Accounting and Bookkeeping
What the examiner expects
Accounting records, classifies and summarizes transactions so that owners, creditors and tax authorities can judge performance and position. Learn the accounting equation (assets = liabilities + capital), the double-entry rules, and the accounting cycle: source document, journal, ledger, trial balance, adjusting entries, then the income statement and statement of financial position. Understand the concepts of business entity, going concern, accrual, consistency, prudence and money measurement. Distinguish capital expenditure from revenue expenditure, and drawings from expenses. Know straight-line and reducing-balance depreciation, provision for doubtful debts, and the purpose of a bank reconciliation statement.
Traps
- A trial balance that balances is not proof of accuracy: errors of principle, omission, compensating errors and wrong entries in both accounts remain hidden.
- Accrual accounting records revenue when earned, not when cash arrives; a cash sale and a credit sale are not the same.
- Depreciation spreads the cost of a fixed asset; it is not a cash fund set aside for replacement.
- Drawings reduce capital; they are not a business expense.
Worked example
A trader starts with cash 50,000. She buys equipment for 20,000 cash and goods for 10,000 on credit. Assets are cash 30,000 + equipment 20,000 + stock 10,000 = 60,000. Liabilities are 10,000 and capital is 50,000, so 60,000 = 10,000 + 50,000. The equation balances after every transaction, which is why every debit must have an equal credit.
Rule of thumb
Ask two questions for each transaction: which accounts are affected, and does each account increase or decrease? Debit the receiver, credit the giver, and check the equation.