Financial Accounting Technician Level 1 cheat sheet

Accounting equation: Assets = Liabilities + Capital (owner's equity). Every transaction preserves this equality.

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

Assets are present economic resources controlled by the entity from past events; liabilities are present obligations to transfer resources.

Capital introduced increases equity; drawings decrease equity and are not an expense.

Revenue increases equity; expenses decrease equity. Profit = Revenue − Expenses for the period.

Dual effect principle: each transaction affects at least two items, keeping total debits equal to total credits.

Current assets are expected to be realised within 12 months or the normal operating cycle; non-current assets are held for continuing use.

Cost convention: assets are initially recorded at historical cost, then adjusted for depreciation, impairment or revaluation.

DEAD CLIC: Debits increase Expenses, Assets, Drawings; Credits increase Liabilities, Income, Capital.

Journal format: date, accounts debited and credited, narrative; total debits must equal total credits.

Purchase of goods on credit: debit Purchases (or Inventory), credit Payables.

Sale of goods on credit: debit Receivables, credit Sales; the cost entry is debit Cost of Sales, credit Inventory.

Cash sale: debit Cash/Bank, credit Sales. Cash purchase: debit Purchases, credit Cash/Bank.

Owner introduces capital by cheque: debit Bank, credit Capital. Owner withdraws cash: debit Drawings, credit Cash.

Payment to a credit supplier: debit Payables, credit Bank. Receipt from a credit customer: debit Bank, credit Receivables.

Contra entry between ledger accounts of the same person: debit Payables, credit Receivables.

Books of prime entry post to ledger accounts; the trial balance lists every ledger balance and must show equal debit and credit totals.

Errors not affecting trial balance agreement: error of omission, error of commission, error of principle, error of original entry, complete reversal, compensating errors.

Errors affecting trial balance agreement: single entry, addition error in one ledger, transposition of digits in one account, posting to wrong side.

Suspense account holds the difference until the error is found; it is cleared by correction entries.

Correction of principle (e.g. vehicle repairs debited to Motor Vehicles): debit Repairs, credit Motor Vehicles.

Correction of omission: enter the original double entry in full.

Correction of commission (wrong personal account, right class): debit correct account, credit wrong account.

Correction of original entry: reverse the wrong amount and post the correct amount to both accounts.

Bank statement balance is reconciled to the cash book balance by adjusting for unpresented cheques, uncredited lodgements, bank charges, interest, direct debits and standing orders.

Adjusted cash book balance = cash book balance ± items appearing on the statement but not yet in the cash book.

Statement balance + uncredited lodgements − unpresented cheques = adjusted cash book balance (for a positive bank balance).

Receivables control account: opening balance + credit sales − receipts − discounts allowed − returns inwards − bad debts = closing balance.

Payables control account: opening balance + credit purchases − payments − discounts received − returns outwards = closing balance.

Control account balance must equal the total of the individual ledger balances; differences arise from errors or omissions.

Only credit transactions enter control accounts; cash sales and cash purchases are excluded.

Dishonoured cheques are debited back to the customer's account and added back in the receivables control account.

Sales day book records credit sales only; total is posted to the credit of the Sales account and individually to receivables ledgers.

Purchases day book records credit purchases only; total posted to debit of Purchases, individually to payables ledgers.

Sales returns day book records goods returned by customers (returns inwards); purchases returns day book records returns to suppliers (returns outwards).

Cash book records receipts and payments; the three-column cash book adds discount allowed and discount received columns.

Petty cash book uses the imprest system: imprest amount − total payments = cash remaining; reimbursement restores the imprest.

Source documents: invoice (credit sale/purchase), credit note (returns), debit note, receipt, remittance advice, petty cash voucher, bank statement.

General journal records non-regular entries: opening entries, corrections, adjustments, purchase or sale of non-current assets on credit.

A credit note issued by a supplier reduces the amount owed by the customer; it is recorded in the returns outwards book of the buyer.

Accruals concept: revenue and expenses are recognised in the period they are earned or incurred, not when cash moves.

Accrued expense (expense owing): debit Expense, credit Accruals; it increases the expense and creates a current liability.

Prepaid expense: debit Prepayment, credit Expense; it reduces the expense and creates a current asset.

Accrued income: debit Accrued income (current asset), credit Income. Income received in advance: debit Income, credit Deferred income (liability).

Closing expense charged to profit or loss = amount paid − opening prepayment + opening accrual + closing accrual − closing prepayment.

Closing income recognised = amount received − opening accrued income + opening deferred income + closing accrued income − closing deferred income.

Depreciation, bad debts and inventory adjustments are adjusting entries made at period end before statements are prepared.

Reversing entries are optional; if used, an accrued expense is reversed on the first day of the next period: debit Accruals, credit Expense.

Straight-line depreciation = (Cost − Residual value) ÷ Useful life; the same charge each year.

Reducing balance depreciation = Carrying amount at start of year × rate; the charge falls each year.

Carrying amount (net book value) = Cost − Accumulated depreciation.

Depreciation charge: debit Depreciation expense, credit Accumulated depreciation (a contra-asset account).

Disposal: debit Disposal account with accumulated depreciation and credit asset account with cost; record sale proceeds; balance is profit or loss on disposal.

Profit on disposal is credited to income; loss on disposal is debited to expenses in the statement of profit or loss.

Capital expenditure is added to the asset cost; revenue expenditure (repairs, maintenance) is charged to profit or loss.

Depreciation is an allocation of cost, not a valuation or a fund set aside for replacement.

IAS 2: inventory is measured at the lower of cost and net realisable value (NRV).

NRV = estimated selling price − estimated costs of completion − estimated costs to sell.

Cost of inventory includes purchase price, import duties, transport and conversion costs; excludes abnormal waste and selling costs.

FIFO assumes the earliest units are sold first; weighted average cost recalculates an average after each purchase.

Cost of sales = Opening inventory + Purchases + Carriage inwards − Returns outwards − Closing inventory.

Gross profit = Revenue − Cost of sales.

Inventory write-down to NRV: debit Cost of sales (or inventory write-down expense), credit Inventory.

Carriage outwards is a selling expense, not part of inventory cost.

Bad debt written off: debit Bad debts expense, credit Receivables.

Bad debt recovered: debit Receivables, credit Bad debts recovered; then debit Bank, credit Receivables.

Allowance for doubtful debts is a contra-asset reducing receivables; it is an estimate, not a write-off of a specific debt.

Increase in allowance: debit Irrecoverable debts expense, credit Allowance. Decrease: debit Allowance, credit Irrecoverable debts expense.

New allowance = closing receivables × estimated percentage; the charge is the movement in the allowance, not the closing balance.

Discount allowed is a selling expense; discount received is income. Both are recorded in the cash book.

Receivables ledger holds individual customer accounts; the receivables control account holds the total.

A credit customer's balance is shown as a current asset; a debit balance on a supplier's account is presented within receivables.

Statement of profit or loss: Revenue − Cost of sales = Gross profit; Gross profit − Expenses = Net profit.

Statement of financial position: Assets = Capital + Liabilities, presented as non-current and current sections.

Closing capital = Opening capital + Capital introduced + Net profit − Drawings.

Drawings are deducted in the capital section of the statement of financial position, not in the profit calculation.

Cost of sales = Opening inventory + Purchases − Closing inventory (adjusted for carriage inwards and returns outwards).

Net profit appears in both statements: in the statement of profit or loss and added to capital in the statement of financial position.

Accruals and prepayments appear in both statements: as adjustments to expenses and as current liabilities or current assets.

Gross profit margin = Gross profit ÷ Revenue × 100%; net profit margin = Net profit ÷ Revenue × 100%.

Statement of profit or loss: Revenue − Cost of sales = Gross profit; Gross profit − Expenses = Net profit.

Statement of financial position: Assets = Capital + Liabilities, presented as non-current and current sections.

Closing capital = Opening capital + Capital introduced + Net profit − Drawings.

Drawings are deducted in the capital section of the statement of financial position, not in the profit calculation.

Cost of sales = Opening inventory + Purchases − Closing inventory (adjusted for carriage inwards and returns outwards).

Net profit appears in both statements: in the statement of profit or loss and added to capital in the statement of financial position.

Accruals and prepayments appear in both statements: as adjustments to expenses and as current liabilities or current assets.

Gross profit margin = Gross profit ÷ Revenue × 100%; net profit margin = Net profit ÷ Revenue × 100%.