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 phase of an accounting 1. It is the summarizing phase of an

system. accounting system.

2. It is a primary stage and basis for 2. It is a Secondary Stage which begins

accounting. where the Book keeping process ends.

3. It is routine in nature and does not require 3. It is analytical in nature and required
any special skill or knowledge special skill or knowledge.

4. It is done by junior staff called book- 4. It is done by senior staff called

keepers accountants.

5. It does not give the complete picture of 5. It gives the complete picture of the
the financial conditions of the business unit. financial conditions of the 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.

Users Classification Information the user want

Return on their investment, financial health of their

1. Owner
company/business.

To evaluate the performance to take various

decisions.
2. Management

Interna
l

Profitability to claim higher wages and bonus,

whether their dues
3. Employees

(PF, ESI, etc.) deposited regularly.

1. Investors and To know about Safety, growth of their investments

Extern potential investors and future of the business.
al

Assessing the financial capability, ability of the business to pay its

2. Creditors
debts.

3. Lenders Repaying capacity, credit worthiness.

Assessment of due taxes, true and fair disclosure of accounting

4. Tax Authorities
information,

To compile national income and other information. Helps to take

5. Government
policy decisions.

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

6. Others
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. Refer diagram on page 11 ncert

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. Refer diagram from ncert
Liabilities: Liabilities are obligations or debts that an enterprise has to pay after some time in the future.
Liabilities can be classified as:

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.
Refer diagram from ncert
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.