Commerce
Commerce tests the language of business transactions: how cash, credit, inventory, and profit are recorded and how statements reflect them. Expect items on the accounting equation, double-entry rules, accrual accounting, and working-capital interpretation.
Core rules
- The accounting equation is Assets = Liabilities + Equity; every transaction keeps it balanced.
- Double entry: each transaction affects at least two accounts, with equal debits and credits.
- Accrual accounting records revenue when earned and expenses when incurred, not when cash moves. The matching principle pairs expenses with the revenue they helped generate.
- Gross profit = revenue - cost of goods sold; net profit also deducts operating expenses, interest, and tax.
- Working capital = current assets - current liabilities; it measures short-term liquidity, not profit.
Worked example
A firm opens with assets 500,000 = liabilities 200,000 + equity 300,000. It buys inventory 50,000 on credit: inventory +50,000 and accounts payable +50,000, so assets 550,000 = liabilities 250,000 + equity 300,000. It then pays suppliers 20,000 cash: cash -20,000 and accounts payable -20,000, leaving assets 530,000 = liabilities 230,000 + equity 300,000. The equation stays balanced because each entry has two effects.
Traps
Treating owner drawings as an expense; recording a cash receipt as revenue before goods are delivered under accrual accounting; adding inventory purchases to expenses immediately instead of matching cost of goods sold; and calling a large cash balance profit. A credit sale increases receivables and revenue, not cash, so liquidity and profit can move in opposite directions.