Accounting and Financial Management
Accounting and Financial Management
This domain tests double-entry bookkeeping, final accounts and the ratios used to judge liquidity, profitability and solvency. Expect journal entries, ledger posting, trial balance, bank reconciliation and working-capital decisions.
Core rules and concepts
- Assets = liabilities + capital; every transaction affects at least two accounts.
- Debit the receiver and credit the giver is a memory aid, but the accounting equation is the reliable test.
- Capital expenditure creates a long-term asset; revenue expenditure is charged to profit and loss.
- Depreciation allocates an asset’s cost over its useful life; it is not a cash payment.
- A bank reconciliation statement explains differences between the cash book and bank statement: unpresented cheques, deposits not yet credited, bank charges and direct credits.
- Gross profit = sales − cost of goods sold; net profit = gross profit − expenses.
Worked example
The cash book shows ₹50,000. A cheque of ₹8,000 deposited has not yet been credited by the bank, and bank charges of ₹500 appear only in the bank statement. The bank statement balance is ₹50,000 − ₹8,000 − ₹500 = ₹41,500. Reasoning: items that reduce the bank statement but are not yet in the cash book are subtracted when moving from cash book to bank statement.
Traps that cost marks
- Recording a cash sale as a credit sale.
- Treating depreciation as cash outflow.
- Adding unpresented cheques in the wrong direction.
- Confusing gross profit with net profit.