MATSEC IM Accounting cheat sheet

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

Double-entry rule: every transaction has at least two entries, one debit and one credit, and total debits always equal total credits.

Normal balances: assets and expenses are debit balances; liabilities, capital and income are credit balances.

Accrual basis: revenue is recognised when earned and expenses when incurred, not when cash is received or paid.

Depreciation methods: straight-line = (Cost − Residual value) ÷ Useful life; reducing balance = Net book value × fixed percentage.

Inventory valuation: FIFO assigns oldest costs to cost of sales; weighted average recalculates unit cost after each purchase.

Trial balance extracts debit and credit balances; it detects arithmetic errors but not errors of principle, omission, commission or compensating errors.

Year-end adjustments: accruals (expense incurred not yet paid), prepayments (paid in advance), bad debts written off, and allowance for doubtful debts.

Sole trader final accounts: Trading account gives gross profit (Sales − Cost of sales); Profit and loss account gives net profit after expenses.

Cost classification by behaviour: fixed cost is constant in total within the relevant range; variable cost is constant per unit; semi-variable cost has both elements.

High-low method: variable cost per unit = (Highest total cost − Lowest total cost) ÷ (Highest activity − Lowest activity); fixed cost = Total cost − (Variable rate × Activity).

Contribution = Sales revenue − Variable costs. Profit = Contribution − Fixed costs.

Break-even point in units = Fixed costs ÷ Contribution per unit; in revenue = Fixed costs ÷ Contribution-to-sales (C/S) ratio.

Margin of safety = Actual (or budgeted) sales − Break-even sales; expressed in units, revenue or percentage of actual sales.

Overhead absorption rate = Budgeted overhead ÷ Budgeted absorption base (e.g., labour hours, machine hours, direct labour cost).

Under- or over-absorption = Actual overhead incurred − Overhead absorbed; over-absorbed when absorbed exceeds actual.

Marginal costing values inventory at variable production cost only; absorption costing includes a share of fixed production overhead.

Relevant cost for decisions: future, incremental cash flows that differ between alternatives; sunk costs and committed fixed costs are irrelevant.

Books of prime entry: sales day book, purchases day book, sales returns day book, purchases returns day book, cash book, general journal.

Sales day book records credit sales only; cash sales go directly to the cash book and are not entered in the sales day book.

Bank reconciliation: adjusted cash book balance = bank statement balance + unpresented cheques − uncredited deposits ± bank errors.

Petty cash imprest system: the float is restored to a fixed amount by reimbursing exactly the total of vouchers paid.

Control account reconciliation: opening balance + credit sales − cash received − returns − discounts allowed ± errors = closing balance.

Suspense account is opened only when a trial balance fails to agree; its balance is cleared once errors are found and corrected.

Error of principle: transaction recorded in the wrong class of account (e.g., capital expenditure posted to repairs); it does not affect trial balance agreement.

Bank statement credit balance means the bank owes the business (asset); a debit balance on the statement means an overdraft (liability).

Gross profit margin = (Gross profit ÷ Revenue) × 100; measures profitability after cost of sales only.

Net profit margin = (Net profit ÷ Revenue) × 100; reflects the effect of operating expenses.

Return on capital employed (ROCE) = (Operating profit ÷ Capital employed) × 100, where capital employed = total assets − current liabilities.

Current ratio = Current assets ÷ Current liabilities; a ratio below 1 signals potential liquidity difficulty.

Quick (acid-test) ratio = (Current assets − Inventory) ÷ Current liabilities; excludes inventory because it is the least liquid current asset.

Inventory turnover = Cost of sales ÷ Average inventory; receivables collection period = (Trade receivables ÷ Credit sales) × 365 days.

Gearing = (Long-term debt ÷ (Long-term debt + Equity)) × 100; high gearing increases financial risk.

Limitations of ratio analysis: ignores non-financial factors, affected by accounting policies and window dressing, and comparisons require similar industry and size.