Accounting Fundamentals and the Accounting Equation
The UPMSP Intermediate Accountancy paper begins with the language of accounting: the dual aspect, the accounting equation and the effect of each transaction on assets, liabilities and capital. Short-answer questions here are definitional, while numerical questions ask you to complete or test the equation.
Core rules
- Every transaction has two effects, so total debits equal total credits.
- Assets = Liabilities + Capital. Expanded: Assets = Liabilities + Capital + Revenue − Expenses − Drawings.
- Capital is the owner's claim: Capital = Assets − Liabilities.
- Revenue and fresh capital increase capital; expenses and drawings reduce it.
- A credit purchase raises stock and creditors by the same amount; a cash purchase only changes the composition of assets.
Worked example
Mohan starts with cash ₹5,00,000, takes a bank loan of ₹2,00,000, buys furniture for ₹1,00,000 cash and goods on credit for ₹60,000. Assets: cash ₹4,00,000 + bank ₹2,00,000 + furniture ₹1,00,000 + stock ₹60,000 = ₹7,60,000. Liabilities: loan ₹2,00,000 + creditors ₹60,000 = ₹2,60,000. Capital ₹5,00,000. Check: ₹2,60,000 + ₹5,00,000 = ₹7,60,000.
Traps that cost marks
- Treating drawings as an expense instead of a reduction of capital.
- Reducing total assets when furniture is bought for cash; only the composition changes.
- Recording the loan as capital.
- Forgetting that a credit purchase increases both sides.