Vidya Coaching Centre

8/16 Basement, Old Rajinder Nagar

New Delhi – 110060
Ph. No. 9810064241, 9871273853
CLASS – XI
ACCOUNTANCY
CHAPTER - 1
MEANING AND OBJECTIVES
OF ACCOUNTING
 MEANING AND DEFINITION OF ACCOUNTING
“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

FEATURES /ATTRIBUTES (CHARACTERISTICS) Of ACCOUNTING

Identification of Financial Measuring the Identified Recording Classifying

Transaction and Events Transaction
• Accounting is an art of • Classifying is the process
• Accounting records only • Accounting measures the recoding business of collecting similar
those transactions and transactions and events in transactions in the books transactions at one place
events which terms of a common of accounts. by opening accounts in
are of financial nature. unit, i.e., the currency of the the Ledger Book.
country. • Recording is the process
• Example : Purchase of of recoding business • Example : Rahul’s
raw material or sale of • Financial transactions and transactions of financial account in the Ledger, all
finished goods by a firm. events are measured in terms character in the book of business transactions
of money. original entry, i.e., connected with Rahul are
• These transactions are journal. posted so that what is
identified with the help • Example : Purchase of ultimately due to Rahul
of bills and receipts goods, say 10 tonnes of steel • This book is further sub or due from Rahul
as evidence of the for 2,50,000 and 1,000 bags – divided into subsidiary can be ascertained.
transactions. of cement for Rs. 2,75,000 books such as Cash
is measured in terms of Book (for recording cash
money. transactions), Purchases
Book (for recording
credit purchases of
goods), Sales Book (for
recording credit sales),
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 FEATURES /ATTRIBUTES (CHARACTERISTICS) or ACCOUNTING

Summarising Analysis and Interpretation Communicating

• This involves presenting • Financial data is analysed and interpreted • Finally, accounting function involves
the classified data in a so that the users of financial data can make communicating the financial data, i.e.,
manner which is a meaningful judgment of the financial financial statements to its users.
understandable and performance (profit) and financial position
useful to internal as of the business. • The accounting information must be
well as external users provided in time and presented to the
of accounting users so that decisions are taken at the
statements. appropriate time.

• The process leads to the

preparation of the
following statements:

(i) Trial Balance,

(ii) Trading and Profit
and Loss Account or
Statement of Profit and
Loss (in case of
companies) and
(iii) Balance Sheet.

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 ACCOUNTING PROCESS
Communicating to Users Financial Transactions

Analysis and Interpretation Journal

1. Cash Book
Summarising 2. Purchases Book
3. Sales Book
Trail Balance 4. Purchases Return Book
Trading and Profit and Loss Account 5. Sales Return Book Recording
(Statement of Profit and Loss) 6. Journal Proper
Balance Sheet

Classifying (Posting into Ledger)

BRANCHES OF ACCOUNTING

Financial Accounting Cost Accounting Management Accounting

• It is that branch of accounting • It tells about the cost of • It is concerned with generating
which records financial transactions products manufactured accounting information relating
and events, summarises and interprets or services rendered to funds, cost profits etc.
them and communicates the results to and helps the as it enables the management
the users. management in fixing in decision making.
• It tells about profit earned prices and exercising
or loss incurred during an control.
accounting year and also
tells about the financial position. 4
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 DISTINCTION BETWEEN BOOK – KEEPING AND ACCOUNTING
Basis Book – keeping Accounting
1. Scope Book – keeping includes : Accounting in addition to Book – keeping includes
(a) Summarising the classified transactions.
(a) Identify the transactions of financial nature.
(b) Analysis and interpreting the summarized
(b) Measuring the identified transactions in terms
results.
of money.
(c) Communicating the results to parties intersected
(c) Recording the measured transaction.
in them.
(d) Classifying them into ledger.

2. Stage Book – Keeping is primary stage. It is the secondary stage. Accounting starts where
Book keeping ends.

3. Objective The main objective of Book keeping is to maintain Its main objective is to ascertain the net results
systematic records of transactions of financial nature. and financial position of the business and to
communicate them to interested parties

4. Nature of Job The Book – keeping function is routine and clerical in The Accounting function is analytical in nature.
nature.

5. Who Performs The Book – keeping function is performed by junior The Accounting function is performed by senior staff.
staff.
It can be performed by persons having limited level It is performed by persons having higher level of
6. Knowledge Level of knowledge. knowledge.

The book – keeper is not required to possess The account is required to possess analytical skill.
7. Analytical Skill analytical skill.

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 DISTINCTION BETWEEN ACCOUNTING AND ACCOUNTANCY
Basis Accounting Accountancy

1. Meaning It is concerned with recording, classifying and It is a body of knowledge prescribing certain rules
summarising of transactions. or principles to be observed while recording
classifying and summarising of transactions.

2. Scope It is narrow in scope. Accounting starts where It is much wider in scope and includes
Book – keeping ends. Book keeping as well as Accounting.

3. Relation It depends on Book – Keeping It depends both on Book keeping and Accounting.

4. Function Its main functions is to ascertain the net results It includes the decision making function also on
and the financial position of the business and to the basis of information provided by book keeping
communicate them to interested parties. and Accounting.

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 ADVANTAGES / FUNCTIONS / OBJECTIVES OF ACCOUNTING

Record of Financial Determine Profit or Determine Financial Assisting the Communicating Accounting
Transactions and Loss Position Management Information to Users
Events
• Another objective of • Another objective of • Another objective of • Another objective of
• The objective of accounting is to accounting is to accounting is to accounting is to provide
accounting is to record determine the determine financial assists the accounting information to
financial transactions financial position. It is known management by users who analyse
and events of the performance, i.e., from the Balance providing financial them as per their individual
organisation in the profit earned or loss Sheet. information to it. requirements.
books of accounts incurred, for the
following the accounting period. • Financial position • The management
principle of Income Statement of the business is as often requires
accounting in a or Trading and relevant for the financial
systematic manner. Profit and Loss users of financial information for
Account or statements as is the decision making,
Statement of Profit Income Statement. exercising control,
and Loss (by budgeting and
companies) forecasting.
prepared at the end
of the accounting
year shows the
profit earned or
loss incurred during
the accounting year.

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 LIMITATIONS OF ACCOUNTING

Accounting Ignores the Accounting Ignores the Effect Accounting may Lead
Qualitative Elements of Price Level Changes to Window Dressing

• Since accounting is confined • Accounting statements are prepared at • The term window dressing means manipulation of
to monetary matters only, historical cost. accounts so as to conceal vital facts and present the
qualitative elements like financial statements in such a way as to show better
quality of staff, industrial • Unless price level changes are considered position than what it actually is.
relations and public while preparing financial statements,
• In this situation, income statement fails to
relations are ignored. accounting information will not show true
provide a true and fair view of the result of
financial results.
operations and the Balance Sheet fails to
provide a true and fair view of the financial position
of the enterprise.

INTERNAL USERS

Owners Management Employees and Workers

• Owners contributes capital in the • The management makes extensive use of • Employees and workers are entitled to bonus at
business and thus are exposed to accounting information to arrive at the year – end, which is linked to the profit
maximum risk. Naturally, they informed decisions such as determination earned by an enterprise.
are interested in knowing the of selling price.
profit earned or loss suffered • Therefore, the employees and workers are
by the business besides the interested in financial statements.
safety of their capital.
• The financial statement give
the information about profit or
loss and financial position
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of the business.
 EXTERNAL USERS

Banks and Financial Investors and Potential Creditors Government and its
Institutions Investors Authorities

• Banks and financial • Investment involves risk • Creditors are those parties who • Government levies varied
institutions and supply goods or services on credit. taxes such as excise duty,
are an essential part of any also the investors do not have VAT, service tax and
business as they provide loans direct control over the • It is a common business practice income tax.
to businesses. business affairs. that a large number of suppliers
remain invested in credit sales. • These government
• Naturally, they watch the • Therefore, they rely on the authorities assess correct
performance of the business to accounting information • Before granting credit, creditors tax dues after an analysis
know whether it is making available to them and seek satisfy themselves about the credit of the financial statements.
progress as projected to ensure answers to questions such – worthiness of the business.
the safety and recovery of the as how safe is their
loan advanced. investment?

QUALITATIVE CHARACTERISTICS OF ACCOUNTING INFORMATION

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

Reliability Relevance Understandability Comparability

Accounting information Accounting information Understandability means that Comparability means that the users should be
must be reliable. must be relevant to the the information provided able to compare the accounting information of an
Reliability of user. Information is through the financial statements enterprise of the period either with that of other
information means it is relevant if it meets the must be presented in a manner periods, known as intra – firm comparison or
verifiable, free from needs of the users in that the users are able to with the accounting information of other
material error and bias. decision – making. understand it. enterprises, known as inter – firm comparison.
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 SYSTEMS OF ACCOUNTING
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 – Debits and Credit – and at the time of recording a transaction, it is recorded once on the debit side
and again on the credit side. For example, at the time of cash purchases, goods are received and in return cash is paid.

FEATURES OF THE DOUBLE ENTRY SYSTEM

It maintains a complete It recognises two fold aspect of every transaction, In this system, one aspect is debited and the other
record of each transaction. viz., the aspect of receiving (value in) and the aspect is credited following the rules of debit and
aspect of giving (value out). credit.

SINGLE ENTRY SYSTEM

In this system, all transactions are not recorded on double entry basis. As regards some transactions, both aspects of the transactions are
recorded, as regards others, either one aspect is recorded or not recorded at all.

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