MATSEC SEC Accounting cheat sheet

Accounting equation: Assets = Capital + Liabilities; every transaction preserves this equality, so debits always equal credits.

Double entry rule: debit the receiver, credit the giver; for accounts, debit increases assets and expenses, credit increases liabilities, capital and income.

Trial balance extracts debit and credit balances; it proves arithmetical equality only, not freedom from error (omissions, compensating errors and errors of principle survive).

Accrual basis: income and expenses are recognised when earned or incurred, not when cash moves; hence accruals (prepayments) and deferrals (accrued income/expenses) adjustments.

Depreciation methods: straight line = (Cost - Residual value) / Useful life; reducing balance = fixed % applied to net book value each year.

Closing inventory valuation rule: lower of cost and net realisable value, applied item by item; NRV = expected selling price less costs to complete and sell.

Bad debts are written off to the income statement; a provision for doubtful debts is created as a percentage of remaining receivables and shown as an expense adjustment.

Statement of financial position format: non-current assets, current assets, capital and reserves, non-current liabilities, current liabilities; working capital = current assets - current liabilities.

Suspense account holds the difference on an unbalanced trial balance until errors are located and corrected by journal entry.

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

High-low method: variable cost per unit = (Highest total cost - Lowest total cost) / (Highest activity - Lowest activity); fixed cost = total cost at either point minus variable element.

Contribution = Sales - Variable costs; profit = Contribution - Fixed costs; break-even units = Fixed costs / Contribution per unit.

Break-even sales value = Fixed costs / C/S ratio, where C/S ratio = Contribution / Sales.

Margin of safety = (Actual or budgeted sales - Break-even sales) / Actual sales, expressed as a percentage or in units.

Absorption costing: overhead absorption rate = Budgeted overhead / Budgeted basis (labour hours, machine hours); under/over absorption = Actual overhead - Absorbed overhead.

Marginal costing values inventory at variable cost only; absorption costing includes fixed production overhead, so profit differs by the fixed overhead carried in inventory change.

Process costing: normal loss is valued at scrap value only; abnormal loss or gain is valued at full cost per good unit and written off to the income statement.

Relevant cost for decisions: future, incremental cash flows only; sunk costs and apportioned fixed overheads are excluded, opportunity cost is included.

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

Sales and purchases are recorded from invoices into day books, then posted in total to the nominal ledger and individually to the receivables or payables ledger (control accounts).

Control account reconciliation: balance per control account adjusted for errors; balance per list of ledger balances adjusted for omissions and errors; the two adjusted figures must agree.

Bank reconciliation: adjusted cash book balance (for unrecorded bank charges, interest, standing orders, dishonoured cheques) must equal the bank statement balance adjusted for unpresented cheques and uncredited deposits.

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

Bank overdraft appears as a current liability; a credit balance in the cash book means an overdraft, so it is a debit balance on the bank statement.

Internal control components: segregation of duties, authorisation, physical safeguards, reconciliation, rotation of staff and documentation; no single person should control a transaction end to end.

Errors not revealed by trial balance: error of omission, commission, principle, original entry, reversal of entries and compensating errors; only one-sided and arithmetical errors affect the trial balance.

Journal entries correct errors: reverse the incorrect entry, then record the correct entry; the corresponding entry for a trial balance difference goes to the suspense account.

Profitability: gross profit margin = Gross profit / Revenue x 100; net profit margin = Net profit / Revenue x 100; mark-up = Gross profit / Cost of sales x 100.

Liquidity: current ratio = Current assets / Current liabilities (about 2:1 often acceptable); quick ratio = (Current assets - Inventory) / Current liabilities (about 1:1).

Efficiency: inventory turnover = Cost of sales / Average inventory; receivables collection period = Receivables / Credit sales x 365; payables payment period = Payables / Credit purchases x 365.

Gearing = Non-current liabilities / (Non-current liabilities + Equity) x 100, or debt/equity; high gearing means greater financial risk and fixed interest burden.

Return on capital employed = Operating profit / (Total assets - Current liabilities) x 100; it links profitability and asset efficiency.

Limitations of ratio analysis: historical cost figures, different accounting policies, inflation, seasonal factors and absence of a comparable benchmark.

Window dressing and overtrading: a business may improve year-end ratios artificially or expand sales faster than working capital can support.

Cash flow vs profit: profit is an accrual measure; a profitable business can fail through poor liquidity, so cash flow statements and cash budgets are analysed alongside ratios.