Chapter 1 Introduction to Accounting Notes | CBSE Class 11 Accountancy

CBSE Class 11 Accountancy Notes : Chapter 1 Introduction To Accounting

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REVISION NOTES

INTRODUCTION TO ACCOUNTING 

MEANING OF ACCOUNTING 

The American Institute of Certified Public Accountants (AICPA) had defined accounting as 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 financial character, and interpreting the results thereof’. 

Accounting as a Source of Information 

accounting is a definite process of interlinked activities, that begins with the identification of transactions and ends with the preparation of financial statements. Every step in the process of accounting generates information. To be useful, the accounting information should ensure to:

• Provide information for making economic decisions; 
• Serve the users who rely on financial statements as their principal source of information;
• Provide information useful for predicting and evaluating the amount, timing and uncertainty of potential cash-flows;
• Provide information for judging management’s ability to utilise resources effectively in meeting goals 
• Provide factual and interpretative information by disclosing underlying assumptions on matters subject to interpretation, evaluation, prediction, or estimation; and • provide information on activities affecting the society. 

Branches of Accounting 

The economic development and technological advancements have resulted in an increase in the scale of operations and the advent of the company form of business organisation. This has made the management function more and more complex and increased the importance of accounting information. This gave rise to special branches of accounting. These are : 

Financial accounting: The purpose of this branch of accounting is to keep a record of all financial transactions so that: 

(a) the profit earned or loss sustained by the business during an accounting period can be worked out, 

(b) the financial position of the business as at the end of the accounting period can be ascertained, and 

(c) the financial information required by the management and other interested parties can be provided. 

Cost Accounting: 

The purpose of cost accounting is to analyse the expenditure so as to ascertain the cost of various products manufactured by the firm and fix the prices. It also helps in controlling the costs and providing necessary costing information to management for decision-making. Management Accounting: 

The purpose of management accounting is to assist the management in taking rational policy decisions and to evaluate the impact of its decisions and actions. 

Tax accounting:

(GST and income tax). The purpose of this accounting is to calculate the tax liabilities of business. 

Social responsibility: It involves the recording of transactions related to expenditure on social benefits. 

Functions of Accounting: 

• Identification: It involves observing all business activities and selecting those events or transactions which can be considered as financial transactions. Measurement: In Accounting we record only those transactions which can be measured in terms of money or which are of financial nature. If a transactions or event cannot be measured in monetary terms, it is not considered for recording in financial accounts. 
• Recording: Once the economic events are identified and measured in financial terms, these are recorded in books of account in monetary terms and in a chronological order. Recording should be done in a systematic manner so that the information can be made available when required. 
• Classifying: Once the financial transactions are recorded in journal or subsidiary books, all the financial transactions are classified by grouping the transactions of one nature at one place in a separate account. This is known as preparation of Ledger. 
• Summarizing: It is concerned with presentation of data and it begins with balance of ledger accounts and the preparation of trial balance with the help of such balances. Trial balance is required to prepare the financial statements i.e. Trading Account, Profit & Loss Account and Balance Sheet. 
• Communication: The main purpose of accounting is to communicate the financial information the users who analyse them as per their individual requirements. Providing financial information to its users is a regular process. 
• Identification Recording Classifying 
• Communication Summarizing

Objectives of Accounting: 

(i) The main objective of the accounting is to keep systematic record of business transactions. That is why, all financial transactions are first recorded in journal and then posted into ledger. 

(ii) Accounting is helpful in preventing and detecting the errors and frauds. 

(iii) Accounting plays important role in calculating the profit or loss during a particular period by preparing Trading account and Profit and Loss Account. 

(iv) Accounting is helpful in ascertaining the financial position of the business. 

(v) Accounting provides useful information to its users. 

Qualitative Characteristics of Accounting: 

(i) Reliability: Accounting information should be reliable, verifiable and based on facts. 

(ii) Relevance: Only Relevant information should be disclosed. Information which is irrelevant and useless should be not be the part of financial statements. 

(iii) Understandability: Accounting information should be presented in a very simple way so that it is easy to understand by its users. 

(iv) Comparability: Financial Statements should contains the figures of current year as well as figures of previous year so that the current performance of the business can be compared with the performance of previous year. 

Advantages of Accounting: 

1. Financial Information about Business 
2. Assistance to Management 
3. Replaces Memory 
4. Facilitates Comparative Study 
5. Facilitates Settlement of Tax Liabilities 
6. Facilitates Loans 
7. Evidence in Court 

Limitations of Accounting: 

1. Accounting is not Fully Exact 
2. Accounting does not Indicate the Realisable Value 
3. Accounting Ignores the Qualitative Elements 
4. Accounting Ignores the Effect of Price Level Change 
5. Accounting may Lead to Window Dressing 

Interested Users of Information: 

Many users need financial information in order to make important decisions. These users can be divided into two broad categories: internal users and external users

• Internal users include: Chief Executive, Financial Officer, Vice President, Business Unit Managers, Plant Managers, Store Managers, Line Supervisors, etc. 
• External users include: present and potential Investors (shareholders), Creditors (Banks and other Financial Institutions, Debenture holders and other Lenders), Tax Authorities, Regulatory Agencies (Department of Company Affairs, Registrar of Companies, Securities Exchange Board of India, Labour Unions, Trade Associations, Stock Exchange and Customers, etc. The owners/shareholders use them to see if they are getting a satisfactory return on their investment, and to assess the financial health of their company/business. • The directors/managers use them for making both internal and external comparisons in their attempts to evaluate the performance. They may compare the financial analysis of their company with the industry figures in order to ascertain the company’s strengths and weaknesses. Management is also concerned with ensuring that the money invested in the company/organisation is generating an adequate return and that the company/organisation is able to pay its debts and remain solvent. • The creditors (lenders) want to know if they are likely to get paid and look particularly at liquidity, which is the ability of the company/organisation to pay its debts as they become due. • The prospective investors use them to assess whether or not to invest their money in the company/organisation. • The government and regulatory agencies such as Registrar of companies, Custom departments IRDA, RBI, etc. require information for the payment of various taxes such as Income Tax (IT), Customs and Excise duties for protecting the interests of investors, creditors(lenders), and also to satisfy the legal obligations imposed by The Companies Act 2013 and SEBI from time-to time. 

Different Roles of Accounting: 

(i) As a language – it is perceived as the language of business which is used to communicate information on enterprises; 

(ii) As a historical record – it is viewed as chronological record of financial transactions of an organisation at actual amounts involved; 

(iii) As current economic reality – it is viewed as the means of determining the true income of an entity namely the change of wealth over time; 

(iv) As an information system – it is viewed as a process that links an information source (the accountant) to a set of receivers (external users) by means of a channel of communication; 

(v) As a commodity – specialised information is viewed as a service which is in demand in society, with accountants being willing to and capable of providing it. 

Basic Accounting Terms: 

1. Business Entity: It means a specifically identifiable business enterprise like Super Bazar, ITC Limited, Hira & Co. etc. 
2. Transactions: An event involving some value between two or more entities. 
3. Assets: These are properties or economic resources of an enterprises which can be expressed in monetary terms it can be divided in two parts 1. Non current assets(more than 1 year period) 2. Current assets (less than 1 year period)
4. Liabilities: These are certain obligations or dues which business has to pay to outsiders. These are of two types: 1. Noncurrent liabilities(payable in more than 1 year) 2 current liabilities (payable in one year)
5. Capital: It is amount invested by the owner of business.
6. Sales: It can be credit or cash, in which goods are sold and delivered to customers. 
7. Revenues: It is the amount which is earned by selling of products and services. 
8. Expenses: It is known as cost of assets consumed or services which used. 
9. Expenditure: It means spending money for some benefit.
10. Profit: Excess of revenues over expenses is called profit. 
11. Gain: It generates from incidental transaction such as sales of fixed asset, winning of court case. 
12. Loss: Excess of expenses over income is termed as loss. 
13. Discount: It is defined as concession or deduction in price of goods sold. 
14. Voucher: It is known as evidence in support of a transaction. 
15. Goods: It refers all the tangible goods in which a business deals. (Raw material, work in progress, finished goods.) 
16. Drawings: Amount of goods or cash which is withdrawn from business for personal use by the proprietor. 
17. Purchases: It means of procurement of goods on credit or cash. 
18. Stock: It is a part of unsold goods. It can be divided into two categories. 

1. Opening stock 
2. Closing stock 

1. Debtors: There are persons who owe to an enterprise an amount for buying goods and services on credit. 
2. Creditors: These are persons who have to be paid by an enterprise an amount for providing the enterprise goods and services on credit. 
3. Discount: it is the reduction in the price of goods. It is of two types: cash discount and trade discount. Trade discount is given to increase sales while cash discount is given for early or prompt payment.

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