Class XI Accountancy Introduction To Accounting Notes - 2020 - 2021

INDIAN SCHOOL MUSCAT
DEPARTMENT OF COMMERCE & HUMANITIES

CLASS :11
ACCOUNTANCY
Worksheet No: 1 Chapter Name: Introduction to Accounting (Notes)
Issued on : ------------------------- Date of submission:------------------------
Name of the student: ________________ Roll No:______ Section: _______
Definition of Accounting
According to the American Institute of Certified Public Accountant “ Accounting is the art
of recording, Classifying and summarizing 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 there of.”
Attributes / Characteristics / Features of Accounting

1. Identifying Financial Transactions and Events:
 It is the process of determining which transactions are to be recorded.
 Accounting records only those transactions which are of financial nature.
 For eg: Purchase of raw materials or sale of goods.
2. Measuring the Identified Transactions:
 Accounting measures the transactions and events in terms of a common
measurement units i.e. the currency of the country.
 For eg. Purchase of goods for Cash Rs. 2,00,000.
3. Recording:
 Recording is the process of recording business transactions of financial character
in the books of original entry i.e. Journal.
 Journal is further sub-divided into subsidiary books such as Cash Book, Purchase
Book, Sales Book etc.
4. Classifying:
 Classifying is a process of collecting similar transactions at one place by opening
accounts in the Ledger Book.
 This book contains individual account heads under which all financial
transactions of similar nature are collected
 For eg. Rahul’s account, Purchase account etc.
5. Summarizing:
 It involves presenting the classified data in a manner which is understandable and
useful to internal as well as external users of accounting statements.
 This process leads to preparation of following statements:
a. Trial Balance
b. Income Statement (Trading and Profit and loss Account)
c. Position Statement ( Balance sheet)
 They are collectively known as Final Accounts or Financial Statements.
6. Analysing and Interpretation:
 Financial data is analyzed and interpreted so that the users of financial data can
make a meaningful assessment of the financial performance (profit) and financial
position of the business.
7. Communicating:
 Finally accounting involves communicating the financial statements to its users
(Internal and External).
Objectives of accounting
1) Maintain Accounting records :
 The objective of accounting is to record financial transactions and events of the
organization in the books of account in a systematic manner following the
principles of accountancy.
2) Determining Profit or Loss:
 Another objective of accounting is to determine the financial performance i.e
profit earned or loss incurred for the accounting period.
 A statement called Profit and loss account is prepared.
3) Determining Financial Position:
 Another objective of accounting is to determine financial position.
 A statement called position statement or the balance sheet is prepared.
4) Providing accounting information to the users:
 Another objective of accounting is to provide accounting information to users
who analyze them as per their individual requirements.
Advantages
1) Financial information about business:
 Financial performance during the accounting period i.e. profit earned or loss incurred and
also the financial position at the end of the accounting period is known through
accounting.
2) Assistance to management:
 The management makes the business plans, takes decisions and exercises control over the
affairs on the basis of accounting information.
3) Replaces memory:
 A systematic and timely recording of transactions obviates the necessity to remember
transactions.
 The accounting provides the necessary information.
4) Facilitates comparative study:
 A systematic record enables a businessman to compare one year’s results with those of
others years and locate significant factors heading to change.
Limitations
1) Accounting is not fully exact:
 Although most of the transactions are recorded on the basis of evidence such as
sale or receipt of cash yet some estimates are also made for ascertaining profit or
loss.
 Examples are providing for depreciation etc.
2) Unrealistic information:
 The Balance sheet does not show the amount of cash which the firm may realize
by the sale of all the assets.
 This is because many assets are not meant to be sold but for use.
3) Accounting ignores the Qualitative elements:
 Since accounting is confined to monetary matters only, qualitative elements like
quality of staff, industrial relations and public relations are ignored.
4) Accounting ignores the effect of price level changes:
 Accounting statements are prepared at historical cost.
 Money as a measurement unit, changes in value. It does not remain stable.
 Unless price level changes are considered while preparing financial statements,
accounting information will jot show true financial results.
5) Accounting may lead to window dressing:
 The term window dressing means manipulation of accounts so as to conceal vital
facts and present the financial statements in such a way as to show better position
than what it actually is.
 In this situation the profit and loss account fails to provide a true and fair view of
the result of operations and balance sheet fails to provide a true and fair view of
the financial position.
Role / Functions of accounting
1) Maintaining a systematic Accounting Records:
 To Maintain systematic accounting records of financial transactions and events.
 It means accounting should be maintained following the accounting rules,
principles and concepts.
2) Preparation of financial statements:
 Financial statement means final accounts prepared at the end of the accounting
period.
 It includes Income statement and Position statement
 It is a important function as it shows the financial performance (profit earned or
loss incurred) and position of the accounting year.
3) Meeting Legal requirements:
 Accounting records are accepted as evidence by the court of law if they are
maintained systematically following the accounting rules, principles and concepts.
 Thus it is the function of accounting to meet legal requirements.
4) Communicating the financial information:
 Another function of accounting is to communicate the financial information to the
users which may be internal as well as external users.
 Such as Banks, Employees, Government etc.
5) Assistance to management:
 Management often requires financial information which is given by the
accounting records which in turn helps the management in decision making.
 It will also help the management in protecting the assets and exercising control.
Accounting information & Types of accounting information

Accounting information refers to the financial statements generated through the process
of Book keeping, use of which helps the users to arrive at decisions. The information made
available by these statements can be categorized into the following:
a) Information relating to Profit or Surplus:

 The income statement makes available the accounting information about the profit
earned or loss incurred as a result of business operations.
 A firm prepares trading a part of profit and loss account which provides
information about the Gross profit or Gross loss and Profit and Loss account
provides information about Net profit and Net loss.
b) Information relating to Financial position
 The Position statement i,e the Balance Sheet makes available the information
about the financial position of the firm
The position statement provides information about the assets owned by the firm,
amounts receivable and the cash and bank balance held by it. These are
represented in the liabilities by the amounts owed by the firm towards loans,
creditors and amount payables.
c) Information relating to Cash flow:
 Cash flow statement is a statement that shows flow both inflow and outflow of
cash during a specific period.
 It is very important as many decisions such payment of liabilities, payment of
dividend, expansion of business are based on availability of cash.
Users of accounting information and their needs

Users of accounting information may be categorized into internal users and external users:
Internal Users:
1) Owners:
 Owners contribute maximum capital to the business and are exposed to risks.
 They are interested in knowing about the profit earned and loss incurred besides
safety of their capital.
2) Management:
 The management makes extensive use of accounting information to arrive at
decisions such as determination of selling price, cost contols and reduction,
investment into new projects etc.
3) Employees and workers:
 Employees and workers are entitled to bonus at the year end which is linked to the
profit earned by the firm.
 They are also interested as the financial statement reflect whether the enterprise has
depsoited the dues towards Provident Fund, ESIC etc.
External Users
1) Banks and Financial Institution:

 Banks and financial institutions are an essential part of any business as they provide
loans to businessmen.
 They want to know the progress of the business to ensure the safety and recovery of
loan advanced
2) Investors and Potential investors:
 Investment involves risk and they do not have direct control over the business.
 They want ot know about the earning capacity of the firm and how safe their
investment is.
3) Creditors:
 Creditors are the parties who supply goods on credit.
 They want to know about the creditworthiness of the firm.
4) Government and its Authorities:
 They use accounting information to compile national income accounts and to take
policy decisions.
5) Researchers:
 They use the accounting information in their research work.
6) Consumers:
 They are interetsed in knowing the accounting information for establishing control so
that the cost of production may be reduced with resultant reduction in the prices of
the products.
Qualitative characteristics of accounting

1) Reliability:
 Accounting information must be reliable.
 Reliability of information means it should be verifiable, free from bias and material error.
2) Relevance:
 Accounting information must be relevant to the users.
 Information is relevant if it meets the needs of the users in decision making.
3) Understandability:
 Understandability means that the information provided through the financial statements must
be presented in a manner that the users are able to understand it.
4) Comparability:
 Comparability means that the users should be able to compare the accounting information of
an enterprise of the period either with that of other periods known as INTRA-FIRM
comparison or with the accounting information of other enterprises known as INTER-FIRM
comparison.
Systems Of Accounting
The systems of recording transactions in the books of accounts are two namely:
1) Double entry system:

 Double entry system of accounting is a system of accounting under which both debit
and credit aspects of accounting are recorded.
 A transaction has two aspects – Debit and Credit.
2) Single entry system:

 Single entry system or Account from incomplete records of recording transactions in
the books of accounts may be defined as an incomplete double entry system.
 In this system all transactions are not on double entry basis.
Branches of Accounting
1. Financial accounting
2. Cost Accounting
3. Management Accounting
4. Forensic Accounting
Book Keeping
Book Keeping is a part of accounting and is concerned with the

recording of financial data in the books of accounts.
Difference between Book Keeping and Accounting
Basis Book keeping Accounting

Meaning It is the art of recording, classifying, Accounting is art of recording financial
summarizing business transactions. transaction, summarizing them and
communicating the financial information to
the users.
Objective To prepare a original books of accounts To record, analyze and interpret business
restricted to journal, subsidiary books, transactions.
ledger only.
Performed by Junior staff Senior staff
Sequence/ Primary stage. Book keeping comes Secondary stage. Accounting starts when
Stage first. book keeping ends.
Scope Limited scope as concerned with Wider scope
recording only
Nature of Job Routine in nature Analytical and dynamic in nature
Special skills It is a mechanical in nature and thus It requires special skills and ability to
does not require special skills analyze and interpret.

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INDIAN SCHOOL MUSCAT

DEPARTMENT OF COMMERCE & HUMANITIES

Issued on : ------------------------- Date of submission:------------------------

Name of the student: ________ Roll No: Section: _

Attributes / Characteristics / Features of Accounting

Accounting information & Types of accounting information

a) Information relating to Profit or Surplus:

Users of accounting information and their needs

1) Banks and Financial Institution:

Qualitative characteristics of accounting

1) Double entry system:

2) Single entry system:

Book Keeping is a part of accounting and is concerned with the

Difference between Book Keeping and Accounting

Basis Book keeping Accounting

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