Finance, Accounting and Basic Bookkeeping for Small Business
What this domain tests
Recording a few transactions correctly, reading a simple profit statement, and knowing the difference between profit and cash.
Core concepts
- Bookkeeping records transactions; accounting also classifies, summarises, interprets and communicates. Both rest on the dual aspect concept, so every transaction has two effects.
- Accounting equation: Assets = Liabilities + Capital.
- Books: journal (original entry), ledger (classification), cash book, petty cash book, trial balance (arithmetic check).
- Capital expenditure buys long-term assets; revenue expenditure is day-to-day running cost. Depreciation spreads an asset's cost over its useful life.
- Profit and loss account shows income minus expenses for a period; the balance sheet shows assets, liabilities and capital on a date.
- Working capital = current assets − current liabilities. Break-even = fixed cost ÷ contribution per unit.
- Keep invoices for GST and for the bank; the composition scheme suits very small traders below the turnover limit.
Worked example
A shop starts with ₹50,000 cash from the owner. Transaction 2: buys furniture for ₹10,000 cash → cash ₹40,000 + furniture ₹10,000 = capital ₹50,000. Transaction 3: buys stock ₹15,000 on credit → assets ₹40,000 + ₹15,000 + ₹10,000 = ₹65,000; liabilities ₹15,000 + capital ₹50,000 = ₹65,000. Both sides still balance. Reasoning: apply the accounting equation to every entry before writing the debit and credit, and errors in one side are caught immediately.
Traps that cost marks
- Treating the owner's drawings as a business expense; drawings reduce capital.
- Saying a profitable firm cannot run short of cash - it can, if debtors pay late or stock is overstocked.
- Writing that a trial balance proves there are no errors; it only proves debits equal credits.