NSSCO Accounting (6143) cheat sheet

Accounting equation: Assets = Capital + Liabilities. Every transaction preserves this equality; profit increases capital, drawings and losses reduce it.

Capital = Assets − Liabilities (owner's equity / net worth). Rearranged forms solve for any missing figure in a transaction table.

Double entry rule: every transaction has equal debits and credits. Debit = increase in asset or expense, decrease in liability, capital or income.

Business entity concept: the owner's private transactions are excluded from the business records; drawings record cash/goods taken by the owner.

Going concern: accounts are prepared assuming the entity continues in operation, so assets are not valued at break-up value.

Accruals (matching) concept: revenue and expenses are recognised when earned/incurred, not when cash moves.

Prudence/conservatism: choose the treatment that avoids overstating assets or profit; recognise losses, not unrealised gains.

Consistency and comparability: apply the same accounting policies each period; disclose any change and its effect.

Source document to book: invoice → purchases/sales day book; credit note → returns books; cheque counterfoil/pay-in slip → cash book; petty cash voucher → petty cash book.

Sales day book and purchases day book record credit transactions only; cash sales/purchases go directly to the cash book.

Posting rule: day book totals go to the general ledger control accounts; individual entries go to the personal (receivable/payable) ledgers.

Returns inwards (sales returns) are debited to the returns inwards account; returns outwards (purchases returns) are credited to the returns outwards account.

Journal entries are used for opening entries, corrections of errors, purchase/sale of fixed assets on credit, and adjustments not covered by other books.

Trial balance: list debit and credit balances; total debits must equal total credits. It proves arithmetical accuracy only - not the absence of errors.

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

Trade discount is deducted on the invoice and never recorded; cash discount is recorded (discount allowed = expense, discount received = income).

Updated cash book balance = bank statement balance adjusted for items on the statement not yet in the cash book (bank charges, interest, standing orders, direct credits, dishonoured cheques).

Reconciliation statement: adjusted cash book balance + unpresented cheques − uncredited deposits = bank statement balance (or present as bank statement balance ± timing differences).

Unpresented (outstanding) cheques: issued and entered in cash book but not yet debited by the bank - deduct in the reconciliation.

Uncredited (outstanding) lodgements: paid in and entered in cash book but not yet credited by the bank - add in the reconciliation.

A credit balance in the cash book column means an overdraft; it appears as a debit balance on the bank statement.

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

Petty cash analysis columns classify expenses (postage, travelling, stationery, cleaning); the totals are posted to the respective expense accounts.

Contra entry: cash withdrawn from bank for office use is credited to bank and debited to cash in the cash book.

Error of principle: a transaction recorded in the wrong class of account (e.g. vehicle repairs debited to motor vehicles). Correction uses a journal, not the suspense account.

Error of omission: a transaction entirely left out - no suspense entry arises; correct by recording the full double entry.

Error of commission: right class of account, wrong person's account - correct by transferring between the two personal accounts.

Error of original entry: wrong amount entered in both accounts - correct by entering the difference in both accounts.

Compensating errors cancel in the trial balance and leave no suspense balance; they must be found by checking, not by the suspense account.

Complete reversal of entries: debit and credit swapped - correct by doubling the amount and posting it the correct way round.

Suspense account is opened only when the trial balance fails to agree; its balance equals the difference between the two trial balance totals.

After all corrections, the suspense account must close to nil; any remaining balance indicates further undetected errors.

Trading account: Sales − Cost of goods sold = Gross profit, where COGS = Opening inventory + Purchases + Carriage inwards − Returns outwards − Closing inventory.

Net profit = Gross profit + Other income − all expenses (including depreciation, bad debts, discount allowed).

Goods taken by the owner for own use: debit Drawings, credit Purchases (or credit an appropriate account); they are not sales.

Carriage inwards is added to purchases; carriage outwards is a selling expense in the profit and loss account.

Balance sheet format: Non-current assets + current assets − current liabilities − non-current liabilities = Capital (plus profit, less drawings).

Working capital = Current assets − Current liabilities; it measures short-term liquidity.

Capital account in the balance sheet: opening capital + net profit + additional capital introduced − drawings = closing capital.

Net profit is transferred to the capital account; the profit and loss account itself closes to nil at year end.

Straight-line depreciation = (Cost − Residual value) ÷ Useful life; reducing-balance = Net book value × fixed percentage.

Depreciation is an expense in the profit and loss account; accumulated depreciation is a credit balance deducted from asset cost in the balance sheet.

Accrued expense: expense incurred but unpaid - debit expense, credit accruals (current liability).

Prepaid expense: paid in advance - debit prepayments (current asset), credit expense.

Accrued income: income earned but not received - debit accrued income (current asset), credit income.

Bad debt written off: debit bad debts expense, credit the customer's account. Bad debts recovered: debit cash, credit bad debts recovered (income).

Provision for doubtful debts = given percentage × trade receivables (after bad debts written off); increase is an expense, decrease is income.

Inventory valuation: lower of cost and net realisable value, applied item by item; closing inventory is deducted in the trading account and shown as a current asset.

Partnership appropriation account: Net profit − interest on capital − partners' salaries − interest on drawings = divisible profit shared in the agreed profit-sharing ratio.

Interest on drawings is income to the partnership (credited to appropriation); interest on capital and salaries are appropriations, not expenses.

In the absence of an agreement, the Partnership Act applies: profits shared equally, no salaries, no interest on capital or drawings.

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

Goodwill on admission of a partner: raise goodwill in old ratio, write off in new ratio; the incoming partner pays for the share acquired.

Non-profit organisations use a receipts and payments account (cash basis), an income and expenditure account (accruals basis) and a balance sheet.

Subscription in arrears = current asset (receivable); subscription in advance = current liability; both adjust the subscription income.

Accumulated fund in a non-profit organisation is equivalent to capital: opening fund + surplus (or − deficit) + legacies/capital receipts − expenses charged to fund.

Issued share capital is recorded at nominal (par) value; any excess received is share premium (a capital reserve).

Ordinary shares carry voting rights and variable dividends; preference shares carry a fixed dividend rate and usually no vote.

Dividends are not an expense; they are an appropriation of retained earnings, recorded when declared.

Statement of financial position: Non-current assets + current assets − current liabilities − non-current liabilities = Share capital + reserves + retained earnings.

Retained earnings = opening retained earnings + profit for the year − dividends paid/declared.

Gross profit margin = Gross profit ÷ Revenue × 100%; net profit margin = Profit for the year ÷ Revenue × 100%.

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

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

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

Manufacturing account: Prime cost = Direct materials + Direct labour + Direct expenses (royalties, hire of plant).

Direct materials consumed = Opening raw materials + Purchases of raw materials + Carriage inwards − Returns outwards − Closing raw materials.

Production cost = Prime cost + Factory overheads (indirect materials, factory rent, depreciation of plant, factory supervisor's wages).

Cost of goods manufactured = Production cost + Opening work in progress − Closing work in progress.

Manufacturing profit (where goods are transferred at cost plus mark-up) = Transfer price − Cost of goods manufactured; it appears in the manufacturing account.

In the trading account, opening finished goods + cost of goods manufactured − closing finished goods = Cost of goods sold.

Fixed costs are constant in total but fall per unit as output rises; variable costs vary with output but are constant per unit.

Contribution = Sales − Variable costs; break-even units = Fixed costs ÷ Contribution per unit.

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