Accounting Fundamentals and Conceptual Framework
This domain tests the language of accounting: the accounting equation, double entry, books of prime entry, trial balance, accrual and cash bases, and the conceptual framework's elements and qualitative characteristics. Expect journal entries, ledger posting and error correction rather than isolated definitions.
Core rules
- The accounting equation is Assets = Liabilities + Equity. Expanded: Equity = Capital + Income - Expenses - Drawings.
- Accrual accounting recognises income when earned and expenses when incurred, not when cash moves. Going concern assumes the entity continues; consistency and prudence support comparability and caution.
- Fundamental qualitative characteristics: relevance and faithful representation. Enhancing: comparability, verifiability, timeliness, understandability.
- An asset is a controlled resource from past events expected to produce future economic benefits; a liability is a present obligation; income increases equity other than owner contributions; expenses decrease equity other than drawings.
Worked example
A trader starts with cash ₹1,00,000 and a bank loan ₹50,000. She buys equipment for ₹30,000 cash, earns fees ₹20,000 cash and pays rent ₹5,000. Cash = 1,00,000 + 50,000 - 30,000 + 20,000 - 5,000 = ₹1,35,000; equipment ₹30,000; assets ₹1,65,000. Liabilities ₹50,000; equity = capital ₹1,00,000 + profit ₹15,000 = ₹1,15,000. The equation balances.
Traps
Do not treat drawings as expense or capital introduced as income. A balanced trial balance does not prove there are no errors. Do not mix capital and revenue expenditure. Do not record credit sales only when cash arrives.