CSEET · Fundamentals of Accounting

Accounting Process: formula sheet

Full chapter guide

Key formulas

Business entity concept: Business and owner are separate; owner's capital = liability of the business; Owner's private expenses are drawings, not business expenses.
Money measurement concept: Only transactions measurable in money are recorded; Skills of staff or quality of management are not recorded.
Going concern concept: Business assumed to continue; assets shown at cost less depreciation; This is why prepaid expenses and fixed assets are carried forward.
Cost concept: Asset recorded at purchase cost, not market value; Cost is the base for later depreciation.
Dual aspect concept: Assets = Liabilities + Capital; Every transaction has two equal effects.
Accounting period concept: Life of business divided into periods, usually 12 months; Needed to find profit for a period.
Accrual and matching: Profit = Revenue earned in the period − Expenses incurred to earn it; Based on earning and incurring, not cash flow.
Realisation (revenue recognition): Revenue is recorded when goods are sold or service is rendered; Receipt of an order or advance alone is not sale.
Consistency: Same methods used year after year; Change only for a good reason, and disclose it.
Conservatism: Provide for all expected losses; ignore expected gains; Example: stock valued at lower of cost and net realisable value.
Materiality: Record or disclose items that could affect a decision; Very small items may be treated simply.
Full disclosure: All significant facts must be disclosed in the statements; Includes contingent liabilities and change of method.
Accounting equation: Assets = Liabilities + Capital; Capital = Assets − Liabilities. Holds after every transaction.
Personal account rule: Debit the receiver; Credit the giver; Applies to accounts of persons, firms, banks, companies, the owner's capital and the owner's drawings.
Real account rule: Debit what comes in; Credit what goes out; Applies to assets such as cash, goods, machinery and furniture.
Nominal account rule: Debit all expenses and losses; Credit all incomes and gains; Applies to rent, wages, commission received, interest earned and similar items.
Double entry check: Total debits = Total credits; Every transaction has at least one debit and one credit of equal total amount.
Personal account rule: Debit the receiver; Credit the giver; Applies to accounts of persons, firms, companies and banks, such as Ramesh or HDFC Bank.
Real account rule: Debit what comes in; Credit what goes out; Applies to assets such as cash, goods, machinery and furniture.
Nominal account rule: Debit all expenses and losses; Credit all incomes and gains; Applies to rent, salary, commission received, interest and similar items.
Journal entry balance check: Total of debit amounts = Total of credit amounts; Holds for every entry, simple or compound.
Opening entry: Capital = Total assets − Total outside liabilities; Debit all assets, credit all liabilities, and credit Capital with the balancing figure.
Standard journal format: Date | Particulars | L.F. | Dr. (₹) | Cr. (₹), then (Being ... narration); Write Dr. against the debit account, and 'To' before the credit account, which is indented.
Posting rule: Debit account: post on Dr side with "To (other account)". Credit account: post on Cr side with "By (other account)".; The amount is the same as in the journal. The particulars show the other account of the entry.
Balance of an account: Balance = Total of larger side − Total of smaller side; Write the balance on the smaller side as c/d so both totals match.
Debit balance: Total Dr > Total Cr, so closing balance is a debit balance; Typical for assets, expenses, losses and debtors.
Credit balance: Total Cr > Total Dr, so closing balance is a credit balance; Typical for liabilities, capital, income and creditors.
Carry down: Balance c/d on the smaller side; Balance b/d on the opposite side below the total; The b/d balance is the opening balance of the next period.
Amount recorded in purchase or sales book: Invoice value = List price − Trade discount; Trade discount is never shown as a separate entry. Cash discount is not recorded in these books.
Cash book balance: Closing balance = Total of debit side − Total of credit side; Cash column should never show a credit balance. Bank column can show an overdraft (credit balance).
Contra entry: Dr Bank column, Cr Cash column (cash deposited) or Dr Cash column, Cr Bank column (cash withdrawn); Both sides are in the same book. Do not post to any ledger account. Mark with C.
Discount column in triple column cash book: Discount allowed (debit side) → Dr Discount Allowed A/c; Discount received (credit side) → Cr Discount Received A/c; The discount columns are only totalled, not balanced. Total is posted to the ledger.
Imprest system: Amount to be reimbursed = Total petty expenses of the period; Opening imprest = Total expenses + Closing petty cash balance (when no extra amount is drawn).
Basic rule: Total of debit balances = Total of credit balances; If they agree, the books are arithmetically accurate. They may still contain errors that do not affect totals.
Normal debit balances: Assets + Expenses + Losses + Drawings + Opening stock + Purchases + Sales returns; Cash, debtors, machinery, rent paid, wages, purchases and drawings all go in the debit column.
Normal credit balances: Liabilities + Capital + Incomes + Gains + Sales + Purchase returns + Provisions and reserves; Creditors, loans taken, capital, discount received and sales go in the credit column.
Difference in totals: Difference = Larger total − Smaller total; Put the difference in a suspense account on the smaller side, if asked, until errors are found.
Suspense account rule: Debit total > Credit total → Credit Suspense with the difference; Credit total > Debit total → Debit Suspense with the difference; Suspense goes on the side that is short, so that the trial balance agrees.
Rectifying entry rule: Rectifying entry = Correct entry − Wrong entry already made; Reverse the wrong effect and add the right effect, then combine into one entry where possible.
Complete reversal: Amount to debit and credit in the rectifying entry = 2 × original amount; The wrong side already has the amount once, so you must cancel it and then post it to the right side.
Errors not affecting the trial balance: Omission (complete), commission, principle, compensating, original entry, complete reversal; No suspense account is used for these.
Errors affecting the trial balance: One-sided posting, wrong amount on one side, wrong totalling or balancing, partial omission; These create a difference, and a suspense account may be opened.
Suspense closing check: Rectifying entries posted to Suspense must together equal the opening difference, so the closing balance is nil; If Suspense does not close to nil, one of your entries is wrong or an error is still missing.
Favourable balance (debit in cash book): Cash book shows a debit balance = Cash at bank (asset). Pass book shows a credit balance for the same money.; The bank treats your deposit as a liability to you, so the pass book is the mirror image of the cash book.
Overdraft: Overdraft: cash book shows a credit balance; pass book shows a debit balance.; Read the question carefully for words like 'overdraft' or 'bank overdraft as per cash book'.
Starting from a favourable cash book balance: Pass book balance = Cash book balance + cheques issued but not presented + direct credits by bank not in cash book − cheques deposited but not collected − direct debits by bank not in cash book; Reverse the same items to go from the pass book to the cash book.
Starting from a favourable pass book balance: Cash book balance = Pass book balance + cheques deposited but not collected + direct debits by bank not in cash book − cheques issued but not presented − direct credits by bank not in cash book; Each item has the opposite sign to the cash book method.
Overdraft rule: If you start from an overdraft balance, the signs of all items reverse.; Safest approach: treat overdraft as a negative amount, then use the same formula.

Quick revision

Assets = Liabilities + Capital is the accounting equation, and it must always balance.
Debit the receiver and credit the giver for personal accounts.
Debit what comes in and credit what goes out for real accounts.
Debit expenses and losses and credit incomes and gains for nominal accounts.
Every transaction affects at least two accounts, with total debits equal to total credits.
The journal is the book of original entry, and the ledger is the book of final entry.
Total both sides of a ledger account, insert the difference as the balancing figure (c/d) on the smaller side so the totals agree, and bring it down (b/d) on the opposite, larger side.
A trial balance agreeing shows arithmetical accuracy only, not that the books are free of errors.
Errors of omission, commission, principle and compensating errors do not all affect the trial balance in the same way.
A suspense account holds a trial balance difference temporarily and is cleared once the errors are found.
A BRS reconciles the cash book bank balance with the passbook balance.
Cheques issued but not yet presented and cheques deposited but not yet credited are common reconciling items.

Common mistakes

Treating accrual and matching as the same thing. Fix: Accrual decides when to record an item. Matching sets the expenses of a period against the revenue of that period.
Saying going concern means the business will never close. Fix: Say it is an assumption that the business will continue for the foreseeable future, with no plan to shut down or scale down sharply.
Treating debit as 'decrease' and credit as 'increase' for every account. Fix: Remember that the effect depends on the account type. Debit increases assets and expenses but decreases liabilities and capital.
Classifying outstanding rent or prepaid insurance wrongly as nominal only. Fix: The expense itself (Rent A/c, Insurance A/c) is nominal. But Outstanding Rent A/c is a representative personal account, because it is a liability to the person to whom rent is owed. Prepaid Insurance A/c is an asset, because the business has paid for cover it has not yet used. It is usually treated as a real account, though some books call it a representative personal account. Neither is nominal. Read the full wording.
Debiting the wrong side for owner-related items, such as drawings or capital introduced Fix: Drawings reduce capital and are debited to Drawings A/c. Capital introduced is credited to Capital A/c.
Recording purchase of an asset as Purchases A/c Fix: Purchases A/c is only for goods meant for resale. Use Machinery A/c, Furniture A/c and so on for assets.
Posting both sides of an entry on the same side Fix: For each entry, say aloud: "This account is debited, that account is credited." Then place each on its own side.
Writing the wrong account name in particulars Fix: In the Cash account, a sale shows "To Sales", not "To Cash". Always write the opposite account.
Recording cash purchases or purchase of furniture in the purchase book. Fix: Purchase book is only for credit purchases of goods meant for resale. Cash purchases go to the cash book and assets go to the journal proper.
Recording the invoice at list price instead of net of trade discount. Fix: Deduct trade discount first and record the net amount. Show no separate entry for trade discount.

Exam tips

Learn one rupee example for each concept. Written answers with an example score better than bare definitions.
For a 'differentiate' question, write at least two points of difference and name the basis of each.
In MCQs, look for the trigger word: separate, cost, continue, earned, same method, expected loss.
If a question uses the word principle, assumption or postulate, answer in terms of the same concepts and state which you are using.
Keep each short note to a definition, an example and a purpose. This fits the time available.
In written answers, name the account type in brackets next to each account. It shows your reasoning and can earn method marks.
Practise classification lists quickly. Questions often give 8 to 10 accounts and ask for the type of each.
Always use the full format: 'Dr' on the first line and 'To' on the credit line.