INTRODUCTION OF ACCOUNTING (Notes)

CLASS-XI

Introduction
A businessman wants to know how much profit/loss he has made during the year. For this
purpose accounts are prepared, so that at the end of accounting period, a businessman can
understand that what are the assets and liabilities of the business. There are different steps
involved in accounting. Indentifying business transaction is the first step of accounting. These
transactions are recorded in the subsidiary books and journal proper. With the help of these
books we prepare ledger accounts. The balances shown by ledger accounts are used for preparing
trial balance, which serves as the basis for the preparation of financial statements. Financial
statements are classified as income statements and position statement. Income statement consists
of making account which shows gross profit/loss and profit and loss account showing net
profit/loss of the business. Finally, position statement (balance sheet) is prepared which reflects
the true position of assets and liabilities of the business. In this way prime object of the business
accounting is to measure and report the profitability and financial status of the business.

Meaning of Accounting
Accounting is 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. Accounting plays important role in providing quantitative information, primarily
financial in nature, about economic entities, that is intended to be useful in making economic
decisions.

Definition of Accounting
“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 thereof.”
AMERICAN INSTITUTE OF Public Accountants
In Simple words, accounting is the process of collecting, recording,
classifying, summarising and communicating financial information to the
users for judgment and decision-making.

Characteristics of Accounting

1. Accounting is an art as well as science: Art is the techniques of

attaining some pre determined object . In Accounting is art of
recording , classifying , summarizing business transaction with view to
ascertain net profit and financial position and Accounting is science
 because it is also organized body of knowledge based on certain
specific principles and Accounting Standards.
2. Recording of financial transaction only Only those business
transaction will be recorded which will measure in the form of financial
character.
3. Recording in the term of money: Each Business transaction is
recorded in the term of money only
4. Classifying After recording the transactions they are classified.
Classification refers to the grouping of all the transactions of same nature
at one place.
5. Summarising It is the process of putting the balances of all accounts at
one place i.e. Trial balance.
6. Interpreating of the results
7. Communicating

Objectives of Accounting
1. To keep systematic and complete record of financial transactions in the
books of accounts according to specified principles and rules to avoid the
possibility of omission and fraud.
2. To ascertain the profit earned or loss incurred during a particular
accounting period which further help in knowing the financial performance of
a business.
3. 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.
4. To provide useful accounting information to users like owners, investors,
creditors, banks, employees and government authorities etc who analyze
them as per their requirements.
5. To provide financial information to the management which help in
decision making, budgeting and forecasting.
6. To prevent frauds by maintaining regular and systematic accounting
records.
Advantages of Accounting
1. Provide Complete and systematic records :- Business transaction
have grown in size and complexity . And it is not possible to remember
each and every transaction. Accounting keeps systematic record of all
business transaction and summarized them and get true picture and
financial position.
2. Information recording profit or loss :-In accounting we will get net
results . and by preparing Profit & Loss Account we disclose net profit
at the end of Accounting year. The information regarding profit is great
use of owner,and various other interested parties.
3. Information regarding financial Position:-In ACCOUNTING REPORT
we will get financial position by preparing balance sheet. Balance sheet
 disclose Asset and their valus one side and Liabilities and their value
other side.
4. Enable comparative study:By keeping systematic record Accounting
help the owner compare one year costs, expenses, sales, and profit
etc. Such information is very useful decision taken by owner to
improve performance of near future.
5. Helpful in assessment of tax liabilities:-Properly maintain business
transaction will get great help when firm assess Income tax or GST.
Such records when audited are trusted by Tax authorities.
6. Evidence in legal Matter:- Properly Maintain accounting
Authenticated records are accepted by courts as a firm evidence.
7. Facilitate Sale of Business: If Business sold then accounting
information can be utilized to determine the proper purchase price.
8. Helpful in raising Loan : Accounting information is very useful when
owner of business want to increase bank loan from bank and other
financial institute . Before sactioning loan bank analyzing various
accounting documents like final Account, Cash Flow statement,
Accounting Ratio .after satisfying throught documents bank give Loan.
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 contain only those informations which can be expressed in terms
of money. It ignore 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.

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
Return on their investment, financial health of their
1. Owner
Internal company/business.
2. Management To evaluate the performance to take various decisions.
1. Investors and Safety and growth of their investments, future of the
potential investors business.
Assessing the financial capability, ability of the business
2. Creditors
to pay its debts.
3. Lenders Repaying capacity, credit worthiness.
External Assessment of due taxes, true and fair disclosure of
4. Tax Authorities
accounting information.
Profitability to claim higher wages and bonus, whether
5. Employees
their dues (PF, ESI, etc.) deposited regularly.
Customers, Researchers etc., may seek different in-
6. Others
formation for different reasons.
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.
4. Tax Accounting:- The Branch of Accounting which is used for tax purpose
is called tax Accounting. Income Tax, GST are computed on the basis of this
accounting
5. Social Responsibility Accounting : The branch of Accounting where we
doing accounting for society for completing our responsibility like customer
satisfaction, product durability, product safety, Public welfare programme
etc.
Book-keeping , Accounting , Accountancy
Book – Keeping 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. This is routine work and clerical nature
At present this work is done by computers. It include four activity
1. Identified the transaction of financial nature
2. Measuring the transaction in the term of money
3. Recording identified transaction in the term of money
 4. Classifying them into ledger
Accounting: Accounting starts where book-keeping ends It include the
following activities
1. Summarising the classified transaction in the form of P&L Account and
balance Sheet
2. Analysing the interpreating the above results
3. Communicating the information to the interested parties
Accountancy : It refers to systematic knowledge of accounting concern with
the help of principle and techniques .It tells us how to book maintain.how to
summarizing accounting information and how to communicate to various interested
parties

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 recording phase of an accounting 1. It is the summarizing phase of an

system. accounting system.

2. It is a primary stage and basis for 2. It is a Secondary Stage which begins

accounting. where the Book keeping process ends.

3. It is routine in nature and does not require 3. It is analytical in nature and required
any special skill or knowledge special skill or knowledge.

4. It is done by junior staff called book- 4. It is done by senior staff called

keepers accountants.

5. It does not give the complete picture of 5. It gives the complete picture of the
the financial conditions of the business unit. financial conditions of the business unit.

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., expenses etc.

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:
(a) Tangible Assets: Tangible Assets are those assets which have physical
existence and can be seen and touched. For Example: Furniture, Machinery
etc.
(b) 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: It is the amount spent to purcahse goods and
services that are used during an accounting period 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 .which is use between 3 to 7
years.
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. Such return are also known as return
outward
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. Such return are also known as return Inward
.
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.
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. This is two types Opening stock and Closing 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.
Turnover: It means total sales made in particulars period
Livestock:- Domestic animal lIke cow, horse which is use in business are
known as Livestock
Investment : It means deployment of funds in shares or debenture of
company with intention of earning returns.

Case Based Question

. Read the following case study and answer questions

Sam and Jay started with Cash 10,000 and Machinery 1,00,000. They
decided to set up a production line for PPE kits for. the protection from Covid
19 virus. As their demand rose, they decided to buy one more piece of
machinery. For the same, they took bank overdraft and purchased the
machinery. The quality of the company’s product was extremely high and
therefore, it could develop a reputation for itself in the market and business
was flourishing. After 1.5 years, their old machinery turned obsolete so they
decided to sell the same. They sold it and got some cash proceeds. To
further increase the brand presence among the concerned stakeholders,
they decided to run advertisements from the cash proceeds of machinery
sold. As more and more customers demanded their product, they decided to
launch a discount for bulk purchases. The discount was not to be recorded in
the books of accounts.

This campaign was successful and they earned a lot of profits from the same.

Q1. Which type of discount is being discussed in the last part of the passage?

(A) Trade discount (B) Cash discount (C) Both (a) and (b) (D) Can’t be
determine

Q2. Which asset is discussed in the line, “The quality of the company’s
product was very high and therefore, it could develop a reputation for itself
in the market and business was flourishing”?

(a) Tangible (b) Intangible (c) Current. (d) Both

(a) and (c)

Q3. Which type of liability is discussed in the passage?

(a) Non-current (b) Curren (c) Both (a) and (b) (d) Can’t be
determined

Q4. What was the capital initially invested?

(a) 10,000 (b) 1,00,000 (c) 1,10,000 (d) Can’t be determined

Q5. The passage involves capital receipts (apart from initial capital invested).

(a) True (b) False

Answer Key (This is given for tick Answer)

Ans1. (a)

Ans2. (b)

Ans3. (b)

Ans4. (c)
Ans5. (a)

Exercise Question For Practice

1. How do we ascertain the financial position of the business ?
2. Miss Preeti an electronic dealer gifted a washing machine valued Rs. 25,000 to her
friend. Will it be recorded in the books of accounts ?
3. “Accounts information should be comparable”Do you agreed with this statement ? Give
ttwo reasons
4. ‘Only Financial Transactions are recorded in Accountancy”Explain the Comments
5. Distinguished between Profit and Gain
6. Fill in the Blanks
(I) Amount which the proprietor has invested in a business is Known as _______
(II) _______ is the cost incurred in producing goods as services.
(III) ______ refers to those liabilities which are to be paid normally within one year
(IV) The person who still owe some amount to the business are termed as ________