Accounting Principles and Processes
This domain tests the conceptual foundation that makes financial statements comparable, plus the mechanical cycle that turns transactions into a trial balance. Expect journal entries, subsidiary books, rectification of errors, bank reconciliation and capital-versus-revenue distinctions.
Concepts the examiner repeats
- Business entity and money measurement - the firm is separate from the owner; only money-measurable events enter the books.
- Going concern and accrual - income and expenses are recognised when earned or incurred, not when cash moves.
- Matching - expenses are set against the revenue of the same period; this is why closing stock, outstanding expenses and prepaid items exist.
- Prudence, consistency, materiality - provide for known losses, never anticipate profits, and disclose any policy change.
- Dual aspect - every transaction produces equal debits and credits.
The process
Journal → ledger → trial balance. Errors of complete omission, commission, principle, compensating errors and errors of original entry can leave the trial balance in agreement. Only one-sided errors, wrong casting or a wrong figure carried into the trial balance disturb it, and only those need a Suspense Account.
Worked example
Goods worth ₹10,000 sold to Ram were posted to Shyam's account. A debit of ₹10,000 and a credit of ₹10,000 both exist, so the trial balance still agrees - it is an error of commission in personal accounts. Rectification:
Ram's A/c Dr. 10,000 To Shyam's A/c 10,000
By contrast, wages paid for installing machinery and debited to Wages A/c is an error of principle: the trial balance agrees, but both capital and revenue figures are distorted.
Traps that cost marks
Passing the rectification entry twice; assuming a tallied trial balance means no errors; treating a bank overdraft as a debit balance; and ignoring that a dishonoured cheque reverses an earlier receipt entry.