Accounting Fundamentals: formula sheet

Key formulas

Accounting equation

Assets = Capital (Owner's Equity) + Liabilities

Every transaction keeps this equation in balance. Capital = Assets − Liabilities.

Accounting cycle order

Transaction → Journal → Ledger → Trial Balance → Adjustments → Final Accounts → Closing

Learn this order. Examiners often ask you to arrange the stages or to name the step after the trial balance.

Core objectives

Record → Ascertain profit/loss → Show financial position → Provide information → Meet legal needs

Use as a checklist when writing a 'state the objectives' answer.

Branch comparison basis

Purpose | Users | Time focus | Legal format | Unit of measure

Compare any two branches on these five points to earn full marks.

Accounting equation

Assets = Capital + Liabilities

Capital is the owner's equity. It also gives Capital = Assets − Liabilities.

Expanded equation

Assets = Opening Capital + Additional Capital + Profit − Drawings + Liabilities

Use it when profit or drawings occur during the period.

Profit from capital change

Profit = Closing Capital − Opening Capital + Drawings − Additional Capital

Used in the statement of affairs method.

AS 1 fundamental assumptions

Going concern, Consistency, Accrual

Assumed to be followed. Disclose only if not followed. Consistency is a convention in general theory, but AS 1 classes it as a fundamental assumption.

Prudence rule

Provide for all expected losses; do not recognise expected profits

Example: stock valued at lower of cost and net realisable value.

Matching rule

Expenses of the period are matched with revenue of the same period

Leads to outstanding and prepaid expense adjustments.

Qualitative characteristics

Fundamental: relevance + faithful representation. Enhancing: comparability, verifiability, timeliness, understandability

Learn the split. Questions ask which characteristic is fundamental.

Elements of financial statements

Assets, Liabilities, Equity (position); Income, Expenses (performance)

Five elements. Equity is the residual: Assets − Liabilities.

Issuance chain

ICAI ASB formulates and submits to NFRA → NFRA recommends to the Central Government (MCA) → Central Government notifies under Section 133 of the Companies Act, 2013

Standards bind companies only after Central Government notification. Write the chain in order: ICAI ASB, NFRA, Central Government.

Applicability test

Listed (other than SME exchange only) or unlisted with net worth ≥ ₹250 crore → Ind AS (mandatory); otherwise → AS, unless the company voluntarily adopts Ind AS

Holding, subsidiary, associate and JV companies of an Ind AS company also follow Ind AS. Companies listed only on SME exchanges follow AS. Once a company adopts Ind AS voluntarily, it must continue with Ind AS. Check current Rules for any change.

Accounting equation

Assets = Liabilities + Equity

Underlies the definition of elements in the framework.

Personal accounts rule

Debit the receiver; Credit the giver

Applies to accounts of persons, firms, companies and the like, including debtors, creditors and the proprietor's capital.

Real accounts rule

Debit what comes in; Credit what goes out

Applies to assets such as cash, stock, machinery and land.

Nominal accounts rule

Debit all expenses and losses; Credit all incomes and gains

Applies to rent, salaries, interest, discount, commission and the like.

Modern approach (accounting equation)

Assets = Liabilities + Capital

Debit increases in assets and expenses; credit increases in liabilities, capital and income. The reverse decreases them.

Trial balance agreement

Total of debit balances = Total of credit balances

Assets, expenses, losses and drawings have debit balances. Liabilities, capital, incomes and reserves have credit balances.

Closing balance of an account

Balance = Larger side total − Smaller side total

Write the balance c/d on the smaller side so that both sides total equally. Bring it down b/d on the opposite side.

Suspense balance

Difference = |Total of debit side − Total of credit side|. If the debit total is less than the credit total, debit Suspense by the difference. If the credit total is less than the debit total, credit Suspense by the difference.

Suspense goes on the side that is short. Debit total less than credit total means debit suspense. Credit total less than debit total means credit suspense.

Rectification entry rule

Correcting entry = Correct entry − Wrong entry already passed

Reverse the wrong effect and record the right one, often combined into a single entry.

One-sided error

Debit side short → Dr Suspense; Credit side short → Cr Suspense

Applies to errors such as posting on one side only or a wrong amount on one side.

Two-sided error

Wrong debit and credit amounts equal → trial balance unaffected → no suspense

Errors of principle, complete omission, and wrong account (same amount both sides) do not need suspense.

Corrected profit

Corrected profit = Reported profit ± effect of each error on revenue items and closing stock

Add back overstated expenses or understated income; deduct understated expenses or overstated income. Errors in closing stock also change profit. An error between two revenue accounts whose effects offset each other, such as Purchases and Purchase Returns, does not change net profit.

Starting from cash book (favourable balance)

Balance as per cash book + Cheques issued but not presented + Interest/dividend/direct deposits credited by bank − Cheques deposited but not collected − Bank charges/direct payments/dishonoured cheques debited by bank = Balance as per passbook

Use this when both balances show money in the bank (debit in the cash book, credit in the passbook). Reverse every sign if starting from the passbook.

Starting from cash book (overdraft)

Overdraft as per cash book − Cheques issued but not presented + Cheques deposited but not collected + Bank charges/dishonour not in cash book − Direct credits not in cash book = Overdraft as per passbook

This formula uses overdraft amounts as positive figures (magnitude terms). Items that increase money in the bank reduce the overdraft; items that reduce money in the bank increase it.

Adjusted cash book balance

Corrected cash book balance = Given cash book balance ± items that are not timing differences

Timing items (uncleared cheques) never change the cash book.

Depreciable amount

Depreciable amount = Cost of asset − Residual value

Cost includes freight, installation and other costs to bring the asset to use.

Straight line depreciation

Annual depreciation = (Cost − Residual value) ÷ Useful life in years

Same amount each full year. For part year, multiply by months used ÷ 12.

SLM rate on cost

Rate % = (Annual depreciation ÷ Cost) × 100

Gives the equivalent rate on original cost. When a rate is given in the question, apply it on cost every year; residual value matters when you must find the life or the rate.

Written down value depreciation

Depreciation = Opening book value × Rate %

Book value = cost less accumulated depreciation. Rate applies to the reducing balance.

Profit or loss on sale

Profit/(Loss) = Sale proceeds − Book value at date of sale

Book value is after depreciation up to the date of sale. Positive means profit.

Change of method adjustment (retrospective, AS 6 position)

Adjustment = Accumulated depreciation under new method − Accumulated depreciation actually charged under old method

If new is higher, charge the shortfall. If lower, credit the excess. Both run from first use to the date of change and are recorded in the year of change. Under Ind AS 8 the change is prospective and no such adjustment is made.

Cost of goods sold

Opening stock + Purchases (net of returns) + Direct expenses − Closing stock

Direct expenses include wages and carriage inward. Closing stock is valued at cost or net realisable value, whichever is lower.

Gross profit

Net sales − Cost of goods sold

If the result is negative, it is a gross loss.

Net profit

Gross profit + Other incomes − Indirect expenses

Indirect expenses are charged after adjusting for outstanding and prepaid items, bad debts, provision and depreciation.

Expense charged to P&L

Expense per trial balance + Outstanding − Prepaid

Apply the same logic to wages in the trading account.

Income credited to P&L

Income per trial balance + Accrued − Received in advance

Accrued income goes to assets, income received in advance to liabilities.

Total bad debts charge

Bad debts per trial balance + Additional bad debts

Additional bad debts reduce debtors before the new provision is calculated.

Provision for doubtful debts charge in P&L

New provision − Old provision (if positive: expense; if negative: income)

New provision is calculated on debtors left after writing off additional bad debts.

Closing capital

Opening capital + Net profit − Drawings (+ Additional capital)

Net loss is deducted instead of net profit.

Balance sheet check

Total assets = Capital + Liabilities

If the totals differ, an adjustment has been shown on one side only.

Quick revision

• Accounting records transactions, classifies them, summarises them and interprets the results.
• The going concern concept assumes the business will continue, which supports spreading asset costs over several years.
• Accrual basis means income and expenses are recorded when they arise, not when cash moves.
• Every transaction has two effects, so total debits equal total credits.
• A balanced trial balance does not prove the books are free of errors.
• Errors of complete omission, errors of principle, compensating errors and posting to the wrong account (same amount, same side) do not affect trial balance agreement.
• Use the suspense account for errors that make the trial balance disagree, such as one-sided errors, and for unexplained differences.
• Cheques issued but not yet presented make the pass book balance higher than the cash book balance; cheques deposited but not yet credited make it lower.
• Straight line depreciation = (Cost − Residual value) ÷ Useful life.
• Reducing balance depreciation is charged on the opening book value each year.
• Adjustments such as outstanding expenses and prepaid expenses appear twice: once in the profit statement and once in the balance sheet.
• Closing stock is credited in the trading account (deducted from cost of goods sold) and shown as a current asset in the balance sheet.

Common mistakes

• Saying management accounting is compulsory and follows accounting standards. Fix: Remember that management accounting is for internal use and has no prescribed format.
• Writing that accounting records all events of the business. Fix: State that only events that are financial in character and measurable in money are recorded. Employee skill or goodwill built internally is not recorded.
• Treating concepts and conventions as the same thing. Fix: Concepts are basic assumptions that underlie recording. Conventions are customs for reporting and policy choice. Say this in distinction answers.
• Confusing going concern with accrual. Fix: Going concern is about continuity of the business. Accrual is about when to record income and expense. Link each to its effect.
• Saying ICAI notifies the standards. Fix: Write the chain in order: ICAI ASB, NFRA, Central Government. ICAI ASB formulates and submits the standards to NFRA. NFRA recommends them to the Central Government (MCA), which notifies them under Section 133 of the Companies Act, 2013.
• Treating Ind AS as identical to IFRS. Fix: Say Ind AS is substantially aligned with IFRS but carries some carve-outs for Indian conditions.
• Treating drawings as an expense and crediting them Fix: Drawings reduce capital. Debit Drawings Account and credit Cash or Bank. In the trial balance it shows on the debit side.
• Placing sales returns on the credit side of the trial balance Fix: Sales returns are a reduction of sales and carry a debit balance. Purchase returns carry a credit balance.
• Using suspense for every error. Fix: Use suspense only when the trial balance was affected. Errors of principle and complete omission need no suspense.
• Debiting suspense when it should be credited. Fix: If the trial balance's debit side is short, debit suspense. If credit side is short, credit suspense.

Exam tips

• For 'distinguish' questions, always use a two-column layout with at least five points. Examiners award marks per point.
• In MCQs, watch for words such as only, always and compulsory. Statements about management accounting that use them are usually wrong.
• Learn the accounting equation. Short numerical MCQs ask you to find missing capital or liabilities.
• Write the accounting cycle as a flow with arrows. It is quick to write and easy to mark.
• Add a one-line example for each branch. It shows you understand the idea and does not cost much time.
• Write definition, rule and example for each concept. Three short lines earn more than one long paragraph.
• For 'distinguish' questions, give four or five points in a clear comparison layout.
• Quote AS 1 correctly: going concern, consistency and accrual are the fundamental assumptions.