Class 11 Accountancy Chapter 1 Introduction To Accounting
NCERT Notes for Class 11 Accountancy Chapter 1 Introduction To Accounting Notes, (Accountancy) exam are Students are taught thru NCERT books in some of state board and CBSE Schools. As the chapter involves an end, there is an exercise provided to assist students prepare for evaluation. Students need to clear up those exercises very well because the questions withinside the very last asked from those.
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NCERT Notes for Class 11 Accountancy Chapter 1 Introduction To Accounting
Class 11 Accountancy Chapter 1 Introduction To Accounting
INTRODUCTION TO ACCOUNTING
Meaning of accounting
- Accounting has rightly been termed as the language of business.
- The basic function of a language is to serve as a means of communication.
- Accounting serves this function by communicating the result of business operations to various parties who are interested in it.
- Accounting is an information system which receives data and inputs, process the same and given its output in the form of information which is useful for decision making.
Definition
According to American Institute of Certified Public Accountants (AICPA) 1941 “ accounting is the art of recording , classifying, summarising in a significant manner and in terms of money, transaction and events which are, part at least of a financial character , and interpreting the result there of”
Features of Accounting
1- Economic event
- Events which take place in a business and are capable of being expressed in terms of money are called economic event. Economic event can be external or internal An external event involves the transfer or exchange of something of value between two or more entities.
- It is called a transaction.
- Internal event
- An internal event is an economic event which takes place entirely within the organisation.
2– Identification, measurement, recording and communication
Identification means what transactions to record i.e., to identify events which are to be recorded. It involves observing activities and selecting those events of financial character.
Measurement means quantification of business transactions into financial terms by using monetary units. If an event cannot be quantified in monetary terms, it is not considered for recording in financial accounts.
The economic events are recorded in books of accounts in monetary terms and in an orderly manner.
Communication means presenting of accounting information in a proper form and manner to the proper person.
3- Organisation
Organisation refers to a business enterprise, whether for profit or not profit motive.
4- Interested users of information
The users of accounting information are internal and external. Internal users include managers and owners. External users are of two types having direct interest and having indirect interest. External users having direct interest include investors, creditors and employees. External users having indirect interest include customers, government, trade associations, labour union, stock exchange, SEBI, registrar of companies etc.
Branches of accounting
Accounting is mainly sub divided in to three financial accounting, cost accounting and management accounting
Financial accounting
Financial accounting is the field of accounting concerned with the summary, analysis and reporting of financial transactions pertaining to a business. This involves the preparation of financial statements available for public consumption
Cost accounting
Cost accounting is the process of recording, classifying, analyzing, summarizing, and allocating costs associated with a process, and then developing various courses of action to control the costs.
Management accounting
The process of preparing management reports and accounts that provide accurate and timely financial and statistical information required by managers to make day-to-day and short-term decisions.
Qualitative characteristics of accounting information.
1- Reliability
Accounting information is said to be reliable if it is free from error and bias. To ensure this it must be verifiable.
2- Relevance
For the purpose of decision making the accounting information should be relevant and it must be available in time.
3- Understandability
Accounting information must be understood by those to whom it is communicate. The content must be enough to clearly convey matters with all its implications.
4- Comparability
Accounting reports should be comparable with other firms to identify similarities and differences. To achieve this the period, the format, unit of measurement etc. should be same
Objective s of accounting
The primary objective of accounting is to provide information to facilitate business decisions. The other objectives of accounting are
1- To maintain records of business
It is very difficult to remember all the business transaction that take place. Accounting serves this purpose of record keeping by recording all the business transactions in the books of account.
2- Calculation of profit and loss
Accounting helps in ascertaining business result i.e., profit earned or loss suffered in business during a particular period. This is done through the preparation of profit and loss account or an income and expenditure account.
3- Ascertain the financial position of the business.
The business man is always interested in knowing his financial position i.e., where he stands, what he owes, and what he owns. That means the position of asset and liabilities. This objective is served by the balance sheet or position statement.
4- Providing information to users
The accounting information obtained from records should be communicated to interested parties in the form of reports, statements, graphs charts etc.
Advantages of accounting
1- Provide quantitative information
Accounting helps in providing quantitative information on profit earned and loss suffered by the business.
2- Helps in ascertaining the financial position of the business
Accounting helps the business to know the financial position that is total asset and liabilities.
3- Systematic recording of data is possible
Accounting helps in making a systematic record of transaction which can be used for future reference.
4- Act as an information system
It provides necessary information to the interested users.
5- Beneficial to different users.
Limitations of accounting
- It records only transactions which can be recorded in monetary terms. Qualitative aspects like managerial skill, service of experts etc. are not considered.
- Accounting is a post mortem survey because it records events as they have taken place. From decision making point of view information is needed not only of past but also about the present and the future.
- Effects of price level changes are not considered.
Accounting records show only actual cost. The real value may vary from time to time. Thus the recorded cost cannot provide correct information.
Basic accounting terms
Entity– Entity means a reality that has a definite individual existence
Business entity– Business entity means a specifically identifiable business enterprise. Business entity is also called accounting entity.
Transaction– Transfer or exchange of something of value between two or more entities called transaction
Business transaction– The term business transaction refers to any business dealings or event which has a value measurable in terms of money and which involve transfer of money or money’s worth between the business and others.
Debtors– Debtor is a person who owes money to the business
Sundry debtors- The total amounts of debtors are collectively known as sundry debtors.
Creditors- The creditor is a person to whom the business owes money.
Sundry creditors- The amounts due to various parties are collectively known as sundry creditors.
Bills receivable-
A bill is a document accepted by the debtor undertaking to pay for the value owed by him. When the goods are sold on credit the seller may insist the buyer to accept a bill, such bill is called bills receivable.
Bills payable
When goods are purchased on credit and bill is made such bill is called bills payable. In this bill the businessman undertakes to pay the value owed by him.
Accounts receivable– It includes amount due from debtors as well as on account of bills receivables.
Account payable- It includes the amount due to creditors and bills payable.
Account– A summary of all business transaction that have taken place during a particular period arranged in relation to one person, thing, expense or income is called a account.
Debit side and credit side–
Accounts traditionally written in the form of ‘T’ having two equal halves, one on the left hand side and other on the right hand side. The left hand side is called debit side and the right hand side is called credit side.
Debiting and Crediting
The recording of transaction on the debit side is called debiting and the recording of transaction on the credit side is called crediting.
Entry– The record of a transaction in an account is called entry.
Debit entry and credit entry
If an entry is in the debit side of an account is called debit entry if it is in the credit side called credit entry.
Debit and Credit
Every transaction has two aspects i.e. receiving aspect and giving aspect. The receiving aspect is called debit and the giving aspect is called credit.
Asset
Assets are the material things or possessions or properties of the business including the amount due to it from others. Asset may be classified in to fixed asset and current asset.
Fixed asset
Assets which are required for relatively longer periods for carrying on the business are called fixed assets. They are help in the generation of income and are not meant for resale.
Fixed assets are classified in to
- Tangible asset
- Assets having definite shape and physical existence are called tangible asset. E.g. Land, building, machinery etc.
- Intangible asset
- Asset having no physical value but are represented by rights in certain things are called intangible asset. E.g. Goodwill, patent, trademark etc.
- Wasting asset
- Assets which exhausted to the extent of extraction are called wasting asset.
- e.g. Mines, quarries, oil fields etc.
- Fictitious asset
- Assets which have no real value but are shown in the books of accounts only for technical reasons are called fictitious asset. Eg. Preliminary expenses discount on issue of shares and debentures, underwriting commission etc.
Current asset
Assets which are held for a very short period are called current assets. These are assets acquired with the intention of converting them in to cash or consuming them during a year. E.g. Cash, stock, raw materials, finished goods, bills receivables etc.
Equity- The total claims of business are called equity
Creditor’s equity
Liabilities are the claims of outsiders against the business and are called creditor’s equity or outsider’s equity
Owners’ equity– Capital is the owner’s claim against the business and is called owner’s equity.
Liabilities
Liabilities are obligations or debts that an enterprise has to pay at some time in the future. Liability means amount which a business owes to others either for money borrowed or for goods and assets purchased on credit or for service rendered. Liabilities are divided in to two categories
Current liabilities
Liabilities which become due and payable within a short period i.e. within a year are called current liabilities. They arise out of normal trade activities. E.g. Creditors, bills payable, outstanding expenses etc.
Fixed or long term liabilities
Liabilities which are payable after a long period are termed as long term liabilities. E.g. Long term loan, debentures etc.
Capital
Capital refers to the money or money’s worth introduced or invested by the owners into business. Capital is the owners claim against the business and is called owner’s equity. Drawings
It is the amount of cash or other asset withdrawn by the owner for his personal purpose.
Revenue
Revenue represents the amount a business earns by selling its products or providing service to its customers. Sales are the major revenue of the business. E.g. Commission, interest, rent etc.
Expense
The term expense denotes the cost incurred by a business in the process of earning revenue. E.g. rent, salary, wages etc.
Expenditure
Spending money or incurring a liability for some benefit, service or property received is called expenditure. E.g. payment of rent, salary, purchase of goods, machinery etc.
Revenue expenditure
If the benefit of expenditure expires within a year it is treated as an expense and also called revenue expenditure. E.g. payment of rent, wages, salary, commission, etc.
Capital expenditure
If the benefit of expenditure lasts for more than a year it is treated as an asset and also called capital expenditure or expenditure which has been incurred to derive long term advantage for the business. Eg. Purchase of asset
Loss
It is the excess of expense over revenue. It decreases in owner’s equity. It also refers money or money’s worth lost without receiving any benefit in return. E.g. cash or goods lost by theft or fire, loss on sale of fixed asset etc.
Profit
Profit is the excess of revenue over expenses. It represents increase in owner’s equity.
Gain
A profit that arises from events or transactions which are incidental to business such as sale of fixed asset, winning a court case, appreciation of value of asset etc. are called gain.
Income
Income is the increase in the net worth of an organisation either from business activity or from other activities. It includes profit also.
Discount
Discounts are deductions allowed either on the selling price or on the amount due. Discounts are two types
Trade discount.
The concession given by the seller to the buyer for making bulk purchase is called trade discount. Normally trade discount is deducted from the actual price and the net amount is shown in the invoice. Therefore trade discount will not come in the books of accounts
Cash discount.
It is a deduction granted by the creditor to the debtor as an inducement for making prompt payment. The discount is a loss to the creditor and a gain to the debtor. When discount granted by the creditor it is called discount received and discount granted to the debtor it is called discount allowed.
Voucher
The documentary evidence in support of a transaction is known as voucher.
Goods
Goods are the Product and articles which are purchased and are meant for resale. For stationery merchant stationery items like books, pen, pencil etc. are goods and for a furniture dealer furniture items like table, chairs etc. are goods for correct accounting of goods they are called by different names purchase, sales, purchase return and sales return.
Purchase
The total amount of goods procured by a business concern both for cash and credit and is meant for resale is termed as purchase.
Purchase return
Return of goods already purchased to suppliers are called purchase return
Sales
Sales are the total revenues from goods or services sold or provided to customers. Sales are the act of exchange of an item of value for cash or credit.
Stock
The goods lying with a business for sale on any given date are called stock.
Closing stock
The value of goods remaining unsold at the end of an accounting period is known as closing stock.
Opening stock
The closing stock of a particular period becomes the opening stock for the next period.
