Fundamentals of Financial Accounting
Fundamentals of Financial Accounting tests the accounting equation, double-entry bookkeeping, accrual accounting, preparation of financial statements, and detection of errors. Expect journal entries, ledger balances, trial balance and bank reconciliation.
Core rules
- Accounting equation: Assets = Liabilities + Capital. Every transaction keeps it balanced; profit increases capital, drawings and losses reduce it.
- Debit entries increase assets and expenses; credit entries increase liabilities, capital and income. Each transaction has equal debits and credits.
- Accrual accounting records revenue when earned and expense when incurred, not when cash moves. Matching and prudence underpin adjusting entries.
- Capital expenditure creates or enhances a non-current asset; revenue expenditure is consumed in the period.
- Depreciation allocates cost over useful life; straight line = (cost - residual value)/useful life.
- A trial balance proves arithmetic debit-credit equality, not complete accuracy.
Worked example
Start with cash 500, loan 200 and capital 300. Buy equipment for cash 50: cash 450, equipment 50, assets 500, liabilities 200, capital 300. Earn a fee of 80 on credit: receivable 80 and capital/profit 80, so assets 580, liabilities 200, capital 380. Pay loan 30: cash 420, assets 550, liabilities 170, capital 380. The equation still balances.
Traps
A trial balance fails to detect omission of a transaction, wrong account on the same side, and compensating errors. A bank statement credit is not the same as a book credit. An accrued expense is a liability; a prepaid expense is an asset. Drawings are not an expense.