Principles of Accounting: Double Entry, Adjustments and Final Accounts
Principles of Accounting tests the accounting equation, double-entry rules, adjusting entries, the trial balance, final accounts and bank reconciliation. Questions are usually small numerical cases where one wrong side of an entry changes the whole answer.
The accounting equation and rules
Assets = Liabilities + Capital. Debit to increase an asset or expense, and to decrease a liability, capital or income. Credit does the reverse. Every transaction has at least two entries and total debits must equal total credits. Profit increases capital; drawings and expenses reduce it.
Accrual and matching
Revenue is recognised when earned and expenses when incurred, not when cash moves. Adjusting entries handle prepaid expenses, accrued expenses, accrued income, unearned income and depreciation. Depreciation allocates the cost of a non-current asset over its useful life; it is not a revaluation.
Worked example
A business starts with cash of PKR 500,000 as capital. It buys equipment for PKR 120,000 on credit and pays rent of PKR 20,000 in cash. Assets are cash 480,000 plus equipment 120,000, totalling 600,000. Liabilities are 120,000 and capital is 500,000 less the 20,000 rent expense, giving 480,000. Liabilities plus capital equal 600,000, so the equation balances. Note that rent reduces profit and therefore capital, not cash alone.
Trial balance and reconciliation
A trial balance lists closing balances and proves arithmetic equality only. It does not detect omission of a whole transaction, compensating errors or posting to the wrong account of the same class. In bank reconciliation, adjust the bank statement for unpresented cheques and deposits in transit, and adjust the cash book for bank charges, standing orders and direct credits.
Traps
Mixing expense and asset treatment, reversing debit and credit for liabilities, ignoring drawings, and treating depreciation as a cash payment.