BASICS
Entity concept: owner separate from company
Double-entry bookkeeping: each transaction affect
at least 2 accounts in balance sheet
Revenue: goods delivered/job completed + money
realised or realisable; from core ops
Expense: expenses associated with revenue in the
same period (matching principle) during core ops
Product costs: directly associated with revenues.
E.g. Raw material, wages of labour, etc
Period costs: Not directly linked to specific
revenues. E.g. Admin salary, utility bills.
Gains: economic value from non-core activities.
Losses: value forgone in non-core activities.
Asset: future economic benefit
Liability: present obligations
OTHER DEFINITIONS
Accounting Methods:
1. GAAP/IFRS – Nature of function (COGS given directly)
2. IndAS- Nature of expenses
Deferred Revenue- payment received but job not done (liability)
Accrued revenue – Job done but payment not collected. Comes under
Accounts Receivables (asset)
Deferred Expenses – payment done to supplier, but
material/inventory/service not taken yet (asset)
Accrued Expense – Materials/service taken from supplier, but payment
not done. Comes under Accounts Payable (liability)
DEAD CLEAR MNEMONIC
Debit: Expenses, Assets, and Dividends
IMPORANT FORMULA
Credit: Liabili es, Equity, and Revenues
Net Income = Revenue + Gains – Expenses - Losses
Opening RE + Net income – Dividends = Closing RE
Final Inv = Start Inv + Purchases - COGS
Opening AP + Purchases – Payments to Suppliers = Closing AP
Opening AR + Credit Sales – Cash Collected = Closing AR
Gross profit = Sales (Revenue from ops) - COGS
Gross profit margin = Gross profit / Sales
Operating Profit = Gross Profit – Operating expense – Depreciation
Operating profit margin = Operating profit / Sales
EBT = Net Income + Taxes
Pretax margin = EBT / Sales
Net profit margin = Net income / Sales
Free Cash Flow (FCFE = Net Income + Depreciation+ Amortization -
Capital Expenditures - Change in Working Capital+ Net Borrowing)
Personal notes
ACCOUNTS RECEIVABLES (AR)
Amounts owed from customers. Not all amounts are realised so we must
create allowance and adjust against “Bad debt expense”
Net realisable AR = Gross AR – Allowance
Loss recognized in P&L is called “Bad Debt Expense (BDE)”.
CASH FLOW STATEMENT (INDIRECT METHOD) Depending on the method, this may or may not be true loss.
The defaulted amount in a period is referred to as “Write Off”.
This is the true loss to AR
o Direct Method: Directly reduce Write off from AR and
expense them as and when they happen
Ending Allowance = Start Allowance + BDE – Write Offs
o % AR method: Calculate Ending allowance as % of AR
and back calculate BDE
o % sales method: Calculate BDE as % of sales and find
out Ending Allowance
Allowance = Contra-assets
Write-offs: reduce AR and allowance (no P&L impact)
Recoveries: Reverse write-off by rese ng AR and allowance (no
P&L impact, record cash)
Reversal of allowance: When es mated losses are overstated,
reverse via- Credit bad debt expense, debit allowance
Both methods give same journal entries but in diff order.
Cash flow from financing and inves ng directly to be Efficiency Ra os
made based on entries of table on Pg 1.
INVENTORY
Goods held for sale or items used in manufacture of products that
will be sold. 3 types – raw material, WIP, finished goods
Capitalized Inventory Costs:
Purchase cost, taxes, freight-in, insurance, storage ( ll
ready)
Manufacturing set up –direct labour, manufacturing
overheads, deprecia on of factory & machinery
Exclude: selling costs, freight-out (delivery to customers),
storage post ready
Personal notes
LIFO Reserve = FIFO Inv. – LIFO Inv.
o Represents unrealized holding gains. Required
disclosure under US GAAP.
Inventory Write-downs:
Lower of cost or market: If market value < cost, write down
inventory
IFRS/Ind AS: reversal allowed up to previous allowance
US GAAP: no reversal
