Fundamentals of Accounting: Concepts, Conventions, Accounting Equation, Journal, Ledger and Trial Balance
Fundamentals of Accounting is the foundation domain: the exam tests whether you can apply concepts and conventions, build the accounting equation, record journal entries, post to ledger accounts and extract a trial balance that agrees.
Core rules
- Business entity keeps owner and business separate; money measurement records only monetary items; going concern assumes continuity; accrual records income/expense when earned/incurred; matching sets expenses against related revenue; prudence provides for losses but not profits; consistency and materiality guide presentation.
- Accounting equation: Assets = Liabilities + Capital. Expanded: A = L + C + Revenue − Expenses − Drawings.
- Journal golden rules: personal - debit the receiver, credit the giver; real - debit what comes in, credit what goes out; nominal - debit expenses/losses, credit incomes/gains.
- Ledger posting uses the same debit/credit; a trial balance lists debit and credit balances and should agree.
Worked example
Start business with cash ₹50,000; buy furniture ₹10,000 cash; buy goods on credit ₹15,000; sell goods costing ₹8,000 for ₹12,000 cash. Assets: cash 50,000 − 10,000 + 12,000 = ₹52,000; furniture ₹10,000; stock 15,000 − 8,000 = ₹7,000; total ₹69,000. Liabilities ₹15,000 + capital (50,000 + profit 4,000) ₹54,000 = ₹69,000. The sale entry is Cash A/c Dr 12,000; Sales A/c Cr 12,000, with the stock transfer handled through purchases/cost of goods sold in final accounts.
Traps
Drawings are not an expense; a trial balance can agree despite omitted or compensating errors; credit purchases affect creditors, not cash; do not debit a nominal account for a capital receipt.