Basics of Accounting
This domain introduces accounting records used in retail: the accounting equation, double entry, invoices, cash and credit transactions, and basic statements. The exam tests classification and simple entries.
Core rules and concepts
- Accounting equation: assets = liabilities + equity.
- Every transaction affects at least two accounts; total debits equal total credits.
- Debit is not “bad” and credit is not “good”; they are left and right entries.
- Revenue increases equity; expenses decrease equity.
- A profit and loss statement shows revenue and expenses for a period; a balance sheet shows assets, liabilities and equity on a date.
- Keep business and personal transactions separate.
Worked example
A shop sells goods for Rs 5,000 cash. Entry: debit cash Rs 5,000; credit sales Rs 5,000. Reasoning: cash, an asset, increases, so it is debited; sales revenue increases equity, so it is credited. If the sale were on credit, the debit would be to the customer receivable instead of cash. The transaction is not profit until cost of goods is also considered.
Traps that cost marks
- Treating sales revenue as profit.
- Mixing owner’s personal spending with business cash.
- Reversing debit and credit.
- Ignoring credit sales until cash arrives.
Key points
- Assets = liabilities + equity.
- Debits must equal credits.
- Revenue is not the same as profit.
- Cash sales and credit sales affect different accounts.
- Separate business and personal records.