DELHI PUBLIC SCHOOL- BOPAL, AHMEDABAD

NOTES ON CHAPTER-1 (2023- 24)

TERM-1,CYCLE-1

CHAPTER NAME: INTRODUCTION TO ACCOUNTING

CLASS: XI
SUBJECT: ACCOUNTANCY

Introduction
According to American Institute of Certified Public Accountants, “Accounting is the art of recording, classifying
and summarising the economic information 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
To keep systematic and complete records of financial transactions in the books of accounts according to specified
principles and rules to avoid the possibility of omission and fraud.
To ascertain the profit earned or loss incurred during a particular accounting period which further help in knowing
the financial performance of a business.

1. 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.
2. To provide useful accounting information to users like owners, investors, creditors, banks, employees
and government authorities etc who analyze them as per their requirements.
3. To provide financial information to the management which help in decision making, budgeting and
forecasting.
4. 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 records 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 contains only those informations which can be expressed in terms of money. It ignores 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 summarizing phase of an accounting
1. It is the recording phase of an accounting system.
system.
2. It is a Secondary Stage which begins where the
2. It is a primary stage and basis for accounting.
Book keeping process ends.
3. It is routine in nature and does not require any special 3. It is analytical in nature and required special skill
skill or knowledge or knowledge.
4. It is done by junior staff called book-keepers 4. It is done by senior staff called accountants.
5. It does not give the complete picture of the financial 5. It gives the complete picture of the financial
conditions of the business unit. 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.
3. 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 arenumber of users interested in knowing about the financial soundness and the profitability of the
business.
Users Classification Information the user want
1. Owner Return on their investment, financial health of their company/business.
Internal
2. Management To evaluate the performance to take various decisions.
1. Investors and potential
Safety and growth of their investments, future of the business.
investors
2. Creditors Assessing the financial capability, ability of the business to pay its debts.
3. Lenders Repaying capacity, credit worthiness.
External 4. Tax Authorities Assessment of due taxes, true and fair disclosure of accounting information.
Profitability to claim higher wages and bonus, whether their dues (PF,
5. Employees
ESI, etc.) deposited regularly.
Customers, Researchers etc., may seek different in-formation for different
6. Others
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.
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., purchase of goods for use in business.
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:
1. Tangible Assets: Tangible Assets are those assets which have physical existence and can be
seen and touched. For Example: Furniture, Machinery etc.
2. 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.

Liabilities: Liabilities are obligations or debts that an enterprise has to pay after some time in the future.
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.

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: If the benefit of expenditure is received within a year, it 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.
Account : Account refers to a summarised record of relevant transaction of particular head at one place.
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.
Goods and Service Tax (GST) : GST is an indirect tax which is levied on the supply of goods and service.
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