LGCSE Accounting (0187) cheat sheet

Accounting equation: Assets = Capital + Liabilities; can be rearranged as Capital = Assets − Liabilities.

Capital is the owner's claim on the business; it increases with profit and capital introduced, decreases with drawings and losses.

Drawings are withdrawals by the owner for personal use; they reduce capital and are not an expense.

Assets are resources controlled by the business (e.g., cash, inventory, equipment); liabilities are present obligations (e.g., loans, payables).

Double-entry rule: every transaction affects at least two accounts; total debits must equal total credits.

DEAD CLIC: Debit Expenses, Assets, Drawings; Credit Liabilities, Income, Capital.

Profit = Total revenue − Total expenses; it belongs to the owner and increases capital.

The trial balance lists account balances to check arithmetical accuracy; it does not prove absence of errors.

Source documents: invoice (credit sale/purchase), credit note (returns), debit note (request for credit note), receipt (cash received), cheque counterfoil (cash paid), petty cash voucher.

Books of prime entry: sales day book (credit sales), purchases day book (credit purchases), sales returns day book, purchases returns day book, cash book, petty cash book, general journal.

Cash book is both a book of prime entry and a ledger account; it records cash and bank transactions.

Petty cash book uses the imprest system: a fixed float is reimbursed periodically for expenses paid.

Ledger accounts are classified as personal (debtors, creditors), real (assets), and nominal (expenses, income).

Posting from day books: sales day book totals are debited to trade receivables and credited to sales; purchases day book totals are debited to purchases and credited to trade payables.

Journal entries are used for non-regular transactions (e.g., opening entries, correction of errors, purchase of fixed assets on credit).

Bank reconciliation: adjusted cash book balance is compared with bank statement; items include unpresented cheques, uncredited deposits, bank charges, standing orders, and dishonoured cheques.

Trial balance errors that do not affect agreement: omission, commission, principle, original entry, reversal, compensating errors.

Errors that do affect trial balance agreement: single entry, addition error, transposition, incorrect account balance.

Suspense account is opened when trial balance does not agree; its balance is corrected when errors are found.

Bank reconciliation: balance per bank statement + deposits not yet credited − unpresented cheques ± bank errors = adjusted bank balance; compare with adjusted cash book balance.

Control accounts: sales ledger control account (total receivables) and purchases ledger control account (total payables) verify subsidiary ledgers.

Sales ledger control account: debit opening balance, credit sales, dishonoured cheques, interest charged; credit cash received, sales returns, bad debts, discount allowed.

Purchases ledger control account: credit opening balance, credit purchases, interest charged; debit cash paid, purchases returns, discount received.

A statement of affairs lists assets and liabilities to estimate capital when records are incomplete.

Income statement (trading and profit and loss account): Sales − Cost of sales = Gross profit; Gross profit + Other income − Expenses = Net profit.

Cost of sales = Opening inventory + Purchases − Purchase returns + Carriage inwards − Closing inventory.

Statement of financial position: Assets = Capital + Liabilities; capital section shows opening capital + net profit + capital introduced − drawings.

Accruals: expenses incurred but not yet paid are added to expenses and shown as current liabilities.

Prepayments: expenses paid in advance are deducted from expenses and shown as current assets.

Depreciation is an expense (e.g., straight-line: (Cost − Residual value) / Useful life; reducing balance: Net book value × rate).

Bad debts are written off as an expense; provision for doubtful debts is created/adjusted as an expense in the income statement.

Inventory valuation: lower of cost and net realisable value (NRV = estimated selling price − costs to complete and sell).

Partnership appropriation account: Net profit + Interest on drawings − Interest on capital − Partners' salaries = Residual profit shared in profit-sharing ratio.

Partners' current accounts record share of profit, interest on capital, salaries (credit) and drawings, interest on drawings (debit).

Partnership statement of financial position: Capital accounts (fixed) and current accounts shown separately; loans from partners are liabilities.

Limited company equity: Share capital (ordinary and preference) + Share premium + Retained earnings (reserves).

Company income statement: Profit before tax − Income tax expense = Profit for the year; appropriations include dividends and transfers to reserves.

Statement of changes in equity: Opening equity + Profit for the year + Share issue proceeds − Dividends = Closing equity.

Preference dividends are usually fixed percentage of nominal value; ordinary dividends depend on profits and are declared by directors.

Company statement of financial position: Non-current assets + Current assets − Current liabilities − Non-current liabilities = Equity.

Gross profit margin = (Gross profit / Revenue) × 100%; Net profit margin = (Net profit / Revenue) × 100%.

Return on capital employed (ROCE) = (Profit before interest and tax / Capital employed) × 100%; Capital employed = Total assets − Current liabilities.

Current ratio = Current assets / Current liabilities; Quick ratio (acid test) = (Current assets − Inventory) / Current liabilities.

Inventory turnover = Cost of sales / Average inventory (times); Inventory turnover period = (Average inventory / Cost of sales) × 365 days.

Trade receivables collection period = (Trade receivables / Credit sales) × 365 days; Trade payables payment period = (Trade payables / Credit purchases) × 365 days.

Earnings per share (EPS) = Profit for the year attributable to ordinary shareholders / Number of ordinary shares.

Dividend per share = Total ordinary dividends / Number of ordinary shares; Dividend cover = Profit for the year / Ordinary dividends.

Limitations of ratio analysis: based on historical cost, ignores qualitative factors, affected by accounting policies, and comparisons require similar businesses.

Going concern: financial statements assume the business will continue in operation for the foreseeable future.

Accruals (matching): revenue and expenses are recognised when earned/incurred, not when cash is received/paid.

Consistency: same accounting methods and policies applied from period to period.

Prudence: revenues and assets are not overstated; expenses and liabilities are not understated; inventory valued at lower of cost and NRV.

Business entity: the business is separate from its owner; owner's personal transactions are not recorded in business books.

Materiality: items significant enough to influence decisions are disclosed separately; immaterial items may be aggregated.

Realisation: revenue is recognised when goods/services are delivered and title passes, not when order is received.

Internal controls: segregation of duties, authorisation, physical safeguards, bank reconciliation, and control accounts help prevent and detect errors and fraud.