Principles of Accounts (POA) Study Guide
1. BASIC DEFINITIONS (Know These Cold!)
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Accounting: Recording, summarizing, and reporting financial transactions.
Asset: Anything owned by the business (e.g. cash, equipment).
Liability: Debts owed by the business (e.g. loans, creditors).
Capital: Owner's investment in the business.
Revenue: Income earned from business operations.
Expense: Costs to run the business (e.g. rent, salaries).
Profit: Revenue - Expenses.
Loss: When Expenses > Revenue.
Drawings: Cash or items withdrawn by the owner.
Dr (Debit): Left side entry (usually for assets and expenses).
Cr (Credit): Right side entry (usually for liabilities, revenue, capital).
Journal: Book of original entry.
Ledger: Book containing individual accounts.
Trial Balance: List of all accounts to check if Dr = Cr.
Financial Statements: Reports like Income Statement and Balance Sheet.
2. CLASSIFIED BALANCE SHEET
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Purpose: Shows financial position (Assets = Liabilities + Capital)
Structure:
- Current Assets: Cash, inventory, receivables
- Non-Current Assets: Land, buildings, vehicles
- Current Liabilities: Creditors, overdraft, short-term loans
- Non-Current Liabilities: Long-term loans, mortgages
- Capital Section: Opening capital + profit - drawings
3. BOOKS OF ORIGINAL ENTRY
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Sales Journal: Records credit sales
Purchases Journal: Records credit purchases
Returns Inward Journal: Goods returned by customers
Returns Outward Journal: Goods returned to suppliers
Cash Book: Records all cash and bank transactions
General Journal: Records non-regular entries like depreciation
4. LEDGERS & TRIAL BALANCE
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Ledgers: Organized accounts (e.g. Cash a/c, Capital a/c)
Posting: Transferring from books of original entry to ledger
Trial Balance: Ensures total debits = total credits
5. PREPARATION & ANALYSIS OF FINANCIAL STATEMENTS
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Income Statement (Trading & Profit and Loss Account):
- Sales - Sales Returns
- Less: Cost of Goods Sold = Gross Profit
- Gross Profit - Expenses = Net Profit
Balance Sheet:
- Lists Assets, Liabilities, and Capital
6. DEPRECIATION
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Definition: Decrease in value of a fixed asset over time.
Methods:
- Straight-Line = (Cost - Scrap Value) ÷ Useful Life
- Reducing Balance = Higher depreciation early on
Effect:
- Depreciation = Expense (Dr Profit & Loss)
- Accumulated depreciation = Contra-Asset
7. RATIO ANALYSIS
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Current Ratio = Current Assets ÷ Current Liabilities
Gross Profit Margin = Gross Profit ÷ Sales × 100
Net Profit Margin = Net Profit ÷ Sales × 100
Return on Capital Employed = Net Profit ÷ Capital × 100
Inventory Turnover = Cost of Sales ÷ Avg Inventory
8. INCOME STATEMENT (Deep Dive)
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Shows profit or loss over a period.
Used to: Calculate taxes, analyze performance, compare with past years.
Revenues include: Sales, Rent Income, Commission Earned
Common Expenses: Wages, Rent, Electricity, Depreciation
