Accounting Principles, Golden Rules of Debit/Credit & The Accounting Cycle

Explanation

Double-entry bookkeeping is an axiomatic recording system where every financial transaction has equal and offsetting debit and credit entries. Nominal accounts track operating expenses and revenues for the accounting period, which are closed into the capital account via the Profit and Loss Account.

Key points

• Golden Rules of Accounting: (1) Personal Accounts: Debit the receiver, Credit the giver; (2) Real Accounts (Assets): Debit what comes in, Credit what goes out; (3) Nominal Accounts (Expenses/Revenues): Debit all expenses and losses, Credit all incomes and gains.
• Accounting Concepts: Business Entity (business separate from owner), Money Measurement, Going Concern, Accrual Concept, Matching Principle, Prudence / Conservatism (anticipate losses, never anticipate profits).
• Accounting Cycle: Source Documents -> Journal -> General Ledger -> Trial Balance -> Adjusting Entries -> Final Financial Statements.
• Trial Balance: Statement of all debit and credit balances; errors not revealed by trial balance include errors of omission, errors of commission, errors of principle, and compensating errors.

Example

Code examples

// Standard Journal Entries:
// 1. Started business with cash NPR 500,000:
//    Cash A/c (Real) ............................ Dr. 500,000
//        To Capital A/c (Personal) ...................... Cr. 500,000
//    (Being capital introduced into business)

// 2. Purchased computer equipment on credit from Apex Ltd for NPR 80,000:
//    Computer Equipment A/c (Real) .............. Dr. 80,000
//        To Apex Ltd A/c (Personal) ..................... Cr. 80,000
//    (Being computer equipment purchased on credit)

// 3. Paid office rent NPR 25,000 by cheque:
//    Rent Expense A/c (Nominal) ................. Dr. 25,000
//        To Bank A/c (Personal) ......................... Cr. 25,000
//    (Being office rent paid)

Exam questions

• [8 Marks] State and explain the Golden Rules of Debit and Credit with two illustrative journal entries for each category.
• [7 Marks] Pass necessary journal entries for 5 given business transactions, post them to Ledger accounts, and balance the Cash account.
• [7 Marks] What is a Trial Balance? Explain four types of accounting errors that are not revealed by a balanced Trial Balance.