CHAPTER-1

Introduction to Accounting class 11 Notes Accountancy

According to American Institute of Certified Public Accountants, “Accounting
is the art of recording, classifying and summarising in a significant manner
and in terms of money, transactions and events which are, in part at least, of
a financial character, and interpreting the results thereof.”

Accounting Principles Board (APB) of AICPA(U.S.A) defined accounting as

“Accounting is a service activity. Its function is to provide quantitative
information, primarily financial in nature, about economic entities that is
intended to be useful in making economic decisions.”

In Simple words, accounting is the process of collecting, recording,

classifying, summarising and communicating financial information to the
users for judgment and decision-making.

Objectives of Accounting
1. To keep systematic and complete record of financial transactions in the
books of accounts according to specified principles and rules to avoid the
possibility of omission and fraud.
2. To ascertain the profit earned or loss incurred during a particular
accounting period which further help in knowing the financial performance of
a business.
3. To ascertain the financial position of the business by the means of
financial statement i.e. balance sheet which shows assets on one side and
Capital & Liabilities on the other side.
4. To provide useful accounting information to users like owners, investors,
creditors, banks, employees and government authorities etc who analyze
them as per their requirements.
5. To provide financial information to the management which help in
decision making, budgeting and forecasting.
6. To prevent frauds by maintaining regular and systematic accounting
records.
Advantages of Accounting
1. It provides information which is useful to management for making
economic decisions.
2. It help owners to compare one year’s results with those of other years to
locate the factors which leads to changes.
3. It provide information about the financial position of the business by
means of balance sheet which shows assets on one side and Capital &
Liabilities on the other side.
4. It help in keeping systematic and complete record of business
transactions in the books of accounts according to specified principles and
rules, which is accepted by the Courts as evidence.
5. It help a firm in the assessment of its correct tax Liabilities such as income
tax, sales tax, VAT, excise duty etc.
6. Properly maintained accounts help a business entity in determining its
proper purchase price.
Limitations of Accounting
1. It is historical in nature; it does not reflect the current worth of a business.
Moreover, the figures given in financial statements ignore the effects of
changes in price level.

2. It contain only those informations which can be expressed in terms of

money. It ignore qualitative elements such as efficiency of management,
quality of staff, customers satisfactions etc.
3. It may be affected by window dressing i.e. manipulation in accounts to
present a more favorable position of a business firm than its actual position.
4. It is not free from personal bias and personal judgment of the people
dealing with it. For example different people have different opinions
regarding life of asset for calculating depreciation, provision for doubtful
debts etc.
5. It is based on various concepts and conventions which may hamper the
disclosure of realistic financial position of a business firm. For example
assets in balance sheet are shown at their cost and not at their market value
which could be realised on their sale.
Book Keeping – The Basis of Accounting
Book keeping is the record-making phase of accounting which is concerned
with the recording of financial transactions and events relating to business in
a significant and orderly manner.

Book Keeping should not be confused with accounting. Book keeping is the
recording phase while accounting is concerned with the summarizing phase
of an accounting system. The distinction between the two are as under.

Book keeping Accounting

1. It is the recording 1. It is the summarizing

phase of an accounting phase of an accounting
system. system.

2. It is a Secondary Stage
2. It is a primary stage which begins where the
and basis for accounting. Book keeping process
ends.
 3. It is analytical in
3. It is routine in nature
nature and required
and does not require any
special skill or
special skill or knowledge
knowledge.

4. It is done by junior 4. It is done by senior

staff called book-keepers staff called accountants.

5. It does not give the 5. It gives the complete

complete picture of the picture of the financial
financial conditions of conditions of the
the business unit. business unit.

Types of accounting information

Accounting information can be categorized into following:

1. Information relating to profit or loss i.e. income statement, shows the net
profit of business operations of a firm during a particular accounting period.
2. Information relating to Financial position i.e. Balance Sheet. It shows
assets on one side and Capital & Liabilities on the other side.
Schedules and notes forming part of balance sheet and income statement to
give details of various items shown in both of them.

Subfields/Branches of Accounting
1. Financial Accounting:- It is that subfield/Branch of accounting which is
concerned with recording of business transactions of financial nature in a
systematic manner, to ascertain the profit or loss of the accounting period
and to present the financial position of the business.
2. Cost Accounting:- It is that Subfield/Branch of accounting which is
concerned with ascertainment of total cost and per unit cost of goods or
services produced/ provided by a business firm.
3. Management Accounting:- It is that subfield/Branch of accounting
which is concerned with presenting the accounting information in such a
manner that help the management in planning and controlling the
operations of a business and in better decision making.
Interested users/parties of Accountings information’s and their
Needs
There are number of users interested in knowing about the financial
soundness and the profitability of the business.

U Classification Information the user

s
e
want
r
s

Return on their
investment, financial
1. Owner
health of their
company/business.

To evaluate the
performance to take
I
various decisions.
n
t
e 2. Management
r
n
a
l Profitability to claim
higher wages and
3. Employees bonus, whether their
dues

(PF, ESI, etc.)

deposited regularly.

E To know about
x 1. Investors and Safety, growth of their
t potential investors investments and future
e of the business.
r
n
Assessing the financial
a
capability, ability of the
l 2. Creditors
business to pay its
debts.

Repaying capacity,
3. Lenders
credit worthiness.

4. Tax Authorities Assessment of due

 taxes, true and fair
disclosure of accounting
information,

To compile national
income and other
5. Government
information. Helps to
take policy decisions.

Customers, Researchers
etc., may seek different
6. Others
in- formation for
different reasons.

Qualitative Characteristics of Accounting Information

Accounting information is useful for interested users only if it posses the
following characteristics:

1. Reliability: Means the information must be based on facts and be verified

through source documents by anyone. It must be free from bias and errors.
2. Relevance: To be relevant, information must be available in time and
must influence the decisions of users by helping them to form prediction
about the outcomes.
3. Understandability: The information should be presented in such a
manner that users can understand it well.
4. Comparability: The information should be disclosed in such a manner
that it can be compared with previous year’s figures of business itself and
other firm’s data.
Basic accounting terms
Business Transaction
An Economic activity that affects financial position of the business and can
be measured in terms of money e.g., expenses etc.

Account : Account refers to a summarized record of relevant transactions of

particular head at one place. All accounts are divided into two sides. The left
side of an account is called debit side and the right side of an account is
called credit side.
Capital: Amount invested by the owner in the firm is known as capital. It
may be brought in the form of cash or assets by the owner.
Drawings: The money or goods or both withdrawn by owner from business
for personal use, is known as drawings. Example: Purchase of car for wife by
withdrawing money from business.
Assets: Assets are valuable and economic resources of an enterprise useful
in its operations. Assets can be broadly classified as:
1. Current Assets: Current Assets are those assets which are held for short
period and can be converted into cash within one year. For example:
Debtors, stock etc.
2. Non-Current Assets: Non-Current Assets are those assets which are
hold for long period and used for normal business operation. For example:
Land, Building, Machinery etc. They are further classified into:
(a) Tangible Assets: Tangible Assets are those assets which have physical
existence and can be seen and touched. For Example: Furniture, Machinery
etc.
(b) Intangible Assets: Intangible Assets are those assets which have no
physical existence and can be felt by operation. For example: Goodwill,
Patent, Trade mark etc.
Liabilities: Liabilities are obligations or debts that an enterprise has to pay
after some time in the future.
Liabilities can be classified as:

1. Current Liabilities: Current Liabilities are obligations or debts that are

payable within a period of one year. For Example: Creditors, Bill Payable etc.
2. Non-Current Liabilities: Non-Current Liabilities are those obligations or
debts that are payable after a period of one year. Example: Bank Loan,
Debentures etc.
RECEIPTS
1. Revenue Receipts: Revenue Receipts are those receipts which are
occurred by normal operation of business like money received by sale of
business products.
2. Capital Receipts: Capital Receipts are those receipts which are occurred
by other than business operations like money received by sale of fixed
assets.
Expenses: Costs incurred by a business for earning revenue are known as
expenses. For example: Rent, Wages, Salaries, Interest etc.
Expenditure: Spending money or incurring a liability for acquiring assets,
goods or services is called expenditure. The expenditure is classified as :
1. Revenue Expenditure: It is the amount spent to purcahse goods and
services that are used during an accounting period is called revenue
expenditure. For Example: Rent, Interest etc.
2. Capital Expenditure: If benefit of expenditure is received for more than
one year, it is called capital expenditure. Example: Purchase of Machinery.
3. Deferred Revenue Expenditure: There are certain expenditures which
are revenue in nature but benefit of which is derived over number of years.
For Example: Huge Advertisement Expenditure.
Profit : The excess of revenues over its related expenses during an
accounting year is profit.
Profit = Revenue – Expenses
Gain: A non-recurring profit from events or transactions incidental to
business such as sale of fixed assets, appreciation in the value of an asset
etc.
Loss: The excess of expenses of a period over its related revenues is termed
as loss. Loss = Expenses – Revenue
Goods: The products in which the business deal in. The items that are
purchased for the purpose of resale and not for use in the business are called
goods.
Purchases: The term purchases is used only for the goods procured by a
business for resale. In case of trading concerns it is purchase of final goods
and in manufacturing concern it is purchase of raw materials. Purchases may
be cash purchases or credit purchases.
Purchase Return: When purchased goods are returned to the suppliers,
these are known as purchase return.
Sales: Sales are total revenues from goods sold or services provided to
customers. Sales may be cash sales or credit sales.
Sales Return: When sold goods are returned from customer due to any
reason is known as sales return.
Debtors: Debtors are persons and/or other entities to whom business has
sold goods and services on credit and amount has not received yet. These
are assets of the business.
Creditors: If the business buys goods/services on credit and amount is still
to be paid to the persons and/or other entities, these are called creditors.
These are liabilities for the business.
Bill Receivable: Bill Receivable is an accounting term of Bill of Exchange. A
Bill of Exchange is Bill Receivable for seller at time of credit sale.
Bill Payable: Bill Payable is also an accounting term of Bill of Exchange. A
Bill of Exchange is Bill Payable for purchaser at time of credit purchase.
Discount: Discount is the rebate given by the seller to the buyer. It can be
classified as :
1. Trade Discount: The purpose of this discount is to persuade the buyer to
buy more goods. It is offered at an agreed percentage of list price at the time
of selling goods. This discount is not recorded in the accounting books as it is
deducted in the invoice/cash memo.
2. Cash Discount: The objective of providing cash discount is to encourage
the debtors to pay the dues promptly. This discount is recorded in the
accounting books.
Income: Income is a wider term, which includes profit also. Income means
increase in the wealth of the enterprise over a period of time.
Stock : The goods available with the business for sale on a particular date is
known as stock.
Cost : Cost refers to expenditures incurred in acquiring manufacturing and
processing goods to make it saleable.
Voucher: The documentary evidence in support of a transaction is known as
voucher. For example, if we buy goods for cash we get cash memo, if we buy
goods on credit, we get an invoice, when we make a payment we get a
receipt.