CHAPTER

Introduction to Accounting
(Meaning and Objectives of Accounting and
Accounting Information)
LEARNING OBJECTIVES
This chapter would enable students to
understand:
Meaning and Definitions of Accounting
Attributes (Characteristics) of Accounting Process
Objectives of Accounting
Accounting Branches of Accounting
Functions of Accounting Book Keeping, Accounting and Accountancy
Advantages of Accounting Accounting Information and its Types
Limitations of Accounting Qualitative CharacteristicsofAccounting Information
Users of Accounting Information
Role of Accounting in Business
Systems of Accounting

MEANINGAND DEFINITIONS OF ACCOUNTING

Accounting is a systematic process of recording, classifying, summarising,
and interpreting the analysing
financial transactions and communicating the results to the
users
thereof)The users of accounting information include owners, creditors, bank and
financial institutions, employees, government, etc. It gives information on:
the resources available;
(ihow the available resources have been employed; and
i i ) the results achieved by their use.
It shows the profit earned or loss incurred during the accounting period, value and
nature of assets, liabilities and owners equity, i.e., capital.
Since accounting is a medium of communication, it is called the language ofbusiness.
"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."
-American Institute of Certified Public Accountants
"Accounting is the science of recording and classifying business transactions and
events, primarily ofa financial character, and the art of making significant summaries,
analysis and interpretations of those transactions and events and communicating the
results to persons uwho must make decisions or form judgment."
-Smith and Ashburne
"Accounting is the process of identifying, measuring and communicating economic
information to pernit informed judgments and decisions by users of the information."
-American Accounting Association
 1.2 Double Entry Book Keeping-CBSE XI

ATTRIBUTES(CHARACTERISTICS)OFACCOUNTING
The characteristics of
accounting are
Identification of Financial Transactions and Events
ACcounting records only those transactions and events which can be measured in terms
of
money. This involves identifying transactions and events that are part of economic
activity for example, purchase of raw material or sale of finished goods by a firm.)
2 Measuring the Identified Transactions
Fnancial transactions and events are
measured in terms of money. An event which
cannot be measured in terms of
money is not recorded in the books of account. For
example, event like
thecalibre qualitylof management team
or or appointment of a
manager are not recorded in the books of acount.

3/Recording.
Accounting is an art of recording business transactions in the books of account.
Recording is the process of recording business transactions of
transactions measured in money terms, in the book
financial character, i.e.,
of original entry i.e., Journa
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 in the main book of accounts known as the Ledger. This book has individual
account heads under which financial transactions related to that account are posted
(transferred) from Journal. For example, in Rahul's Account in the Ledger, all business
transactions entered into with Rahul are posted. It enables to ascertain amount due
to Rahul or due from Rahul.

5. Summarising
This involves presenting the classified data in a manner which is understandable and
useful for internal as well as external users of financial statements. This process leads
to the preparation of Trial Balance from which:
(i) Trading and Profit and Loss Account or Statement of Profit and Loss (in case of
Companies), and
(i) Balance Sheet are prepared.
The above statements are collectively known as Final Accounts or Financial Statements.

6. Analysis and Interpretation

Analysis and interpretation of the financial data are carried out so that|the users of
financial data can make a meaningful judgement/of the profitability and financial
position of the business.
Introduction to Accounting 1.3

7. Communicating
Finally, accounting function involves communicating the financial information, i.e.,
financial statements, to its users. The accounting information should be provided in
time to the users so that appropriate decisions may be taken at the appropriate time.

/OBJECTIVES OF ACcOUNTING
The objectives of accounting are:

1. Maintaining Accounting Records

The objective of accounting is to record financial transactions and events of the organisation
in the books of account in a systematic manner: llowing the principles of accountancy.

2. Determining Profit or Loss

Another objective of accounting is to determine whether during the accounting period,
the firm has earned profit or has incurred loss. For this purpose, a statement called
an Income Statement or the Trading and Profit and Loss Account is prepared.
(Rewenues resulting from the transactions of the period are transferred in the credit
and expenses are transferred in the debit.The difference between the two sides is
either profit or loss.
3. Determining Financial Position
Another objective of accounting is to determine financial position. It is known from
the Balance Sheet, which shows value of the assets on one side and liabilities on the
other side. Financial position of the business is as relevant for the users of financial
statements as is the Income Statement, i.e., Profit and Loss Account (Statement of
Profit and Loss, in the case of Companies).

4. Facilitating Management
The management often requires financial information for decision-making, effective
control, budgeting and forecasting. Accounting provides financial information to assist
the management in discharging this function.

5. Providing Accounting Information to Users

Yet another objective of accounting is to provide accounting information to users, both
internal and external, who analyse them according to their requirements.
6. Protecting Business Assets
Another objective of accounting is to have records of assets owned by the business.
Accounting maintains record of assets owned by the business which enables the
management to exercise control and protect them.

FUNCTIONS OF ACCOUNTING
1. Maintaining Systematic Accounting Records
The primary function of accounting is to maintain systematic accounting records of
financial transactions and events.
 Keeping-CBSE XI
Book
Double Entry
1.4

}Preparation of FinancialStatements or Final AccouE

and include
the accounting period
Financial statements are prepared at the end of Statement (Balance sheet).
Position
(Profit and Loss Account) and o r loss i n c u r r e d
tatement i.e., profit earned
statements show the financial performance,
anclal Balance s h e e t
as at
tne
the accounting year and the financial position, i.e.,
ing statements are important for
all the users for
Both the
l e accounting year.
taking decisions.

3.Meeting Legal Requirements maintained

Accounting records a r e accepted as evidence by the court
of lawif they a r e
Besides, the law such
systematically following the accounting principles and concepts.
submissions of returns
as the Companies Act, Icome Tax Act, GST Act, etc., require
submitted if the
i n the form and period as is prescribed in the law. The
returns c a n be

accounting records are maintained systematically and timely.

4. Communicating the Financial Information

information to
It is yet another function of accounting to communicate the financial
the users, which may be internal users or external users, such as management, banks,
employees, government authorities, etc.
5.Assistance to Management
Management often requires financial information which is given by the accounting
records which in turn helps the management in decision-making. Accounting record
should be maintained in such a manner that the assets owned are known. It will assist
the management in protecting the assets and also exercising control.

ADVANTAGES OF ACCOUNTING

1. Financial Information about Business

Financial performance during the accounting period, i.e., profit earned or loss incurred and
also the financial position at the end of the accounting period is known from accounting.

2. Assistance to Management
The management makes business plans, takes decisions and exercises control on the
basis of accounting information.

3. Replaces Memory
A systematic and timely recording of transactions obviates the necessity to remember
transactions. The accounting record provides the necessary information.

4. Facilitates Comparative Study

A systematic record enables comparison of one year's results with those of other years
and identify factors leading to change, if any.
Introduction to Accounting 1.5

5. Facilitates Settlement of Tax Liabilities

A systematic aceounting record immensely helps in settlement of income tax and Goods
and Services Tax (GST) liabilities, since it is a good evidence of the correct recording
of transactions.
6. Facilitates Loans
Loan is granted by the banks and financial institutions on the basis of growth
potential which is supported by the performance and security of loan. Accounting
makes available the information with respect to performance and also assets that are
available as security.

7. Evidence in Court
Systematic record of transactions is often accepted by the Courts as good evidence.
8. Facilitates Sale of Business
If someone desires to sell his business, the accounts maintained by him will enable
the ascertainment of the proper purchase price.
9. Assistance in the Event of Insolvency
Insolvency proceedings involve explaining many transactions that have taken place in
the past. Systematic accounting records assist a great deal in such situation.

10. Helpful in Partnership Accounts

At the time of admission or retirement or death of a partner or in case of dissolution
of the firm, the accounting record is of vital importance and use because it provides
the basis to reach a settlement.
LIMITATIONSOF AccOUNTING
1. Accounting is not Fully Exact
Accounting is not fully exact in spite of the fact that transactions are recorded on the
basis of evidence, yet some estimates are also made for ascertaining profit or loss,
for examples, estimating the useful life of an asset, providing for doubtful debts, net
realisable value of closing stock, etc.
2. Unrealistic Information
Assets are recorded in the books of accounts at historical cost and depreciated over
their estimated useful life. The fact that the assets are recorded at historical cost and
as a result, current values are not shown. Also their useful life is estimated to provide
depreciation, it makes the information unrealisti.

3. Accounting Ignores the Qualitative Elements

Accounting is confined to monetary matters only, therefore, qualitative elements like
quality or skills of management and staff, industrial relations and public relations
are ignored.
1.6
Double Entry Book keeping--CBSEXI

Changes
* Accounting lgnores the Effect of Price Level
ACCounting statements are prepared at historical cost. Money, as a measurement

unit, changes in value frequently, i.e., it does not remain stable. Accouning, however.
presumes that value of money remains stable. Unless price level changes are considered,

accounting information will not show correct financial results

5. Accounting May Lead to Window Dressing
n e term window dressing means manipulation of accounts in a way so as to conceal

Vital facts and present the financial statements to show a better position than what
actually is. In this situation, income statement (i.e., Profit and Loss Account) does not
SOW correct profit or loss and the Balance Sheet does not provide a true and fair view

of the financial position of the enterprise.

ROLE OF ACCOUNTING IN BUSINESS

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

analysing, interpreting and communicating the financial infornmation of the business.

Following points highlight the role of accounting in business

1. Maintenance of Systematic Records

The primary role of accounting is to maintain systematic records of financial transactions
in order to ascertain the net profit or loss for the accounting period and financial position
of the business as on a particular date.

2. Assistance to Management
Accounting assists the management by making available financial information for
effective functioning and rational decision making.

3. Facilitates Comparative Study

A systematic record of financial transactions enables comparison of one year's results
with those of other years and identifies reasons leading to change, if any.

4. Evidence in Court
Accounting records are often accepted by courts as good evidence.
5. Others
() Proper accounting records obviates the necessity to remember business transactions.

(i) Facilitates Raising Loans.

(ii) Facilitates sale of Business Dy ascertaining the proper purchase
price.
Facilitates settlement of tax liabilities.
(iv)
Introduction to Accounting 1.7

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

Analysis and Journal

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

Classifying (Postinginto Ledger)-

*Not in Syllabus.

BRANCHES OF ACcoUNTING
The branches of accounting are:
1. Financial Accounting;
2. Cost Accounting; and
3. Management Accounting.
Financial Accounting
Financial Accounting is that branch of accounting which records financial transactions
and events, summarises and interprets them before communicating the results to the
users. It determines profit earned or loss incured during an accounting period (usually
a year) and the financial position on the date when the accounting period ends. The
end-product of financial accounting is the Profit and Loss Account for the period ended
(which shows the profit earned or loss incurred) and the Balance Sheet as on the last
day of the accounting period (which shows the financial position).
In short, financial accounting is confined to recording of financial transactions and
events in the books of account, preparation of financial statements, i.e., the Profit
and Loss Account and the Balance Sheet, analysing the financial st¡tements and
communicating the financial information to the users of accounting information.
1.8 Double Entry Book Keeping-CeSEX

Cost Accounting
s Dranch 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 cost
Management Accounting
lanagement Accounting is that branch of accounting which 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.

BOOK KEEPING, ACCoUNTING AND ACCOUNTANCY

The terms Book Keeping' and 'Accounting, are often considered as same and are used
interchangeably. But these two terms are different from each other. Accounting is a
wider term than Book Keeping. It 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 account, and
4. Classifying recorded transactions and events, i.e., posting them into Ledger accounts.

Definitions of Book Keeping

"Book Keeping is an art of recording in the books of account the monetary aspect of
commercial and financial transactions." -Northcott
"Book Keeping is an art of recording business dealings in a set of books:"-J.R. Batliboi
"Book Keeping is the science and art of recording correctly in the books of account all those
business transactions that result in the transfer of money or money's worth"-R.N. Carter

"Book Keeping is the art of recording bUsiness transactions in a systematic manner."

-A.N. Rosen Kamptf

Accounting
Accounting is a wider term than Book Keeping. lt starts where Book Keeping ends.

In other words, Book Keeping is a part of accounting

Introduction to Accounting 1.9

Difference between Book Keeping and Accounting

Basis Book Keeping Accounting

1. Scope Book Keeping involves identifying financial| Accounting involves summarising the recorded
them and
transactionsand events; measuring them in transactionsand events,interpreting
money terms; recording them in the books communicating the results thereof.
of account arnd classifying them.
2. Stage Itisaprimarystage. Itisthebasisforaccounting. It is a secondary stage. It begins where Book
Keeping ends.

3. Objective The objective of Book Keeping is to maintain The objective of Accounting is to ascertain net
systematic records of financial transactions. results of operations and financial postionandto
communicate information 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 workcan be performedby It being a specialised function is performed by

a trained staff.
not sotrained staff.
6. Special Book Keeping is mechanical in nature and, Accounting requires special skills andabilityto
Skills | thus, does not require special skills. analyse and interpret.

Accountancy
Accountancy is a systematic knowledge of accounting. It explains how to deal with
various aspects of accounting. It educates us how to maintain the books of account
and how to summarise the accounting information and communicate it to the users.
In the words of Kohler, accountaney refers to the entire body of the theory and practice
of accounting.
Accounting and Accountancy
Accountancy is knowledge whereas accounting is the action or process. Accounting
process is carried out on the basis oftherules and principles framed by accountancy.
Thus, it may be said that accountancy is knowledge of accounting and accounting is
the application of accountancy.

ACCOUNTING INFORMATION
"Accounting is a service activity. ts function is to provide qualitative information,
primarily financial in nature, about economic entities that is intended to be useful in
making economic decisions." -Accounting Principles Board

As an information system, accounting collects financial data, records it in the books

of account, classifies and summarises it to produce financial information that is
communicated to its users. Accounting begins with the identification of transactions of
financial nature and ends with the preparation of financial statements (i.e., Income
Statement and Balance Sheet). Each step in the process of accounting generates
information. Generation of information is not an end in itself, it is a way to facilitate
the communication of information to users of accounting information.
 1.10
Double Entry Book Keeping-CBSE XI

Types of
Accounting Information
ACCounting information refers to the financial statements generated through the process
Book Keeping, use of which helps the users to arrive at decisions. The financial
statements so generated are the Income Statement, i.e., Profit and Loss Account and
he Position Statement, i.e., Balance Sheet. The information made available by these
statements are:
. nformation Relating to Profit or Surplus
h e Income Statement makes available the accounting information about the
p r o t earned or loss incurred as a result of business operations or otherwise
an accounting period.
during
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.
A and Loss in the form prescribed in Schedule II,
company prepares Statement of Profit
Part lI of the Companies Act, 2013 to determine Net Profit or Net Loss.
A Not-for-Profit Organisation prepares Income and Expenditure Account to determine
Surplus or Deficit.
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 of
liabilities, payment of dividend and expansion ofbusiness, etc., are based on availability
of cash.

QUALITATIVE CHARACTERISTICS OF ACCOUNTING INFORMATION

Qualitative characteristics are attributes that make the accounting information useful
to users. The qualitative characteristics are:

1. Reliability a11121
Accounting information must be reliable. Reliability of information means itis
verifiable, free from bi¡s and material error.

2. Relevance 1I13 ldhd

Accounting information must be relevant to the user. Information is relevant if it meets
the needs of the users in decision-making.
Introduction to Accounting 1.11

3.Understandability
Understandability means that the information provided through the financial
statements must be presented in a manner that the users are able to understand 1t.

4. Comparability
Comparability means that the users should be able to compare the accounting
information of an enterprise of the period either with that of other periods, known
as intra-firm comparison or with the
accounting information of other enterprises,
known as inter-firm comparison.

USERS OF ACCOUNTING INFORMATION

Users of Accounting Information may be Internal Users or External Users.

Internal Users
Internal Users are the users who have access to information that can be taken from
the accounting records.
(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.

External Users

External Users are the users who do not have access to accounting records and have
to base their decision on financial statements.

) 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 has deposited its dues towards Employees' Provident Fund and Employees'
State Insurance, etc., or not with the appropriate authorities.

(ii) 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.
 1.12 Double Entry Book Keeping-CBSE

(ii) Investors and Potential Investors

nvestment involves risk and also the investors do not have direct control over the
the
Dusiness affairs. Therefore, they rely on the accounting information available
enterprise
to them
and seek answers to uestions such as-what is the earning capacity of the
and how safe is their
investment?
(iv) Creditors
Creditors are those parties who supply goods and/or services on credit. lt is a common
DuSiness practice that a large number of suppliers remain invested in credit sales. Before
granting credit, creditors satisfy themselves about the credit-worthiness of the business.
The financial statements help them immensely in making such an assessment.

() Government and its Authorities

The government makes use of financial statements to compile national income accounts
and other information. The information available to it enables it to take policy decisions.

overnment levies various taxes such as custom duty, GST and income tax. These
government authorities assess correct tax dues after analysis of the financial statements,

(vi) Public
ihey want to see the business running since it makes substantial contribution to
the economy in many ways, e.g., employment of people, patronage to suppliers, etc.
They also want to see the concern of the business for environment, amount spent as
Corporate Social Responsibility.
Thus, financial acounting provides useful financial information to various user groups
for decision-making.
(vii) Researchers
Researchers use accounting information in their research work.

SYSTEMS OF ACCOUNTING

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 means a system of accounting which recognises and records
both aspects-Debit and Credit of a financial transaction. At the time of recording a
transaction, one aspect is recordlecd on the debit side and other aspect is recorded on the
credit side. For example, when goods are purchased for cash, goods are acquired and in
wot1rn eash is paid. In this transaction, two aspects are involved, i.e.,
receiving goods
and paving cash. Under the Double Bntry >ystem, both these aspects are recorded. This
SVstem is based on the 'Dual Aspect oncept and is universally applied in accounting
Introduction to Accounting 1.13

Features of the Double Entry System

(i) It maintains a complete record of each transaction.
(i) It recognises two-fold aspect of every transaction, viz., the aspect of receiving
(value in) and the aspect of giving (value out).
(111) In this system, one aspect is debited and the other aspect is credited following
the rules of debit and credit.
(iu) Since one aspect of a transaction is debited and the other is credited, the total of
all debits is always equal to total of all credits. It helps in establishing arithmetical
accuracy by preparing the Trial Balance.

Stages of Double Entry System

A complete system of double entry book keeping has following three stages:
) Recording the transactions in the Journal.
(i) Classifying transactions in the Journal by posting them to the appropriate ledger
accounts and then preparing the Trial Balance.
(ii) Closing the books and preparing the final accounts.
All these stages shall be discussed one by one in succeeding chapters.

Advantages of the Double Entry System

The advantages of Double Entry System are:

() Scientific System
Double Entry System is a scientific system of recording business transactions as
compared to Single Entry system. It helps attain the objectives of accounting.

(ii) Complete Record of Transactions

Under the system, both sides of a transaction are recorded. It is a complete record as
it results in showing correct income or loss, assets and liabilities.

(iii) Arithmetical Accuracy of Accounts is Ensured

work be
By the use of this system, arithmetical accuracy of the accounting can

established through the Trial Balance.

(iv) Determining Profit or Loss
Profit earned or loss incurred during a period can be determined by preparing Profit
and Loss Account.

() Ascertaining Financial Position

Financial position of the firm or the institution can be ascertained at the end of each period
by preparing the Balance Sheet.

(vi) Details for Purposes of Control

The system permits accounts to be maintained in as much detail as necessary and,
therefore, provides significant information for purposes of control, etc.
 1.14
Double Entry Book Keeping-CBSE
(vi) Comparative Study is Possible
O O n e year may be compared with those of previous years and reasons for the
change can be identified.
viii) Helps Management in
Decision-making
Management is able to obtain good information for its work, especially in making c
decisions.
ix) Detection of Frauds
rauds and
and Misappropriations
misappropriations are minimised since complete information about all assets
and liabilities is
available.
t1s because
of these advantages that the Double Entry System is extensively used.
2. Accounts from Incomplete Records or Single Entry
System
Account from Incomplete Records or Single Entry System of recording transactions in
he books of
account may be defined as an
incomplete Double Entry System. In this
system, all transactions are not recorded on double entry basis. In some
both transactions,
aspects of the transactions are recorded, while in others, either one
aspect is
recorded or not recorded at all. Instead of
maintaining all the accounts, only Personal
Accounts and Cash Book are maintained under this The
system. accounts maintained
under this system are
incomplete and unsystematic and, therefore, not reliable.
Since all transactions are not recorded under this
system on double entry basis, it is
not possible to prepare a Trial Balance. As a
result, the Profit and Loss Account and
the Balance Sheet cannot be
prepared.

QUESTIONS
Higher Order Thinking Skills (HOTS) Questions

Q.1. Resignation by a Marketing Manager is recorded in the books of account.

not
Why?
Ans. It is not recorded because it cannot be measured in money terms.
Q. 2. Book Keeping is not a part of accounting. Do you agree with the statement?
Ans. No. Book Keeping is a part of accounting. Two processes of accounting, i.e., collecting and
recording of financial transactions and events
the processes of Book Keeping.
are

Q.3. Is the basic objective of Book Keeping to maintain systematic records or to ascertain net
results of operations of financial transactions?
(MSE Chandigarh)
Ans. The basic objective of Book Keeping is to maintain systematic records of financial
transactions.
9.4. Recording the transactions and events correctly and preparing financial statements are
the only objectives of accounting. Do you agree?
Ans. No. Besides recording them correctly and preparing financial statements, accounting has
the objectives of facilitating management control and
communicating financial informatio
to the users.