EXAM PREPP ┬╖ AFM FOUNDATION ┬╖ CHAPTER 1
Accounting Basics for JAIIB & DBF: Accounting Equation, Debit & Credit
Accounting рд╢реБрд░реВ рдХрд░рдиреЗ рдХреЗ рд▓рд┐рдП commerce background рдЬрд╝рд░реВрд░реА рдирд╣реАрдВред рдкрд╣рд▓реЗ transaction рдХрд╛ effect рд╕рдордЭреЗрдВ, рдлрд┐рд░ debit рдФрд░ credit рд▓рдЧрд╛рдПрдБред рдЗрд╕ chapter рдореЗрдВ original examples рдХреЗ рд╕рд╛рде рдпрд╣реА sequence рд╕реАрдЦреЗрдВрдЧреЗред
Attempt the free accounting quiz1. Start with the business viewpoint
Accounts рдмрдирд╛рддреЗ рд╕рдордп business рдФрд░ owner рдХреЛ рдЕрд▓рдЧ рдорд╛рдиреЗрдВред Owner рдХреЗ personal рдЦрд░реНрдЪ рдХреЛ business expense рдорд╛рди рджреЗрдиреЗ рд╕реЗ profit рдФрд░ capital рдЧрд▓рдд рдирд┐рдХрд▓ рд╕рдХрддреЗ рд╣реИрдВред рдЙрджрд╛рд╣рд░рдг: owner тВ╣80,000 business рдореЗрдВ рд▓рдЧрд╛рддрд╛ рд╣реИ рддреЛ business рдХреЛ cash рдорд┐рд▓рддрд╛ рд╣реИ рдФрд░ ownerтАЩs capital рдмрдврд╝рддреА рд╣реИред рдпрд╣ sales revenue рдирд╣реАрдВ рд╣реИред
| Term | Easy meaning | Example |
|---|---|---|
| Asset | Business рдХрд╛ resource рдпрд╛ recoverable amount | Cash, furniture, customer receivable |
| Liability | Business рдХреА рдмрд╛рд╣рд░реА party рдХреЗ рдкреНрд░рддрд┐ obligation | Loan payable, supplier payable |
| Capital / equity | Assets рдореЗрдВ liabilities рдШрдЯрд╛рдиреЗ рдХреЗ рдмрд╛рдж owner рдХрд╛ interest | OwnerтАЩs investment, adjusted for profit/loss and drawings |
| Income | Business earnings; рд╣рд░ cash receipt income рдирд╣реАрдВ | Service fees earned |
| Expense | Income рдХрдорд╛рдиреЗ рдпрд╛ business рдЪрд▓рд╛рдиреЗ рдореЗрдВ consumed cost | Current-month rent, salaries |
Receivable = amount business рдХреЛ рдорд┐рд▓рдирд╛ рд╣реИред Payable = amount business рдХреЛ рджреЗрдирд╛ рд╣реИред Drawings = proprietor рдХрд╛ personal use рдХреЗ рд▓рд┐рдП cash/goods рдирд┐рдХрд╛рд▓рдирд╛; рдЗрд╕реЗ salary expense рди рдорд╛рдиреЗрдВред
2. Accounting equation: Assets = Liabilities + Capital
Assets = Liabilities + Capital
Capital = Assets тИТ Liabilities
Liabilities = Assets тИТ Capital
рд╣рд░ transaction рдХреЗ рдмрд╛рдж equation balanced рд░рд╣рддреА рд╣реИред Balance рдХрд╛ рдЕрд░реНрде рдпрд╣ рдирд╣реАрдВ рдХрд┐ cash рдФрд░ profit рдмрд░рд╛рдмрд░ рд╣реЛрдВрдЧреЗред рдиреАрдЪреЗ рдПрдХ рд╣реА business рдХреЗ successive transactions рдХрд╛ effect рд╣реИ; amounts тВ╣ рдореЗрдВ рд╣реИрдВред
| Transaction | Total assets after transaction | Liabilities | Capital |
|---|---|---|---|
| Owner introduces cash 80,000 | 80,000 cash | 0 | 80,000 |
| Buys office furniture for cash 12,000 | 68,000 cash + 12,000 furniture = 80,000 | 0 | 80,000 |
| Receives business loan 25,000 | 93,000 cash + 12,000 furniture = 105,000 | 25,000 | 80,000 |
| Pays current-month rent 5,000 | 88,000 cash + 12,000 furniture = 100,000 | 25,000 | 75,000 |
Why did capital fall? Rent is an expense. Expense reduces profit and therefore ownerтАЩs equity, assuming no other income or expenses. In contrast, furniture purchase merely exchanged one asset for another in this example; depreciation is ignored here.
3. Debit and credit: apply the account-type rule
Debit (Dr.) account рдХреА left side рдФрд░ Credit (Cr.) right side рд╣реИред Debit рдХреЛ рд╣рдореЗрд╢рд╛ increase рдФрд░ credit рдХреЛ рд╣рдореЗрд╢рд╛ decrease рди рд╕рдордЭреЗрдВ; effect account рдХреЗ nature рдкрд░ рдирд┐рд░реНрднрд░ рд╣реИред
| Account category | Increase | Decrease |
|---|---|---|
| Assets | Debit | Credit |
| Expenses / losses | Debit | Credit |
| Liabilities | Credit | Debit |
| Capital / equity | Credit | Debit |
| Income / gains | Credit | Debit |
Traditional rules рднреА рдЙрдкрдпреЛрдЧ рд╣реЛрддреЗ рд╣реИрдВ: personal accountтАФdebit the receiver, credit the giver; real accountтАФdebit what comes in, credit what goes out; nominal accountтАФdebit expenses/losses, credit incomes/gains. рд╢реБрд░реБрдЖрддреА practice рдореЗрдВ рдПрдХ transaction рдХреЛ modern account-type method рд╕реЗ рдкреВрд░рд╛ solve рдХрд░реЗрдВ; рдЕрд▓рдЧ approaches рдХреЛ рдмреАрдЪ рдореЗрдВ mix рдХрд░рдиреЗ рд╕реЗ рдмрдЪреЗрдВред
4. Original worked journal entries
рд╣рд░ example рдореЗрдВ рдкрд╣рд▓реЗ рджреЛ accounts identify рдХрд░реЗрдВ, рдлрд┐рд░ рдЙрдирдХрд╛ type рдФрд░ increase/decrease рджреЗрдЦреЗрдВред рдпреЗ illustrations introductory рд╣реИрдВ; tax, interest accrual рдФрд░ depreciation рдХреЗрд╡рд▓ рдЬрд╣рд╛рдБ рдмрддрд╛рдпрд╛ рдЧрдпрд╛ рд╣реИ рд╡рд╣реАрдВ consider рдХрд┐рдП рдЧрдП рд╣реИрдВред
| Transaction | Entry | Reason |
|---|---|---|
| Owner puts тВ╣60,000 cash into a new business | Cash A/c Dr. 60,000 To Capital A/c 60,000 | Cash asset increases; capital increases. |
| Office printer bought for тВ╣9,000 cash | Office Equipment A/c Dr. 9,000 To Cash A/c 9,000 | Equipment increases; cash decreases. Printer is for office use, not resale. |
| Office furniture тВ╣14,000 bought on credit from Meera Furnishers | Furniture A/c Dr. 14,000 To Meera Furnishers A/c 14,000 | Asset and supplier payable both increase. |
| Current-month electricity expense тВ╣2,200 paid | Electricity Expense A/c Dr. 2,200 To Cash A/c 2,200 | Expense increases; cash decreases. |
| Repays тВ╣7,000 of loan principal in cash | Loan Payable A/c Dr. 7,000 To Cash A/c 7,000 | Liability and cash decrease. Principal repayment is not interest expense. |
| Customer pays an existing тВ╣4,500 receivable | Cash A/c Dr. 4,500 To Customer Receivable A/c 4,500 | Cash increases and receivable decreases; collection does not create fresh revenue. |
| Owner withdraws тВ╣3,000 cash for personal use | Drawings A/c Dr. 3,000 To Cash A/c 3,000 | Drawings reduce ownerтАЩs capital; cash decreases. |
A compound entry
A business buys office equipment worth тВ╣18,000, pays тВ╣6,000 immediately and owes the rest to the supplier. Entry: Equipment A/c Dr. тВ╣18,000; To Cash A/c тВ╣6,000; To Supplier A/c тВ╣12,000. Total debit тВ╣18,000 = total credit тВ╣18,000. Double entry requires equal debit/credit totals; it does not restrict every transaction to exactly two accounts.
5. Banking examples and common exam traps
Whose books are we reading? A customerтАЩs positive bank balance is an asset in the customerтАЩs books. The corresponding deposit payable is a liability in the bankтАЩs books. A loan receivable is an asset for the lender and a loan payable is a liability for the borrower. Always identify the reporting entity first.
- Loan received тЙа income: cash comes in, but an obligation is created.
- Loan principal repaid тЙа expense: cash and liability reduce; interest is considered separately.
- Cash received тЙа profit: it may be capital, borrowing or collection of an earlier receivable.
- Drawings тЙа operating expense: keep personal withdrawals separate.
- Debit total = credit total: this arithmetic check alone does not prove correct classification.
6. Five-minute revision check
- Identify whose books the question describes.
- Name the accounts affected.
- Classify each as asset, liability, capital, income or expense.
- Mark increase/decrease and apply the debit/credit table.
- Check equal debit and credit totals; explain the equation effect.
Try it: Assets тВ╣1,46,000; liabilities тВ╣39,000. Capital = тВ╣1,07,000. If тВ╣8,000 of loan principal is then repaid in cash, assets become тВ╣1,38,000 and liabilities тВ╣31,000; capital stays тВ╣1,07,000.
7. Practise, then choose your course
рдкрд╣рд▓реЗ 10 original questions attempt рдХрд░реЗрдВред рдЧрд▓рдд answers рдХреЗ рдмрд╛рдж рдЗрд╕реА chapter рдХрд╛ relevant example рджреЛрдмрд╛рд░рд╛ solve рдХрд░реЗрдВред
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Frequently asked questions
Can a non-commerce student begin with this chapter?
рд╣рд╛рдБред Account categories рд╕реЗ рд╢реБрд░реВ рдХрд░реЗрдВ, рдлрд┐рд░ equation рдФрд░ worked entries рдХрд░реЗрдВред рдкрд╣рд▓реЗ рдХрдард┐рди terminology рдпрд╛рдж рдХрд░рдиреЗ рдХреЗ рдмрдЬрд╛рдп transaction рдХрд╛ effect рд╕рдордЭреЗрдВред
Does debit always mean money goes out?
рдирд╣реАрдВред Debit рдПрдХ account side рд╣реИред Cash asset рдмрдврд╝реЗ рддреЛ cash debit рд╣реЛрддрд╛ рд╣реИ; liability рдШрдЯреЗ рддреЛ liability debit рд╣реЛрддреА рд╣реИред
Are these official IIBF questions?
рдирд╣реАрдВред Chapter examples рдФрд░ linked quiz original Exam Prepp practice рд╣реИрдВ; рдЗрдиреНрд╣реЗрдВ PYQ рдХреЗ рд░реВрдк рдореЗрдВ label рдирд╣реАрдВ рдХрд┐рдпрд╛ рдЧрдпрд╛ рд╣реИред
