CMA Foundation · Fundamentals of Financial and Cost Accounting

Journal and Ledger: formula sheet

Full chapter guide

Key formulas

Accounting equation: Assets = Liabilities + Capital; Capital can be found as Assets − Liabilities. Also written as Capital = Assets − Liabilities.
Expanded equation: Assets = Liabilities + Opening Capital + Profit − Drawings (+ Fresh Capital); Profit = Incomes − Expenses. Profit raises capital, drawings reduce it.
Personal account rule: Debit the receiver; Credit the giver; Applies to persons, firms, companies, banks and representative personal accounts.
Real account rule: Debit what comes in; Credit what goes out; Applies to assets such as cash, goods, machinery, land and goodwill.
Nominal account rule: Debit all expenses and losses; Credit all incomes and gains; Applies to rent, wages, interest paid, commission received, and so on.
Dual aspect: Total Debits = Total Credits; Holds for every transaction.
Personal account rule: Debit the receiver; Credit the giver; Applies to accounts of persons, firms, banks and companies, such as Ravi. Capital and Drawings are also treated as personal accounts because they represent the proprietor.
Real account rule: Debit what comes in; Credit what goes out; Applies to assets such as cash, goods, machinery, furniture, land.
Nominal account rule: Debit all expenses and losses; Credit all incomes and gains; Applies to rent, salary, interest, commission, discount and similar items.
Opening entry: Assets A/c Dr (each) ; To Liabilities A/c (each) ; To Capital A/c (balancing figure); Capital = Total assets − Outside liabilities.
Compound entry check: Total of debit amounts = Total of credit amounts; Use this to catch a missing or wrong figure.
Capital in the accounting equation: Capital = Assets − Liabilities; Used to find the capital in an opening entry.
Posting rule: Debit side of journal entry → Debit side of the account; Credit side of journal entry → Credit side of the account; The amount stays the same. Only the account name in particulars is the other account of the entry.
Debit balance: Total of debit side > Total of credit side → Balance = Debit total − Credit total (debit balance); Typical for assets, expenses and debtors. Written as By Balance c/d on the credit side.
Credit balance: Total of credit side > Total of debit side → Balance = Credit total − Debit total (credit balance); Typical for liabilities, capital, incomes and creditors. Written as To Balance c/d on the debit side.
Carry down: Closing balance c/d of this period = Opening balance b/d of next period; Balance c/d goes on the smaller side. Balance b/d goes on the opposite (larger) side, below the totals, which is the side where the balance belongs.
Cash account limit: Cash Account (cash in hand) cannot have a credit balance; Cash paid cannot exceed cash available, so a credit balance in the Cash Account (cash in hand) signals an error. This rule does not apply to a Bank Account, which can show a credit balance when there is an overdraft.
Purchase book rule: Credit purchase of goods for resale → Purchase book; Cash purchases go to the cash book. Credit purchase of assets goes to journal proper.
Sales book rule: Credit sale of goods dealt in → Sales book; Cash sales go to the cash book. Sale of an old asset on credit goes to journal proper.
Return books: Purchase returns = returns outward; Sales returns = returns inward; Returns of goods bought or sold on credit only. Cash returns go to the cash book.
Cash book sides: Debit = receipts and discount allowed; Credit = payments and discount received; Discount columns are not balanced like the cash and bank columns. Their totals are posted to the Discount Allowed and Discount Received accounts in the ledger.
Contra entry: Cash deposited in bank: Dr Bank column, Cr Cash column. Cash withdrawn: Dr Cash column, Cr Bank column; Both accounts are in the cash book, which itself acts as the cash and bank ledger accounts, so no separate ledger posting is needed.
Closing balance of cash book: Closing balance of the cash column or bank column = Debit total of that column − Credit total of that column (discount columns excluded); Work out cash and bank separately and leave the discount columns out. A credit balance in the bank column is an overdraft.
Imprest reimbursement: Amount reimbursed = Total petty expenses for the period; Closing petty cash + expenses = imprest amount, if no extra cash was given.

Quick revision

Accounting equation: Assets = Capital + Liabilities.
Personal account: debit the receiver, credit the giver.
Real account: debit what comes in, credit what goes out.
Nominal account: debit expenses and losses, credit incomes and gains.
Every transaction has equal total debits and total credits.
The journal is the book of original entry; the ledger is the book of final entry.
Balance = difference of the two sides. Write it on the smaller side as c/d so both totals match; the account's balance is of the nature of the larger side (debit balance if the debit side is larger).
Purchase book records only credit purchases of goods meant for resale.
In a contra entry, both the debit (cash or bank) and the credit (bank or cash) are in the cash book, on opposite sides. It is marked 'C' and has no ledger posting.
Drawings reduce capital. Debit Drawings, credit Cash (for cash withdrawn) or Purchases (for goods withdrawn for personal use).
In a trial balance, total debit balances equal total credit balances if the books are arithmetically accurate.
A trial balance can agree even with errors such as omission of a whole entry or wrong account.

Common mistakes

Treating debit as 'increase' and credit as 'decrease' for every account. Fix: Debit and credit mean left and right. Debit increases assets and expenses. Credit increases liabilities, capital and incomes.
Calling outstanding expenses or prepaid expenses nominal accounts. Fix: Under the personal-account classification, outstanding and prepaid expenses are shown as representative personal accounts. Outstanding rent is a liability and prepaid rent is an asset. The outstanding or prepaid amount is not itself the nominal expense. Only the rent expense account is nominal.
Debiting the proprietor's capital account when the owner withdraws goods or cash for personal use. Fix: Debit Drawings A/c. Credit Cash or Purchases, whichever went out.
Treating purchase of an asset as Purchases A/c. Fix: Purchases A/c is only for goods meant for resale. Machinery, furniture or a computer bought for use is debited to its own asset account, whether bought for cash or on credit.
Posting an amount on the same side as in the journal for both accounts. Fix: Remember each entry has two sides. The debited account takes it on its debit side, the credited account on its credit side.
Writing the wrong particulars, such as the account's own name. Fix: In particulars always write the other account of the entry. Use "To" on the debit side and "By" on the credit side.
Recording credit purchase of furniture or machinery in the purchase book Fix: The purchase book is only for goods meant for resale. Assets go to journal proper.
Including cash discount in the totals of the purchase or sales book Fix: Trade discount is deducted before recording. Cash discount appears only when payment is made, in the cash book.

Exam tips

Most questions are one-line transactions. Name the two accounts first, then apply the rule. This takes under 30 seconds.
Watch for tricky items: drawings, outstanding expenses, prepaid expenses, goodwill and bank loans. Know their account type by heart.
In equation questions, write A = L + C and fill in the numbers. Do not do it in your head.
Eliminate options that put the same account on both the debit and credit side, or that debit an account whose rule requires a credit.
There is no negative marking, so attempt every question even if you must guess after elimination.
Most MCQs test the debit or credit account. Classify the account type first and the answer follows.
Watch for traps: goods taken by the owner (Drawings), assets bought on credit (debit the asset account, not Purchases; credit the supplier) and discount.
For opening entry questions, compute capital first. Many options differ only in the capital figure.