ACCA Applied Knowledge · Financial Accounting

Double-entry bookkeeping principles including the maintenance of accounting records: formula sheet

Full chapter guide

Key formulas

Basic accounting equation: Assets = Capital + Liabilities; Must hold after every transaction. Also written as Capital = Assets − Liabilities.
Extended accounting equation: Closing capital = Opening capital + Capital introduced + Profit − Drawings; Profit = Income − Expenses. A loss is subtracted instead.
Profit from capital movement: Profit = Closing capital − Opening capital − Capital introduced + Drawings; Used in incomplete records questions where no income or expense figures are given.
Normal balances: Debit: assets, expenses, drawings. Credit: liabilities, capital, income; Increase an account on its normal side; decrease it on the opposite side.
Account types: Personal = people or organisations; Real = assets; Nominal = income, expenses; Older classification. Capital is sometimes treated as personal (the owner).
Accounting equation: Assets = Liabilities + Equity; Every transaction keeps this equation in balance.
Debit and credit rule for assets and expenses: Increase = Debit; Decrease = Credit; Applies to asset accounts and expense accounts. Drawings also follow this rule.
Debit and credit rule for liabilities, equity and income: Increase = Credit; Decrease = Debit; Applies to liabilities, capital, retained earnings and income accounts.
Dual aspect: Total debits = Total credits; Each transaction has equal debit and credit amounts.
Sales day book posting: Dr Receivables control account (gross total); Cr Sales (net total); Cr Sales tax (tax total); Individual invoices are also posted to each customer's account in the sales ledger, which is a memorandum ledger outside the double entry when control accounts are used.
Purchases day book posting: Dr Purchases (net total); Dr Sales tax (tax total); Cr Payables control account (gross total); Use the inventory or expense account instead of purchases if the item is not goods for resale.
Sales returns day book posting: Dr Sales returns (net); Dr Sales tax (tax); Cr Receivables control account (gross); Based on credit notes issued to customers.
Purchases returns day book posting: Dr Payables control account (gross); Cr Purchases returns (net); Cr Sales tax (tax); Based on credit notes received from suppliers.
Journal entry layout: Date | Dr Account | Cr Account | Narrative; Total debits must equal total credits in every journal entry.
Gross amount: Gross = Net + Sales tax; Day books show net, tax and gross columns. The gross column equals the sum of the other two.
Basic posting rule: Debit = assets and expenses increase; Credit = liabilities, capital and income increase; Total debits must always equal total credits for each transaction.
Cash book receipt: Receipt: Dr Bank, Cr the other account (sales, receivable, etc.); The bank is debited when money comes in.
Cash book payment: Payment: Cr Bank, Dr the other account (expense, payable, asset, etc.); The bank is credited when money goes out.
Cash book balance: Closing balance = opening balance + receipts − payments; A positive result is a debit balance (cash at bank). A negative result is an overdraft (credit balance).
Discount allowed: Dr Bank (cash received); Dr Discount allowed; Cr Receivable (cash + discount); Discount allowed is an expense. The customer's account is cleared in full.
Discount received: Cr Bank (cash paid); Cr Discount received; Dr Payable (cash + discount); Discount received is income. The supplier's account is cleared in full.
Imprest reimbursement: Amount to reimburse = float − cash in hand = total of vouchers paid; Entry: Dr Petty cash, Cr Bank. The expense accounts are debited from the analysis columns.
Petty cash expenses: Dr each expense account; Cr Petty cash (total spent); Post the analysis column totals, not each voucher.
Balancing a ledger account: Balance c/d = larger side total − smaller side total; Put the balance c/d on the smaller side so both sides total the same. Bring it down (b/d) on the opposite side.
Trial balance rule: Total debit balances = Total credit balances; Holds only if every entry has equal debits and credits and all balances are listed correctly.
Accounting equation: Assets = Capital + Liabilities; Explains why debits equal credits: every transaction keeps the equation in balance.
Errors not revealed (memory list): Omission, Commission, Principle, Original entry, Compensating, Reversal; Each leaves total debits equal to total credits, so the trial balance still agrees.
Normal balances: Debit: assets, expenses, drawings. Credit: liabilities, capital, income.; Contra items reverse this: allowance for receivables and accumulated depreciation are credits.
Source document to record flow: Source document → book of prime entry → ledger account → trial balance → financial statements; Use this order to decide where a document is first recorded.
Invoice amount with sales tax: Gross invoice = Net amount + Sales tax; Sales tax = net amount × tax rate. The exam gives the rate.
Credit note effect: Net balance owed = Invoices − Credit notes − Payments; A credit note reduces the receivable for the seller and the payable for the buyer.
Document purpose rule: Invoice = demand for payment; Credit note = reduction; Statement = summary; Receipt = proof of payment; Most objective questions test these definitions.
Good code rule: Unique + consistent + logical + easy to extend; Use these features to judge a coding system.

Quick revision

Accounting equation: Assets = Capital + Liabilities, and Capital rises with profit and falls with drawings.
Every transaction has at least one debit and one credit of equal value.
Debit increases assets and expenses; credit increases liabilities, capital and income.
Debit decreases liabilities, capital and income; credit decreases assets and expenses.
Books of prime entry include the sales day book, purchases day book, returns day books, cash book, petty cash book and journal.
Day books list credit transactions; totals are posted to the ledger, and individual entries go to the receivables or payables ledger.
The cash book records receipts and payments through the bank and, in many systems, is part of the double entry itself.
To balance a ledger account, total both sides, insert the difference on the smaller side as the balance carried down so the totals agree, then bring the balance down on the opposite side.
A trial balance lists debit and credit balances; total debits must equal total credits.
A balanced trial balance does not prove the records are free of errors, such as omissions or wrong accounts.
Source documents, such as invoices, credit notes and receipts, support each entry and provide an audit trail.
Drawings reduce capital and are not an expense.

Common mistakes

Treating drawings as an expense. Fix: Drawings reduce capital directly and never appear in profit or loss. Expenses reduce profit.
Classifying a prepayment as an expense or an accrual as an asset. Fix: A prepayment is a current asset (the business has paid ahead). An accrual is a current liability (the business owes money).
Thinking debit always means increase and credit always means decrease. Fix: Remember the rule depends on the account type. A credit increases a liability but decreases an asset.
Debiting the wrong side of the bank account when money is paid in. Fix: In your own books, the bank is an asset. Cash received is a debit to bank; cash paid out is a credit.
Recording a cash sale in the sales day book. Fix: The sales day book is for credit sales only. Cash sales go straight to the cash book.
Mixing up sales returns and purchases returns day books. Fix: Ask who issued the credit note. If you issued it, sales returns. If you received it, purchases returns.
Debiting the bank when money is paid out (or crediting it when money is received). Fix: In your own ledger, the bank is an asset. Money in increases it, so debit. Money out reduces it, so credit.
Posting only the cash received to the customer's account and leaving a small balance. Fix: Credit the receivable with cash plus discount allowed. Debit the discount allowed account with the discount.
Putting a balance in the wrong column Fix: Look at which side of the account is larger. That side gives the debit or credit balance.
Treating accumulated depreciation or allowance for receivables as debits Fix: These reduce assets, so they carry credit balances.

Exam tips

Write the equation at the top of your rough paper and update it line by line for each transaction.
In multiple response questions, count how many options you must select before you start choosing.
In number entry questions, check the sign and the units. Profit and drawings move capital in opposite directions.
Watch for items that look like expenses but are assets or liabilities, such as prepayments, accruals and drawings.
If a figure is missing, rearrange the equation rather than guessing.
In multiple choice questions, check the debit and credit sides in each option before reading the rest. Many wrong options only swap the sides.
For number entry, read whether the answer should be a debit or credit balance and give the label if asked. Do not enter a negative figure unless told to.
In multiple response questions, select exactly the stated number of options. Work out the entries yourself first, then match them.