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Accounting Fundamentals

Paper-III Finance & Economics (Post-specific) · Finance & Economics Coverage

Useful for: SSC CGL

Overview

Accounting records transactions with the double-entry system so that the accounting equation always balances.

Key points

Accounting equation: Assets = Liabilities + Capital.
Personal account: debit the receiver, credit the giver.
Real account: debit what comes in, credit what goes out.
Nominal account: debit expenses and losses, credit incomes and gains.
A trial balance checks arithmetical accuracy, not all errors.

Explanation

Depreciation: straight-line method (equal amount yearly) vs written-down value (fixed rate on reducing balance).
Capital expenditure creates long-term assets; revenue expenditure maintains operations.
Accrual concept records income and expenses when earned or incurred, not when cash moves.
Errors of omission and compensating errors are not revealed by the trial balance.

Step by step

Identify the concept, rule or constitutional provision involved.
Apply the definition or formula precisely.
Check signs, totals and the direction of the effect.

Examples

Capital ₹50,000 and liabilities ₹20,000 → assets ₹70,000.
Machine ₹1,00,000 at 10% straight-line → ₹10,000 per year; at 10% written-down value → ₹10,000 in year 1 and ₹9,000 in year 2.
Rent paid in cash → debit Rent (nominal), credit Cash (real).

Traps and advanced points

Trap: Debiting the giver in personal accounts.
Trap: Treating repairs as capital expenditure.
Trap: Thinking a balanced trial balance means no errors.

Quick revision

A = L + C.
Golden rules by account type.
SLM equal; WDV reducing.

Practice MCQs

The accounting equation is
1. Liabilities = Assets + Capital
2. Assets = Capital − Liabilities
3. Assets = Liabilities + Capital
4. Capital = Assets + Liabilities
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Answer: (c) Assets = Liabilities + Capital. It always balances under double entry.
Under the double-entry system, every transaction affects
1. only the capital account
2. only one account
3. only cash
4. at least two accounts
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Answer: (d) at least two accounts. Debits always equal credits.
The journal is called the book of
1. original entry
2. final entry
3. capital
4. balances
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Answer: (a) original entry. Transactions are first recorded in it.
A trial balance is prepared to check the
1. profit of the firm
2. arithmetical accuracy of ledger accounts
3. cash in hand only
4. market value of assets
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Answer: (b) arithmetical accuracy of ledger accounts. It does not reveal all errors.
Depreciation is a fall in the value of
1. stock due to sale
2. fixed assets due to use and passage of time
3. cash due to payment
4. debtors due to receipts
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Answer: (b) fixed assets due to use and passage of time. It is charged to the profit and loss account.
Which of these is a current asset?
1. Machinery
2. Debtors
3. Land
4. Goodwill
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Answer: (b) Debtors. Current assets are converted into cash within a year.