Accounting and Book-keeping Fundamentals
What the domain tests
Accounting and Book-keeping Fundamentals tests double entry, the accounting equation, basic books and why records matter for a business.
Core rules and concepts
- Book-keeping records transactions systematically. Accounting summarises, analyses and interprets them. Both rely on evidence such as vouchers and invoices.
- Accounting equation: Assets = Liabilities + Capital. Every transaction preserves this equation.
- Double entry: every debit has an equal credit. Debit increases assets and expenses and decreases liabilities, capital and income. Credit increases liabilities, capital and income and decreases assets and expenses.
- The journal records transactions chronologically. The ledger groups them by account. A trial balance checks arithmetic equality, not correctness. A cash book records cash and bank transactions. Bank reconciliation explains differences between the cash book and the bank statement.
- Capital is the owner's claim. Drawings reduce capital; profit increases it.
Worked example
A business has cash ₹40,000, stock ₹30,000, furniture ₹30,000 and a bank loan ₹25,000. Assets = 40,000 + 30,000 + 30,000 = ₹1,00,000. Capital = Assets minus Liabilities = 1,00,000 minus 25,000 = ₹75,000. It then buys furniture for ₹10,000 cash: cash falls to ₹30,000, furniture rises to ₹40,000, total assets remain ₹1,00,000 and capital is unchanged. Reasoning: this is an asset swap; only profit, drawings or new capital and liabilities normally change capital.
Traps that cost marks
Do not treat debit as always bad or credit as always good. A balanced trial balance does not prove there are no errors. A cash sale is not a credit sale. Personal expenses are drawings, not business expenses. Loan repayment includes both principal and interest, which need separate treatment.