Accounting Concepts, Financial Statements, GST Basics & Auditing — RPSC RAS Paper I, Unit III, Part C
Weightage: Part C of Paper I Unit III, one of three parts alongside sociology and management. The 2026 revision expanded law and management-related content, and accounting questions tend to ask for definitions, formats and short worked items, so exact vocabulary matters.
1. Accounting and its cycle
Accounting is recording, classifying, summarising and interpreting financial transactions so that users, such as owners, lenders, tax authorities and managers, can make decisions. The cycle runs: transaction, journal, ledger, trial balance, final accounts.
The accounting equation is Assets = Liabilities + Capital. The rules of debit and credit follow the type of account:
| Account type | Debit | Credit |
|---|---|---|
| Personal | The receiver | The giver |
| Real (assets) | What comes in | What goes out |
| Nominal | Expenses and losses | Incomes and gains |
2. Concepts, principles and standards
Basic concepts underlie generally accepted accounting principles (GAAP): business entity, going concern, money measurement, cost, dual aspect, accrual, matching, realisation, consistency, prudence (conservatism), materiality and full disclosure.
In India, Accounting Standards are formulated by the Institute of Chartered Accountants of India and notified by the government under Section 133 of the Companies Act, 2013. Larger companies follow Ind AS, which are converged with international standards, while others follow the earlier Accounting Standards. The syllabus expects basic knowledge only, such as the purpose of standards on inventory valuation, cash flows and disclosure of accounting policies.
3. Financial statements
Final accounts have three parts:
- Trading account: shows gross profit (sales minus cost of goods sold).
- Profit and loss account: shows net profit after expenses.
- Balance sheet: lists assets, liabilities and capital at a date; companies use the format prescribed in Schedule III of the Companies Act.
Ratio analysis interprets them:
| Group | Ratio | Formula or norm |
|---|---|---|
| Liquidity | Current ratio | Current assets ÷ current liabilities; about 2:1 is a common benchmark |
| Liquidity | Quick ratio | (Current assets − inventory) ÷ current liabilities; about 1:1 |
| Solvency | Debt-equity ratio | Long-term debt ÷ shareholders' funds |
| Profitability | Net profit ratio | Net profit ÷ sales |
| Activity | Inventory turnover | Cost of goods sold ÷ average inventory |
4. Cash flow statement
A cash flow statement reports actual cash movements in three parts: operating activities (day-to-day business), investing activities (buying and selling long-term assets) and financing activities (raising or repaying capital and borrowings). Operating cash flow can be shown by the direct method (receipts and payments) or the indirect method (adjusting profit for non-cash items). It matters because profit can be positive while cash is short.
5. Computerised accounting
Computerised systems such as Tally and larger ERP packages record vouchers into ledgers automatically, and produce trial balances, statements and GST returns on demand. Benefits are speed, accuracy and easy reporting. Risks are data loss, unauthorised access and errors from wrong master data, so backups, access controls and audit trails are essential.
6. GST basics
The Goods and Services Tax replaced most indirect taxes from 1 July 2017, under the 101st Constitutional Amendment, and the GST Council (Article 279A) decides rates and rules. It is a destination-based, multi-stage tax with a credit for tax paid on inputs.
- CGST and SGST are levied on intra-state supplies, and IGST on inter-state supplies and imports.
- Input tax credit avoids tax on tax.
- The rate structure was simplified in 2025 towards two main rates, with a higher rate for certain sin and luxury goods, so check the latest schedule.
7. Auditing
Audit is an independent examination of accounts and records to form an opinion on whether they give a true and fair view. Its objectives are to express that opinion, to detect errors and fraud, and to check compliance with law.
| Type | Key point |
|---|---|
| Statutory audit | Compulsory for companies under the Companies Act, 2013 |
| Internal audit | By the organisation's own staff, of controls and efficiency |
| Cost audit | Of cost records in prescribed industries |
| Tax audit | Under the Income-tax Act for businesses above a limit |
| Government audit | By the Comptroller and Auditor General under Articles 148-151 |
An audit programme is the detailed plan of procedures, with the scope, timing and methods for each area, supported by working papers. Common techniques are vouching (checking entries against documents) and verification of assets and liabilities.
Social audit examines the social impact of a programme through community verification. MGNREGA requires Gram Sabha social audits, and Rajasthan's Mazdoor Kisan Shakti Sangathan pioneered the jan sunwai. Performance audit tests economy, efficiency and effectiveness. Efficiency audit compares outputs with the resources used.
Worked example 7.1 (a 5-mark answer, ~50 words). "A firm's current assets are 6 lakh rupees, inventory is 2 lakh rupees and current liabilities are 3 lakh rupees. Find the current ratio and quick ratio."
Model answer. Current ratio = 6 ÷ 3 = 2:1. Quick assets = 6 − 2 = 4 lakh rupees, so quick ratio = 4 ÷ 3 = about 1.33:1. Both meet common benchmarks (2:1 and 1:1), so short-term liquidity is comfortable.
Common traps RPSC sets here
- Mixing gross profit and net profit. Gross profit comes from the trading account; net profit from the profit and loss account.
- Confusing prudence with consistency. One recognises probable losses, the other applies the same method year on year.
- Treating social audit as one of the CAG's audits. The CAG runs financial, compliance and performance audits; social audit is community verification.
- Quoting GST rates as fixed. Rates were revised in 2025.
Memory aids
- "Operating, Investing, Financing": the three parts of the cash flow statement.
- "Assets = Liabilities + Capital": the accounting equation.
- "Economy, Efficiency, Effectiveness": the three Es of performance audit.
Summary
Accounting records transactions through the journal, ledger, trial balance and final accounts, on concepts such as going concern, accrual and prudence, and on Accounting Standards notified under the Companies Act. Financial statements are read through ratios, and cash flow statements show operating, investing and financing flows.
GST (from 2017) is a destination-based tax with input credit. Audit tests the true and fair view, through statutory, internal, cost, tax and government audits, with social, performance and efficiency audits used in public administration.
Exam protocol
- Give definitions in one line, then a format or example.
- Show formulae in numerical questions and state the benchmark.
- In audit answers, distinguish financial, compliance and performance audit clearly.
