Class 11 Accountancy Part 1

Chapter 1 - Introduction To Accounting

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Meaning of Accounting
Accounting is the process of recording, classifying and summarizing the monetary or
financial transactions in a systematic manner and make analysis & interpretation of results to
communicate it with different users of accounts.

Process/Stages of Accounting

Identifying from
vouchers

Interpreting by
preparing financial Recording in journal
statements and
communicating.

Summarising in Trial
Classifying in ledger
balance

● Identifying: Identifying the business transactions from various sources is the first step of
accounting. It involves observing all business activities and identifying those which are
considered as financial transactions.
● Recording: Only those transactions are recorded in books of accounts which can be
measured in terms of money. It involves recording them in a journal or cash book and
keeping a systematic record of all of them.
● Classifying: After recording the transactions they are classified. Classification refers to
the grouping of all the transactions of same nature at one place.
● Summarising: It is the process of putting the balances of all accounts at one place i.e.
Trial balance and prepare Trading and Profit & loss a/c, and Balance Sheet.
● Communicating: Accounting also includes the communication of financial data like
financial statements to the users who analyse them as per individual requirements.

Objectives/ Role/ Functions of Accounting

1. To maintain proper records of business transactions according to specified rules which
helps them to minimize the chance of omission and fraud.
2. To ascertain the net profit or loss suffered on account of business transactions during a
particular period and to know the exact reasons leading to profit or loss.
3. To ascertain the financial position of business by means of financial statement i.e.
 Balance sheet.
4. To ascertain the progress of business from year to year and to detect errors and
frauds.
5. To provide accounting information to various interested parties like owners, creditors,
banks, employees etc.
6. It helps management to take rational decision by providing useful financial information.

Advantages/ Importance of Accounting:

1. Accounting provides permanent records for all business transactions and provides reliable
information to various parties.
2. Accounting provides the Profit and loss of a business for a given period of time.
3. Accounting provides the facility of comparative study of the various aspects of business
like profit sales, purchase, etc. with that of previous years and helps businessmen to make
decisions.
4. Accounting forms a basis in the process of performance evaluation to improve the
performance of employees, divisions, activities, etc.
5. Accounting records act as approved evidence in legal matters.
6. It replaces memory and provides necessary information.
7. It facilitates settlement of Tax liability.

Limitations of Accounting
● One of the major limitations of accounting is that it considers only monetary transactions.
Non monetary aspects like quality, honesty, skills are ignored in accounting.
● It considers only historical transactions and the figures given in the financial statement do
not consider price level changes.
● It is influenced by personal judgments and not free from personal bias which affects its
credibility.
● It is affected by window dressing which means manipulation of accounts so that financial
statements describe a more favourable position than the actual position.
● Financial accounts are unsuitable for forecasting because they are only records of past
events.
● Accounting is not fully exact.

Book-Keeping-Base of Accounting
Book keeping is an art of recording the transactions in the books of accounts. Only those
transactions which bear a monetary value are recorded. It is the first step of accounting. Its
main purpose is record keeping or maintenance of books of accounts. It should not be
confused with accounting.
Differences between the two are as follows.

Basis of
Bookkeeping Accounting
distinction
Scope It is concerned only with It also includes classifying,
recording of monetary summarizing, analysing and also
transactions. communicating the results to users.
Stage It’s a primary stage. It’s a secondary stage.
Objective To maintain systematic To calculate the net profit or net loss
records of business. in the business.

Nature Routine and clerical. Analytical.

 Staff involved It is done by junior It is done by senior level staff.
level staff.

Meaning of Accountancy:
Accountancy is a systematic knowledge of accounting. It explains how to deal with various
aspects of accounting. It educates us how to maintain the books of accounts and how to
summaries the accounting information and communicate it to the users.

Branches of Accounting
1. Financial Accounting: It is that branch of accounting which records financial transactions
and events. The main purpose of this branch is to record the business transactions in a
systematic manner, to ascertain profit or loss and to present the financial position of the
business with the help of a balance sheet.
2. Cost Accounting: It deals with recording costs of products, operations and activities. The main
purpose of cost accounting is to ascertain the total cost and per unit cost of goods
produced and services rendered by business.
3. Management Accounting: The main purpose of this branch is to present the accounting
information in such a way as to assist the management in planning and controlling the
operations of business.
4. Tax Accounting: This branch is used for tax purposes. Income tax and gst are computed on
the basis of this accounting.

Qualitative Characteristics of Accounting Information

Accounting information should be prepared and presented in such a way that is able to depict
a clear view of business enterprise.

1. Reliability: It implies that information must be factual and verifiable. And free from errors.
2. Relevance: Accounting information must be relevant to the objectives of enterprise.
To be relevant, information must help the users of accounting information in making
decisions.
3. Understandability: Accounting information should be presented in such a manner that
they are understood easily by their users such as investors, employees, etc.
4. Comparability: It is a very useful quality of accounting information. Financial statements
should contain previous year data so that it can be compared with current year so that
current performance be compared with past performance.

Users of Accounting Information

Users of accounting information may be categorized in to Internal and External users

Internal Users
a) Owners
b) Management
c) Employees and workers

External Users
a) Banks and Financial Institutions
b) Investors and Lenders
c) Creditors
d) Government and Its Authorities
e) Researchers
f) Consumers and Public
Systems of accounting:

There are following two systems of recording transactions in the books of accounts:

1) Double Entry System

2) Single Entry System

Double-entry system

 The double entry system is based on the Dual Aspect Principle of accounting.
 Every transaction has two aspects, ‘a Debit’ and ‘a credit’ of an equal amount.
 This system of accounting recognises and records both aspects of the transaction.

Features of Double-entry system

i) It maintains a complete record of each transaction

ii) It recognise two fold aspect of every transaction

iii) In this system one aspect is debited and the other aspect is credited following the rule of
Debit and Credit.

iv) Total of all debit is always equal to total of all credits.

Advantages of the Double-entry System of Accounting

Following are the main advantages of the double-entry system of accounting:

Scientific system: As compared to the other systems, this system of recording transactions is
more scientific and useful to achieve the objective of accounting.

A complete record of the transaction: Since both the aspects of transactions are considered
there is a complete recording of each and every transaction. Using these records we are able to
compute profit or loss easily.

Checks arithmetical accuracy of accounts: Under this system, by preparing a Trial Balance
we are able to check the arithmetical accuracy of the records.

Determination of profit/loss and depiction of financial position

 Under this system by preparing ‘Profit & Loss A/c’ we get to know about the profit earned or
loss incurred.
 By preparing the ‘Balance Sheet’ the financial position of the business can be ascertained, i.e.
position of assets and liabilities is depicted.

Helpful in decision making: Administration and management are able to take decisions on the
basis of factual information under the double-entry system of accounting.

Single entry system

 Under this system, both aspects are not recorded for all the transactions.
 Either only one aspect is recorded or both the aspects are not recorded for all the transactions.