CA Foundation · Accounting

Theoretical Framework: formula sheet

Full chapter guide

Key formulas

Accounting process (sequence): Identify → Record → Classify → Summarise → Analyse → Interpret → Communicate; Use this order when a question asks for the meaning or the scope of accounting.
Bookkeeping vs accounting (scope): Bookkeeping = Recording (journal, subsidiary books, ledger posting); Accounting = Bookkeeping + Classifying + Summarising + Analysing + Interpreting + Communicating; Bookkeeping is a part of accounting. Never say accounting is a part of bookkeeping.
Internal and external users: Internal: owners, managers, employees. External: investors, lenders, suppliers, customers, government, public; Some books treat owners as a separate group. Say which grouping you follow.
Business entity: Business and owner are separate persons for accounting; Owner's capital is a liability of the business to the owner. Personal expenses paid from business are drawings.
Going concern: Assume the business will continue; assets are shown at cost less depreciation, not at break-up value; If liquidation is expected, this assumption no longer applies.
Accrual: Revenue and expenses are recognised when earned or incurred, not when cash is received or paid; Gives rise to outstanding and prepaid expenses, accrued and unearned income.
Matching: Expenses of a period = costs incurred to earn that period's revenue; Closing stock is carried forward because its cost relates to next period's sales.
Prudence: Provide for all probable losses; do not recognise unrealised gains; Example: stock at lower of cost and net realisable value.
Materiality: Disclose items whose omission or error could influence users' decisions; Depends on amount and nature. It is not a fixed percentage.
Consistency: Same accounting policies from period to period, unless a change is required by law, a standard or gives a fairer view; Changes must be disclosed.
AS 1 fundamental assumptions: Going concern, Consistency, Accrual; If followed, no disclosure is needed. If not followed, the fact must be disclosed.
Meaning of Accounting Standards: Accounting Standards = written rules for recognition, measurement, presentation and disclosure; Use this as the opening line of any definition answer.
Issuing body in India: ICAI formulates; Central Government notifies for companies; Notification under the Companies Act, 2013, is on the recommendation of NFRA.
AS vs Ind AS basis: AS = Indian GAAP based; Ind AS = converged with IFRS; Converged means brought close to IFRS, not copied exactly.
Objectives of standards: Uniformity + Comparability + Reliability + Reduced alternatives; A handy four-point list for short-answer questions.
Cash basis rule: Record only when cash is received or paid; No debtors, creditors, outstanding or prepaid items.
Accrual basis rule: Income when earned; expense when incurred (cash timing irrelevant); This is the accrual assumption itself. Matching related expenses with revenue of the period is a separate concept applied on top of it.
Hybrid basis rule: Part cash basis + part accrual basis; Typical case: expenses on accrual, some incomes on cash.
Double entry rule: Total debits = Total credits for every transaction; Each transaction affects at least two accounts.
Profit under single entry: Profit = Closing capital − Opening capital + Drawings − Additional capital introduced; Statement of affairs method; used when only incomplete records exist. Closing capital comes from closing assets and liabilities, so depreciation, bad debts and provisions must be adjusted when you value those assets and liabilities in the statement of affairs. If they are given as additional information after the profit is found, deduct them from the profit.
Asset definition: Asset = resource controlled + past event + expected future economic benefits; All three parts must be present. Control matters, not legal ownership.
Liability definition: Liability = present obligation + past event + expected outflow of resources; A future intention or plan alone is not a present obligation.
Equity: Equity = Assets − Liabilities; The residual interest of owners.
Recognition criteria: Recognise if (1) probable inflow or outflow of benefits AND (2) reliable measurement of cost or value; Both conditions must be met. Failing either means no recognition in the statements.
Income and expense effect: Income increases equity; Expense decreases equity (excluding owner contributions and drawings); Capital introduced is not income. Drawings are not an expense.
Historical cost vs fair value: Historical cost = price paid at acquisition; Fair value = exit price at measurement date; Historical cost does not change with market prices. Fair value does.

Quick revision

Accounting equation: Assets = Capital + Liabilities, and it must balance after every transaction.
Going concern: assume the business will continue, so assets are not valued at forced-sale prices.
Accrual: record income and expenses when earned or incurred, not when cash moves.
Matching: charge expenses to the period in which the related revenue is recognised.
Prudence: provide for expected losses but do not record expected gains.
Consistency: use the same methods from period to period unless there is a good reason to change.
Personal accounts: debit the receiver, credit the giver. Real accounts: debit what comes in, credit what goes out. Nominal accounts: debit expenses and losses, credit incomes and gains.
Capital expenditure gives benefit over more than one period; revenue expenditure is used up in the current period.
Cash basis records only cash receipts and payments; accrual basis records dues and receivables too.
Double entry records every transaction with equal debit and credit; single entry is incomplete.
Accounting standards bring uniformity and comparability in financial statements.
Elements of financial statements are assets, liabilities, equity, income and expenses.

Common mistakes

Saying bookkeeping and accounting are the same thing. Fix: Remember that bookkeeping only records. Accounting also summarises, analyses and interprets.
Writing that accounting records all events of a business. Fix: Say that only transactions that can be expressed in money are recorded. Staff skill or a good brand name is not recorded as such.
Mixing up accrual and matching. Fix: Accrual decides when to record an item. Matching decides which period's revenue an expense belongs to. Say both in one line.
Saying prudence allows creating hidden reserves or understating profit deliberately. Fix: Prudence means reasonable caution for real uncertainty. Deliberate understatement is not prudence.
Saying Ind AS is the same as IFRS. Fix: Write that Ind AS is converged with IFRS, with some changes to suit Indian conditions.
Saying ICAI alone makes standards legally binding on companies. Fix: Say ICAI formulates, and for companies the Central Government notifies the standards under the Companies Act, 2013.
Saying accrual basis means recording when cash is received. Fix: Remember accrual means 'earned or incurred'. Cash timing does not matter.
Treating hybrid basis as the same as accrual basis. Fix: In hybrid, at least some items follow cash basis. Write which items follow which basis.
Saying an asset must be owned by the enterprise. Fix: Write that an asset is a resource controlled by the enterprise. An asset held under a lease can qualify because the enterprise controls it.
Recognising an item just because it meets the definition. Fix: Always test probability of benefit flow and reliable measurement before recognising.

Exam tips

For 'distinguish' questions, give at least four points and write them in a clear two-column layout.
Always mention 'in terms of money' in the definition. Examiners look for it.
For users, pair each user with a different need. Generic answers lose marks.
Short MCQ-style questions often test the stage: bookkeeping stops at the ledger, and interpretation belongs to accounting.
Keep the answer to the marks. Two to three marks need a definition and two to three crisp points, not a page.
For 'identify the concept' questions, write the name first, then the reason from the facts. Marks usually follow the reason.
Learn the AS 1 list (going concern, consistency, accrual) and the three governing considerations (prudence, substance over form, materiality) as separate lists.
In differentiate-between answers, give at least three points and one example. Use a two-column layout if the question allows.