ICSAN Intro Accounting cheat sheet

Accounting is the process of identifying, measuring, recording, classifying, summarising and communicating economic information to permit informed judgements and decisions by users.

Financial accounting reports to external users (owners, lenders, tax authorities) and is governed by standards; management accounting reports internally and is unconstrained by format.

Bookkeeping records transactions; accounting adds classification, summarisation, interpretation and reporting on top of that record.

Users of accounts include investors (profitability, risk), lenders (liquidity, gearing), employees (job security), government (tax), suppliers (creditworthiness) and the public (social impact).

The accounting equation: Assets = Capital + Liabilities; equivalently Capital = Assets − Liabilities (net assets).

Capital introduced by the owner increases capital; drawings and losses decrease it; profit increases it.

Profit = Revenue − Expenses for a period; it is a flow measure, whereas capital is a point-in-time balance.

Stewardship (accountability for resources entrusted) and decision usefulness are the two classical purposes of financial reporting.

Not-for-profit entities still apply double entry; the difference is that any surplus is retained rather than distributed to owners.

Going concern: accounts are prepared assuming the entity will continue in operation for the foreseeable future; if not, break-up values apply.

Accruals (matching): revenue and costs are recognised when earned or incurred, not when cash moves; this drives accruals and prepayments.

Business entity: the owner's private transactions are excluded from the entity's accounts; drawings are a capital transaction, not an expense.

Prudence: exercise caution under uncertainty - recognise liabilities and losses on reasonable expectation, but not unrealised gains.

Consistency: apply the same accounting policies each period; a change must be disclosed with its effect.

Materiality: an item is material if omitting or misstating it could influence users' decisions; immaterial items need not follow strict treatment.

Historical cost convention records assets at acquisition cost; the alternative is fair value or revaluation.

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

Regulatory hierarchy: legislation (e.g. Companies Acts) overrides accounting standards, which override local conceptual guidance; IFRS/IAS are issued by the IASB.

Every transaction has two equal effects: total debits = total credits; the duality convention underpins the whole system.

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

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.

Only credit transactions enter the sales and purchases day books; cash sales and cash purchases go directly to the cash book.

The journal records non-routine entries: opening entries, corrections of errors, asset disposals, year-end adjustments.

Source documents map to books: invoice → day book; credit note → returns day book; cheque stub/receipt → cash book.

Posting is periodic: day book totals are posted to ledger control accounts; individual items are posted to personal ledgers.

A contra entry in the cash book (cash withdrawn for office use) has both a debit and a credit within the cash book itself.

Trade discount is deducted on the invoice and never recorded; cash (settlement) discount is recorded as a discount allowed or received.

Ledger accounts are T-accounts: debit side left, credit side right; the balance is the excess of one side and is brought down on the opposite side.

Trial balance lists every ledger balance; total debit balances must equal total credit balances.

Errors that do NOT affect trial balance agreement: error of omission, error of commission, error of principle, compensating errors, original entry error, complete reversal of entries.

Errors that DO affect trial balance agreement: one-sided entry, addition error in a ledger account, posting the same side twice, transposition of digits in one account only.

Error of principle: a capital item wrongly treated as revenue (e.g. machinery repairs capitalised, or a vehicle purchase debited to motor expenses).

Error of commission: right class of account, wrong person or wrong account within the class (e.g. debited A. Bello instead of B. Bello).

Correction of errors is journalised: the journal entry must move the wrong entry out and the correct entry in, keeping debits equal to credits.

Suspense account holds the difference on a trial balance; it is cleared once one-sided errors are found and corrected.

A bank overdraft is a credit balance in the cash book and appears in the trial balance credit column.

Bank statement balance and cash book balance differ because of timing and recording differences; the reconciliation explains the gap.

Items on the bank statement not yet in the cash book: bank charges, interest, standing orders, direct debits, credit transfers, dishonoured cheques - adjust the cash book first.

Items in the cash book not yet on the statement: unpresented cheques and uncredited lodgements (outstanding deposits) - these adjust the statement side.

Adjusted cash book balance = opening cash book balance ± items appearing only on the statement.

Reconciliation: balance per bank statement + lodgements not credited − unpresented cheques ± bank errors = adjusted cash book balance.

A cheque paid in that is dishonoured is reversed in the cash book (debit customer, credit bank) and is not a reconciling item once adjusted.

Sales ledger control account: opening debit balances + credit sales − sales returns − receipts − discounts allowed − bad debts written off ± transfers = closing debit balances.

Purchases ledger control account: opening credit balances + credit purchases − purchase returns − payments − discounts received = closing credit balances.

Control account balances should equal the total of the individual ledger balances; a difference indicates a posting error or an unrecorded item.

Accrued expense (owed at year end): debit expense, credit accruals; it increases the expense and creates a current liability.

Prepaid expense (paid in advance): debit prepayments, credit expense; it reduces the expense and creates a current asset.

Accrued income: debit accrued income (current asset), credit income; prepaid income (received in advance): debit income, credit prepaid income (liability).

Only the expense/income relating to the period enters the income statement; the balance sheet carries the accrual or prepayment forward.

Bad debt written off: debit bad debts expense, credit receivables. If a previously written-off debt is recovered: debit bank, credit bad debts recovered (income).

Allowance for doubtful debts is a provision against receivables: debit irrecoverable debts expense, credit allowance. It is shown as a deduction from receivables.

Increase in allowance = expense; decrease in allowance = income. The allowance is based on a percentage of remaining receivables after write-offs.

Depreciation of a non-current asset is an accrual-type adjustment: debit depreciation expense, credit accumulated depreciation.

Closing inventory adjustment: debit inventory (asset), credit cost of sales; opening inventory is credited to the inventory account and charged to cost of sales.

Income statement structure: Revenue − Cost of sales = Gross profit; Gross profit − Expenses = Net profit.

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

Carriage outwards is a selling/distribution expense, not part of cost of sales.

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

Closing capital = Opening capital + Capital introduced + Net profit − Drawings.

Current assets typically include inventory, trade receivables (net of allowance), prepayments and cash; current liabilities include payables, accruals, bank overdraft and tax.

Gross profit margin = Gross profit / Revenue × 100; Net profit margin = Net profit / Revenue × 100.

Expenses are classified as distribution (selling), administration, and finance costs for presentation purposes.

Drawings are never an expense; they reduce capital and may be in cash, goods or assets taken by the owner.

Capital expenditure acquires or improves a non-current asset; revenue expenditure maintains it and is expensed.

Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life - it is not a valuation of the asset.

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

Reducing balance: Net book value × rate; the charge falls each year and the asset is never fully written off.

Sum-of-digits (accelerated): Depreciation = (Cost − Residual) × Remaining life / Sum of years' digits.

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

NBV = Cost − Accumulated depreciation. Accumulated depreciation is a contra-asset account, not a liability.

Disposal: debit disposal account with accumulated depreciation and with proceeds; the balancing figure is profit (credit) or loss (debit) on disposal.

Profit on disposal = Proceeds − NBV at date of sale; it is reported in the income statement, not as revenue.

Partnership profit is shared per the partnership agreement: interest on capital, salary to partners, interest on drawings, then residual profit in the agreed ratio.

Appropriation account distributes profit; it is not an expense account and does not affect total profit.

Current account records drawings, interest on drawings, salary and share of profit; capital account records capital introduced and interest on capital.

Absence of agreement (default): profits and losses shared equally, no interest on capital, no salaries, no interest on drawings.

Interest on drawings is income to the partnership: debit each partner's current account, credit appropriation account.

Incomplete records: use the accounting equation or a statement of affairs to derive opening and closing capital.

Profit under incomplete records = Closing capital + Drawings − Capital introduced − Opening capital.

Mark-up = Gross profit / Cost of sales; Margin = Gross profit / Revenue. Convert: Mark-up = Margin / (1 − Margin).

Missing figures can be derived from control accounts (credit sales from receivables) or from the cash book (cash sales from banked takings).

Current ratio = Current assets / Current liabilities; a value near 2:1 is a common benchmark, but industry matters.

Quick (acid test) ratio = (Current assets − Inventory) / Current liabilities; a value near 1:1 is often targeted.

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

Receivables collection period = Trade receivables / Credit sales × 365 days.

Payables payment period = Trade payables / Credit purchases × 365 days.

Gearing = Debt (long-term liabilities) / (Debt + Equity) × 100; higher gearing means greater financial risk.

Return on capital employed (ROCE) = Operating profit / Capital employed × 100, where capital employed = Total assets − Current liabilities.

Asset turnover = Revenue / Capital employed; ROCE = Operating margin × Asset turnover (DuPont decomposition).

Limitations of ratio analysis: different accounting policies, historical cost, inflation, seasonal effects, and lack of comparable industry data.

Accounting is the process of identifying, measuring, recording, classifying, summarising and communicating economic information to permit informed judgements and decisions by users.

Financial accounting reports to external users (owners, lenders, tax authorities) and is governed by standards; management accounting reports internally and is unconstrained by format.

Bookkeeping records transactions; accounting adds classification, summarisation, interpretation and reporting on top of that record.

Users of accounts include investors (profitability, risk), lenders (liquidity, gearing), employees (job security), government (tax), suppliers (creditworthiness) and the public (social impact).

The accounting equation: Assets = Capital + Liabilities; equivalently Capital = Assets − Liabilities (net assets).

Capital introduced by the owner increases capital; drawings and losses decrease it; profit increases it.

Profit = Revenue − Expenses for a period; it is a flow measure, whereas capital is a point-in-time balance.

Stewardship (accountability for resources entrusted) and decision usefulness are the two classical purposes of financial reporting.

Not-for-profit entities still apply double entry; the difference is that any surplus is retained rather than distributed to owners.

Going concern: accounts are prepared assuming the entity will continue in operation for the foreseeable future; if not, break-up values apply.

Accruals (matching): revenue and costs are recognised when earned or incurred, not when cash moves; this drives accruals and prepayments.

Business entity: the owner's private transactions are excluded from the entity's accounts; drawings are a capital transaction, not an expense.

Prudence: exercise caution under uncertainty - recognise liabilities and losses on reasonable expectation, but not unrealised gains.

Consistency: apply the same accounting policies each period; a change must be disclosed with its effect.

Materiality: an item is material if omitting or misstating it could influence users' decisions; immaterial items need not follow strict treatment.

Historical cost convention records assets at acquisition cost; the alternative is fair value or revaluation.

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

Regulatory hierarchy: legislation (e.g. Companies Acts) overrides accounting standards, which override local conceptual guidance; IFRS/IAS are issued by the IASB.

Every transaction has two equal effects: total debits = total credits; the duality convention underpins the whole system.

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

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.

Only credit transactions enter the sales and purchases day books; cash sales and cash purchases go directly to the cash book.

The journal records non-routine entries: opening entries, corrections of errors, asset disposals, year-end adjustments.

Source documents map to books: invoice → day book; credit note → returns day book; cheque stub/receipt → cash book.

Posting is periodic: day book totals are posted to ledger control accounts; individual items are posted to personal ledgers.

A contra entry in the cash book (cash withdrawn for office use) has both a debit and a credit within the cash book itself.

Trade discount is deducted on the invoice and never recorded; cash (settlement) discount is recorded as a discount allowed or received.

Ledger accounts are T-accounts: debit side left, credit side right; the balance is the excess of one side and is brought down on the opposite side.

Trial balance lists every ledger balance; total debit balances must equal total credit balances.

Errors that do NOT affect trial balance agreement: error of omission, error of commission, error of principle, compensating errors, original entry error, complete reversal of entries.

Errors that DO affect trial balance agreement: one-sided entry, addition error in a ledger account, posting the same side twice, transposition of digits in one account only.

Error of principle: a capital item wrongly treated as revenue (e.g. machinery repairs capitalised, or a vehicle purchase debited to motor expenses).

Error of commission: right class of account, wrong person or wrong account within the class (e.g. debited A. Bello instead of B. Bello).

Correction of errors is journalised: the journal entry must move the wrong entry out and the correct entry in, keeping debits equal to credits.

Suspense account holds the difference on a trial balance; it is cleared once one-sided errors are found and corrected.

A bank overdraft is a credit balance in the cash book and appears in the trial balance credit column.

Bank statement balance and cash book balance differ because of timing and recording differences; the reconciliation explains the gap.

Items on the bank statement not yet in the cash book: bank charges, interest, standing orders, direct debits, credit transfers, dishonoured cheques - adjust the cash book first.

Items in the cash book not yet on the statement: unpresented cheques and uncredited lodgements (outstanding deposits) - these adjust the statement side.

Adjusted cash book balance = opening cash book balance ± items appearing only on the statement.

Reconciliation: balance per bank statement + lodgements not credited − unpresented cheques ± bank errors = adjusted cash book balance.

A cheque paid in that is dishonoured is reversed in the cash book (debit customer, credit bank) and is not a reconciling item once adjusted.

Sales ledger control account: opening debit balances + credit sales − sales returns − receipts − discounts allowed − bad debts written off ± transfers = closing debit balances.

Purchases ledger control account: opening credit balances + credit purchases − purchase returns − payments − discounts received = closing credit balances.

Control account balances should equal the total of the individual ledger balances; a difference indicates a posting error or an unrecorded item.

Accrued expense (owed at year end): debit expense, credit accruals; it increases the expense and creates a current liability.

Prepaid expense (paid in advance): debit prepayments, credit expense; it reduces the expense and creates a current asset.

Accrued income: debit accrued income (current asset), credit income; prepaid income (received in advance): debit income, credit prepaid income (liability).

Only the expense/income relating to the period enters the income statement; the balance sheet carries the accrual or prepayment forward.

Bad debt written off: debit bad debts expense, credit receivables. If a previously written-off debt is recovered: debit bank, credit bad debts recovered (income).

Allowance for doubtful debts is a provision against receivables: debit irrecoverable debts expense, credit allowance. It is shown as a deduction from receivables.

Increase in allowance = expense; decrease in allowance = income. The allowance is based on a percentage of remaining receivables after write-offs.

Depreciation of a non-current asset is an accrual-type adjustment: debit depreciation expense, credit accumulated depreciation.

Closing inventory adjustment: debit inventory (asset), credit cost of sales; opening inventory is credited to the inventory account and charged to cost of sales.

Income statement structure: Revenue − Cost of sales = Gross profit; Gross profit − Expenses = Net profit.

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

Carriage outwards is a selling/distribution expense, not part of cost of sales.

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

Closing capital = Opening capital + Capital introduced + Net profit − Drawings.

Current assets typically include inventory, trade receivables (net of allowance), prepayments and cash; current liabilities include payables, accruals, bank overdraft and tax.

Gross profit margin = Gross profit / Revenue × 100; Net profit margin = Net profit / Revenue × 100.

Expenses are classified as distribution (selling), administration, and finance costs for presentation purposes.

Drawings are never an expense; they reduce capital and may be in cash, goods or assets taken by the owner.

Capital expenditure acquires or improves a non-current asset; revenue expenditure maintains it and is expensed.

Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life - it is not a valuation of the asset.

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

Reducing balance: Net book value × rate; the charge falls each year and the asset is never fully written off.

Sum-of-digits (accelerated): Depreciation = (Cost − Residual) × Remaining life / Sum of years' digits.

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

NBV = Cost − Accumulated depreciation. Accumulated depreciation is a contra-asset account, not a liability.

Disposal: debit disposal account with accumulated depreciation and with proceeds; the balancing figure is profit (credit) or loss (debit) on disposal.

Profit on disposal = Proceeds − NBV at date of sale; it is reported in the income statement, not as revenue.

Partnership profit is shared per the partnership agreement: interest on capital, salary to partners, interest on drawings, then residual profit in the agreed ratio.

Appropriation account distributes profit; it is not an expense account and does not affect total profit.

Current account records drawings, interest on drawings, salary and share of profit; capital account records capital introduced and interest on capital.

Absence of agreement (default): profits and losses shared equally, no interest on capital, no salaries, no interest on drawings.

Interest on drawings is income to the partnership: debit each partner's current account, credit appropriation account.

Incomplete records: use the accounting equation or a statement of affairs to derive opening and closing capital.

Profit under incomplete records = Closing capital + Drawings − Capital introduced − Opening capital.

Mark-up = Gross profit / Cost of sales; Margin = Gross profit / Revenue. Convert: Mark-up = Margin / (1 − Margin).

Missing figures can be derived from control accounts (credit sales from receivables) or from the cash book (cash sales from banked takings).

Current ratio = Current assets / Current liabilities; a value near 2:1 is a common benchmark, but industry matters.

Quick (acid test) ratio = (Current assets − Inventory) / Current liabilities; a value near 1:1 is often targeted.

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

Receivables collection period = Trade receivables / Credit sales × 365 days.

Payables payment period = Trade payables / Credit purchases × 365 days.

Gearing = Debt (long-term liabilities) / (Debt + Equity) × 100; higher gearing means greater financial risk.

Return on capital employed (ROCE) = Operating profit / Capital employed × 100, where capital employed = Total assets − Current liabilities.

Asset turnover = Revenue / Capital employed; ROCE = Operating margin × Asset turnover (DuPont decomposition).

Limitations of ratio analysis: different accounting policies, historical cost, inflation, seasonal effects, and lack of comparable industry data.