Fundamentals of Accounting
Domain 1 examines the conceptual foundation and the bookkeeping cycle: accounting concepts and conventions, the dual aspect, journal and ledger, trial balance, capital versus revenue, depreciation and bank reconciliation. Questions are practical and often test the effect of an entry on profit and on the balance sheet.
Foundations
- Business entity, money measurement, going concern, accrual, matching, prudence, consistency, materiality and historical cost.
- Dual aspect: every transaction has equal debits and credits.
- Capital expenditure creates or enhances earning capacity; revenue expenditure maintains it.
Recording cycle
Source document → journal (prime entry) → ledger → trial balance. Debit the receiver and credit the giver; under the modern approach, debit increases assets and expenses, while credit increases liabilities, capital and income.
Worked example: the owner starts business with cash Rs. 50,000; furniture is bought for cash Rs. 15,000; goods are bought on credit Rs. 20,000. Journal: Cash Dr 50,000 / Capital Cr 50,000; Furniture Dr 15,000 / Cash Cr 15,000; Purchases Dr 20,000 / Creditors Cr 20,000. Ledger balances are cash Rs. 35,000 Dr, furniture Rs. 15,000 Dr, purchases Rs. 20,000 Dr, capital Rs. 50,000 Cr and creditors Rs. 20,000 Cr. The trial balance totals Rs. 70,000 on each side.
Traps: treating drawings as an expense; debiting a capital purchase to repairs; omitting outstanding expenses from profit; treating a bank overdraft as a debit balance; assuming an agreeing trial balance proves accuracy, although errors of principle, omission, commission and compensating errors can cancel.