Financial Accounting Fundamentals: The Accounting Equation and the Cycle
This domain tests whether you can build and read the basic accounting model: the elements of financial statements, the accounting equation, debit and credit mechanics, and the accounting cycle from transaction to closing. Korean exams expect both K-IFRS terminology and K-GAAP (일반기업회계기준) terms, so know the Korean labels for assets, liabilities, equity, revenue, and expense.
Core rules
- Assets = Liabilities + Equity must hold after every transaction; each transaction keeps it balanced.
- Debit (차변) increases assets and expenses; credit (대변) increases liabilities, equity, and income.
- Recognition depends on meeting the element definition and reliable measurement, not on cash movement.
- The cycle: journalize, post to the ledger, prepare an unadjusted trial balance, adjust, prepare an adjusted trial balance, prepare statements, then close temporary accounts.
Worked example
A company issues shares for ₩100,000,000 cash and buys equipment for ₩30,000,000 on 30-day credit. The share issue debits Cash 100,000,000 and credits Share capital 100,000,000. The purchase debits Equipment 30,000,000 and credits Accounts payable 30,000,000. Assets are 130,000,000 (cash 100,000,000 plus equipment 30,000,000); liabilities are 30,000,000 and equity 100,000,000, totalling 130,000,000. The equation holds because each entry has equal debits and credits, and no entry touches only one side.
Traps
- Adding VAT to revenue: a ₩1,000,000 sale plus 10% VAT credits Sales only ₩1,000,000; the ₩100,000 is VAT payable.
- Treating a capital purchase as an expense, or owner's drawings as an expense rather than a reduction of equity.
- Mixing cash basis and accrual: unpaid wages still create an expense and a liability at year-end, and a customer prepayment is a liability, not revenue.