Introduction to Accounting

(Meaning and Objectives of Accounting and A:ccounting Information)

LEARNING OBJ ECTIVES

This ChapMr would enable you to understand:
Q Meaning and Definitions of Accountin g 0 Accounting Process
0 Attributes (Characteristics) of Accountin g 0 Branches of Accounting
0 Objectives of Accounting 0 Book Keeping, Accounting and Ao::ountancy
0 Functions of Accounting 0 Accounting Information and its Types
Q Advantages of Accounting 0 Qualitative Characteristics of Accounting Information
0 limitations of Accounting 0 Users of Accounting Information
0 Role of Accounting in Business 0 ,systems of Accounting

Accounting is a systematic process of identifying, measuring, recording, classifying,

summarising, interpreting and communicating financial information to the users. It
gives information on:
(i) the resources available;
(ii) how the available resources have been employed; and
(iii) the results achieved by their use.
It show.s the profit earned or loss incurred during the accounting period, value and
n ature of assets, liabilities and owners' equity, i. e., capital.
Since accounting is a medium of communication, it is called the language of business.
'!Accounting is the art of recording, classifying and summarising in a significant manner
and in terms of money; transactions a nd events which are, in part at least, of a financia l
character, a nd interpreting the res ults thereof."
- American Institute of Certified Public Accountants
"A ccoun ting is the scien ce of recording and classifying business transactions and
events, p rimarily of a fin a ncial character, and the art of making sign Z:/ican t su,nmaries,
analysis and interpreta tions of those tra nsactions and events and comm un icatin§{ the
results to p erso n1:1 who mw1t make decisions or form )1tdgment."
- S1nith and Ashburne
''Accounting iH the process of idenl ifyi nl{, m easu ring a nd communicating econom ic
information to p ermit informed j udgm ents a.n d d ecisions by users of the information."
- Ame rican Account ing Asso c iat ion
The definition s of ncco unt in g hri ng to I iglit- Llw followin g chu ractu ri ri tics of accounbng:
1. ldenti.fi catiou ol Financial Transactions and Events: Accounting records only
those trnnsnction s nnd events whi ch ca n be meas ured jn. term s of money. Thi s involves
identifting tra nsactions and events that are part of economic activity, for ~xamph\
purchase of raw material or sale of fini sh ed goods by a firm. Such tra_nsactwns are
identified with the h elp of bills and receipts as evidence of the transactions.
2. Measuring the Identified Transactions: Accounting measures t h e t:an saetion~
and events in terms of a common measurement unit (that is the currency of a country;.
In other words, financial transactions and events are m easured in terms 0 / money.
Note: An event which cannot be measured in terms of money is not recorded in the books of account.
For example, event like the calibre or quality of management team or appointment of a manager
are not recorded in the books of account.
3. Recording: Accounting is an art of recording business transactions in the books
of account. Recording is the process of recording business transactions of financial
character in the book of original entry, i.e., Journal. This book is furthe r sub-
divided into subsidiary books such as Cash.Journal or Cash Book (for recording cash
transactions), Purchases Journal or Purchases Book (for recording credit purchases of
goods), Sales Journal or Sales Book (for recording credit sales) , etc.
4. Classifying: Classification is the process of grouping transactions or entries of one
nature at one place. The transactions recorded in the 'Journal' or the subsidiary books
are classified or posted to the main book of account known as the Ledger. This book
contains individual account heads under which all financial transactions of a similar
nature ~re collected. For example, in Rahul's Account in the Ledger, all busine~s
transact10ns related to Rahul are posted so that what is ultimately due to Rahul or
due fro m Rahul can be ascertained.

· Summarising:
5. d This involves presenting
. the classified data 1·n a manner w h.1c l1
1s un erstandable . and useful for internal as well as external users o f accountm£ ·
statements. This process leads to the preparation of the foll · . t t ~
(t.) Tna
· lB
a 1ance,
owing s a emen t s:
(ii) T ra a·mg .and Profit and Loss Account or Statement of Pr ft
Compames) and O 1 an d L os::;
,~ . . ,
(111 (\1::--t' o't
.

(ii i ) Balan ce Sheet.

Th, r
·• c a >ow~ Htatcments are collectively known a 8 F· l
Statements. ina Accounts or Financial
6. Ana l?His and Int erpretation: J\nn]ysis Hn<l in t_:\. .
arc carr. J(~u out Ko that Lh e w,ers 01 f' . · .·. ei pretnt 10 n of tht' financial <la tR
ofth c:.t t· 1· , .1n,rnu,1 1 cnLn1 c·1 n m1I~ .
e pro.1- 1 :wi ity nn d f'in ancinl Jw sit ior . _· l '. f \.en n1enn1ngful judgement
thP- f_u t ure in
. a })dte r wa y. ' , . O 1 1' 11C
1
· )\l '~ tn · ~- 'l'll .l S l1l' l ps in planning for
· C!-:,

7. Commu nica ting: Finn ll y Lh • , , . . .

financi·1] d t · ,.. • ·' c <1ccou nLin g· functi on · l
'. a a, i.e. , man cin l s tnl<.!menl , L •l . ·' invo ves co mmunicating the
b~ provided in time and prese nted to ,~, 0 l s users. Tlw accoun tino- information must
taken at the right timp,. · , w usen:; so that appropria
· . tbe d ec1s10ns
. . may b e
tntroouc,,uv ,, ,v , ' "'-'V"' ,.,, ·~

Tlw objl'ct i\'l':-- of HC( 'ou nt ing· :u·< ':

Hc<· ounti ng is t o reco rd
l. 1\1ai 11 tai11 i11.g Acco un ti ng Ueco rd s: The ohj,•div< · of
in th<! ho<Jk s of ~Jcco unt in a
fi rn.rncia l t r~rn sact io n~ a nd eve n ts of Lhl' orga nj i,n Lion
systL'llWtic mnm wr fo llowi ng the princ iples of accounLancy.
untin g is to dete rmin e the
2. Dete rm inin g Pro fit o r Loss : Ano ther objective of acco
1wt n~sult of tra n sacti ons for a perio d. In oth
er word s, to dete rmin e wh ethe r <luring
rred a loss. For this purp ose,
the acco untin g perio d, th e fir m has earn ed a profi t,or incu
a state men t calle d an Inco me Stat eme nt or t he Trad
ing and Prof it and Loss
actio ns of the perio d are
Acco unt is pr epar ed . Reve nues resu lting fro m th e trans
renc e betw een the two sides
recor ded in the cred it and expe n ses in th e debit . The diffe
is eithe r profi t or loss .
acco untin g is to dete rmin e
3. Dete nnin ing Fina ncia l Posi tion : Ano ther objective of
t . Fina ncia l posit ion of the
fina ncial posit ion. It is know n from the Bala nce Shee
a s is the Inco me Stat eme nt,
busi ness is as relev ant for the user s of finan cial state men ts
the case of Com pani es).
i.e., Profi t and Loss Acco unt (Stat emen t of Prof it and Loss , in
ires finan cia.l infor mati on
4. Fac ilita ting Man agem ent: The man agem ent often requ
astin g. Acco untin g prov ides
for decis ion-m akin g, effective control, budg eting and forec
g this func tion.
fina ncial infor mati on to assis t the man agem ent in disch argin
her objec tive of acco untin g
5. Prov idin g Acco unti ng Info rma tion to Users: Yet anot
and exte rnal, who. anal yse
is t9 prov ide acco untin g infor mati on to users , both inter nal
them as per their need s.
g is to h ave reco rds of
6. Prot ectin g Bus ines s Asse ts: Anot her objective of acco untin
d of asse ts owne d by the
asset s owne d by the busi ness . Acco untin g main tains recor
and exerc ise contr ol.
busin ess whic h enab les the man agem ent to prote ct them

ary func tion of acco untin g

1. Mai ntai ning Syst ema tic Acco unti ng Reco rds: The prim
tran sacti ons and even ts. It
js to ma intai n syste mati c acco untin g recor ds of finan cial
d following the acco untin g
mean s that the acco untin g recor ds shou ld be main taine
rules , princ iples and conc epts. It is so beca u se r eliab
le fin ancia l state men ts can be
draw n if prop~r accountin g record s are main taine d.
ts m0a ns fin al acco unts
2.Pr epar atio n of Fina ncia l Stat e,ne nts: Fina ncial sta te men
m e Sta teme n t (Prof it and
prep ared at t he e ncl of Lh e acco unting period . "It includes .Inco
is an impor tan t function of
Loss Account) and Pm, iti on SLalc m cnt (11ulnn ce Shed ) . ll
cial perfo rman ce, i.e., profi t
accou nting bcca usu th e finan cinl sL11Lc munL s show tlw finnn
the finan cial posit ion, i.e.,
earn ed or loss incu rred cJ u rin g th P accoun Lin g yen r and
e state men ts are impo rtant
Bala nce Shee t as at Lh e end of th e nccounLin g yeur . Both th
for all the user s for ta kin g dcc iRion s.
 1.4 Double Entry Book Keeping- CBSE XI

3. Meeting Legal Requirem ents: Accoun ting records arc accepted as evidence by
the court of law if they ar e ma intained systemat ically fo llowing the accountin g rules
principle s and concepts. Besides, the law such a s the Companies Act, Income Tax Act'
GST Act, etc., require submissions of returns in the form and period as is prescribed
in th e law. The r eturns can be submitte d if the accountin g records are maintained
systemat ically and timely. A systemat ic accountin g r ecord maintain ed following the
accountin g principle s and concepts is accepted by the authoriti es to be correct. Thus
it is a function of accountin g to meet the legal requirem ents. '
4. Conimun icating the Financia l Informat ion: It is yet another function of accounting
to communi cate the financial informati on to the users, which may be internal users or
external users, such as managem ent, banks, employee s, governm ent authoriti es, etc.
5. Assistan ce to Manage ment: Managem ent often, requires financial infor mation
which is given by the accountin g records which in turn helps the management in
decision- making. Accounti ng record should be maintain ed in such a manner that the
assets owned are known. It will assist the managem ent in protectin g the assets and
also exercisin g control. ,

1, Financi al Informa tion about Busines s: Financia l performa nce during the
accounti ng period, i.e., profit earned or loss incurred and also the financial position at
V the end of the accounti ng period is known through accountin g.
2. Assistan ce to Manage ment: The managem ent makes business plans , takes
decisions and exercises control over the affairs on the basis of accountin g information.
3. Replace s Memory : A systemat ic and timely recording of transacti ons obviates the
necessity to remembe r transacti ons. The accountin g record provides the necessary
informat ion.
4. Facilita tes Compar ative Study: A systemat ic record enables a businessm an to
compare one year's results with those of other years and locate significa nt factors
leading to change, if any.
5. Facilita tes Settlem ent of Tax Liabilit ies: A systemat ic accounti ng record
immense ly helps in settleme nt of income tax and Goods and Services Tax (GST)
lia_b ilities, since it is a good evidence of the correctne ss of transacti ons.
6. Facil~ta tes Loans: Loan is granted by the banks and finan cial institutio ns on the
basis of growth potential which is supporte d by the performa nce. Accounti ng makes
available the informat ion with respect to performa nce.
7. Evidenc e in Court: Systema tic record of transacti ons is often accepted by th e
Courts as good evidence .
8· Facilita tes Sale of Busines s: If someone desires to sell his business, the accounts
maintain ed by him will enable the ascertain ment of the proper purchase price.
9· AssiS t ance ~n the Event of Insolven cy: Insolven cy proceedi ngs involve explainin g
rd
ma~y transactw ns that have taken place in the past. Systema tic accountin g reco s
assist a great deal in such situation .
mrroaucuur, 1u ru.,l .,v w "" ,y

time of adm issio n or retir eme nt or

10. Hel pfu l in Par tne rsh ip Acc oun ts: At the
firm , the acco unti ng reco rd is of vita l
dea th of a part ner or in case of diss olut ion of the
s to reac h a sett lem ent.
imp orta nce and use beca use it prov ides the basi
h elps in taki ng a larg e num ber of
11. Hel pfu l in Dec isio n-m alli ng: Acc oun ting
prop rieto r, the pric e at which goods
deci sion s like the a mou nt to be with draw n by
sho uld be sold, etc.

1™ 1~ (!!? ~ hilRlli
is not fully exac t in spit e of the fact
1. Acc oun ting is not Ful ly Exa ct: Acc oun ting
s of evid ence , yet som e esti mat es are
that mos t tran sact ions are reco rded on the basi
ples , esti mat ing the usef ul life of an
also mad e for asce rtai ning prof it or loss, for exam
le valu e of clos ing stock, etc.
asse t, prov idin g for dou btfu l deb ts, net real isab
rma tion may not be real istic sinc e
2. Unr eali stic Info rma tion : Acc oun ting info
acco unti ng concepts and conv enti ons.
acco unti ng stat eme nts are prep ared following the
it is take n that bus ines s will con tinu e
For exa mpl e, und er the Going Con cern Concept,
reco rded at cost and depr ecia ted over
for a fore seea ble futu re. Accordingly, asse ts are
isab le at book valu e.
thei r usef ul life: The asse ts may not be actu ally real
Acc oun ting is conf ined to mon etar y
3. Acc oun ting Ign ores the Qua lita tive Ele men ts:
qua lity or skil ls of man age men t and
mat ters only , ther efor e, qua litat ive elem ents like
igno red.
staf f, indu stri al rela tion s and public rela tion s are
Cha nge s: Acc oun ting stat eme nts
4. Acc oun ting Ign ore s the Effe ct of Pric e Lev el
sure men t unit , chan ges in valu e
are prep ared at hist oric al cost. Money, as a mea
ting, how ever , pres ume s that valu e
freq uen tly, i.e., it does not rem ain stab le. Accoun
cha nge s are con side red, acco unti ng
of mon ey rem ains stab le. Unl ess pric e leve l
info rma tion will not show corr ect fina ncia l resu lts.
The term win dow dres sing mea ns
5. Acc oun ting Ma y Lea d to Win dow Dre ssin g:
vita l fact s and pres ent the fina ncia l
man ipul atio n of acco unts in a way so as to conceal
actu ally is. In this situ atio n, inco me
stat eme nts to show a bett er posi tion than wha t it
prov ide a true and fair view of the
stat eme nt (i.e. , Prof it and Loss Account) fails to
to prov ide a true and fair view of the
resu lt of ope ratio ns and the Bala nce She et fails
fina ncia l posi tion of the ente rpri se . .

recordin g, clas sify ing. sum mar isin g,

Accounting iij a proc ess of iden tifyi ng, mea suri ng,
ncia l tran sact ion of a busi ness in
ana lysing, inte rpre ting and com mun icat ing the fina
a usef ul man ner.
in the fi eld of busi ness:
Following poin ts high ligh t the role of acco unti ng
ary role of acco unti ng is to mai ntai n
1. Ma inte nan ce of Sys tem atic Rec ord s: The prim
r to asce rtain the net profit or loss
systema tic reco rds of fina ncia l tran sact ions in orde
the busi ness as on a part icul ar date .
for the acco unti ng peri od and fina ncia l posi tion of
 1.6 Double Entry Book Keeping- CBSE XI

2 · Assistance to Management: i\ccounLin g provides assjstance to manage ment by

providing finan cia I i nforma bon f'or its effective fun ctioning and t a kin g rational
decisions .
3. Facilitates Comparative Stttdy: A systematic record of financial tra nsactions enables
a businessman to compare one year's r es ults wj th th ose of oth er years and locate
significant r easons leading to ch a n ge , if a ny.
4. Evidence in Court: Accounting r ecords are often accepted by courts a s good evidence.
5. Others:
U) Proper accounting records obviates the necessity to remember business tran sactions.
(ii) Facilitates Raising Loans.
(iii) Facilitates sale of Business by ascertaining the proper purchase price.
(iv) Facilitates settlement of tax liabilities.

Based on the attributes of accounting, the steps of accounting process are a s follows:
(i) Identifying Financial Transactions and Events, (ii) Recording, (iii) Classifying.
I (iv) Summarising, (v) Analysing and Interpreting and (vi) Communic a ting.
The accounting process may be explained with the help of a diagram:
Accounting Process
Financial Transactions
Communicating
and Events
to Users

t
Analysis and Journal
Interpretation 1. Cash Book
, 2. Purchases Book
t
Summarising
3. Sales Book
4. Purchases Return Book
1. Trial Balance 5. Sales Return Book
2. Trading and Profit and Loss Account 6. Bills Payable Book* Recording
(Statement of Profit and Loss) 7. Bills Receivable Book*
8. Journal Proper
3. Balance Sheet

Classifying (Posting into Ledger) ....◄t----------

*Not in Syllabus.

With the changing times, following s ecialis db .

to meet the changed requirements: p e ranches of accounting have emer ged

Branches of Accounting

Financial Accounting
i
Cost Accounting Management Accounting
Introduction to Accounting
1.7
Financial Accounting

Financia l Accounting is thnt hran ch of acco un t in g whi ch records fin ancial t •

and events s · · • · ransact10ns
, , un:manses and mtcrprcts them before communicating the res lt t th
u sers. It d eterm u~es profit earned or loss incurred during an accounting perio~ t O

11
e
a year) and t~e. fman_cial position on the date wh en Lhc accounting period en~:~;h~
en d ~pr oduct of fma ncial acco unting is the Profit and Loss Account for the period end d
(which shows the profit earned or loss incurred) and the Balance Sheet as on the laest
day of the accou nting period (which shows the financial position).
~n short, fin ~ncial accounting is confi ned to the preparation of financial statements,
i.e., t h e Profit and Loss Account and the Balance Sheet, for the users of accounting
information.

Cost Accounting

This branch of accounting is concerned with ascertaining cost of products, operations,

processes or activities. It is that branch of accounting which deals with recording costs
with the objective of ascertaining, reducing and controlling costs.

Management Accounting
Management Accounting is the most recently developed branch of accounting. It is
concerned with generating accounting information relating to funds, costs, profits, etc.,
as it enables the management in decision-making. We may say that Management
Accounting addresses the needs of a single user group, i. e., the management.

The terms 'Book Keeping' and 'Accounting', often considered as same is not correct. The
two terms are different from each other. Accounting is a wider concept and includes
Book Keeping.
Meaning of Book Keeping
Book Keeping is a part of accounting being a process of recording financial transactions
and events in the books of account. Thus, Book Keeping involves:
1. Identifying financial transactions and events,
2. Measuring them in terms of money,
3. Recording the identified financial transactions and events in the books of accoun t,
and
4. Classifying recorded transactions and events, i. e., posting them into Ledger accounts.

Definitions of Book Keeping

"B 00 k K.. . · , ·s an art of recording in the boohs ol acco unt the monetary aspect of
eeping i. . . _. . ,, · - Northcott
commercial and finan cial transactions.
· · · 1· b k " J R Batliboi
"Book Keeping is an art of recording business dealings in a set O 00 "s. - · ·
 1.8
Doub le Entry Book Keeping- CBSE XI
"Boo k Keeping is the scien ce and art. of rccorcl ,:ng correctly
. . in the boohs of acco t ll
busine ss trans act1011s t Iwt rrs u I t 111
. I
t 1.e lra11 s(rr of rnoney or money's worth." - RNun a thos
. C e
"Boo!~ Keep ing is the art of recordin l-[ bu sines s lrun sacli · · • arter
ons in a systematic manner."
- A.N. Ro sen Kam pff
Acco untin g
Acco un ting is a wid er ro nc~ pt t_han Book Keep ing. H
st a r ts wher e Book Keep ing ends.
In othe r word s. Book Keep m g 1s a part of acco untin
g.
Difference between Book Keeping and Accountin
g

Basis Book Keeping -

Accounting
1. Scope Book Keeping is concerned with identifying financial
Accounting is conce rned with summarising '"e
transactions and events ; measuring them in money
recorded transactions and events, interpreting tt- ~-
terms; recording them in the books of account and
and communicating the results thereof.
classifying them.
2. Stage It is a primary stage. It is the basis for accounting. It is a secondary stage. It begins where Boc,
Keeping ends.
I 3. Objective The objective of Book Keeping is to maintain
systematic records of financial transactions.
The object ive of Accounting is to ascertain re'
results of operat ions and financial position and ic
commu nicate inform ation to the interested parties
4. Nature of Job This job is routine in nature,.
This job is analytical and dynamic in nature.
5. Performance It being a routine work is performed by junior It being a specialised function is performed Dy
staff. senior staff.
6. Special Book Keeping is mechanical in nature and, thus, Accounting requires special skills and ability :o
Skills does not require special skills. analyse and interpret.

Acco unta ncy

Acco unta ncy is a syst ema tic know ledg e of acco untin
g. It expl ains how to deal witt.
vario us aspe cts of acco untin g. It educ ates us how
to main tain the books of account
and how to sum mari se the acco untin g infor mati on
and comm unic ate it to the users.
In the word s of Koh ler, acco unta ncy refers to the entir
e body of the theory and prac tict'
of acco unting.
Acco unti ng and Acco unta ncy
Acco unta ncy is know ledg e whe rea s acco untin g is
the actio n or proc ess. Arcountin~
proc ess is carri ed out on the basi s of the rules a nd
principles fram ed by arcounrnnc~··
Thu s, it may be said that acco unta ncy is know ledg
e of acco untin g and accoun t in~ 1~
the appl icati on of acco unta ncy.

''Acc ount ing is a .c;eruice activ ity . It .~ f11n ctio 11 ,:~ to

prn1 id1• qu olita tii·c i11/on natio~1.
1

prim arily finan cial in natu re, uhou l <'co 11 0111ic ent iti<'s
that i.-; inten ded to be useful~~
mak ing econ omic decis ion.8. '' - Acco unt ing Prin ciple s Boat
 1.9
As an informatio? _syste m, accounting collects financial data, records it in the books
of accou ~1t, cdlass1_f1es and summarises it to produce financial information that is
cf_ornm~n 1cate to its users. Accounting begins with the identification of transactions of
manc1a 1 nature and ends with the preparation of financial statements (.
• i.e., I ncome
?tateme1:t and Bala~ce Sheet). Each step in the process of accounting generates
information. _Generat10n of information is not an end in itself, it is a way to facilitate
t he commumcatio n of information to users of accounting information.
Types of Accounting Information
Accounting information refers to the financial statements generated through the process
of Book Keeping, u se of which helps the users to arrive at decision s. The financial
statements so generated are the Income Statement, i.e. , Profit and Loss Account and
the Position Statement, i.e., Balance Sheet. The information made available by these
statements can be categorised into the following:
1. Information Relating to Profit or Surplus;
2. Information Relating to Financial Position; and
3. Information about Cash Flow.
Let us now discuss these in detail.
1. lnfo~mation Relating to Profit or Surplus: The Income Statement makes
available the accounting information about the profit earned or loss incurred as a
result of business operations or otherwise during an accounting period.
A firm prepares Trading Account, a part of the Profit and Loss Account, which provides
information about Gross Profit or Gross Loss and Profit and Loss Account provides
information about the Net Profit or Net Loss.
2. Information Relating to Financial Position: The Position Statement. i.e. ,
the Balance Sheet makes available the information about the financial position of
the entity. The Position Statement provides information about the assets owned by
the entity, amounts receivable and the cash and bank balances held by it. These are
represented in the liabilities by the amounts owed by the entity towards loans, creditors
and amounts payable, and capital.
3. Information about Cash Flow: Cash Flow Statement is a statement that shows flow.
both inflow and outflow, of cash during a specific period. It is of immense use as many
decisions such as payment ofliabilities, payment of dividend and expansion of business.
etc.,. are based on availability ~f cash.

Qualitative characteristics are attributes that make the accounting information useful
to users. The qualitative characteristics are:
1. Reliability: Accounting information must be reliable. Reliability of information
means it is verifiable, free from bias and material error.
2. Relevance: Accounting information must be relevant to the user. Information is
relevant if it meets the needs of the users in decision-makin g.
3. Understanda bility: Understandab ility means that the information provided
through the financial statements must be presented in a manner that the users are
able to understand it.
1.10
Double Entry Book Keeping- CBSE XI

4· Compara,bility: Comµnrabi lity m cHn R that Lh e u se r s Rhoul<l be ah] e to compare

th e. accounting information of an enterpl'i se of the period eith er wi t h that of other
periods, known H S intra-firm con1parison or with the accoun t ing information of
oth er enterpri sL'S , known a ~ inter-firm comparison.

Users of Accoun t in g Information may be categorised into Internal U sers and

External Users.
Internal Users
(i) Owners: .Owners contribute capital in the business and thus are exposed to
maximum risk. Naturally, they are interested in knowing the profit earned or loss
incurred by the business besides the safety of their capital. The financial statements
give the information about profit or loss and financial position of the business.
(ii) Management: The management makes extensive use of accounting information
to arrive at informed decisions such as determination of selling price, cost
controls and reduction, investment into new projects, etc.
(iii) Employees and Workers: Employees and workers are, entitled to bonus at
the year-end, which is linked to the profit earned by an enterprise. Therefore,
the employees and workers are interested in financial statements. Besides, the
financial statements also reflect whether the enterprise h~s deposited its dues
towards Employees' Provident Fund and Employees' State Insurance, etc., or not
with the appropriate authorities.

External Users
(i) Banks and Financial Institutions: Banks and financial institutions are an
essential part of any business as they provide loans to businesses. Naturally, they
watch the performance of the business to know whether it is making progress as
projected to ensure the safety and recovery of the loan advanced and payment
of interest. They assess it by analysing the accounting information.
(ii) Investors and Potential Investors: Investment involves risk and also the
investors do not have direct control over the business affairs. Therefore, they
rely on the accounting information available to them and seek answers to
questions such as-what is the earning capacity of the enterprise and how safe
is their investment?
(iii) Creditors: Creditors are those parties who supply goods and/or services on
credit. It is a common business practice that a large number of suppliers remain
invested in credit sales. Before gra nting credit, creditors satisfy th emselves
about the credit-worthiness of the business. The financial state ments help them
immensely in making such a n assess ment.
(iv) Government and its Authorities: The governm ent makes use of financial
statements to compil e national income accounts <1nrl other information. The
information available to it enabl es it to take policy decisions.
 Introduction to Accounting 1.1 1 '
(~·OVl'rr\ 1111..rnt ll vit' ~ v11rit d
1 1
ln Xl' H HUC' h 11 H cu Hlom duty, GST nn<l income tax.
1'lw~e go vt'l'lll\H' nl :n1Lh oriLil H HHHUHH curred La x
1
clu u H aftur an a nalysis of the
fina ncin l ~lHtl'm e nl s .
(v) Researc her_.;;: lh spa rclw n; use accounting information in their research work.
1

(d) Con sum e ,·s: Com;ume rs requi re accounting inform a tion fo r establishing good
accounting control so that cost of production may be r educed wjth the res ultant
reduction in the prices of products they buy. Sometim es, pr1ces of some prod ucts
are fixed by th e government, so it needs accounting information to fix fai r prices
so that consumers and producers are not exploited.
(vii) Public: They want to see the business running since it mak es substantial
contribution to the economy in many ways, e.g., employment of people, patronage
to suppliers, etc. Thus, financial accounting provides useful financia l infor mation
to various user groups for decision-making.

Accounting is an Art as well as a Science. Art is the technique which helps us to achieve
our desired objectives. Accounting is an art of recording, classifying and summarising
financial transactions. It helps us in knowing the profitability and financial position
of the business.
Any organised knowledge based on certain basic principles is a 'science'. Accounting is
also a science as it is an organised knowledge based on certain basic principles.

The systems of recording transactions in the books of account are two namely:
1. Double Entry System, and 2. Single Entry System.
1. Double Entry System
Double Entry System of accounting is a system of accounting under which both. debit
and credit, aspects of accounting are recorded. A transaction has two aspects-Debit
and Credit-and at the time of recording a transaction, one aspect is recorded on the
debit side and other aspect is recorded on the credit side. For example. at the time of
cash purchases, goods are received and in return cash is paid. In the transaction . two
a spects are involved, i.e., receiving goods and paying cash and under the Double Entry
System, both these aspects are recorded. One part, i.e., the r eceip t of goods. is debited
and the second part, i.e., payment of cash, is credited. In other words. if only two
accounts are affected (as in the purchase of building for cash), one Recount . Building,
is debited and the other account, Cash , is credited for the same amount. If more than
two accounts are affected by a tran saction, th e sum of th e debit entries must be equal
to the sum of the credit entri es. Thu s , on any day, total nmount debited is equal to
the total amount credited.
Thus, we can define Double Entry System a s: "The systern which recognises and records
both aspects of a transaction. The Double Entry System has proved to be a scientific
and complete system of accounting."
 t .1 L
Doub le Entry Book Keeping- CBSE XI
Features of the Double Entry System
l . lt mni nt a in s n ro mpl Pt l' t'Cl'Ol'C\ of enc
h t rn 1n-m cLion .
2 · ~t reC'o
gni ~e~ two-fold ns pl'ct of ever y Lntn HrH.: Lion , uiz.,
Llw HHp<·cl. 1>1' n•c;c; ivi n g ( vn I u,!
rn) nnd t he nsµe ct of givin l-{ (val ue ouL) .
~1- In thi~ syst em. Ol1l' asµ ed is debi ted and
the othe r mi pccL iHc:rc~ditc d foll,,wi ng tJH!
rule s of dc·bit and cred it.
-L Since one nspcct of a tran sact ion is debi
ted and the othe r is cred ikd , the; t<>t ~JI ,,f
all debi ts is alwa ys equa l to tota l of all cred its.
It help s in esta bfo;hi ng arithm<:tic:al
accu r ac~, by prep arin g the Tria l Balance.

Stages of Double Entry System

A co mpl ete syst em of double entr y book keep
ing has following thre e stag es:
1. Rec ordi ng the tran sact ions in the Jour
nal.
2. Clas sifying tran sact ions in the Jou rnal by
post ing them to the app ropr iate ledger
acco unts and then prep arin g the Tria l Balance.
3. Closing the books and prep arin g the final
acco unts .
All thes e stag es shal l be disc usse d one by one
in succeeding cha pter s.
Advantages of the Double Entry System
The adv anta ges of Dou ble Ent ry ·sys tem are:
(i) Scie ntif ic Sys tem : Dou ble Ent ry Sys
tem is a scientific syst em of recordin g
bus ines s tran sact ions as com pare d to othe r
syst ems of Book Kee ping . It help s
atta in the obje ctiv es of acco unti ng.
(ii) Com plet e Rec ord of Tra nsa ctio ns: Und
er the syst em , both sides of a
tran sact ion are reco rded . It is a com plet e reco
rd as it resu lts in sh owin g corre ct
inco me or loss, asse ts and liab iliti es.
(iii) Ari thm etic al Acc ura cy of Acc oun ts is
Ens ure d: By the u se of this system,
arit hme tica l accu racy of the acco unti ng wor k can
be esta blish ed through the
Tria l Bala nce.
(iv) D~t erm inin g Pro fit or Loss: Prof it
earn ed or loss incu rred duri ng a period
can be dete rmi ned by prep arin g Prof it and
Los s Account.
( v) Kno wle dge of Fin anc ial Pos ition :
Fina ncia l position of the firm or the institution
can be asce rtain ed at the end of each period by
prep arin g the Bala nce Sheet.
(vi) Ful l Det ails· for Pur pos es of Con trol
: The syst em perm it s accounts to be
mai ntai ned in as muc h deta il as nece ssar y
and , ther efor e, provides significant
info rma tion for purp oses of cont rol, etc.
(vii ) Com par ativ e Stu dy is Pos sibl e: Res
ults of one yea r may be co mpared wi£ h
thos e of prev ious yea rs and reas ons for the
cha nge may be asce rtain ed.
(vii i) Hel ps Ma nag eme nt in Dec isio n-m akin
g: Man age men t may be nble to obtnin
good info rma tion for its wor k, espe cially in
mak in g dec ision s.
Introduction to Accou nti1 1g

(ix) D<'ft>cfio11 of Frn 11 ds 0 11 d Mi;wp propr ialion H: l 'rn llCl HHn d m1 H

1 a pp ro priatio n s
m\' minimi ~l d ~itH't' cu111 p lt l l' i1ili ll'1nnl i(ln 11 hou L:i ll 11 HH<!LH :rn<l liahilit
1 1 ies iHavailable.
C!Xtensiv ely
l t i~ lwcn ll ~l' of t lw~i' nd v:\ll t :11.w~ t lt n I 11H ' Dou hi <· En Lry SyHtc~m i H u Hed
in nll countr tt'~.

2. Accounts from Incomplete Records or Single Entry Syste m

Accou n t fro m lnco mpk't l' Reco rds or S ingJc En try System of record ing
tran sadi orn, in
. In this
tlw book~ of :weou nt may be defin ed a ~ an inco mplet e Doubl e Entry System
~:'-~km . all t r a n sa c-tion ~ are n ot record ed on doubl e entry basis. In
some tran sactions,
one aspec t is
both aspec ts of the transa ctions are record ed, whil e jn others , either
onl y Per sonal
rerord ed or not r ecorde d at all. Instea d of maint aining all th e accou nts,
main tained
Accou nts and Cash Book are maint ained under thi s sys tem. The accou nts
reliab le.
under t his syst em are incomplete and unsys temat ic and , ther efore, not
basis, it is
Since all transa ctions are not record ed under this system on doubl e entry
Account an d
not possib le to prepa r e a Trial Balan ce. As a result , the Profit an d Loss
the Balan ce Sheet canno t be prepa red.

( Highe r Order Thinking Skills (HOTS) Questions )

terms.
Q. 1. Accou ntin g r ecords transa ction s and events that can be measu red in money
Give reason s.
Is th is, i n your opinio n, a li mitatio n of accoun ting or a n a dvanta ge?
is a n advan tage as
Ans. Yes. Accou nting record s only financ ia l tran saction s a nd events . It
ick, i.e. , money .
tra n sactio n s of diver se natu r e are r ecorde d u sing a comm on yardst
h ave far-rea ching
But t h ere are oth er impor tant transa ctions and eve n ts which may
red in money
effect on b u si n e ss . They are not r ecorde d becau se they canno t be measu
is a limita tion to
term s. For exam ple , produ ction loss du e to la bou r strike . Thus, it
t hat e xte nt.
t. Why·?
Q. 2. Resign a tion by a Mark eti n g Ma n ager is n ot record ed in the book s of accoun
Ans. It is not record ed beca u se it ca nnot be measu red in mon ey t erms.
'?
Q. 3. Book Keepin g is n ot a pa r t of accoun ting. Do you a gree with the stnten wnt
ing. i.e .. collt'ct ing ~rnd
An s. No . Book Keepin g is a part of accoun tin g. Two proces ses of a cco unt
Kt.' Ppin~.
record ing of fin a ncia l tran saction s a nd even ts a r e t he proces sl'~ of Book
asrt-=•rtttin net
Q. 4. IHthe bai-, ic objective of Book Keepin g to ma in ta in sys te tTrn t ic n'cord : :- or to
(i.\ /SR Chm1digllrh :?0 11)
r es ults of op<m 1t ion s of f"ina ncinl t rnn s ncl ions'!
nnnc in l tran:::nctions.
Ans. Th<: ha Hi<.: ohj<;cli w of Book K, •l•pin g iHto 11rn int.11 in syslt> tnnt ic l'l'rnrds offi
n nnci~\l ~tntPm ents a re
Q. 5. Hccoru in g t hl' trun s n(' LionH1111d 1'Vt' llts cnlT(T t.ly 11 nd µr q >n r ing t'i
t h e onl y objt~ctiV(!H of ;l('c-oun t in g. Do you ng1·c•c• ?
l' nwn ts. acco unting has
An s . No. Bes id e:-; re<.:ordi n g Lh l!tn r otTec tl y 11 nd p1·1•p111·in g l'in nnci11 I s tnt
a ncial inform ation
th e objedives of' fn <.: ilita tin g rn 11 n11 gL•n11 •11t ('O nt rol a nd (·omm 1rn ic11 t ing fin
to th e u ser s.