Accounting and Financial Literacy
Accounting and Financial Literacy tests the accounting equation, double-entry records, financial statements, and personal money management concepts such as budgeting and compounding.
Core rules and concepts
- The accounting equation is Assets = Liabilities + Capital. Every transaction affects at least two accounts and the equation stays balanced.
- Debit and credit are not "good" or "bad"; they are left and right sides of an account. For a bank, a loan is an asset; a customer deposit is a liability.
- The trial balance checks arithmetic equality, not correctness. The profit and loss account shows income and expenses; the balance sheet shows assets, liabilities and capital at a date.
- Depreciation allocates the cost of a fixed asset over its useful life. GST is a tax collected and paid, not business income. TDS is tax deducted at source.
Worked example
A bank sanctions a Rs 2 lakh loan and credits the customer's account. Entry: debit Loan Asset Rs 2,00,000; credit Customer Deposit Rs 2,00,000. Assets increase by Rs 2 lakh and liabilities increase by Rs 2 lakh, so the equation remains balanced. Reasoning: the bank has a new claim on the borrower and a new obligation to the depositor; both sides grow.
Traps that cost marks
Do not treat a deposit as bank income; it is a liability. Do not record a loan disbursement as an expense. Do not say the trial balance proves there are no errors. Do not add GST to sales revenue. Do not confuse profit with cash balance.