Accountancy and Book‑Keeping Revision Notes
Designed for quick last‑minute review – over 1200 words of key concepts.
What is Accountancy & Book‑Keeping?
Understanding the distinction between these two core functions is fundamental.
- Book‑Keeping – The systematic recording of daily financial transactions in journals and ledgers.
- Accountancy – The broader field encompassing book‑keeping, plus classifying, summarising, interpreting, and communicating financial information.
- Primary Objective – To provide a true and fair view of an entity’s financial position and performance.
The Fundamental Accounting Equation
This equation is the cornerstone of the double‑entry system and must always balance.
| Element | Symbol | Normal Balance | Examples |
|---|---|---|---|
| Assets | A | Debit (+) | Cash, Debtors, Inventory, Fixed Assets |
| Liabilities | L | Credit (+) | Creditors, Loans, Outstanding Expenses |
| Owner’s Equity | E | Credit (+) | Capital, Retained Earnings, Reserves |
Equation: A = L + E (Assets = Liabilities + Equity).
- Every financial transaction keeps this equation in balance.
- Memory Aid: “A Lazy Elephant” – Assets = Liabilities + Equity.
The Double‑Entry System Rules
For every transaction, the total debits must equal the total credits.
| Rule | Debit (Dr.) | Credit (Cr.) |
|---|---|---|
| Increase in Asset | Dr. | — |
| Decrease in Asset | — | Cr. |
| Increase in Liability / Equity | — | Cr. |
| Decrease in Liability / Equity | Dr. | — |
| Increase in Expense / Loss | Dr. | — |
| Decrease in Expense / Loss | — | Cr. |
| Increase in Revenue / Gain | — | Cr. |
| Decrease in Revenue / Gain | Dr. | — |
Key Principle: Every transaction has at least one debit and one credit of equal amount.
Types of Accounts (Traditional Classification)
| Classification | Nature | Rule | Examples |
|---|---|---|---|
| Personal | Relates to persons or entities | Debit the receiver, Credit the giver | Debtors, Creditors, Bank A/c |
| Real | Relates to assets | Debit what comes in, Credit what goes out | Machinery, Building, Stock |
| Nominal | Relates to incomes, gains, expenses, losses | Debit expenses/losses, Credit incomes/gains | Salary, Rent, Sales, Interest |
Memory Aid: “PRE” – Personal, Real, Expense/Nominal.
The Accounting Cycle: 10 Key Stages
- Identify & Analyse Transactions – Using source documents (invoices, receipts).
- Journalising – Recording in the Journal (Book of Original Entry).
- Posting to Ledger – Transferring entries to individual Ledger Accounts (T‑accounts).
- Balancing Ledger Accounts – Calculating closing balances.
- Trial Balance – Listing all ledger balances to check arithmetic accuracy (Debit total = Credit total).
- Adjusting Entries – Recording accruals, deferrals, depreciation, and provisions.
- Adjusted Trial Balance – Prepared after incorporating adjustments.
- Financial Statements – Preparing the Income Statement, Balance Sheet, and Cash Flow Statement.
- Closing Entries – Transferring nominal account balances to the Profit & Loss Account and then to Capital.
- Post‑Closing Trial Balance – Verifying only real and personal accounts remain.
Common Adjusting Entries
| Adjustment | When Needed | Journal Entry (Dr.) | Journal Entry (Cr.) |
|---|---|---|---|
| Accrued Expenses | Expense incurred but not paid | Expense A/c Dr. | To Outstanding Expenses A/c |
| Prepaid Expenses | Payment made for future benefit | Prepaid Expense A/c Dr. | To Cash/Bank A/c |
| Accrued Income | Income earned but not received | Accrued Income A/c Dr. | To Income A/c |
| Depreciation | Allocation of fixed asset cost | Depreciation A/c Dr. | To Accumulated Depreciation A/c |
| Provision for Doubtful Debts | Estimating potential bad debts | Bad Debts Expense A/c Dr. | To Provision for Doubtful Debts A/c |
Memory Aid: “APPIDPS” – Accrued Expenses, Prepaid Expenses, Accrued Income, Income in Advance, Depreciation, Provision, Stock.
Financial Statements Overview
Income Statement (Profit & Loss)
Shows profitability over a period. Key line items: Revenue, Cost of Goods Sold (COGS), Gross Profit, Operating Expenses, Net Profit.
Balance Sheet
Snapshots financial position at a point in time. Follows A = L + E.
Lists Non‑Current & Current Assets, and Shareholders’ Funds, Non‑Current & Current Liabilities.
Cash Flow Statement
Tracks cash movement in three categories:
- Operating Activities: Cash from core business.
- Investing Activities: Cash from buying/selling assets.
- Financing Activities: Cash from/to owners and creditors.
Memory Aid: “OIF” – Operating, Investing, Financing.
Core Accounting Concepts & Conventions
| Concept | Meaning | Implication |
|---|---|---|
| Going Concern | Business will continue operating. | Assets valued at cost, not liquidation value. |
| Accrual Concept | Record revenue when earned, expenses when incurred. | Basis for adjusting entries like accruals and prepayments. |
| Prudence (Conservatism) | Anticipate losses, not profits. | Create provisions for doubtful debts. |
| Consistency | Use same policies period‑to‑period. | Ensures comparability of financial statements. |
| Matching Concept | Match expenses with the revenues they help generate. | Links COGS to sales, depreciation to asset use. |
Last‑Minute Exam Tips
- Memorise the Accounting Equation (A = L + E) – it’s the backbone.
- Recall debit/credit rules with: “DEAD‑CLIC” (Debit increases Expenses, Assets, Drawings; Credit increases Liabilities, Income, Capital).
- Depreciation is a non‑cash expense – add it back in the operating section of the cash flow statement.
- Practice a full cycle: Journal → Ledger → Trial Balance to reinforce understanding.
- For ratios, write the formula first, then plug in the numbers.
