Principles of Accounting and Basic Concepts
What the domain tests
Principles of Accounting and Basic Concepts examines whether you can explain why transactions are recorded systematically and apply the assumptions that make financial statements comparable. Expect definitions of accounting, book-keeping and accountancy; users of accounting information; basic terms such as capital, drawings, assets, liabilities, revenue and expense; and the concepts and conventions that guide recording.
Core rules
- Business entity: the proprietor and the business are separate for accounting. A shop owner’s household electricity bill is drawings, not business expense.
- Money measurement: only transactions measurable in money are recorded.
- Dual aspect: every transaction has two effects; assets = liabilities + capital.
- Accrual: revenue and expense are recognised when earned or incurred, not merely when cash moves.
- Going concern, consistency, prudence, materiality, cost, matching and realisation guide valuation and timing.
- Capital expenditure creates a long-term asset; revenue expenditure maintains earning capacity.
Worked example
A trader starts with cash ₹80,000, buys furniture for ₹15,000 cash, and pays rent ₹4,000. After the furniture purchase, cash falls by ₹15,000 and furniture rises by ₹15,000, so total assets are unchanged; the equation remains ₹80,000 = ₹0 + ₹80,000. Rent is a revenue expense: cash becomes ₹61,000 and capital falls to ₹76,000 through profit reduction. The equation is ₹61,000 cash + ₹15,000 furniture = liabilities ₹0 + capital ₹76,000.
Traps
Do not treat the owner’s personal payment as business expense; do not record an order placed as a transaction; do not confuse capital expenditure with revenue expenditure; and do not say the accounting equation is violated by credit sales-debtors replace stock or increase assets alongside capital through profit.