Accounting Fundamentals

📊 Accounting Fundamentals — At a Glance

This is the Accounting Cycle — every sub-topic on this page is a building block in this exact chain, ending in the Final Accounts you'll study next.

1 Accounting Concepts

2 Accounting Principles

While concepts are the foundational assumptions, accounting principles (or conventions) are the practical guidelines that govern how those concepts are applied. Together, concepts + principles + procedures form GAAP — Generally Accepted Accounting Principles.

3 Double-Entry System

Under the double-entry system, every transaction affects at least two accounts, with one side debited and the other credited by an equal amount — a direct consequence of the Dual Aspect concept.

Golden Rules of Accounting

Modern approach: Assets and Expenses increase with a Debit; Liabilities, Capital, and Income increase with a Credit.

4 Journal

The Journal is the book of original (prime) entry — a chronological record of every transaction, showing the accounts to be debited and credited, along with a brief narration.

Format: Date | Particulars (Dr./Cr. accounts) | Ledger Folio (L.F.) | Debit Amount | Credit Amount.

5 Ledger

The Ledger is the book of final entry — a classified record where all transactions relating to a particular account (from the Journal) are grouped together in a "T-shaped" account. Journal entries are posted to the Ledger, and each ledger account is then balanced to find its net debit or credit position.

6 Trial Balance

A Trial Balance is a statement listing all ledger account balances (debit and credit) as on a particular date, to test the arithmetical accuracy of the books — total debits must equal total credits.

7 Cash Book

The Cash Book is a unique subsidiary book that also acts as a ledger account for cash (and bank) transactions — no separate posting to a "Cash Account" in the ledger is needed.

8 Bank Reconciliation Statement (BRS)

A BRS reconciles the difference between the balance shown in the firm's Cash Book and the balance shown in the bank's Pass Book/statement on a given date — almost always caused by timing differences, not real errors.

9 Errors and Rectification

10 Depreciation

Two Classic Methods

SLM: Depreciation = (Cost − Scrap Value) / Useful Life — a constant amount each year. WDV: Depreciation = Book Value × fixed rate — a larger amount in early years, shrinking over time.

Key Rates Carried Forward (WDV Method, Tax Year 2026-27)

11 Provision

A Provision is a charge against profit, created for a known liability or expense of uncertain amount or timing — e.g., Provision for Doubtful Debts, Provision for Taxation. It is created regardless of whether the business makes a profit or a loss, because it is a charge, not an appropriation.

12 Reserve

A Reserve is an appropriation of profit — money set aside to strengthen the financial position or fund a specific future need. Unlike a provision, a reserve can be created only when there is a profit.

Provision vs Reserve

13 Capital vs Revenue Expenditure

Capital Expenditure acquires or improves a fixed asset, benefiting the business for more than one accounting year — only its depreciation is charged to P&L each year. Revenue Expenditure covers day-to-day running costs, fully consumed within the year, and is charged entirely to the Trading/P&L Account.

Deferred Revenue Expenditure is revenue in nature but so large that its benefit spreads across several years (e.g., a one-time, heavy advertising campaign) — it is written off gradually over those years.

14 Accrual vs Cash Basis

✓ Key Takeaways

• The Accounting Cycle: Journal → Ledger → Trial Balance → Final Accounts.
• Dual Aspect underpins double-entry: every transaction has an equal debit and credit; Assets = Liabilities + Capital.
• A tallying Trial Balance does not guarantee error-free books — errors of principle, compensating errors, and complete omissions can slip through.
• BRS reconciles Cash Book vs Pass Book balances, almost always due to timing differences.
• Depreciation is now governed by Section 33 of the Income-tax Act, 2025 (from Tax Year 2026-27), replacing the old Section 32 — same rates, same 180-day rule.
• Provision = charge against profit (even in a loss); Reserve = appropriation of profit (only when profitable). Banks must set aside ≥25% of profit to Statutory Reserve.
• Capital Expenditure → Balance Sheet (depreciated over years); Revenue Expenditure → fully charged to P&L in the year incurred.
• Accrual Basis (mandatory for companies/banks) matches income and expenses to the correct period; Cash Basis merely tracks cash movement.

📝 Top 50 JAIIB-Style MCQs on Accounting Fundamentals

Test your understanding with these 50 practice MCQs, closely modelled on the pattern expected in the upcoming JAIIB AFM exam — including combination-answer questions. Each question has 5 options — the correct answer is hidden by default; tap "Show Answer" to reveal it along with a short explanation.