CMA Foundation · Fundamentals of Financial and Cost Accounting

Financial Statements of Sole Proprietorship: formula sheet

Full chapter guide

Key formulas

Capital expenditure test: Acquires or improves a fixed asset / increases earning capacity / benefit beyond one year → Capital; Shown in the Balance Sheet as an asset. Depreciation on it is a revenue charge.
Revenue expenditure test: Day-to-day running or maintenance / benefit within the year → Revenue; Charged to the Trading or Profit and Loss Account.
Deferred revenue expenditure: Written off in current year = Total amount ÷ Number of years of benefit; Balance carried to Balance Sheet = Total − Amount written off; Equal write-off is the usual exam assumption unless the question gives another pattern.
Capital receipt vs revenue receipt: Capital: capital introduced, loans, sale of fixed assets. Revenue: sales, interest, commission, rent received; Capital receipts go to the Balance Sheet. Revenue receipts go to the Profit and Loss Account.
Repairs on purchase of second-hand asset: Cost of asset = Purchase price + Repairs to make it usable + Installation charges; These costs are capitalised. Later routine repairs are revenue.
Cost of goods sold: Opening stock + Net purchases + Direct expenses − Closing stock; Net purchases = Purchases − Purchase returns. Direct expenses include wages, carriage inward, freight and similar costs.
Gross profit: Net sales − Cost of goods sold; Net sales = Sales − Sales returns. A negative result is a gross loss.
Net profit: Gross profit + Other incomes − Indirect expenses; Indirect expenses include salaries, rent, office and selling expenses. Drawings are not an expense.
Closing capital: Opening capital + Net profit − Drawings (+ Additional capital); If there is a net loss, subtract it instead of adding.
Balance sheet equality: Total assets = Capital + Outside liabilities; If the two sides differ, recheck the stock, profit and capital figures.
Where items go: Trading: stock, purchases, sales, returns, direct expenses. P&L: indirect expenses and incomes. Balance sheet: assets, liabilities, capital, drawings; Sorting each trial balance item correctly is the main skill tested.
Net sales: Net sales = Sales − Sales returns (returns inwards); Use net sales on the credit side of the trading account.
Net purchases: Net purchases = Purchases − Purchase returns (returns outwards); Purchases are shown on the debit side after deducting returns.
Cost of goods sold: Cost of goods sold = Opening stock + Net purchases + Direct expenses − Closing stock; This is the debit side of the trading account after adjusting for closing stock.
Gross profit: Gross profit = Net sales − Cost of goods sold; A negative result is gross loss.
Gross profit ratio: Gross profit ratio = (Gross profit ÷ Net sales) × 100; Used when the question gives a percentage on sales.
Closing stock rule: Closing stock = lower of cost and net realisable value; Stock is valued at the lower of cost and net realisable value.
Net profit: Net profit = Gross profit + Indirect incomes − Indirect expenses − Losses; If the answer is negative, it is a net loss. Use only items of the current year after adjustments.
Net profit when there is gross loss: Net profit = Indirect incomes − Gross loss − Indirect expenses − Losses; Gross loss is carried to the debit side of the profit and loss account.
Closing capital: Closing capital = Opening capital + Net profit + Additional capital − Drawings; Use minus net loss instead of plus net profit when there is a loss.
Sides of the account: Debit side: gross loss, indirect expenses, losses. Credit side: gross profit, indirect incomes, gains; Remember: expenses and losses on the debit side, incomes and gains on the credit side.
Accounting equation: Assets = Liabilities + Capital; Total of both sides of the balance sheet must agree.
Closing capital: Closing capital = Opening capital + Additional capital + Net profit − Drawings (− Net loss, if any); Interest on capital is added and interest on drawings is deducted, only if the question gives them.
Opening capital from assets and liabilities: Capital = Total assets − Outside liabilities; Used when capital is not given directly.
Net assets / working capital: Working capital = Current assets − Current liabilities; A positive figure means short-term assets cover short-term dues.
Order of liquidity: Assets: Cash → Bank → Debtors → Stock → ... → Fixed assets → Goodwill; Liabilities start with the one payable earliest, such as bank overdraft and creditors; capital comes last.
Order of permanence: Assets: Goodwill → Land → Building → Machinery → ... → Stock → Debtors → Bank → Cash; Liabilities start with capital, then long-term loans, then current liabilities.
Outstanding expense: P&L expense = Paid + Outstanding − Prepaid; Outstanding expense is a liability in the Balance Sheet. Prepaid is an asset.
Accrued income: P&L income = Received + Accrued − Received in advance; Accrued income is an asset. Income received in advance is a liability.
Depreciation: Depreciation is a P&L expense and is deducted from the asset in the Balance Sheet; If the asset was bought during the year, charge only for the period of use unless the question says otherwise.
Bad debts: Bad debts (P&L) = Bad debts in trial balance + Further bad debts; Deduct only the further bad debts from Sundry Debtors.
Provision for doubtful debts: New provision = % × (Debtors − Further bad debts); P&L charge = Total bad debts (trial balance + further) + New provision − Old provision; Total bad debts means the bad debts in the trial balance plus the further bad debts. If the result is negative, the old provision was larger than the amount needed. Treat the net amount as a gain and show it as a credit in P&L.
Interest on capital: Interest = Capital × Rate × Time; Debit P&L and add to capital. Use opening capital unless the question says otherwise.
Interest on drawings: Interest = Drawings × Rate × Time; Credit P&L and deduct from capital. Use the period that the question states.
Straight line depreciation per year: (Cost of asset + Installation cost − Scrap value) ÷ Useful life in years; Same amount every year. Add any cost needed to bring the asset into use.
Straight line rate: Annual depreciation ÷ Original cost × 100; The rate is derived from the annual charge. If a rate is given, apply it to original cost (or to cost less scrap if the question says so).
WDV depreciation per year: Opening book value × Rate % × Period ÷ 12; Book value = Cost − Depreciation charged so far. Scrap value is not deducted.
Book value at end: Opening book value − Depreciation for the year; This is the amount shown in the balance sheet.
Provision for doubtful debts: (Closing debtors − Additional bad debts) × Provision %; Charge to P&L only the change from the old provision: New provision − Old provision.
Provision for discount on debtors: (Debtors − Bad debts − Provision for doubtful debts) × Discount %; Applied on good debtors. Charge only the increase over the old provision; a decrease is a gain.
Provision versus reserve: Provision = charge against profit; Reserve = appropriation of profit; Provision reduces profit before it is found. Reserve is made out of profit.

Quick revision

Capital items give benefit over more than one year; revenue items are consumed in the current year.
Only revenue expenses and incomes go to the Trading and Profit and Loss Accounts.
Gross profit = Net sales − Cost of goods sold.
Cost of goods sold = Opening stock + Net purchases + Direct expenses − Closing stock.
Net profit = Gross profit + Other incomes − Indirect expenses.
Carriage inwards and wages are direct expenses and go to the Trading Account.
Closing stock given in the adjustments is credited in the Trading Account and shown as a current asset in the Balance Sheet. If closing stock is already in the trial balance, it appears only in the Balance Sheet.
Outstanding expense is added to the expense and shown as a liability; prepaid expense is deducted and shown as an asset.
Accrued income is added to income and shown as an asset; income received in advance is deducted and shown as a liability.
Drawings reduce capital; net profit increases it.
Closing capital = Opening capital + Net profit − Drawings (plus any additional capital introduced).
Depreciation is a non-cash expense charged to the Profit and Loss Account and deducted from the asset.

Common mistakes

Treating all repairs as revenue. Fix: Repairs that improve the asset or make a newly bought asset usable are capital. Only routine upkeep is revenue.
Classifying by item name instead of purpose. Fix: Always check why the item was bought. Goods bought for resale are purchases, even if they look like machinery.
Treating drawings as an expense in the profit and loss account Fix: Drawings reduce capital. Deduct them from capital in the balance sheet and never charge them to profit.
Adding closing stock to the trading account debit side or leaving it out of the balance sheet Fix: Closing stock appears twice: credited in the trading account (or deducted from cost of goods sold) and shown as an asset in the balance sheet.
Showing carriage outwards in the trading account. Fix: Carriage inwards is a direct expense (trading account). Carriage outwards is a selling expense (profit and loss account).
Not deducting returns from purchases and sales. Fix: Always compute net purchases and net sales before totalling.
Putting drawings on the debit side of the profit and loss account. Fix: Drawings are the owner's withdrawal. Deduct them from capital only.
Ignoring outstanding and prepaid adjustments. Fix: Add outstanding amounts and deduct prepaid amounts to get the expense for the year.
Showing drawings as an expense in the profit and loss account. Fix: Drawings reduce capital. Deduct them from capital in the balance sheet only.
Adjusting closing stock a second time, or mixing up closing stock given in adjustments with closing stock in the trial balance. Fix: Closing stock given outside the trial balance: debit Closing Stock A/c (a current asset in the balance sheet) and credit Trading A/c. That is the full double entry, so do not adjust it again. Closing stock inside the trial balance: show it only in the balance sheet, as the trading account has already been credited with it and it is not carried to the trading account again.

Exam tips

Most questions are one-line classification MCQs. Decide using purpose first, then benefit period.
Watch for trick items: goods for resale, repairs on a newly bought asset, and legal costs of buying property.
For deferred revenue, check the year of spending and how many years are left before computing the balance.
Remember sale of fixed assets is a capital receipt, but profit or loss on it is a Profit and Loss item.
With no negative marking, always attempt every question after eliminating options that break the treatment rule.
Read the adjustment notes before you start. Most wrong answers come from missing an outstanding or prepaid item.
In MCQs, work out only the figure asked. You rarely need to draw the full statements.
Memorise which expenses are direct: wages, carriage inward, freight, fuel and power, and factory expenses. Everything else is usually indirect.