Accounting fundamentals: the accounting equation, double-entry bookkeeping, books of prime entry, and the trial balance
Domain 1 tests whether you can move confidently between the accounting equation, the ledger and the trial balance. The equation Assets = Capital + Liabilities expands to Assets = Capital + Profit − Drawings + Liabilities, where profit is income less expenses. Every transaction affects at least two accounts, and total debits must equal total credits.
Books of prime entry
Record first in the sales day book (credit sales), purchases day book (credit purchases), sales returns book, purchases returns book, cash book (cash and bank) and journal (other items). Post totals or individual entries to the nominal ledger. The trial balance lists ledger balances at a date; it checks arithmetic equality only.
Worked example
An owner starts with N$50,000 cash and a N$20,000 vehicle: Dr Cash 50,000, Dr Vehicle 20,000, Cr Capital 70,000. Buys inventory on credit N$8,000: Dr Purchases 8,000, Cr Payables 8,000. Sells goods on credit for N$12,000: Dr Receivables 12,000, Cr Sales 12,000. Trial balance totals: debit Cash 50,000 + Vehicle 20,000 + Receivables 12,000 + Purchases 8,000 = 90,000; credit Capital 70,000 + Payables 8,000 + Sales 12,000 = 90,000. Reasoning: each transaction has equal debits and credits, so the equation stays balanced.
Traps
A balanced trial balance does not prove accuracy: errors of omission, commission, principle, original entry, reversal and compensating errors can cancel. Do not debit an expense increase. Remember that the cash book is both a book of prime entry and a ledger account.