ICSAN Financial Accounting cheat sheet

The IASB Conceptual Framework identifies the objective of general purpose financial reporting as providing financial information useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity.

Fundamental qualitative characteristics are relevance and faithful representation; enhancing characteristics are comparability, verifiability, timeliness and understandability. Enhancing characteristics cannot make immaterial or irrelevant information useful.

The five elements are assets, liabilities, equity, income and expenses. An asset is a present economic resource controlled by the entity as a result of past events; a liability is a present obligation to transfer an economic resource as a result of past events.

Recognition requires relevance and faithful representation; measurement bases permitted are historical cost, fair value, value in use/fulfilment value and current cost.

In Nigeria, IFRS is adopted for public interest entities, while SMEs apply the IFRS for SMEs Standard; the Financial Reporting Council of Nigeria (FRC) is the statutory regulator, and CAMA 2020 governs company reporting and filing with the CAC.

IAS 1 requires a complete set of financial statements: statement of financial position, statement of profit or loss and OCI, statement of changes in equity, statement of cash flows and notes, including comparative information.

Going concern, accrual and materiality are the underlying assumptions/pervasive concepts in IAS 1; offsetting is prohibited unless required or permitted by a Standard.

Conceptual Framework definitions drive the accounting equation: Assets = Liabilities + Equity, and profit = income less expenses, with equity increased by owner contributions and profit.

Accounting equation: Assets = Capital + Liabilities. Expanded: Assets = Capital + Profit - Drawings + Liabilities, where Profit = Income - Expenses.

Double entry rule: every transaction affects at least two accounts and total debits always equal total credits.

DEAD CLIP: Debits increase Expenses, Assets, Drawings; Credits increase Liabilities, Income, Capital (and capital injected).

Entity, going concern, accrual (matching), consistency, prudence, materiality and periodicity are core concepts; realisation, full disclosure and objectivity are conventions.

Accrual concept records income when earned and expenses when incurred, not when cash moves; prudence requires caution under uncertainty but does not permit deliberate understatement of assets or overstatement of liabilities.

Historical cost vs fair value: revaluation of a non-current asset increases the asset and creates a revaluation surplus in other comprehensive income (equity), not profit.

Business entity concept treats the owner and business as separate, so drawings are a reduction of capital, not an expense.

If assets rise and liabilities are unchanged, capital must rise by the same amount; a transaction changing only the composition of assets leaves capital unchanged.

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 and the general journal.

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

The sales day book total is posted periodically: debit trade receivables control account, credit sales account. Individual entries go to the customers' personal ledger.

The journal is used for non-routine entries: opening entries, corrections of errors, depreciation, accruals, and purchase or sale of non-current assets on credit.

Petty cash imprest system: the float is restored to a fixed amount by reimbursing exactly the amount spent, supported by petty cash vouchers.

Source documents map to books: invoice to sales/purchases day book, credit note to returns day book, receipt/payment voucher to cash book, and a journal voucher to the general journal.

A contra entry in the cash book (cash withdrawn from bank for office use) is recorded on both sides of the cash book, so no separate ledger posting is needed.

Trade discount reduces the invoice price before recording; cash (settlement) discount is recorded separately in the receivables/payables ledger and discount allowed/received accounts.

Ledger classification: personal ledgers (receivables and payables) hold customer and supplier accounts; the nominal (general) ledger holds income, expense, asset and liability accounts.

Trial balance lists closing debit and credit balances; agreement proves arithmetical equality of debits and credits, not the absence of errors.

Errors not revealed by a trial balance: error of omission, error of commission, error of principle, compensating errors, complete reversal of entries and original entry error.

Errors revealed by a trial balance: single-sided entry, addition error, transposition, and posting a different amount to one side.

Control accounts are memorandum records; the balance on the receivables control account should equal the sum of the individual receivables ledger balances.

Receivables control account: opening balance + credit sales - sales returns - receipts from customers - discounts allowed - bad debts written off = closing balance.

Payables control account: opening balance + credit purchases - purchase returns - payments to suppliers - discounts received = closing balance.

A trial balance debit balance indicates an asset or expense; a credit balance indicates a liability, income or capital.

Bank statement balance is the bank's record; cash book balance is the entity's record. Reconciliation explains the difference between them.

Adjusted cash book items: bank charges, interest, standing orders, direct debits, direct credits, dishonoured cheques and bank errors already corrected by the bank.

Items in the cash book but not yet on the statement: unpresented cheques (deduct from bank statement balance in the reconciliation) and uncredited lodgements/deposits (add).

Reconciliation format: balance per bank statement + lodgements not credited - unpresented cheques +/- bank errors = balance per adjusted cash book.

Overdraft: a credit balance in the cash book is a bank overdraft and appears as a current liability; a debit balance is a positive bank balance.

Control account reconciliation: difference between the control account balance and the list of ledger balances is corrected by adjusting the control account for omissions, mispostings and casts, and adjusting the list for individual ledger errors.

Contra between receivables and payables ledgers, bad debt write-offs, discounts allowed and interest charged on overdue accounts all affect the receivables control account.

A stale or post-dated cheque must be treated carefully: a post-dated cheque is not a valid receipt until its date, and a dishonoured cheque reverses the original receipt entry.

Suspense account is opened only when the trial balance does not agree; its balance equals the difference between total debits and total credits.

Correction of an error uses a journal entry; if the original entry involved the suspense account, the correction must clear the suspense account.

Error of principle: treating capital expenditure as revenue expenditure (e.g. repairs debited to motor vehicles) - correction debits the expense and credits the asset.

Error of commission: posting to the wrong account of the same class (e.g. wrong customer) - correction transfers the amount between the two personal accounts.

Complete reversal of entries: reverse the original double entry by debiting the account originally credited and crediting the account originally debited for twice the amount.

Compensating errors cancel each other in the trial balance and therefore do not affect the suspense account; they still misstate individual balances.

Effect on profit: overstating expenses understates profit; overstating income overstates profit. Determine the net effect of each error before adjusting the statement of profit or loss.

Errors affecting only statement of financial position items (e.g. misposting between two assets) do not change profit but change asset and liability balances.

Accrued expense (accrual): expense incurred but not yet paid - debit expense, credit accruals (current liability).

Prepaid expense: paid but not yet incurred - debit prepayments (current asset), credit expense.

Accrued income: earned but not received - debit accrued income (current asset), credit income. Income received in advance is a current liability.

Depreciation methods: straight line = (cost - residual value) / useful life; reducing balance = carrying amount x rate; units of production = (cost - residual) x units used / total units.

Depreciation starts when an asset is available for use, not when purchased; a change in useful life or residual value is a change in accounting estimate applied prospectively.

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

Provision is recognised when there is a present obligation from a past event, a probable outflow and a reliable estimate; a contingent liability is disclosed but not recognised.

Allowance for receivables (doubtful debts): increase is an expense in profit or loss; the closing allowance is deducted from trade receivables in the statement of financial position.

Cost of sales = opening inventory + purchases + carriage inwards - purchase returns - closing inventory. Gross profit = revenue - cost of sales.

Profit for the year = gross profit + other income - all expenses (distribution, administration, finance).

Statement of financial position: non-current assets at carrying amount + current assets - current liabilities = net current assets; then less non-current liabilities = net assets, equal to capital.

Capital account movement: opening capital + capital introduced + profit - drawings = closing capital.

Partnership: profit is shared in the profit-sharing ratio; appropriations include partners' salaries, interest on capital and interest on drawings, then residual profit shared in the agreed ratio.

In the absence of a partnership agreement, the Partnership Act applies: profits and losses shared equally, no interest on capital, no salaries, and 5% interest on advances (loans) by partners.

Partners' current accounts record appropriations, drawings and interest; partners' capital accounts record permanent capital. A debit balance on a current account indicates drawings exceeded the share of profit.

Admission or retirement of a partner may create goodwill; under IFRS, internally generated goodwill is not recognised, so adjustments are made through partners' capital accounts.

Share capital is recorded at nominal (par) value in share capital; any excess received is share premium. Both are equity and are not income.

Statement of changes in equity: opening balance + profit for the year + other comprehensive income + shares issued - dividends paid +/- transfers to reserves = closing balance.

IAS 1 requires a statement of financial position, statement of profit or loss and OCI, statement of changes in equity, statement of cash flows and notes, with comparatives and a statement of compliance with IFRS.

Current/non-current classification: an asset is current if realised within 12 months, held for trading, or is cash; liabilities follow the same logic.

Dividends declared after the reporting period are not recognised as a liability but disclosed; interim dividends paid during the year reduce retained earnings.

Under IAS 10, adjusting events after the reporting period (e.g. bankruptcy of a major debtor, settlement of a court case) adjust the financial statements; non-adjusting events are disclosed.

Earnings per share (IAS 33) = profit attributable to ordinary shareholders / weighted average number of ordinary shares. Preference dividends are deducted from profit.

Retained earnings are reduced by dividends and transfers to reserves; a bonus (capitalisation) issue converts reserves to share capital without changing total equity.

Gross profit margin = gross profit / revenue x 100%. Net profit margin = profit before tax / revenue x 100%.

Return on capital employed (ROCE) = operating profit / (total assets - current liabilities) x 100%. Return on equity = profit after tax / ordinary shareholders' equity.

Current ratio = current assets / current liabilities. Quick (acid test) ratio = (current assets - inventory) / current liabilities.

Inventory turnover = cost of sales / average inventory (times); days = 365 / turnover. Receivables days = trade receivables / credit sales x 365. Payables days = trade payables / credit purchases x 365.

Gearing = debt / (debt + equity) or debt/equity; interest cover = operating profit / finance cost.

Asset turnover = revenue / total assets; dividend cover = profit after tax / dividends; dividend payout = dividends / profit after tax.

Limitations: ratios ignore qualitative factors, inflation and differing accounting policies; year-end balances may not be representative; comparisons need industry benchmarks.

A high current ratio may hide slow-moving inventory or poor receivables collection; always analyse the components rather than the ratio alone.

IAS 7 requires classification into operating, investing and financing activities; cash comprises cash on hand and demand deposits, and cash equivalents are short-term, highly liquid investments with original maturity of three months or less.

Operating activities may be presented using the direct method (gross cash receipts and payments) or the indirect method (profit adjusted for non-cash items and working capital changes).

Indirect method: profit before tax + depreciation + impairment + finance cost - interest income +/- decrease/increase in inventory, receivables, payables - tax paid - interest paid.

Investing activities: purchase or sale of property, plant and equipment, intangibles and investments; interest and dividends received are usually investing.

Financing activities: proceeds and repayment of loans, share issues, dividends paid, and finance lease payments.

Profit on disposal of a non-current asset is deducted in operating activities and the proceeds shown under investing; depreciation is added back because it is non-cash.

Increase in trade payables is added; increase in trade receivables and inventory is deducted, because cash is tied up.

Reconciliation: opening cash + net cash flow from all three activities = closing cash, which must equal the cash and cash equivalents in the statement of financial position.

Public sector entities apply IPSAS, which is based on accrual accounting and converged with IFRS; Nigeria's public sector has adopted IPSAS accrual basis for financial reporting.

Government accounting focuses on the Consolidated Revenue Fund, appropriation and budget compliance; the Accountant-General prepares the financial statements.

Not-for-profit entities apply the IFRS for SMEs or IPSAS where relevant; receipts and payments accounts are cash-based, while income and expenditure accounts are accrual-based.

Subscriptions in arrears are receivables; subscriptions in advance are liabilities; life membership subscriptions are capitalised and recognised over the membership period.

Fund accounting separates restricted and unrestricted resources; restricted funds can only be used for the donor-specified purpose.

Surplus or deficit (not profit) is reported; there are no dividends, and accumulated funds replace share capital as the equity equivalent.

Public sector budgets are authorisation documents; variances between budget and actual are reported, and overspending of a vote is a control breach.

Donated goods and services are recognised when their fair value can be measured reliably and they would otherwise have been purchased.

Computerised accounting controls: access controls (passwords, user profiles), input validation (range, format, existence checks), audit trails, backup and disaster recovery, and segregation of duties.

A computerised system reduces arithmetic errors but does not eliminate errors of principle, wrong coding or fraud; audit trails must be retained.

Spreadsheet risks include hard-coded values, broken formulas and version control problems; model integrity checks and documentation mitigate them.

IFAC/IESBA Code of Ethics fundamental principles: integrity, objectivity, professional competence and due care, confidentiality, and professional behaviour.

A self-interest threat arises from financial interest or dependence on a client; self-review from auditing own work; advocacy from promoting a client; familiarity from long association; intimidation from pressure.

Safeguards include engagement quality review, rotation of engagement partner, independent review, and declining or withdrawing from the engagement when threats cannot be reduced.

Confidentiality continues after the professional relationship ends; disclosure is permitted only when required by law or authorised by the client.

Tax evasion is illegal and must not be facilitated; tax avoidance using lawful arrangements is permissible, but the accountant must not misrepresent facts to tax authorities.