ACCA Applied Knowledge · Financial Accounting

The main elements of financial statements: formula sheet

Full chapter guide

Key formulas

Asset definition: Asset = present economic resource + controlled by the entity + result of past events; All three parts must be met. Legal ownership is not required.
Liability definition: Liability = present obligation + to transfer an economic resource + result of past events; The obligation may be legal or constructive. A future intention alone is not enough.
Equity definition: Equity = Assets − Liabilities; Equity is the residual interest. It is not a separate claim to be measured on its own.
Accounting equation: Assets = Liabilities + Equity; Always holds. Use it to find a missing figure.
Recognition rule: Recognise if the item meets the definition AND recognition gives relevant information and a faithful representation; Meeting the definition alone does not guarantee recognition.
Income: Income = increase in assets or decrease in liabilities that increases equity (excluding contributions from equity holders); Includes revenue and gains.
Expenses: Expenses = decrease in assets or increase in liabilities that decreases equity (excluding distributions to equity holders); Includes ordinary expenses and losses.
Profit: Profit = income − expenses; Profit for the period increases equity (if positive).
Equity link: Closing equity = opening equity + profit + capital introduced − dividends (± other comprehensive income); Capital and dividends bypass profit or loss.
Accounting equation: Assets = Equity + Liabilities; The statement must balance. Total assets always equal total equity and liabilities.
Equity: Equity = Total assets − Total liabilities; Use this to find a missing equity figure. Equity includes share capital, share premium and reserves.
Net current assets (working capital): Current assets − Current liabilities; A negative result means current liabilities exceed current assets.
Carrying amount of non-current assets: Cost (or revalued amount) − Accumulated depreciation (and impairment); Non-current assets are shown at carrying amount, not at cost.
Current asset rule: Cash, or expected to be realised or used within 12 months or the operating cycle, or held for trading; Anything else is non-current.
Current liability rule: Due to be settled within 12 months of the reporting date or within the operating cycle; A long-term loan's next-12-month repayment is current. The rest stays non-current.
Gross profit: Gross profit = Revenue − Cost of sales; Cost of sales = opening inventory + purchases (and carriage inwards) − closing inventory.
Operating profit: Profit from operations = Gross profit + Other income − Distribution costs − Administrative expenses; Exact line names vary, but this is the order you follow.
Profit before tax: Profit before tax = Profit from operations − Finance costs; Interest on loan notes is a finance cost. Add investment income if given.
Profit for the year: Profit for the year = Profit before tax − Income tax expense; The tax expense is the current-year charge adjusted for any under- or over-provision from last year.
Total comprehensive income: Total comprehensive income = Profit for the year + Other comprehensive income; OCI includes revaluation surplus on non-current assets. A revaluation deficit is OCI only to the extent it reverses an earlier surplus on the same asset.
Recognition test: Recognise if: meets definition of an element AND recognition gives useful information (relevant + faithful representation); Both conditions must be met. Meeting the definition alone is not enough.
Historical cost: Asset: cost incurred + transaction costs. Liability: value of consideration received less transaction costs; Updated over time, e.g. for depreciation, impairment and amortisation.
Fair value: Price received to sell an asset or paid to transfer a liability, in an orderly transaction between market participants at the measurement date; An exit price. It is not an entity-specific value.
Value in use / fulfilment value: Present value of expected future cash flows from using an asset (value in use) or settling a liability (fulfilment value); Entity-specific. Based on the entity's own expectations, not the market's.
Current cost: Asset: cost today of an equivalent asset. Liability: consideration received today for an equivalent liability, less transaction costs; An entry price. Contrast with fair value, which is an exit price.

Quick revision

Asset: a resource controlled by the entity as a result of past events, from which future economic benefits are expected.
Liability: a present obligation arising from past events, expected to result in an outflow of economic benefits.
Equity is the residual interest: assets minus liabilities.
Income increases equity, other than contributions from owners.
Expenses decrease equity, other than distributions to owners.
Owners' drawings or dividends are distributions, not expenses.
Accounting equation: assets = liabilities + equity.
Statement of financial position shows position at a date. Profit or loss shows performance over a period.
Current items are normally due or realised within 12 months or the operating cycle.
Profit or loss and other comprehensive income together give total comprehensive income.
An item is recognised if it meets the definition and can be measured reliably.
Historical cost is the original amount paid or received. Other bases include current value and fair value.

Common mistakes

Treating legal ownership as the test for an asset Fix: Remember the test is control of an economic resource. Check who obtains the benefits and bears the risks.
Recording a liability for a planned future cost Fix: No present obligation means no liability. A budget or board intention is not an obligation arising from a past event.
Treating a dividend paid as an expense. Fix: Dividends are distributions to equity holders. They are excluded from expenses and shown in the statement of changes in equity.
Treating share capital received as income. Fix: Contributions from equity holders are excluded from income. Only increases in equity from other sources count.
Treating a bank overdraft as a negative current asset or as non-current. Fix: Show an overdraft as a current liability. Net bank balances only when they are with the same bank and the right of set-off applies.
Showing the whole long-term loan as non-current. Fix: Split it. The amount repayable within 12 months of the reporting date is a current liability. The rest is non-current.
Treating a revaluation surplus as income in profit or loss. Fix: Put revaluation surplus in OCI. It is unrealised and the standards require OCI treatment.
Deducting dividends as an expense. Fix: Dividends are distributions of profit to owners. Show them in the statement of changes in equity only.
Recognising an item just because it meets the definition of an element. Fix: Always state both conditions. Mention uncertainty of existence, low probability or unreliable measurement as reasons not to recognise.
Saying fair value is what the entity would get from using the asset. Fix: Fair value is a market exit price. Value in use is entity-specific and based on its own cash flows.

Exam tips

Write the three parts of each definition on your rough paper at the start. Tick them off for each option.
Watch for words such as 'intends', 'plans' and 'expects'. They usually signal an item that fails the liability test.
In multiple response questions, select exactly the stated number of options. Each selected option must pass every test.
For number entry on equity, compute assets minus liabilities and check the result with the accounting equation.
Know the difference between definition and recognition. Questions often test whether an item that fits the definition is still left out.
In multiple choice questions, apply the equity test to each option and cross out those that leave equity unchanged.
Watch for the words dividend, drawings and share issue. They signal items excluded from income and expenses.
Know the difference between income (revenue plus gains) and expenses (ordinary expenses plus losses). Questions may test the definitions word for word.