Accounting Fundamentals and Theory Base of Accounting
This domain tests the conceptual bedrock of the subject: what accounting sets out to do, the vocabulary used, and the assumptions that make financial statements comparable. CHSE questions are usually short-answer items plus one application question on the accounting equation or on spotting the concept a treatment violates.
The theory base
- Business entity – owner and business are separate; drawings are not an expense.
- Money measurement – only what can be measured in money is recorded.
- Going concern – assets appear at cost less depreciation, not at break-up value.
- Accrual – revenue and expenses are recorded when earned or incurred, not when cash moves.
- Matching – the expenses of a period are set against the revenue they helped earn.
- Consistency, prudence, materiality, full disclosure and cost complete the list.
The accounting equation
Assets = Liabilities + Capital. Every transaction keeps it in balance; this is the dual aspect idea in action.
Worked example
A starts business with ₹5,00,000 cash, buys furniture for ₹80,000, buys goods on credit ₹60,000, and sells half the goods for ₹50,000 cash. Cash = 5,00,000 − 80,000 + 50,000 = ₹4,70,000; furniture ₹80,000; stock ₹30,000, so assets are ₹5,80,000. On the other side, creditors ₹60,000 and capital ₹5,00,000 plus profit ₹20,000 (50,000 − 30,000) = ₹5,20,000. Both sides agree at ₹5,80,000.
Traps
- Recording a transaction only once, or missing that a credit purchase raises an asset and a liability together.
- Treating drawings as an expense rather than a reduction of capital.
- Using prudence to create hidden reserves, which breaks consistency and full disclosure.
- Calculating profit as cash in minus cash out while ignoring accrued items.