SPM Accounting (3756) cheat sheet

Accounting equation: Assets = Capital (owner's equity) + Liabilities; total debits always equal total credits.

Assets are resources controlled by the business with expected future economic benefit; liabilities are present obligations to transfer resources.

Capital = Assets − Liabilities; profit increases capital, drawings and losses decrease it.

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

Owner's drawings are not an expense; they reduce capital and are shown as a deduction in the statement of financial position.

Every transaction affects at least two items in the equation and keeps it balanced (dual aspect concept).

Purchase of a non-current asset on credit increases assets and increases liabilities by equal amounts.

Revenue earned on credit increases assets (receivables) and increases capital via profit.

Going concern: financial statements assume the entity continues operating for the foreseeable future, so assets are not valued at break-up value.

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

Prudence: do not overstate assets or income; recognise liabilities and losses as soon as they are probable.

Consistency: the same accounting policies are applied from period to period unless a change is disclosed and justified.

Business entity: the owner and the business are separate accounting entities; personal transactions are excluded from the books.

Historical cost: assets are recorded at their original transaction cost, not current market value.

Materiality: an item is material if omitting or misstating it could influence users' economic decisions.

Realisation: revenue is recognised when the sale is complete and the risks and rewards of ownership have passed.

Invoice (sales/purchase): records credit sales and credit purchases, showing goods, quantities, unit prices, trade discount and VAT.

Credit note: issued by a seller to reduce an amount owed for returned goods or overcharges; posted to returns inwards/outwards.

Debit note: issued by a buyer to request a reduction or to record goods returned to a supplier.

Receipt: evidence of cash received; used to record cash receipts and to support cash book entries.

Petty cash voucher: authorises each small payment and supports entries in the petty cash book.

Bank statement: issued by the bank; used to reconcile the cash book with the bank's records.

Statement of account: a summary sent to a customer listing invoices, credit notes and the balance due.

Cheque counterfoil and paying-in slip: internal evidence of payments and lodgements supporting cash book entries.

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

Sales day book records credit sales only; cash sales go directly to the cash book.

Purchases day book records credit purchases of goods for resale; non-current asset purchases go to the general journal.

General journal is used for opening entries, corrections of errors, non-current asset purchases, depreciation and year-end adjustments.

Posting rule: totals of day books are posted to ledger accounts periodically; individual entries are posted to receivables/payables ledgers.

A journal entry must state the accounts debited and credited, the amounts, and a narration explaining the reason.

Trade discount is deducted on the invoice and never recorded separately; cash discount is recorded in the cash book.

Contra entry: a transaction between the cash book and the bank column (e.g. cash deposited) is recorded on both sides of the cash book.

Ledger accounts are classified as personal (receivables, payables, capital) and impersonal (real accounts for assets, nominal accounts for income and expenses).

Receivables ledger holds individual customer accounts; payables ledger holds individual supplier accounts; the general ledger holds the rest.

Debit the account that receives value; credit the account that gives value.

Assets and expenses normally have debit balances; liabilities, capital and income normally have credit balances.

A debit balance in a payables account indicates an overpayment or a returned goods entry not yet settled.

The receivables ledger control account balance must equal the sum of individual customer balances.

Contra between receivables and payables ledgers: debit the payables account and credit the receivables account for the same amount.

Balancing an account: the difference between the two sides is the balance carried down, entered on the smaller side.

Trial balance lists every ledger balance; total debits must equal total credits if double entry is complete.

Trial balance does not detect errors of principle, omission, commission, original entry, compensating errors or complete reversal.

Errors that do affect the trial balance: single entry, addition errors, transposition, and posting to the wrong side.

Suspense account is opened for the difference in the trial balance and cleared when errors are found.

Opening entries: debit assets, credit liabilities, and credit capital with the net balance.

Closing entries transfer income and expense balances to the profit or loss summary.

A trial balance can still balance when a transaction is posted to the wrong account of the same class (error of commission).

Total of the sales day book is debited to receivables control and credited to sales; the individual amounts are posted to customer accounts.

Cash book bank balance is a mirror of the bank account; debit balance means money at bank, credit (overdraft) means money owed to the bank.

Bank statement balance is from the bank's viewpoint: a credit balance on the statement means the customer has money at the bank.

Items in cash book but not on statement: unpresented cheques and outstanding lodgements.

Items on statement but not in cash book: bank charges, interest, direct debits, standing orders and dishonoured cheques - these require cash book entries.

Adjusted cash book balance = bank statement balance + unpresented cheques − outstanding lodgements (for a positive balance).

Dishonoured cheque: reverse the original receipt by crediting the cash book and debiting the customer's account.

Standing order and direct debit are payments initiated by the customer; bank charges and interest are recorded by the bank without the customer's knowledge.

Petty cash book uses the imprest system: the float is restored to a fixed amount at the end of each period.

Error of omission: a transaction is completely left out of the books; no trial balance difference.

Error of commission: posted to the wrong account of the same class (e.g. wrong customer); trial balance still balances.

Error of principle: posted to the wrong class of account (e.g. revenue expense to a non-current asset); trial balance still balances.

Error of original entry: wrong amount entered in the source document and posted consistently; trial balance still balances.

Compensating errors: two or more errors cancel each other out; trial balance still balances.

Complete reversal of entries: debit and credit swapped; trial balance still balances but the account balances are wrong.

Correction of a one-sided error uses the suspense account; correction of a two-sided error uses the two affected accounts only.

If the suspense account has a debit balance, the original trial balance had excess credits; the suspense account is credited when the error is corrected.

Accrued expense: expense incurred but not yet paid or invoiced; debit expense, credit accruals.

Prepaid expense: expense paid in advance; debit prepayments, credit expense to reduce the current year's charge.

Accrued income: income earned but not yet received; debit accrued income, credit income.

Income received in advance: debit income, credit deferred income; it is a liability in the statement of financial position.

Bad debt written off: debit bad debts expense, credit the customer's account.

Allowance for doubtful debts: created by debiting irrecoverable debts expense and crediting the allowance account.

Increase in allowance is an expense; decrease in allowance is income (reduction of expense) in the profit or loss.

Allowance is calculated as a percentage of remaining receivables after writing off bad debts; it is a credit balance deducted from receivables.

Depreciation is the systematic allocation of the depreciable amount of a non-current asset over its useful life.

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

Reducing balance: Net book value × Rate; the charge falls each year and never reaches zero.

Units of production: (Cost − Residual value) × Units used in period ÷ Total expected units.

Depreciation is an expense in profit or loss; accumulated depreciation is a credit balance deducted from cost in the statement of financial position.

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

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

Depreciation is not a cash flow and does not reduce cash; it is added back in a statement of cash flows.

Statement of profit or loss: Revenue − Cost of sales = Gross profit; Gross profit − Expenses = Profit for the year.

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

Statement of financial position: Non-current assets + Current assets − Current liabilities − Non-current liabilities = Capital.

Capital section: Opening capital + Profit − Drawings = Closing capital (adjusted for capital introduced).

Current assets include inventory, trade receivables, other receivables, prepayments and cash; current liabilities include payables, accruals and bank overdraft.

Gross profit margin = Gross profit ÷ Revenue × 100%; mark-up = Gross profit ÷ Cost of sales × 100%.

Inventory is valued at the lower of cost and net realisable value.

Carriage inwards is added to purchases; carriage outwards is a distribution expense in profit or loss.

Partnership appropriation account distributes profit: interest on capital, partners' salaries, interest on drawings, then residual profit shared in the profit-sharing ratio.

Interest on capital is a debit in the appropriation account and a credit to each partner's current account.

Interest on drawings is a credit in the appropriation account and a debit to the partner's current account.

Partners' salaries are debited in the appropriation account, not in the profit or loss as an expense.

Capital account records permanent capital; current account records drawings, share of profit, interest and salaries.

In the absence of a partnership agreement, profits and losses are shared equally and no interest or salaries are allowed.

Admission of a partner: revaluation of assets and goodwill adjustments are shared among old partners in the old ratio.

Dissolution: realisation account records sale of assets, settlement of liabilities and realisation expenses; the balance is shared in the profit-sharing ratio.

Share capital is credited with the nominal value of shares issued; any excess is credited to share premium.

Statement of financial position: Assets − Liabilities = Equity (share capital + reserves + retained earnings).

Reserves are either capital reserves (share premium, revaluation surplus) or revenue reserves (retained earnings).

Dividends are not an expense; they are deducted from retained earnings and shown in the statement of changes in equity.

Current ratio = Current assets ÷ Current liabilities; quick ratio = (Current assets − Inventory) ÷ Current liabilities.

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

Gearing = Non-current liabilities ÷ (Non-current liabilities + Equity) × 100%.

Return on capital employed = Operating profit ÷ (Total assets − Current liabilities) × 100%.

Interest cover = Operating profit ÷ Finance costs; a lower ratio indicates greater financial risk.