ACCA Applied Knowledge · Financial Accounting

Incomplete records: formula sheet

Full chapter guide

Key formulas

Accounting equation: Assets − Liabilities = Capital (net assets); Use it at the start and the end of the year to find opening and closing capital.
Profit from net assets: Profit = Closing net assets − Opening net assets + Drawings − Capital introduced; Add back drawings because they reduced net assets. Deduct capital introduced because it raised net assets but is not profit.
Capital reconciliation: Opening capital + Capital introduced + Profit − Drawings = Closing capital; Rearrange this to find any one missing figure: profit, drawings, capital introduced or opening capital.
Net assets: Net assets = Total assets − Total liabilities; Include all assets and liabilities, such as bank overdraft, accruals and payables.
Basic ledger rule: Opening balance + additions - reductions = Closing balance; Rearrange to find whichever single item is missing.
Receivables control account: Opening receivables + credit sales - cash received - discounts allowed - irrecoverable debts - returns inwards = Closing receivables; Credit sales is usually the balancing figure on the debit side.
Payables control account: Opening payables + credit purchases - cash paid - discounts received - returns outwards = Closing payables; Credit purchases is usually the balancing figure on the credit side.
Total sales: Total sales = Credit sales + Cash sales; Add cash sales only if they are separate from the receivables account.
Cash drawings: Opening cash + receipts - payments - Closing cash = Drawings; Use when drawings are the only unknown cash payment.
Purchases from cost of sales: Purchases = Cost of sales + Closing inventory - Opening inventory; Use when the question gives cost of sales or a margin or mark-up.
Mark-up: Mark-up % = Gross profit ÷ Cost of sales × 100; The base is cost of sales. Cost of sales = 100%.
Margin: Margin % = Gross profit ÷ Sales × 100; The base is sales. Sales = 100%.
Basic link: Sales = Cost of sales + Gross profit; This holds in every question. Use it to fill the gaps.
Sales from cost with mark-up: Sales = Cost of sales × (1 + mark-up %); A 25% mark-up means sales = cost × 1.25.
Cost from sales with margin: Cost of sales = Sales × (1 − margin %); A 20% margin means cost = sales × 0.80.
Margin to mark-up: Mark-up % = Margin % ÷ (100% − Margin %); A 20% margin gives 20 ÷ 80 = 25% mark-up.
Mark-up to margin: Margin % = Mark-up % ÷ (100% + Mark-up %); A 25% mark-up gives 25 ÷ 125 = 20% margin.
Cost of sales: Cost of sales = Opening inventory + Purchases − Closing inventory; Use this once you know cost of sales, to find a missing purchases or inventory figure.
Cost of sales (trading account): Cost of sales = Opening inventory + Purchases − Drawings of goods − Closing inventory; Rearrange to find any one missing item. Purchases means net of returns and including carriage inwards.
Cost of sales from margin: Cost of sales = Sales × (100% − margin %); Margin is a percentage of sales.
Cost of sales from mark-up: Cost of sales = Sales × 100 ÷ (100 + mark-up %); Mark-up is a percentage of cost.
Inventory that should be on hand: Expected inventory = Opening inventory + Purchases − Drawings of goods − Cost of sales; Use cost of sales at the date of the loss, from sales up to that date.
Inventory lost: Loss = Expected inventory − Inventory saved or remaining; Insurance claims are normally based on cost.
Goods taken as drawings: Dr Drawings, Cr Purchases (at cost); This is not a sale, so no profit is added.
Accounting equation: Capital = Assets − Liabilities; Use it at the start of the year to find opening capital and at the end to find closing capital.
Profit from net assets: Profit = Closing capital − Opening capital + Drawings − Capital introduced; Use it when you only know net assets at two dates. Drawings are added back because they reduced capital without being an expense.
Closing capital: Closing capital = Opening capital + Profit − Drawings + Capital introduced; Rearrangement of the line above. It is the last figure in the statement of financial position.
Credit sales: Sales = Cash received from customers + Irrecoverable debts written off + Discounts allowed + Closing receivables − Opening receivables; Add cash sales if there are any. This is a receivables control account balancing figure.
Credit purchases: Purchases = Payments to suppliers + Discounts received + Closing payables − Opening payables; This is a payables control account balancing figure.
Cost of sales: Cost of sales = Opening inventory + Purchases − Closing inventory; Add carriage inwards if given. Then gross profit = sales − cost of sales.
Expense for the year: Expense = Cash paid + Closing accrual (or − Closing prepayment) − Opening accrual (or + Opening prepayment); Apply it to each expense in turn. The statement of profit or loss shows the expense, not the cash paid.
Mark-up and margin: Mark-up = Gross profit ÷ Cost of sales; Margin = Gross profit ÷ Sales; Use them to find sales from cost of sales, or the reverse, when one figure is missing.

Quick revision

Accounting equation: assets − liabilities = capital.
Profit = closing capital − opening capital + drawings − capital introduced.
Every missing figure is a balancing figure in a ledger account.
Credit sales = closing receivables + cash received + discounts and irrecoverable debts − opening receivables.
Credit purchases = closing payables + payments − opening payables.
Mark-up = profit ÷ cost. Margin = profit ÷ sales.
With a 25% mark-up, cost is 100, profit 25 and sales 125, so margin is 20%.
Cost of sales = opening inventory + purchases − closing inventory.
Missing inventory = expected closing inventory − actual closing inventory, valued at cost.
Drawings are a balancing figure in the cash or bank account if all other items are known.
Adjust for accruals, prepayments and depreciation before finalising profit.
Always check that the statement of financial position balances.

Common mistakes

Treating the increase in net assets as profit without adjusting for drawings Fix: Always add drawings back. The owner took value out, so true profit was higher than the increase.
Subtracting drawings instead of adding them when finding profit Fix: Write the full reconciliation first, then rearrange it. Profit = Closing − Opening + Drawings − Capital introduced.
Putting the opening balance on the wrong side of the account. Fix: Remember: receivables on the left, payables on the right. Sketch the T before writing any numbers.
Using cash paid to suppliers as purchases. Fix: Adjust for opening and closing payables. Purchases = payments + closing payables - opening payables, ignoring other items.
Applying a mark-up percentage to sales. Fix: If it is mark-up, the base is cost. Put 100 against cost of sales first.
Treating margin and mark-up as the same number. Fix: Remember the base: mark-up on cost, margin on sales. Convert only with the formulas.
Confusing margin with mark-up Fix: Margin is on sales, mark-up is on cost. A 25% mark-up equals a 20% margin. Underline the word in the question.
Leaving the loss at selling price Fix: Convert sales to cost of sales first. Every inventory figure must be at cost.
Forgetting to add back drawings when finding profit from net assets Fix: Always write the full formula first: closing capital − opening capital + drawings − capital introduced.
Treating cash paid as the expense Fix: Adjust each payment for opening and closing accruals and prepayments to get the expense for the year.

Exam tips

Read for hidden items: goods taken by the owner, money introduced, and liabilities such as accruals or overdrafts.
Write the capital reconciliation on your workings sheet every time. It makes the signs easy to check.
In multiple-choice questions, wrong options are often made by using the wrong sign for drawings or capital introduced. Work out your answer before looking at the options.
For number entry questions, enter only the figure asked for, and give a negative number only if the question allows for a loss.
If the question gives profit and asks for drawings or opening capital, rearrange the same reconciliation rather than learning a new formula.
In multiple-choice questions, wrong options are often built from the common errors: ignoring discounts, or reversing the sign of the opening balance. Calculate before looking at the options.
Number entry questions need an exact figure. Check whether the question wants a whole number and write only the number.
For multiple response questions, work out each stated figure separately before selecting the options.