Introduction to Accounting Class 11 Notes Accountancy

Introduction to Accounting Notes

1. Book-Keeping Accounting and Accountancy Book-Keeping-It is an art of recording in the books of accounts, the monetary aspect of commercial and financial transactions. Book-Keeping is a part of accounting; it is concerned with record keeping or maintenance of books of accounts.

Accounting is a wider concept than book-keeping; it starts where book-keeping ends. Accounting is an art of recording, classifying and summarizing the financial data and interpreting the results thereof.

Accounting Accountancy refers to the entire body of the theory and practice of accounting; it is the systematic knowledge of accounting. It tells us why and how to prepare the books of accounts and how to summarize the accounting information and communicate it to the interested parties.

2. Objectives of Accounting

• Systematic recording of business transactions
• Calculation of profit and loss
• Ascertainment of financial position
• Providing accounting information to its users for decision-making

3. Functions of Accounting

• Maintaining systematic records
• Communicating the financial results for decision-making
• Meeting government regulation
• Protecting business assets
• Assistance to management
• Stewardship or trusteeship
• Control

4. Accounting Process and Cycle

Accounting process starts with identifying financial transactions, involves recording, classifying and summarizing and ends with interpreting accounting information and communicating the result to various concerned parties by preparing final accounts.

The Complete sequence beginning with the recording of the transactions and ending with the preparing of the final accounts, is called accounting cycle.

5. Is Accounting Science or an Art?

Accounting is both an art as well as a science. Accounting is an art of recording, classifying and summarizing financial transactions. It helps us in ascertaining the net profit and financial position of the business enterprise.

Accounting is also a science as it is an organized knowledge based on certain principles.

6. Branches of Accounting

• Financial accounting the process of identifying, measuring, recording, classifying, summarizing, analyzing, interpreting and communicating the financial transactions and events is known as financial accounting. The purpose of this branch of accounting is to keep a record of all financial transactions.
• Cost accounting it is the process of ascertaining and controlling the cost of a product, operation or function. The purpose of cost accounting is to analyse the expenditure, so as to ascertain the cost of various products manufactured by the firm and fix the prices. It also helps in controlling the costs and providing necessary coasting information to management for decision-making.
• Management Accounting it is the use of accounting techniques for providing to help all levels of management in planning and controlling the activities of business to enable decision-making.

The purpose of management accounting is to assist the management in taking rational policy decisions and to evaluate the impact of its decisions and actions. Management accounting not only includes cost accounting but also covers other areas such as capital expenditure decision, capital structure decisions, dividend decisions.

• Social responsibility accounting is the process of identifying, measuring and communicating the social effects of business decision to various users to enable judgments and decision-making by them. It is accounting for social costs and social benefits.
• Human resource accounting it is the process of identifying, measuring and communicating the value of investment made in human resources of an enterprise.

7. Advantages of Accounting

• Financial information about the business
• Assistance to management
• Replaces memory
• Facilities comparative study
• Facilities settlement of tax liabilities
• Facilitates raising loans
• Acts as an evidence in court
• Helps at the time of insolvency
• Helps in ascertaining the value of business
• Helps in ascertaining the net result of operations
• Helps in ascertaining financial position

8. Limitations of Accounting

• Accounting is not fully exact
• Accounting does not indicate the realizable value
• Ignores the qualitative elements
• Ignores price level changes
• Window dressing
• Not free from bias

9. Different Roles of Accounting

• As a language
• As a historical record
• As current economic reality
• As an information system

10. Accounting Information

Accounting is a service activity. Its function is to provide qualitative information, primarily financial in nature, about economic entities that is intended to be useful in making an economic decision.

11. Qualitative Characteristics of Accounting Information

• Reliability
• Relevance
• Understandability
• Comparability

12. Types of Accounting Information

• Information relating to profit or surplus
• Information relating to financial position
• Information about cash flow

13. Users of Accounting Information

Users of accounting information may be categorized into internal users and external users.

• Internal Users
• Owners
• Management
• Employees and workers
• External Users
• Investors and potential investors
• Unions and employee groups
• Lenders and financial institutions
• Suppliers and creditors
• Customers
• Government and other regulators
• Social responsibility groups
• Competitors

14. Basic Accounting Terms

• Business transaction it means a transaction or event entered into by various parties and recorded in the books of accounts. It can be a cash transaction or a credit transaction.
• Account it is a summarized record of transactions relating to a particular head at one place. In an account, not only the amounts of transactions are recorded but their effects and directions are also recorded.
• Capital is the amount invested by the owner in the business. It may be in the form of cash of kind. In accounting ‘business’ and ‘owner’ and separate and distinct entities. Hence, capital is the liability of the business towards the owners in accounting, such liability is also called internal liability or internal equity or owner’s equity.
• Drawings It is the amount withdrawn by the owner in cash or assets from the business for personal use. Drawings reduce the capital of the owner in the business.
• Liabilities It means the amount owed (payable) to the business to outsiders are called external or outside liabilities or simple liabilities. For example, creditors, overdraft etc.

Liabilities can be classified as

• Current Liabilities These are the liabilities which are payable within a year. E.g. Creditors, bills payable, short-term loans etc.
• Non-Current Liabilities Anything not classified as current liability is non-current liability. These are payable after a period of more than one year. E.G. debentures, long-terms etc.
• Assets are property (movable or immovable) or legal rights owned by an individual or business. These are the economic resources of an enterprise that can be usually expressed in monetary terms. Assets can be classified into
• Current Assets These are the assets which are purchased to convert them into cash within a short period of time, i.e. one year e.g. debtors, stock.
• Non-Current Assets Anything not classified as current asset is non-current asset. These are the assets held by the business not with the purpose to resell but are held either as investment or to facilities business operations, e.g. fixed assets such as land, building, machinery, long-term investments, etc.
• Fixed Assets
• Tangible assets these are the assets which have a physical existence, e.g. land, buildings, furniture, vehicle etc.
• Intangible assets these are the assets which do not have physical existence, i.e. they cannot be seen or touched, e.g. trademarks, copyrights, patents, goodwill etc.
• Receipts The amount received or receivable by selling assets, goods or service is known as receipts. The receipts are categorized into two parts:
• Capital receipts The amount received or receivable by selling assets is known as capital receipts, e.g. sale building, furniture.
• Revenue receipts The amount which is received or receivable against the sale of goods or services is known as revenue receipts.
• Expenditure it is the amount spent or liability incurred for acquiring assets, goods and services. Types of expenditure are
• Capital Expenditure It is the expenditure incurred to acquire assets or improving the quality of existing assets which will increase the earning capacity of the business. These expenditure give benefit to the business for more than one accounting year. E.g. purchase of machinery.
• Revenue Expenditure It is the amount spent to purchase goods and services that are consumed during the accounting period. Revenue expenditure does not increase the earning capacity rather maintains the existing earning capacity.
• Deferred revenue expenditure it is revenue expenditure in nature but provides benefits for more than one accounting period, e.g. heavy advertising expenditure to promote a new product will give benefit for more than one accounting period and hence, is a deferred revenue expenditure.
• Expenses Cost incurred by a business in the process of earning revenue are known as expenses. It is a value which has expired during the accounting period. It may be
• Prepaid Expense
• Outstanding Expense
• Income it is increase in economic benefits during an accounting period in the form of inflow of assets or decrease of liabilities, that result in increase in internal equity other than those relating to contribution from equity participants.
• Profit Excess of revenue of a business over its cost is termed as profit. Profits are generally of two types:
• Gross Profit it means excess of operating revenues over direct/operating expenses.
• Net Profit it means the excess of revenue over expenses and losses. It increases owner’s equity.
• Gain it is a profit of irregular or non-recurring nature. It is a profit that arises from events or transactions which are incidental to business such as sale of fixed assets, winning a court case, appreciation in the value of an asset etc.
• Loss the excess of expenses of a period over its related revenues is termed as loss. It decreases owner’s equity. It also refers to money or money’s worth lost (or cost incurred) without receiving any benefit in return. e.g. cash or goods lost by theft or a fire accident, etc. It also includes loss on sale of fixed assets
• Goods are the articles or things in which a business deals. It is a term that applies to all the items held for sale. They are thus stock-in-trade of an enterprise which is purchased or manufactured with a purpose of selling. For a furniture dealer, furniture is good, for a vehicle dealer, vehicle is goods.
• Purchase The term purchase is used for purchases of goods and not fixed assets. Goods are articles purchased for resale or for producing the finished product which are also to be sold.

The term ‘purchases’ includes both cash and credit purchases of goods. Goods purchases for cash are termed as cash purchases and goods purchased on credit are termed as credit purchases.

• Purchases return goods purchased may be returned when they are not as per specification, are defective or due to any other reasons. Goods returned are known as purchases or return outwards.
• Sales it means sale of goods, sales are total revenues from goods or services sold or provide to customers. Sales include both cash and credit sales. When goods for cash, they are termed cash sales and when sold on credit, they are termed credit sales.
• Sales Return Goods sold when returned by the purchaser are termed as sales return or return inwards.
• Stock It is the articles which are held by an enterprise for the purpose of sale in the ordinary course of business or for the purpose of using it in the production of goods meant for sale. Stock are of following kinds:
• Stock of new material it includes stock of raw material used for manufacturing of goods, e.g. stock of cloth to be used for making shirts.
• Work-in-progress it is a stock that is in the process of being finished, i.e. they are partly finished goods.
• Trade receivables the term ‘receivable’ includes the outstanding amount due form others. It includes debtors and bills receivables.
  1. Debtors are personsand/or other entities who own to the enterprise an amount for buying goods and services on credit. The total amount standing against such persons and/or entities on the closing date, is shown in the balance sheet as sundry debtors on the asset side.
  2. Bills receivable it means a bill of amount accepted by a debtor, the amount of which be received on the specified date.

Also Read: Introduction to Accounting Class 11th Accountancy (Commerce) CHAPTER-1

• Trade Payables The term ‘payables’ includes amounts due to others. Accounts payable include trade creditors as well as bills payable promissory notes.
  1. Creditors are persons and/or entities who have to be paid by the enterprise amount for providing the enterprise goods services on credit. The total amount standard the favour of such persons and/or entities or closing date, is shown in the balance she/he sundry creditors on the liabilities side.
  2. Bills Payable it means a bill of exchange amount of which will be payable on the spate date.
• Cost the amount of expenditure incurrent attributable to a specified article, product is known as cost.
• Discount it is any type of reduction in the primary goods sold.

Discount is generally of two types:

1. Trade Discount it is offered at a percentage of list price, at the time of separate goods. The objective of allowing trade distribute is to persuade the buyer to buy more goods.
2. Cash Discount the objective of allowing the discount is to encourage the debtor to paid dues promptly.

• Voucher it is a documentary evidence in support of a transaction, e.g. cash memo, invoice of receipts, debit/credit notes etc.