CMA Intermediate · Financial Accounting

Final Accounts of Commercial Organisations: formula sheet

Full chapter guide

Key formulas

Gross profit: Gross profit = Net sales − Cost of goods sold; Cost of goods sold = Opening stock + Net purchases + Direct expenses − Closing stock. Net sales is sales less sales returns. Net purchases is purchases less purchase returns.
Net profit: Net profit = Gross profit + Other incomes − Indirect expenses; A negative result is a net loss. Other incomes include commission received and interest received.
Closing capital: Closing capital = Opening capital + Additional capital + Net profit − Drawings (− Net loss if any); Use this to check that the Balance Sheet capital figure is correct.
Accounting equation: Assets = Capital + Liabilities; The Balance Sheet totals must agree on this basis.
Capital vs revenue test: Benefit within the year → revenue; benefit beyond the year or asset creation → capital; Apply this to every item in the trial balance. Expenses to bring an asset to working condition are capitalised.
Net purchases: Net purchases = Purchases − Purchase returns; Purchase returns are also called returns outwards.
Net sales: Net sales = Sales − Sales returns; Sales returns are also called returns inwards.
Cost of goods sold: Cost of goods sold = Opening stock + Net purchases + Direct expenses − Closing stock; Use only direct expenses here.
Gross profit: Gross profit = Net sales − Cost of goods sold; A negative result is a gross loss.
Gross profit ratio: Gross profit ratio = Gross profit ÷ Net sales × 100; Based on net sales, not purchases.
Net profit: Net profit = Gross profit + Other incomes − Operating expenses − Non-operating expenses; If the result is negative, it is a net loss.
Expense for the year (outstanding and prepaid): Expense charged = Amount paid + Outstanding at end − Outstanding at start − Prepaid at end + Prepaid at start; For incomes, closing accrued is added and closing advance is deducted; opening balances are reversed.
Income for the year: Income credited = Amount received + Accrued at end − Accrued at start − Income received in advance at end + Income received in advance at start; Accrued income is added; income received in advance is deducted. Opening accrued income and opening advance income relate to the previous year, so they are reversed.
Bad debts and provision: Charge for bad debts and provision = Bad debts + New provision − Old provision; If old provision is higher, the difference is a credit to the account. Calculate the new provision on debtors after deducting further bad debts.
Depreciation on straight line: Annual depreciation = (Cost − Scrap value) ÷ Useful life; For a part year, charge for the months of use unless the question says otherwise. Depreciation on factory assets is a manufacturing or trading account charge; depreciation on other assets goes to the profit and loss account.
Net profit to capital: Closing capital = Opening capital + Net profit + Additional capital − Drawings; Net profit is added to capital; drawings are never charged to the profit and loss account.
Expense charged to P&L: Expense for the year = Paid + Outstanding at end − Outstanding at start + Prepaid at start − Prepaid at end; Use this to find the correct charge when opening and closing balances are both given.
Income credited to P&L: Income for the year = Received + Accrued at end − Accrued at start + Advance at start − Advance at end; Same logic as expenses, applied to income.
Bad debts charged: Total charge = Bad debts written off + New provision − Old provision; If the old provision is larger than the new one plus bad debts, the net result is a credit (gain).
Provision for doubtful debts base: Provision for doubtful debts = Rate % × (Debtors − Further bad debts); Deduct further bad debts first. Calculate the provision for doubtful debts on the balance after that. The provision for discount is calculated afterwards.
Provision for discount on debtors: Provision = Rate % × (Debtors − Further bad debts − Provision for doubtful debts); Discount is expected only on good debtors, so deduct the doubtful provision first.
Depreciation (straight line): Annual depreciation = (Cost − Residual value) ÷ Useful life; For the reducing balance method, apply the rate to the written down value.
Drawings: Closing capital = Opening capital + Net profit + Additional capital − Drawings; For goods drawn, credit Purchases (Trading Account) and debit Drawings, which is deducted from Capital in the Balance Sheet. Do not credit Sales. Interest on drawings is income of the business.
Accounting equation: Assets = Capital + Liabilities; Both sides of the balance sheet must total the same. A difference means an error or a missed adjustment.
Closing capital of a sole proprietor: Closing capital = Opening capital + Net profit + Additional capital − Drawings − Net loss; Items already taken through the Profit and Loss Account are in the profit figure, so do not count them twice. Adjust capital only for items not already taken through profit.
Net book value of a fixed asset: Book value = Cost − Accumulated depreciation; Show the asset at net value, or show cost and deduct depreciation, as the question requires.
Debtors (net): Net debtors = Gross debtors − Bad debts − Provision for doubtful debts; Provision for discount on debtors, if given, is also deducted.
Current asset test: Current if expected to be realised, sold or consumed within the operating cycle or twelve months, or held for trading, or is cash or cash equivalent; Anything else is non-current.
Current liability test: Current if due to be settled within the operating cycle or twelve months, or held for trading; Instalments of a long-term loan due within twelve months are current.
Order of liquidity vs permanence: Liquidity: most liquid first. Permanence: most permanent first; The order for liabilities differs between the two formats. Under liquidity, short-term liabilities come first. Under permanence, capital comes first and short-term liabilities come last.
Total income: Total income = Revenue from operations + Other income; Revenue from operations is shown net of what the question says to net off, such as returns.
Total expenses: Total expenses = Cost of materials consumed + Purchases of stock-in-trade + Changes in inventories + Employee benefit expense + Finance costs + Depreciation and amortisation + Other expenses; Changes in inventories = Opening stock − Closing stock of finished goods and work-in-progress. A result that is negative reduces expenses.
Profit before tax: Profit before tax = Total income − Total expenses; Exceptional items, if any, are shown before this figure.
Profit for the period: Profit for the period = Profit before tax − Tax expense; Tax expense includes current tax and deferred tax if the question gives it.
Surplus carried to Balance Sheet: Closing balance in surplus = Opening balance + Profit for the period − Transfers to reserves − Dividends declared and approved; Shown under Reserves and Surplus as Surplus in the Statement of Profit and Loss. Under AS 4 (revised), a dividend proposed or declared after the balance sheet date is not a liability at that date and is disclosed in the notes. Follow the question's instruction if it says otherwise.
Current classification test: Current if realised or settled within the operating cycle or within 12 months of the reporting date; Everything else is non-current.
Suspense account direction: Total of credits > total of debits → debit Suspense A/c with the difference; total of debits > total of credits → credit Suspense A/c; Suspense is the balancing figure that makes the trial balance agree.
Rectification entry with suspense: For a one-sided error: correct the account affected and take the other side to Suspense A/c; Example: a credit omitted in an account means credit that account and debit Suspense.
Closing entry for expenses: Trading or P&L A/c Dr. To Expense A/c; Expense accounts have debit balances, so they are credited to close them.
Closing entry for incomes: Income A/c Dr. To Trading or P&L A/c; Income accounts have credit balances, so they are debited to close them.
Net profit transfer: Profit and Loss A/c Dr. To Capital A/c (for net profit); reverse for net loss; For a sole proprietor, drawings are also closed to Capital A/c.
Corrected profit when errors found before closing: Corrected profit = profit before correction ± effect of each corrected nominal item; Each corrected income raises profit; each corrected expense lowers profit, only for nominal accounts.

Quick revision

Gross profit = Net sales + Closing stock − Opening stock − Purchases (net) − Direct expenses.
Net profit = Gross profit + Indirect incomes − Indirect expenses.
Every adjustment is shown twice: once in the income statement and once in the Balance Sheet.
Outstanding expense is added to the expense and shown as a liability; prepaid expense is deducted from the expense 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.
Closing stock given in the adjustments appears in the Trading Account (credit side) and as a current asset.
Closing stock already shown in the trial balance is not credited again in the Trading Account.
Bad debts are written off first; then provision for doubtful debts is made on the remaining debtors.
Depreciation is charged to the Profit and Loss Account and deducted from the asset in the Balance Sheet.
Drawings reduce capital; they are never an expense.
A company's Balance Sheet follows Schedule III headings, with equity and liabilities, and assets, each split into current and non-current.
A Suspense Account balance is a temporary figure; clear it once the errors are found and corrected.

Common mistakes

Treating the purchase of furniture or machinery as an expense in the Profit and Loss Account. Fix: Ask whether the benefit lasts beyond the year. If yes, it is capital expenditure and goes to the Balance Sheet as an asset.
Showing drawings in the Profit and Loss Account. Fix: Drawings are a withdrawal of capital by the owner. Deduct them from capital in the Balance Sheet.
Showing purchases and sales without deducting returns. Fix: Tick returns inwards and outwards first and show net figures or deduct them in the account.
Putting carriage outwards or other selling costs in the trading account. Fix: Carriage inwards is direct. Carriage outwards is a selling expense for the Profit and Loss Account.
Showing drawings or the owner's personal expenses as an expense in the profit and loss account. Fix: Drawings reduce capital. Only expenses of the business go to the profit and loss account.
Charging the full amount paid for an expense, ignoring outstanding or prepaid amounts. Fix: Always apply the adjustment formula. Show the outstanding amount as a liability and the prepaid amount as an asset in the balance sheet.
Adding prepaid expenses to the expense instead of deducting them. Fix: Outstanding means still to pay, so add. Prepaid means paid for the future, so deduct. Show prepaid as an asset.
Calculating the provision for doubtful debts on the gross debtors figure. Fix: Deduct further bad debts first, then apply the provision rate to the remaining debtors.
Showing an item on both the final accounts and the balance sheet without the adjustment's second effect, such as outstanding rent charged to the P&L but not shown as a liability. Fix: Write both effects beside every adjustment before you start drawing the statement.
Deducting drawings from profit rather than from capital, or forgetting drawings completely. Fix: Drawings never enter the P&L. Deduct them in the capital working.

Exam tips

In the MCQ section, expect capital versus revenue classification. Test the benefit period first, then check whether the cost is needed to bring an asset into use.
In written answers, draw the Trading Account, the Profit and Loss Account and the Balance Sheet separately with clear headings and dates. Step marks are given for each correct item.
Show workings for net sales, net purchases and cost of goods sold in a note. A small slip then costs only one mark, not the whole answer.
Remember that the Trading Account is for the year ended on a date, while the Balance Sheet is as at a date. Using the wrong wording can lose marks.
Check that the Balance Sheet totals agree before you finish. If you have time, recheck the tagging of the large items first.
Read the adjustments before you write anything. Closing stock and withdrawals change the answer.
Write a quick list of direct expenses and indirect expenses beside the trial balance and tick each item.
Show workings for net purchases, net sales and adjusted wages. Step marks are awarded for these.