Accounting and Financial Records
Accounting and Financial Records
This domain tests the accounting equation, source documents, double entry, the trial balance and the preparation of simple financial statements. Accuracy in debits, credits and classification is more important than lengthy presentation.
Core rules
- Assets = liabilities + equity. Every transaction keeps this equation balanced.
- Debit entries increase assets and expenses; credit entries increase liabilities, equity and income.
- Source documents include receipts, invoices, credit notes and bank statements; they support entries in books of original entry.
- The trial balance checks arithmetic equality, not complete accuracy: compensating errors can still balance.
- Gross profit = sales revenue − cost of sales. Net profit = gross profit + other income − expenses.
Worked example
A owner starts with P10,000 cash. Assets rise by P10,000 and equity rises by P10,000. The business buys equipment for P3,000 cash: equipment rises by P3,000 and cash falls by P3,000, so total assets are unchanged. It buys stock for P2,000 on credit: inventory rises by P2,000 and liabilities rise by P2,000. It sells goods costing P1,200 for P1,800 cash: cash rises by P1,800, inventory falls by P1,200 and equity rises by P600 profit. Final assets are P8,800 cash + P800 inventory + P3,000 equipment = P12,600; liabilities P2,000; equity P10,600.
Traps that cost marks
- Reversing debits and credits.
- Treating drawings as a business expense.
- Omitting cost of sales from the income statement.
- Recording capital expenditure as a revenue expense.
- Assuming a balanced trial balance proves there are no errors.