Accounting and Costing Basics for SEBI Grade A: Journal, Final Accounts, Ratios, Depreciation, Marginal Costing, Break-even (+ Quiz)

Commerce & Accountancy and Costing together make up a large part of SEBI Grade A Paper 2. Many aspirants from non-commerce backgrounds find them hard, but the questions are mostly about concepts and simple formulas. This guide gives you both, with worked examples.

Accounting concepts and conventions

Concept	Meaning
Business entity	Business is separate from its owner
Going concern	The business will continue in the foreseeable future
Money measurement	Only things measured in money are recorded
Accrual	Income and expenses recorded when earned/incurred, not when cash moves
Matching	Expenses matched with the revenue of the same period
Dual aspect	Every transaction has two effects: Assets = Liabilities + Capital
Historical cost	Assets recorded at purchase price
Conservatism (prudence)	Anticipate no profit, provide for all possible losses
Consistency	Same methods every year
Materiality	Record what matters to users

Golden rules of accounting

Account type	Debit	Credit
Personal (people, firms)	The receiver	The giver
Real (assets)	What comes in	What goes out
Nominal (expenses, incomes)	All expenses and losses	All incomes and gains

Modern approach: increase in asset/expense = debit; increase in liability/capital/income = credit.

Accounting cycle

Transaction → Journal (book of original entry) → Ledger → Trial Balance → Final Accounts (Trading A/c, Profit & Loss A/c, Balance Sheet)

• Trial balance checks arithmetical accuracy; it does not catch errors of omission, principle or compensating errors.
• Bank Reconciliation Statement matches the cash book with the bank passbook.
• Capital vs revenue: capital expenditure creates long-term assets (machinery); revenue expenditure is for day-to-day running (wages, rent).

Depreciation

Method	How it works
Straight Line Method (SLM)	Same amount every year = (Cost − Scrap value) ÷ Useful life
Written Down Value (WDV)	Fixed % on the reducing balance; higher charge in early years; used for income tax
Sum of years’ digits, units of production, annuity, sinking fund	Other methods

Example (SLM): Machine ₹1,10,000, scrap ₹10,000, life 5 years → depreciation = ₹1,00,000 ÷ 5 = ₹20,000 a year.

Key ratios (most asked)

Ratio	Formula	Ideal / meaning
Current ratio	Current assets ÷ Current liabilities	2:1 (liquidity)
Quick (acid-test) ratio	(Current assets − Inventory − Prepaid) ÷ Current liabilities	1:1
Debt–equity ratio	Long-term debt ÷ Shareholders’ funds	2:1 or lower (solvency)
Interest coverage ratio	EBIT ÷ Interest	Higher is safer
Inventory turnover	Cost of goods sold ÷ Average inventory	Higher = faster-moving stock
Debtors turnover	Credit sales ÷ Average debtors	Collection period = 365 ÷ ratio
Gross profit ratio	Gross profit ÷ Net sales × 100	Profitability
Net profit ratio	Net profit ÷ Net sales × 100	Profitability
Return on equity (ROE)	Net profit ÷ Shareholders’ equity × 100	Return to owners
EPS	(Net profit − Preference dividend) ÷ Number of equity shares	Per-share earnings
P/E ratio	Market price ÷ EPS	Valuation

Cash flow statement (AS 3 / Ind AS 7)

Activity	Examples
Operating	Cash from customers, payments to suppliers and staff
Investing	Buying or selling fixed assets and investments
Financing	Issuing shares, taking or repaying loans, paying dividends

Ind AS (converged with IFRS) apply to listed and large companies; banks and NBFCs follow separate timelines.

Costing basics

Elements of cost and the cost sheet

Item	Meaning
Prime cost	Direct material + direct labour + direct expenses
Factory (works) cost	Prime cost + factory overheads
Cost of production	Works cost + office/administration overheads
Cost of sales	Cost of production + selling and distribution overheads
Sales	Cost of sales + profit

Marginal costing and break-even

Term	Formula
Contribution	Sales − Variable cost (= Fixed cost + Profit)
P/V ratio (profit-volume)	Contribution ÷ Sales × 100
Break-even point (BEP), units	Fixed cost ÷ Contribution per unit
BEP, sales value	Fixed cost ÷ P/V ratio
Margin of safety	Actual sales − BEP sales (also = Profit ÷ P/V ratio)

Example: Selling price ₹50, variable cost ₹30, fixed cost ₹2,00,000.

• Contribution per unit = 50 − 30 = ₹20; P/V ratio = 20 ÷ 50 = 40%
• BEP = 2,00,000 ÷ 20 = 10,000 units (or ₹5,00,000 of sales)
• If sales are 15,000 units: profit = (15,000 × 20) − 2,00,000 = ₹1,00,000; margin of safety = 5,000 units

Standard costing and budgets

Term	Meaning
Standard cost	Pre-set cost used for control
Variance	Actual − Standard; favourable if actual cost is lower
Material cost variance	= Price variance + Usage variance
Labour cost variance	= Rate variance + Efficiency variance (+ idle time)
Fixed budget	One activity level
Flexible budget	Changes with activity level
Zero-based budgeting	Every expense justified from zero each year

Exam-ready one-liners

1. Assets = Liabilities + Capital (dual aspect).
2. Real account: debit what comes in, credit what goes out.
3. Trial balance does not detect errors of omission or principle.
4. SLM depreciation = (Cost − Scrap) ÷ Life.
5. Ideal current ratio 2:1; quick ratio 1:1.
6. Contribution = Sales − Variable cost; BEP (units) = Fixed cost ÷ Contribution per unit.
7. Margin of safety = Actual sales − Break-even sales.
8. Prime cost = Direct material + Direct labour + Direct expenses.

Related reading

• Corporate finance basics: NPV, IRR, WACC
• Companies Act 2013 key sections
• SEBI Grade A 2027 guide

Quiz: test yourself

Formulas follow standard textbooks (ICAI study material and NCERT). Practise numericals regularly for speed.