CS Executive · Corporate Accounting and Financial Management

Introduction to Accounting: formula sheet

Full chapter guide

Key formulas

Accounting equation: Assets = Capital (Owner's equity) + Liabilities; The basis of all recording. Every transaction keeps both sides equal.
Profit for a period (capital method): Profit = Closing capital − Opening capital + Drawings − Additional capital introduced; Use when only capital figures are given.
Accounting cycle order: Identify → Measure → Record → Classify → Summarise → Analyse and interpret → Communicate; Book-keeping covers only recording and classifying. Accounting covers the whole sequence.
Fundamental accounting assumptions (AS 1): Going concern + Consistency + Accrual; Assumed to be followed. Disclose only if any one is not followed.
Considerations governing accounting policies (AS 1): Prudence + Substance over form + Materiality; Used when choosing and applying accounting policies.
Accounting equation (dual aspect): Assets = Capital + Liabilities; Every transaction keeps this equation balanced.
Matching principle: Profit for the period = Revenue earned − Expenses incurred to earn it; Based on accrual, not on cash received or paid.
Prudence rule: Provide for expected losses; do not record expected gains; Do not misuse it to create hidden reserves.
Inventory valuation (prudence in practice): Closing stock = Lower of cost and net realisable value; A standard application of prudence.
Who issues and who notifies: ICAI formulates → NFRA recommends → Central Government notifies; Standards apply to companies under the Companies Act only after notification. Remember the chain in this order.
Which set applies: Specified companies (and their holding, subsidiary, JV, associate) → Ind AS; all other companies → AS; The Ind AS test depends on listing and net worth thresholds in the rules. Do not quote threshold figures unless you are sure of them.
Meaning of convergence: Ind AS = IFRS adapted for Indian conditions (not a word-for-word adoption); Use the word converged, not adopted, when describing Ind AS.
Numbering: AS 1, AS 2 ... versus Ind AS 1, Ind AS 2 ...; Numbers do not always match for the same subject. Ind AS 2 is Inventories, as is AS 2, but cash flows is AS 3 and Ind AS 7.
Accounting cycle order: Transaction → Journal → Ledger → Trial Balance → Adjustments → Final Accounts; Learn the order. Questions often ask which step comes next.
Personal account rule: Debit the receiver; Credit the giver; Applies to persons, firms, companies and also to capital and drawings.
Real account rule: Debit what comes in; Credit what goes out; Applies to assets such as cash, stock, machinery and land.
Nominal account rule: Debit all expenses and losses; Credit all incomes and gains; Applies to rent, salaries, interest, commission and discount.
Modern (accounting equation) rule: Assets = Liabilities + Capital. Debit increase in assets and expenses; credit increase in liabilities, capital and income; Reverse the effect to decrease. It gives the same answers as the golden rules.
Trial balance check: Total of debit balances = Total of credit balances; Agreement shows arithmetical accuracy only.
Ledger balance: Balance = Larger side total − Smaller side total; If the debit side is larger, the balance is a debit balance.
Gross profit: Gross profit = Sales (net of returns) − Cost of goods sold; Cost of goods sold = Opening stock + Purchases (net) + Direct expenses − Closing stock.
Net profit: Net profit = Gross profit + Other incomes − Indirect expenses; A negative result is a net loss.
Expense for the year (outstanding and prepaid): Expense for the year = Paid − Opening outstanding + Closing outstanding + Opening prepaid − Closing prepaid; Outstanding is a liability. Prepaid is an asset. Opening outstanding relates to the earlier year, so deduct it. Opening prepaid relates to this year, so add it.
Income for the year (accrued and unearned): Income for the year = Received − Opening accrued + Closing accrued + Opening unearned − Closing unearned; Accrued income is an asset. Unearned income is a liability. Opening accrued was earned last year, so deduct it. Opening unearned is earned this year, so add it.
Depreciation (straight line): Depreciation = (Cost − Scrap value) ÷ Life in years; For part of a year, charge only the months of use unless the question says otherwise.
Provision for doubtful debts: Provision = Rate × (Debtors − Further bad debts); Charge the new provision, less the old one, to P&L. Show debtors net of the provision in the balance sheet.
Capital (closing): Closing capital = Opening capital + Net profit + Additional capital − Drawings; Used in the balance sheet of a sole proprietor.
Suspense account rule: Excess of credits over debits in the trial balance: debit Suspense. Excess of debits: credit Suspense.; Suspense is placed on the side that is short.
Rectification principle: Rectifying entry = Correct entry − Wrong entry already passed; Errors that do not affect the trial balance are corrected without suspense.

Quick revision

Accounting is identifying, recording, classifying, summarising and interpreting financial transactions.
Double entry means every transaction has equal debit and credit effects.
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.
Going concern assumes the business will continue for the foreseeable future.
Accrual concept records income and expenses when they arise, not when cash moves.
Prudence means provide for expected losses but do not anticipate gains.
Consistency means following the same accounting policies from year to year unless there is a valid reason to change.
Accounting Standards and Ind AS bring uniform and comparable financial reporting.
A trial balance with equal totals does not prove that the books are free from errors.
Errors of omission, commission, principle and compensating errors may not disturb trial balance agreement.
Use a suspense account for errors that make the trial balance disagree, then clear it on rectification.
Adjustments such as outstanding expenses and prepaid items appear twice in final accounts: once in the P&L side and once in the balance sheet.

Common mistakes

Treating book-keeping and accounting as the same thing. Fix: Remember that book-keeping only records and classifies. Accounting also summarises, analyses, interprets and communicates.
Listing only owners as users of accounting information. Fix: Always list internal and external users and state what each needs, such as lenders needing repayment ability.
Mixing up accrual with cash basis, for example recording rent only when paid. Fix: Ask when the right to receive or the duty to pay arose. Record on that date and adjust for outstanding and prepaid items.
Saying going concern means the business will never close. Fix: Say it assumes the business will continue for the foreseeable future with no intention or need to liquidate. If that fails, state the departure.
Saying NFRA issues accounting standards. Fix: Write that ICAI formulates, NFRA recommends to the Central Government, and the Central Government notifies.
Writing that Ind AS is the same as IFRS. Fix: Say Ind AS is converged with IFRS, with changes made for Indian conditions.
Debiting or crediting the wrong side for drawings and capital Fix: Drawings reduce capital. Debit drawings when the owner takes cash or goods. Capital has a credit balance.
Putting the debtor on the credit side of the trial balance Fix: Debtors are assets and have debit balances. Creditors are liabilities and have credit balances.
Adding outstanding expenses only in the balance sheet. Fix: Add outstanding to the expense in P&L and show it as a liability. Do both together.
Showing closing stock only in the balance sheet when it is given as an adjustment. Fix: If closing stock is in the trial balance, it is already adjusted. If given outside, credit it in the trading account and show it as an asset.

Exam tips

Learn one clean definition and reuse it in all theory answers on this topic.
For users, always write the need beside each user. A bare list scores less.
In distinctions, use at least five bases and a two-column layout.
Link the answer to the Companies Act requirement to keep books of account when the question is on the role of accounting for a company.
Practise the capital method profit question, since it combines theory with a short calculation.
For differentiate-between questions on concepts and conventions, write points on nature, basis, and examples, and give a rupee example for each side.
Write the three AS 1 fundamental assumptions by name, and state that disclosure is needed only when one is not followed.
In application questions, name the concept before doing any calculation. The name earns marks even if arithmetic slips.