Accounting, Bookkeeping and Financial Literacy
Accounting, bookkeeping and financial literacy tests whether you can record transactions, read statements and apply money skills. Expect the accounting equation, double entry, trial balance, final accounts, depreciation, bank reconciliation and personal budgeting.
Core rules
- Assets = Liabilities + Capital.
- Every transaction has two effects: debit one account, credit another.
- Journal, ledger, trial balance, trading and profit and loss account, then balance sheet.
- Capital expenditure creates an asset; revenue expenditure is a recurring expense.
- Depreciation allocates an asset's cost over its useful life; straight-line and written-down-value are common methods.
- Bank reconciliation explains differences between the cash book and bank statement.
- Financial literacy covers budgeting, emergency funds, compounding, inflation, credit scores and insurance.
Worked example
A business buys furniture for ₹20,000 cash. Debit furniture, because the asset increases by ₹20,000, and credit cash, because the asset decreases by ₹20,000. Total assets are unchanged and the equation still balances. If instead the furniture were bought on credit, the debit would be furniture and the credit would be a creditor, increasing both assets and liabilities by ₹20,000. Reasoning: the form of payment determines the credit entry, not the asset acquired.
Traps that cost marks
Debiting and crediting the same side; treating capital expenditure as a revenue expense; forgetting outstanding expenses and prepaid items; and assuming a cash profit equals an accounting profit. In personal finance, do not call a credit limit income or an EMI a saving.