Financial Accounting: Principles, Journal, Ledger, Trial Balance, Final Accounts
Financial Accounting tests the accounting cycle from source document to final accounts. The exam expects correct debit-credit logic, not memorised journal entries.
The accounting cycle
- Accounting equation: Assets = Liabilities + Capital; every transaction keeps it balanced.
- Golden rules: debit the receiver and credit the giver for personal accounts; debit what comes in and credit what goes out for real accounts; debit expenses and losses, credit incomes and gains for nominal accounts.
- Journal, ledger, trial balance, trading and profit and loss account, then balance sheet.
- Accrual: record income when earned and expense when incurred, not when cash moves.
- Depreciation is a non-cash expense that allocates the cost of a fixed asset over its useful life.
- Capital expenditure creates an asset; revenue expenditure is consumed in the period.
Worked example
Salary of ₹5,000 for March is unpaid at year-end. Entry: Salary A/c Dr 5,000 To Outstanding Salary A/c 5,000 Effect: expense increases by debit; liability increases by credit. Salary appears in the profit and loss account and outstanding salary in the balance sheet.
Traps
- Debiting an increase in a liability.
- Treating drawings as an expense instead of a reduction in capital.
- Ignoring closing stock in the trading account.
- Recording depreciation without an accumulated depreciation account.
- Believing a balanced trial balance proves there are no errors; errors of omission, principle and compensating errors can still exist.