Accounting and Economics: Double Entry and Market Reasoning
What the paper tests
Accounting and Economics combines double-entry bookkeeping and final accounts with basic economic reasoning about scarcity, markets and government policy.
Core rules
- Accounting equation: Assets = Capital + Liabilities.
- Every debit has a credit; a trial balance tests arithmetic equality, not the absence of fraud.
- Cost of sales = opening stock + purchases - closing stock. Gross profit = sales - cost of sales.
- A change in price causes movement along a demand curve; a change in income, taste or population shifts the curve.
- Inflation reduces purchasing power; it is not the same as a rise in one price.
Worked example
Sales $120,000; opening stock $20,000; purchases $70,000; closing stock $15,000. Cost of sales = 20,000 + 70,000 - 15,000 = $75,000. Gross profit = 120,000 - 75,000 = $45,000. The reasoning is that closing stock is unsold, so it must be subtracted from goods available for sale; adding it would overstate cost of sales.
Traps
- Adding closing stock instead of subtracting it.
- Mixing capital expenditure with revenue expenditure.
- Forgetting accruals and prepayments at year end.
- Treating a movement along a demand curve as a shift.
- Confusing gross profit with net profit.