Accounting Fundamentals and Basic Concepts
Accounting Fundamentals and Basic Concepts
This domain tests the conceptual foundation of Tamil Nadu HSE Second Year Accountancy: the accounting equation, accounting concepts and conventions, capital and revenue items, and the basis of recording transactions.
Core rules
- Dual aspect: every transaction has two effects; Assets = Liabilities + Capital must always balance.
- Going concern assumes continuity; accrual records income and expenses when earned or incurred, not when cash moves; matching pairs expenses with related revenue.
- Capital expenditure creates or improves an asset; revenue expenditure is routine operating spending. Drawings are owner withdrawals, not business expenses.
- Consistency, prudence, materiality and money measurement guide treatment and disclosure.
Worked example
A trader starts with cash Rs.4,00,000, takes a bank loan Rs.1,00,000 and buys goods on credit Rs.50,000. Cash becomes Rs.5,00,000; stock is Rs.50,000; assets total Rs.5,50,000. Liabilities are loan Rs.1,00,000 plus creditors Rs.50,000, total Rs.1,50,000; capital is Rs.4,00,000; total Rs.5,50,000. The loan increases both an asset and a liability, while the credit purchase increases stock and creditors.
Traps
Treating drawings as an expense; recording a credit sale only when cash is received under accrual; adding a loan to capital; confusing capital expenditure with revenue expenditure; and ignoring the second effect of a transaction.