NCERT Solutions for Class 11 Accountancy Chapter 1 - Introduction to Accounting

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    Short Answer Type Questions

    1. Define accounting.

    Ans. Accounting can be defined, as the process of identifying, measuring, recording and communicating the required information relating to the economic events of an organisation to the interested users of such information.

    2. State the end product of financial accounting ?

    Ans. The end product of financial accounting is financial statements i.e., trading and profit and loss account and balance sheet.

    3. Enumerate the main objective of accounting.

    Ans. The main objective of accounting is to analyse the profit and loss of business.

    4. Who are the users of accounting information?

    Ans. Users of accounting information may be categorised into internal users and external users.

    (i) Internal Users: These are the persons within the organisation, who are interested in knowing theaccounting information of the business. Internal user are that individual who runs, manages andoperates the daily activities of the inside area of an organisation; for e.g., Owners, directors, managersetc.

    (ii) External Users: These are the persons outside the organisation, who are interested in knowingaccounting information of the business. External users are those individuals who take interest inthe account information of an organisation but they are not part of the organisation’s administrationprocess for e.g., Creditors, investors etc.

    5. State the nature of accounting information required by long-term lenders.

    Ans. The long term lenders are interested in knowing, if they are likely to get paid and look particularly at liquidity, which is the ability of the company or organisation to pay its debts as they become due. They just want to ensure the recovery and return on their investment with the enterprise.

    6. Who are the external users of Information?

    Ans. Persons outside the organisation, who are interested in knowing accounting information of the business. The various external users are:

    (i) Investors and Potential Investors: They require information on the risks and return on investment.

    (ii) Unions and Employee Groups: They require information on the stability, profitability anddistribution of wealth within the business.

    (iii) Lenders and Financial Institutions: They require information on the creditworthiness of thecompany and its ability to repay loans and pay interest.

    (iv) Suppliers and Creditors: They require information on whether amount owed will be repaid whendue, and on the continued existence of the business.

    7. Enumerate information needs of management.

    Ans. Management is interested in the accounting information to get timely information on cost of sales, profitability etc. that will help the management in planning, controlling and decision making.

    8. Give any three examples of revenues.

    Ans. (i) Amount received from sale of goods

    (ii) Rent received

    (iii) Commission received

    9. Distinguish between debtors and creditors; profit and gain.

    Ans.

    Basis Debtor Creditor
    Meaning Debtor is a person or a firm to whom goods have been sold or services rendered on credit and payment not received. Creditor is a person or a firm from whom goods have been purchased or service have been taken on credit and payment has not been made.
    Balance sheet It is shown on the assets side of balance sheet. It is shown on the liability side of balance sheet.
    Nature It is current asset. It is current liability.
    Basis Profit Gain
    Meaning Profit is the excess of total revenue over total expenses of a business enterprise for an accounting period. Gain is a monetary benefit, profit or advantage that arises from transactions, which are incidental to business.
    Nature It is regular in nature. It is irregular in nature.

    10. Accounting information should be comparable. Do you agree with this statement? Give two reasons.

    Ans. Yes, I agree with this statement that accounting information should be comparable. If acting information is not comparable, we will not be able to compare the result of previous year with the current year and secondly, if these informations are not comparable we will not be able to compare ourself with our competitors.

    11. If the accounting information is not clearly presented, which of the qualitative characteristic of the accounting information is violated?

    Ans. If the accounting information is not clearly presented; it will violate the qualitative characteristic of  understandability. Because the qualities that distinguish between good and bad communications in a message are fundamental to the understandability of the message.

    12. ‘The role of accounting has changed over the period of time.’ Do you agree? Explain.

    Ans. The role of accounting is changing over period of time. Nowadays, accounting is not only recording the financial events but also provides accounting information to various users i.e., internal and external users. Information provided by accounting helps users to take decision for growth of business.

    13. Explain each of the following accounting terms.

    (i) Fixed Asset

    (ii) Revenue

    (iii) Expenses

    (iv) Short-term liability

    (v) Capital

    Ans. (i) Fixed Asset: Fixed Assets are property (moveable or im-moveable) or legal rights owned by an individual or business. These are the economic resources of an enterprise that can be usefully expressed in monetary terms.

    (ii) Revenue: It means the amount received from sale of goods or services. Revenue is an inflow of assets, which results in an increase in the owner's equity, e.g., sale of goods, rent, commission, interest, dividend etc. Revenue differs from income. Sale of goods and services is revenue and cost of sale of goods and services is an expense. The difference between revenue and expense is income.

    (iii) Expenses: Cost incurred by a business in the process of earning revenue is known as expense. It is a value which has expired during the accounting period. It may be:

    (a) Cash payment (salaries, wages, rent)

    (b) Writing off a part of fixed assets (depreciation)

    (c) Writing off a current asset (bad debts)

    (iv) Short-term Liabilities: It refers to a liability, which is payable within one year.

    (v) Capital: Capital is the amount invested by the owner in the business. It may be in the form of cash or kind. In accounting 'business' and 'owner' are separate and distinct entities. Hence, capital is a liability of the business towards the owners. In accounting, such liability is also called internal liability or internal equity or owner's equity.

    14. Define revenues and expenses.

    Ans. Revenue: It means the amount received from sale of goods or services. Revenue is an inflow of assets, which results in an increase in the owner's equity; e.g., sale of goods, rent, commission, interest, dividend etc. Revenue differs from income. Sale of goods and services is revenue and cost of sale of goods and services is an expense. The difference between revenue and expense is income.

    Expenses: Cost incurred by a business in the process of earning revenue is known as expense. It is a value which has expired during the accounting period. It may be:

    (i) Cash payment (salaries, wages, rent)

    (ii) Writing off a part of fixed assets (depreciation)

    (iii) Writing off a current asset (bad debts)

    15. What is the primary reason for the business students and others to familiarise themselves with the accounting discipline?

    Ans. Every monetary transaction must be recorded in such a manner that various accounting users must understand and interpret these results in the same manner without any ambiguity. The reasons for business students and others, to familiarise themselves with the accounting discipline are given below:

    (i) It helps in learning the various aspects of accounting.

    (ii) It helps in learning how to maintain books of accounts.

    (iii) It helps in learning how to summarize accounting information.

    (iv) It helps in learning how to interpret the accounting information with relative accuracy.

    Long Answer Type Question

     16. What is accounting? Define its objectives.

    OR

    Define accounting and its objectives.

    Ans. Accounting can be defined, as the process of identifying, measuring, recording and communicating the required information relating to the economic events of an organisation to the interested users of such information.

    The objectives of accounting are as follows:

    (i) Systematic Recording of Business Transactions: Accounting systematically records financial transactions and events of the enterprise in the books of accounts. It classifies the recorded data under relevant accounts and summarises them into financial statements. Accounting is done to keep a systematic record of financial transactions, assets, liabilities in a systematic manner. The recorded information enables verifiability and acts as an evidence.

    (ii) Calculation of Profit or Loss: Another objective of accounting is to ascertain the profit or loss sustained by a business during an accounting period. For this purpose, a statement called the income statement or the Trading and Profit and Loss account is prepared. In this account, the revenue and the expenses incurred in the accounting period are recorded, and the comparison of the two shows whether the business has earned profit or incurred loss.

    (iii) Ascertainment of Financial Position: Accounting also aims at ascertaining the financial position of the business concern which can be done by preparing a position statement, also called as Balance sheet. Balance sheet is a systematic record of various assets and liabilities.

    (iv) Providing Accounting Information to its Users for Decision-making: Another important objective of accounting is to provide accounting information to its users. Users are generally of two types internal and external. The accounting information is communicated in the form of reports, statements, graphs, charts etc.

    17. Explain the factors which necessitated systematic accounting.

    Ans. The factors that necessitated systematic accounting are given below:

    (i) Accounting records only financial transactions events that are financial in nature only.

    For example, salary of an employee is recorded in the books but his/her educational qualification is not recorded.

    (ii) Accounting records are only those transactions which are in monetary terms.

    (iii) Business transactions of similar nature are classified and posted under their respective accounts.

    (iv) All business transactions are summarised in the form of Trial Balance, Trading A/c, Profit & Loss A/c and Balance Sheet.

    (v) Systematic accounting enables analysing and interpreting the data in systematic manner.

    18. Describe the informational needs of external users.

    Ans. External Users: These are the persons outside the organisation, who are interested in knowing accounting information of the business. The various external users are:

    (i) Investors and Potential Investors: They require information on the risks and return on their investment.

    (ii) Unions and Employee Groups: They require information on the stability, profitability and distribution of wealth within the business.

    (iii) Lenders and Financial Institutions: They require information on the creditworthiness of the company and its ability to repay loans and pay interest.

    (iv) Suppliers and Creditors: They require information on whether amount owed will be repaid when due, and on the continued existence of the business.

    (v) Customers: They require information on the continued existence of the business and thus, the probability of a continued supply of products, parts and after sales service.

    (vi) Government and Other Regulators: They require information on the allocation of resources and the compliance to regulations.

    (vii) Social Responsibility Groups: such as environmental groups require information on the impact on environment and its protection.

    (viii) Competitors: They require information on the relative strengths and weaknesses of their competitors and for comparative and benchmarking purposes. Whereas, the above categories of users share in the wealth of the company, competitors require the information mainly for strategic purposes.

    19. What do you mean by an asset and what are different types of assets?

    Ans. Assets are property (moveable or im-moveable) or legal rights owned by an individual or business. These are the economic resources of an enterprise that can be usefully expressed in monetary terms. It is an item Owned or controlled by a business. It has economic value that can be realised by either converting into cash or generating income for the company.

    Assets can be classified into:

    (i) Current Assets: These are the assets which are purchased to convert them into cash within a short period of time, i.e., one year, e.g., debtors, stock etc.

    (ii) Non-current Assets: Anything not classified as current assets is non-current asset. These are the assets held by the business not with the purpose to resell but are held either as investment or to facilitate business operations i.e., held for long-term. Fixed assets such as land, building machinery, long-term investments, etc.

    (a) Tangible Assets: These are the assets which have a physical existence, i.e., they can be seen or touched, e.g, land, buildings, furniture, vehicle, etc.

    (b) Intangible Assets: These are the assets which do not have physical existence, i.e., they cannot be seen or touched, e.g., trademarks, copyrights. patents, goodwill, etc.

    (iii) Fictitious Assets: These are unexpired losses and expenditures. These are basically not assets because they do not have a realisable value, e.g., deferred revenue expenditure, discount on issue of shares, loss on issue of debentures, etc.

    20. Explain the meaning of gain and profit. Distinguish between these two terms.

    Ans.

    Basis Profit Gain
    Meaning Profit is the excess of total revenue over total expenses of a business enterprisefor an accounting period. Gain is a monetary benefit, profit or advantage that arises from transactions, which are incidental to business.
    Nature It is regular in nature. It is irregular in nature.

    21. Explain the qualitative characteristics of accounting information.

    Ans. Qualitative characteristics are the attributes of accounting information which tend to enhance its understandability and usefulness. In order to assess whether accounting information is useful, it must possess the characteristics of reliability, relevance, understandability and comparability.

    Qualitative Characteristics of Accounting Information:

    (i) Reliability: It means the users must be able to depend on the information. It must be factual
    and verifiable. Reliable information should be free from error and bias. To ensure reliability, the information disclosed must be credible, verifiable by independent parties, must use the same method of measuring and be neutral and faithful.

    (ii) Relevance: Accounting information presented by financial statements must be relevant to the decision making needs of the users. Unnecessary and irrelevant information should not be included.

    To be relevant, information must be available in time, must help in prediction and feedback, and
    must influence the decisions of users.

    (iii) Understandability: The information provided in financial statements must be understandable by the users. Understandability implies that the accounting information provided to the decision-makers must be interpreted by them in the same sense as it was prepared and conveyed to them.

    (iv) Comparability: It means that the users should be able to compare the accounting information.

    To be comparable, accounting reports must belong to a common period and use common unit of measurement and format of reporting.

    (a) When accounting information of a period is compared with the same business enterprise of other period, it is known as intra-firm comparison.

    (b) When accounting information of an enterprise is compared with that of other enterprises, it is known as inter-firm comparison.

    22. Describe the role of accounting in the modern world.

    Ans. Accounting is not an end in itself; it is a means to an end. The role of accounting has been changing with the changes in economic development and increasing demands of the society. As the numbers of transactions in a business are very large it becomes difficult to remember all the transactions.

    Accounting helps in describing and analysing a mass of data of an enterprise through measurement, classification and summarisation and reduces those data into reports and statements, which show the financial condition and results of operations of that enterprise. Hence, it is regarded as a language of business. Accounting, on the other hand, also performs the service activity by providing quantitative financial information that helps the users in various ways.

    Accounting as an information system, collects and communicates economic information about an enterprise to a wide variety of interested parties. However, accounting information relates to the past transactions and is quantitative and financial in nature.

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