Introduction To Accounting Class 11 Notes Accountancy Chapter 1 - CBSE
Chapter : 1
What Are Introduction To Accounting ?
Accounting
Accounting is a process of identifying, measuring recording, classifying, summarising, analysing interpreting and communicating the financial business transactions in a useful manner.
Characteristics Or Features Or Attributes Of Accounting
- Identification of Financial Transactions and Events
- Measurement of Transactions
- Recording
- Classifying
- Summarising
- Analysing and Interpreting
- Communicating
Branches Of Accounting
Financial Accounting
- It deals with maintenance of books of accounts to determine profitability and financial position of the business.
Cost Accounting
- It deals with accounting which is concerned with controlling the cost of products manufactured or services rendered.
Management Accounting
- It deals with accounting which is concerned with decision-making process of management .
Book-keeping, Accounting And Accountancy
There is a fundamental difference between the three terms.
Book-keeping
Book-keeping is the process of recording the financial transactions and events of a business. It is a part of accounting and involves.
- Identification of Financial Transactions and Events.
- Measurement of Transactions in terms of money,
- Recording the financial transactions in Journal or Subsidiary Books,
- Classifying them through Ledger.
Accounting
Accounting is a broad term and in addition to Book-keeping, it also includes summarising, interpreting and communicating the financial data to the interested parties.
Accountancy
Accountancy refers to systematic knowledge of the principles and the techniques, which are applied in accounting. It has a wider approach than accounting.
Uses of Accounting
- Financial Reporting
- Decision-making
- Planning and Budgeting
- Tax Compliance
- Monitoring Performance
- Resource Allocation
- Stakeholder
- Internal Control
- Auditing
- Legal Compliance
- Performance Evaluation
- Historical Record keeping
Objectives Of Accounting
- To maintain systematic record of Business Transactions
- To ascertain Profit or Loss
- To determine Financial Position
- To provide information to various users
- To assist the Management
Advantages of Accounting
- Provides information about Financial Performance
- Provides assistance to Management
- Facilitates Comparative Study
- Helpful in Raising Loans
- Evidence in Court
- Help in Decision Making
Limitations of Accounting
- Accounting does not indicate the Realisable Value
- Ignores Effect of Price Level Changes
- Ignore the Qualitative information
- Affected by Window Dressing
Role Of Accounting In Business
Accounting is a process of identifying, measuring, recording, classifying, summarising, analysing, interpreting and communicating the financial information of the business.
Following points highlighted the role of accounting in business:
- Maintenance of Systematic Records
- Assistance to Management
- Facilities Comparative Study
- Evidence in Court
- Others
Accounting Information
Accounting Information refers to the financial statements prepared through the process of Book-keeping.
Types of Accounting Information
- Income Statement
- Statement of Financial Position
- Cash Flow Statement
Users Of Accounting Information
The users may be categorised into Internal Users and External Users.
Internal Users of Accounting Information
- Owners: They need the accounting information to know the profitability and financial soundness of the
business. - Management: Management needs accounting information to take various decisions.
- Employees: They use the information to assess the ability of the business to pay higher wage.
External Users of Accounting Information
- Banks and Financial Institutions: They need it to ensure safety and recovery of the bank advanced and regularity of the interest amount.
- Investors and Potential Investors: They are interested in knowing the earning capacity of the business and safety of the investment.
- Creditors: They need accounting information to ascertain financial soundness and creditworthiness of the
firm. - Public: Public is interested in the accounting information to know the contribution of business towards the
welfare of the society.
Qualitative Characteristics Of Accounting Information
- Reliability: Accounting intimation must be free from material error and personal biasness and verifiable
- Relevance: Unnecessary and relevant intimation should not be included in financial statements.
- Understandability: Information should be presented in such a manner that users can easily understand it.
- Comparability: Users should be able to make intra-firm and inter-firm companion.
Systems Of Accounting
There are main two systems of recording transactions in the book of accounts
- Double Entry System refers to a system of accounting which recognises and records both aspects of a transaction.
- Single Entry System is a system in which either both aspects of transaction are recorded or only one aspect is recorded or not recorded at all.
Business Transaction
Business Transaction is an economic activity of the business, which changes its financial position.
Characteristics of a Business Transaction:
- It brings about a change in the financial position of the firm.
- It involves exchange of goods or services for money consideration.
- A transaction has two aspects a Debit and a Credit of equal amount.
- A transaction may be a cash transaction or a credit transaction.
Account
Account is a summarised record of related transactions at one place under a particular head.
Capital
Capital is the amount invested by the owner in the business.
Drawings
Drawings refer to the withdrawal of money and/or goods by the owner from the personal use.
Liabilities
Liabilities are obligations or debts that an enterprise has to pay at some time in the future. Liability can be further classified as:
(a) Non-Current Liability
(b) Current Liability
Assets
Assets are economic resources of an enterprise, which can be expressed in terms of money. Assets can be further classified as:
- Current Assets: Current Assets are those assets which are held for short term period with the purpose of converting them into cash within one year.
- Non-Current Assets: Non-Current Assets are those assets which are held for long term period in the business and are not meant for resale.
Income
Income is the surplus of revenue over expenses i.e., it is the profit earned during a period.
Profit
Profit is the excess of total revenues over total expenses of a business enterprise for an accounting period. Profit is normally categorised as Gross Profit and Net Profit.
Fixed Assets
Fixed Assets are those Non-Current Assets which are held for use in the business and are not meant for resale. Fixed assets are further classified as:
(a) Tangible Assets
(b) Intangible Assets
(c) Fictitious Assets
Receipts
Receipts refer to the amounts received or receivable by the business organisation from selling assets, goods or services. Receipts are of two kinds namely:
(a) Revenue Receipts
(b) Capital Receipts
Expenditure
Expenditure refers to the amount spent or liability incurred for acquiring assets, goods or services. Expenditure can be further classified as:
(a) Capital Expenditure
(b) Revenue Expenditure
(c) Deferred Revenue Expenditure
Revenue
Revenue is total amount received or receivable from the sale of goods or services.
Expense
Expense is the cost incurred by a business in the process of earning revenue.
Goods
Goods refers to the products in which the business unit is dealing, i.e., goods mean all the items which are purchased and sold in the ordinary course of business.
Stock Or Inventory
Stock or inventory refers to the goods held by a business for sale in the ordinary course of business or for consumption in the production of goods or services for sale. Stock may be opening stock and closing stock.
Gain
Gain is a monetary benefit, profit or advantage that arises from transactions, which are incidental to business.
Loss
Loss is the excess of total expenses over total revenue.
Purchases
Purchases refer to the amount of goods bought by a business for resale or for use in the production.
Purchases Return
When purchased goods are returned to the seller due to some reason like not according to specifications or due to some defect, then it is termed as Purchases Return.
Sales
Sales refer to the amount of goods sold that are already bought or manufactured by the business.
Sales Return
When sold goods are returned by the purchaser due to some reason, then it is termed as Sales Return.
Trade Receivables
Trade Receivables refers to the amount receivable for sale of goods sold or services rendered in the normal course of business. Trade Receivables include both Debtors and Bills Receivable.
Trade Payables
Trade Payables refers to the amount payable for purchase of goods or services taken in the normal course of business. Trade Payables include both Creditors and Bills Payable.
Cost
Cost is the total expenditure incurred or chargeable to a specified product or activity.
Voucher
Voucher is a documentary evidence in support of a business transaction.
Discount
Discount is any type of reduction in the price by
the seller to the buyer. It may be of two types:
- Trade Discount: Trade Discount is the rebate allowed by the seller at a fixed percentage of the list price.
- Cash Discount: Cash Discount is the rebate allowed to the buyer for making prompt payment.
