Financial Accounting Fundamentals
Financial Accounting Fundamentals tests your grip on the concepts and conventions that sit under every set of final accounts: the accounting equation, accrual, matching, prudence and the capital-versus-revenue split. Questions usually arrive as short computations or as 'which treatment is correct' items.
Core rules
- Assets = Liabilities + Capital; every transaction must leave this equation balanced.
- Accrual: record income when earned and expense when incurred, not when cash moves. The matching concept follows from it.
- Prudence: provide for likely losses, never anticipate profits.
- Capital expenditure creates or enhances earning capacity (new machine, extension); revenue expenditure maintains it (repairs, rent, wages).
- Depreciation allocates cost less residual value over useful life. SLM gives an equal annual charge; WDV gives a falling charge.
Worked example
A machine costs ₹1,20,000 with residual value ₹20,000 and a five-year life. SLM charge = (1,20,000 − 20,000) ÷ 5 = ₹20,000 a year; after three years the book value is 1,20,000 − 60,000 = ₹60,000. If instead ₹15,000 is spent replacing a worn motor so the machine merely keeps working, that is revenue expenditure and hits the profit and loss account, not the asset.
Traps that cost marks
- Depreciating land, or charging a full year on an asset bought or sold mid-year without applying a pro-rata basis.
- Treating a provision (a charge against profit) as a reserve (an appropriation of profit).
- Booking a prepaid insurance premium as an expense of the current year, breaking the matching rule.
- Reading 'capital' in the accounting equation as share capital only, when it means total owner's equity.