Accounting
Concepts and statements
The accounting domain covers how transactions become financial statements: the statement of financial position (balance sheet), the statement of profit or loss, and the statement of cash flows. Understand the accruals basis, going concern, consistency, prudence, and substance over form. Assets are recognised when future economic benefits are probable and measurable; liabilities when an obligation exists.
Measurement and adjustments
Know depreciation methods (straight line and reducing balance), inventory valuation (lower of cost and net realisable value), and impairment. Provisions are recognised for probable outflows that can be reliably estimated; contingent liabilities are disclosed, not provided, unless the outflow becomes probable.
Traps in questions
- Profit is not cash. A profitable firm can run out of cash; the cash flow statement explains the difference.
- Depreciation is an allocation, not a fund set aside for replacement.
- Capitalising versus expensing changes profit in the current year and later years.
- Substance over form: a lease that transfers risks and rewards is treated as a purchase even if legal title stays with the lessor.
Worked rule of thumb
An asset costs 10,000, has a residual value of 1,000 and a four-year life. Straight-line depreciation is (10,000 − 1,000) ÷ 4 = 2,250 per year. Under reducing balance at 25%, year one is 10,000 × 25% = 2,500; year two is (10,000 − 2,500) × 25% = 1,875. Ask which method the stem specifies before calculating, and check whether residual value applies.