchases Return, Sales Return, Bills Receivable, Bills Payable and Journal Proper.

Cash Book with cash and bank columns is both a journal and a ledger; contra entries appear in both columns and are marked 'C'.

Purchases Book records only credit purchases of goods; cash purchases, asset purchases and returns go elsewhere.

Bank Reconciliation Statement starts from one balance and reconciles to the other by adding or deducting timing and error items.

Cheques issued but not presented: add to cash book balance to reach pass book balance. Cheques deposited but not cleared: deduct.

Bank charges, interest and direct collections appear in the pass book only; adjust the cash book before reconciling.

Overdraft is a credit balance in the cash book; treat the reconciliation in the reverse direction from a positive balance.

BRS format: balance as per cash book, add items credited by bank only, less items debited by bank only, equals balance as per pass book.

Straight line: Depreciation = (Cost − Scrap Value) / Useful Life; equal charge each year on original cost.

Written down value: Depreciation = Book Value at start of year × Rate; charge declines each year.

Depreciation is a non-cash expense charged to Profit & Loss Account; accumulated depreciation is a contra-asset.

Asset account method debits depreciation to the asset account; provision method credits a separate Provision for Depreciation account.

Profit or loss on sale = Sale proceeds − Book value on date of sale (cost less depreciation to date).

Depreciation for part of the year is prorated by months; commonly charged from date of purchase to year end.

Methods of providing depreciation include fixed instalment, diminishing balance, annuity and sinking fund.

Change in depreciation method is applied prospectively; the unabsorbed or excess amount is adjusted in the year of change.

Trading Account computes Gross Profit = Net Sales − Cost of Goods Sold; COGS = Opening Stock + Purchases + Direct Expenses − Closing Stock.

Profit & Loss Account derives Net Profit = Gross Profit + Other Income − Indirect Expenses.

Balance Sheet is a statement of assets, liabilities and capital on a date, not an account with debit and credit totals.

Closing entries: debit Trading A/c and credit Stock, Purchases, Sales Return, Wages; credit Trading A/c and debit Sales, Closing Stock.

Adjustments require double effect: outstanding expense debited to expense and shown as a liability; prepaid expense deducted from expense and shown as an asset.

Closing stock is valued at cost or net realisable value, whichever is lower, and appears in Trading Account credit and Balance Sheet asset.

Drawings are deducted from capital; net loss is also deducted from capital in the Balance Sheet.

Bad debts recovered, interest on drawings and commission received are credited to Profit & Loss Account.

Profit-sharing ratio applies after charging interest on capital, interest on drawings, salary and commission to partners.

Interest on drawings is income to the firm, credited to Profit & Loss Appropriation Account and debited to the partner's capital or current account.

In the absence of a deed, profits and losses are shared equally and no interest on capital or salary is allowed.

Goodwill on admission is credited to sacrificing partners in their sacrifice ratio = old ratio − new ratio.

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

Gaining ratio on retirement = new ratio − old ratio; the retiring partner's share of goodwill is compensated by gaining partners.

On dissolution, Realisation Account records sale of assets and payment of liabilities; the balance is profit or loss shared by partners.

Partner's Loan Account arises when a partner lends money; interest is payable even without a deed at the agreed or reasonable rate.

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

Issue of shares at premium: Securities Premium credited and shown under Equity and Liabilities until utilised per law.

Forfeiture of shares: debit Share Capital with called-up amount, credit Share Forfeiture with amount received; reissue discount may be charged to Forfeiture.

Debentures are long-term borrowings; interest is a charge against profit, unlike dividend on shares.

Issue of debentures at discount: Discount on Issue of Debentures is an asset written off over the debenture life.

Redemption of debentures may be funded by Debenture Redemption Reserve and specified investments as required by company law.

Profit prior to incorporation is a capital profit credited to Capital Reserve; post-incorporation profit is distributable.

Dividend is declared out of current or accumulated profits; it is not an expense in the Statement of Profit and Loss.

Prime Cost = Direct Material + Direct Labour + Direct Expenses.

Works Cost = Prime Cost + Factory Overheads ± Work-in-Progress adjustment.

Cost of Goods Sold = Opening Finished Stock + Cost of Production − Closing Finished Stock.

Cost of Sales = Cost of Goods Sold + Administration and Selling & Distribution Overheads.

Profit = Sales − Cost of Sales; Contribution = Sales − Variable Cost; P/V Ratio = Contribution / Sales × 100.

Break-even point in units = Fixed Cost / Contribution per unit; in value = Fixed Cost / P/V Ratio.

Margin of safety = Actual Sales − Break-even Sales; Margin of Safety Ratio = Margin of Safety / Actual Sales.

Cost classification: by nature (material, labour, expense), by behaviour (fixed, variable, semi-variable) and by function (production, selling).

Audit objectives: primary objective is expression of opinion on true and fair view; secondary objectives include detection of errors and fraud.

Errors: clerical, error of principle, error of omission, error of commission and compensating errors.

Fraud types: misappropriation of cash, misappropriation of goods and manipulation of accounts.

Types of audit: statutory, internal, external, government, cost, tax, management and continuous audit.

Continuous audit suits large businesses with frequent transactions but risks familiarity and alteration of records.

Annual or final audit is conducted at year end; interim audit is conducted between two annual audits.

Independence of the auditor is essential; an auditor cannot be an officer or employee of the audited entity.

Audit evidence is gathered through inspection, observation, inquiry, confirmation, recalculation and analytical procedures.

Audit evidence is more reliable when obtained from independent external sources than from internal records.

Documentary evidence is more reliable than oral representation; the auditor's own inspection is more reliable than indirect evidence.

Vouching verifies the authenticity and accuracy of entries in books by examining supporting documents.

Verification confirms existence, ownership, valuation and presentation of assets and liabilities on the balance sheet date.

Working papers record the audit plan, procedures performed, evidence obtained and conclusions; they are the auditor's property.

Permanent audit file holds continuing information (deeds, contracts, constitution); current file holds the year's working papers.

External confirmation of receivables and bank balances is written evidence from a third party and is strong evidence.

Audit sampling selects less than 100% of items; risk of sampling and non-sampling risk should be assessed.

Internal control comprises the control environment, risk assessment, control activities, information and communication, and monitoring.

Internal check divides work so that no single person records a transaction completely from start to finish.

Internal check examples: one person receives cash, another records it, a third reconciles the bank statement.

Internal audit is an independent appraisal function within the organisation reporting on the adequacy of internal controls.

Internal audit is conducted by employees; the statutory auditor is an external independent professional.

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

Segregation of duties between custody of assets, authorisation and record keeping reduces the risk of fraud.

The auditor may rely on internal controls after testing them; if controls are weak, substantive testing is increased.

Audit report expresses an opinion on whether financial statements give a true and fair view in accordance with the applicable framework.

Unmodified (clean) opinion is issued when statements are free from material misstatement.

Qualified opinion is issued for material but not pervasive misstatements; disclaimer where the effect is material and pervasive.

Adverse opinion is issued where misstatements are material and pervasive.

Key components: title, addressee, auditor's opinion, basis for opinion, responsibilities of management and auditor, signature and date.

Emphasis of Matter and Other Matter paragraphs do not modify the opinion.

Going concern, litigation and subsequent events are considered for disclosure and impact on the opinion.

An auditor must date the report not earlier than the date on which the financial statements are approved.