Accountancy: Financial Accounting and Book-keeping
The accounting equation and double entry
Assets = Liabilities + Capital. Every transaction has two aspects, so total debits equal total credits. An increase in an asset or expense is debited; an increase in a liability, capital or income is credited. Book-keeping records transactions; accounting summarises and interprets them.
Books of entry and trial balance
Transactions are first recorded in the journal or subsidiary books (cash book, purchases book, sales book, returns books), posted to ledger accounts, and summarised in the trial balance. A trial balance that agrees does not prove accuracy: errors of principle, complete omission, compensating errors and posting to the wrong account on the correct side remain undetected. A bank reconciliation statement explains differences between the cash book and pass book, such as cheques issued but not presented and bank charges not entered.
Depreciation and final accounts
Straight-line method: (Cost − Scrap value) ÷ Useful life, charged equally each year. Written-down-value method: a fixed percentage on the opening book value, giving higher depreciation in early years. Closing stock is credited in the trading account and shown as a current asset; outstanding and prepaid items are adjusted in the profit and loss account.
Worked example
A machine costs ₹1,20,000, scrap ₹20,000, life 5 years. SLM depreciation = (1,20,000 − 20,000)/5 = ₹20,000 per year. Under 20% WDV, year 1 = ₹24,000 and year 2 = 20% of ₹96,000 = ₹19,200.
Traps
Capital expenditure wrongly treated as revenue; forgetting depreciation on additions by date; mixing gross profit with net profit; ignoring outstanding expenses.