Accounting concepts, principles and the accounting equation
What the examiner tests
This section checks whether you can name and apply the underlying concepts, and whether you can use the accounting equation to record transactions rather than memorise entries.
Core rules
- Business entity: the owner's private transactions are not business transactions.
- Going concern: accounts assume the business continues in the foreseeable future.
- Historical cost: assets are recorded at cost, subject to depreciation and impairment.
- Prudence: do not overstate assets or income; provide for losses as soon as they are probable.
- Accruals (matching): income and expenses are recognised in the period they relate to, not when cash moves.
- Consistency: use the same accounting policies each year.
- Dual aspect: every transaction has two effects. The equation is Assets = Capital + Liabilities, or A = Capital + Profit − Drawings + Liabilities.
Worked example
A trader starts with N$50,000 cash. She buys equipment for N$20,000 cash, inventory N$10,000 on credit, and pays the supplier N$4,000.
- Cash: 50,000 − 20,000 − 4,000 = 26,000
- Inventory: 10,000
- Equipment: 20,000
- Assets = 56,000
- Liabilities = 6,000
- Capital = 50,000 Equation: 56,000 = 50,000 + 6,000. The equipment purchase changes composition, not capital. The credit purchase increases assets and liabilities equally. The payment reduces both cash and the liability.
Traps
Do not treat drawings as an expense; they reduce capital. Do not record the owner's private electricity bill in the business. Do not say the trial balance proves accuracy; it only proves debits equal credits. When asked for the effect on the equation, state both the amount and the direction.