ACCA Applied Knowledge · Financial Accounting

Statement of financial position: formula sheet

Full chapter guide

Key formulas

Accounting equation: Assets = Equity + Liabilities; Total assets must equal total equity and liabilities. Use it as your final check.
Net assets: Net assets = Total assets − Total liabilities = Equity; Useful when the question gives equity items and asks for a missing figure.
Working capital: Working capital = Current assets − Current liabilities; A common objective test link between classification and liquidity.
Current asset test: Current if: in operating cycle, held for trading, expected to be realised within 12 months, or cash/cash equivalent (unless restricted from being exchanged or used to settle a liability for at least 12 months); An asset that meets none of these tests is non-current.
Current liability test: Current if: settled in operating cycle, held for trading, due within 12 months, or no right to defer 12 months; A loan repayable in 12 months or less is current. The part due later is non-current.
Carrying amount: Carrying amount = Cost (or valuation) − Accumulated depreciation or amortisation; Non-current assets appear at carrying amount, not cost.
Equity: Equity = Share capital + Share premium + Revaluation surplus + Retained earnings; Add other reserves if given.
Carrying amount: Carrying amount = Cost (or revalued amount) − Accumulated depreciation − Accumulated impairment losses; For intangibles, use accumulated amortisation instead of depreciation.
Straight-line depreciation: Annual depreciation = (Cost − Residual value) ÷ Useful life in years; Use this unless the question gives another method.
Reducing balance depreciation: Annual depreciation = Carrying amount at start of year × Rate %; The base is carrying amount, not original cost. Residual value is not deducted first.
Accumulated depreciation: Closing accumulated depreciation = Opening + Charge for the year − Depreciation on disposals; Remove the depreciation of any asset sold.
Impairment: Impairment loss = Carrying amount − Recoverable amount (if carrying amount is higher); Recoverable amount is the higher of fair value less costs of disposal and value in use.
Inventory value (IAS 2): Inventory = lower of cost and net realisable value; Compare item by item or by group of similar items, not across the whole inventory in one total.
Net realisable value: NRV = estimated selling price − estimated costs to complete − estimated selling costs; Costs to complete apply only to partly finished goods.
Net trade receivables: Net receivables = gross receivables − irrecoverable debts written off − allowance for receivables; The allowance is a deduction from receivables, not a liability.
Prepayment: Prepayment = amount paid × (months of the next period ÷ total months covered); Shown as a current asset. Reduces the expense in profit or loss.
Accrual: Accrual = expense for the period − amount paid for the period; Shown as a current liability. Increases the expense in profit or loss.
Change in allowance: Statement of profit or loss charge = new allowance − old allowance (credit if lower); Only the movement goes to profit or loss.
Equity: Equity = Share capital + Share premium + Revaluation surplus + Retained earnings; Also equals total assets − total liabilities.
Share issue entry: Dr Bank (shares × issue price); Cr Share capital (shares × nominal value); Cr Share premium (shares × (issue price − nominal value)); Premium is the difference between issue price and nominal value.
Bonus issue entry: Dr Share premium or retained earnings; Cr Share capital (bonus shares × nominal value); No cash. Total equity is unchanged. Use share premium first if told to.
Rights issue entry: Dr Bank (new shares × rights price); Cr Share capital (nominal value); Cr Share premium (balance); Treat like a normal share issue, at the rights price.
Revaluation gain: Gain = revalued amount − carrying amount; Dr Asset; Cr Profit or loss (only the part that reverses an earlier revaluation loss on the same asset that was charged to profit or loss); Cr Revaluation surplus (the rest, via other comprehensive income); The part of the gain that reverses an earlier loss on the same asset, previously charged to profit or loss, is credited to profit or loss. Any excess is shown in other comprehensive income and credited to revaluation surplus.
Retained earnings closing: Closing = Opening + Profit for the year − Dividends declared in the year (deducted when declared, not when paid); Dividends are deducted in the period they are declared. A dividend declared before year end but still unpaid is also deducted.
Annual finance cost: Finance cost = Nominal value × Coupon rate × Time fraction; Use the nominal value, not the market value. For part-year borrowing, use months outstanding ÷ 12.
Accrued interest: Accrued interest = Finance cost for the year − Interest paid in the year; Assumes no accrual at the start of the year. Show in current liabilities.
Current portion: Current portion = Capital repayable within 12 months of the reporting date; The balance is non-current: Non-current portion = Total loan − Current portion.
Redeemable preference shares: Redeemable preference share dividends = finance cost in profit or loss; Classified as a liability under IAS 32 because redemption is compulsory.
Debenture versus preference share: Debenture: interest, liability. Redeemable preference share: dividend treated as finance cost, liability. Irredeemable preference share: dividend, equity.; Classify by obligation to pay cash, not by the name.
Accounting equation: Assets − Liabilities = Equity; The statement of financial position must satisfy this. Use it as a final check.
Closing retained earnings: Opening retained earnings + Profit for the year − Dividends = Closing retained earnings; Profit comes from the adjusted income and expense balances. Dividends are only those declared in the year.
Carrying amount: Cost (or valuation) − Accumulated depreciation = Carrying amount; Show non-current assets at carrying amount. Add the year's depreciation to the opening accumulated depreciation.
Reducing balance depreciation: Depreciation = Rate × (Cost − Accumulated depreciation b/f); Apply the rate to the carrying amount at the start of the year.
Accrual and prepayment: Accrual: expense rises, liability created. Prepayment: expense falls, current asset created.; Accrued expenses are current liabilities. Prepaid expenses are current assets.
Closing inventory entry: Dr Inventory (current asset); Cr Cost of sales; The trial balance usually shows opening inventory. Closing inventory is given as an adjustment.
Allowance for receivables: Write off irrecoverable debts first. Then: Allowance = % × (Receivables − Debts written off); Only the change in the allowance goes to profit or loss. Show receivables net of the full allowance.

Quick revision

Assets = equity + liabilities, at a single date.
Carrying amount = cost − accumulated depreciation (and impairment, where applicable).
Current items are those expected to be settled or realised within 12 months, or within the normal operating cycle.
Inventory is valued at the lower of cost and net realisable value.
Receivables are shown net of the allowance for receivables.
Accruals are current liabilities. Prepayments are current assets.
Share capital equals number of shares × nominal value.
Share premium is the excess received over nominal value. It is a reserve, not share capital.
Retained earnings = opening balance + profit for the year − dividends declared.
A loan repayable within 12 months is a current liability. The rest stays non-current.
Accrued loan interest is a current liability, even if the loan is non-current.
If the statement does not balance, look for a missed adjustment before changing figures.

Common mistakes

Showing non-current assets at cost instead of carrying amount. Fix: Always deduct accumulated depreciation from cost before putting the asset in the statement.
Classifying a whole loan as non-current when part is repayable within 12 months. Fix: Split the loan. The instalment due within 12 months is current. The rest is non-current.
Showing the asset at cost in the statement of financial position. Fix: Always subtract accumulated depreciation and impairment. Report carrying amount.
Deducting only the current year's depreciation instead of the accumulated total. Fix: Add the year's charge to the opening accumulated depreciation first, then deduct the total.
Valuing inventory at selling price, or at the higher of cost and NRV. Fix: Inventory is never above cost. Compare cost with NRV and take the lower one.
Forgetting to deduct selling costs when finding NRV. Fix: Always write NRV = selling price − costs to complete − selling costs.
Crediting the whole proceeds of a share issue to share capital. Fix: Always split the proceeds into nominal value and premium before posting.
Treating a bonus issue as bringing in cash. Fix: A bonus issue is a transfer between equity accounts. No bank entry, and total equity is unchanged.
Showing the whole loan as non-current when part is repayable within 12 months. Fix: Always ask what is due within 12 months of the year end and move that amount to current liabilities.
Adding accrued interest to the loan balance. Fix: Keep capital and interest separate. Interest payable goes in current liabilities.

Exam tips

Do the classification test first. Many objective test questions are really asking whether an item is current or non-current.
Check due dates on loans and the reporting date. A loan due in 11 months is current even if it was taken out for ten years.
Use the balancing check on number entry questions. If a missing figure is needed, assets = equity + liabilities finds it fast.
In multiple response questions, read how many answers to select. Do not pick items that belong in profit or loss, such as depreciation expense.
Learn the ACCA exam layout: non-current assets, current assets, equity, non-current liabilities, current liabilities. It is the exam presentation convention, not an IAS 1 requirement.
Read the last line first. Many options are traps: cost, the year's charge, and accumulated depreciation all look plausible.
In multiple response questions, check each statement against the definition of carrying amount before you select.
In number entry questions, work in the units given, enter only the number, and check the sign and rounding rule.