Accountancy Notes PDF Class 11 Chapter 1

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Accountancy Notes PDF

On
Introduction to Accounting
(Class – 11 / Chapter- 1)
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Introduction
According to the American Institute of Certified Public Accountants, “Accounting is the art of recording,
classifying and summarising the economic information 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.”
The Accounting Principles Board (APB) of AICPA (U.S.A) defined accounting as “Accounting is a service
activity. Its function is to provide quantitative information, primarily financial in nature, about economic
entities that is intended to be useful in making economic decisions.”
In Simple words, accounting is the process of collecting, recording, classifying, summarising and
communicating financial information to the users for judgment and decision-making.
Objectives of Accounting
1. To keep systematic and complete records 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
helps in knowing the financial performance of a business.
3. To ascertain the financial position of the business by the means of a 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 helps in decision making, budgeting
and forecasting.
6. To prevent frauds by maintaining regular and systematic accounting records.
Advantages of Accounting
1. It provides information which is useful to management for making economic decisions.

2. It helps owners to compare one year’s results with those of other years to locate the factors which
lead to changes.
3. It provides information about the financial position of the business by means of a balance sheet
which shows assets on one side and Capital & Liabilities on the other side.
4. It helps in keeping systematic and complete records of business transactions in the books of
accounts according to specified principles and rules, which is accepted by the Courts as evidence.
5. It helps a firm in the assessment of its correct tax Liabilities such as income tax, sales tax, VAT,
excise duty etc.
6. Properly maintained accounts help a business entity in determining its proper purchase price.
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 contains only information which can be expressed in terms of money. It ignores 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 assets 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 positions of a business firm. For example assets in the balance sheet are shown at their
cost and not at their market value which could be realised on their sale.
Book Keeping – The Basis of Accounting
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.
Bookkeeping 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.
Bookkeeping Accounting
1. It is the recording phase of an accounting system.

1. It is the summarizing phase of an accounting
system.
2. It is a primary stage and basis for accounting. 2. It is a Secondary Stage which begins where the
Bookkeeping process ends.
3. It is routine in nature and does not require any 3. It is analytical in nature and requires special skill
special skill or knowledge or knowledge.
4. It is done by junior staff called book-keepers 4. It is done by senior staff called accountants.
5. It does not give the complete picture of the financial 5. It gives the complete picture of the financial
conditions of the business unit. conditions of the business unit.
Types of accounting information
Accounting information can be categorized into following:
1. Information relating to profit or loss i.e. income statement, shows the net profit of business
operations of a firm during a particular accounting period.
2. Information relating to Financial position i.e. Balance Sheet. It shows assets on one side and
Capital & Liabilities on the other side.
3. Schedules and notes forming part of the balance sheet and income statement to give details of
various items shown in both of them.

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 helps the management in planning
and controlling the operations of a business and in better decision making.
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 predictions 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 Terms in Accounting

1. Entity: It means a thing that has a definite individual existence.
2. Transaction: An event involving some value between two or more entities.
3. Assets: Anything which is in the possession or is the property of business enterprises including the
amount due to it from others is called assets. Assets may be classified as Fixed Assets and Current
Assets.
4. Liabilities: It refers to the amount which the business enterprise owes to outsiders accepting the
amount owed to proprietors.
Liabilities may be classified as follows:
1. Long-term Liabilities
2. Current Liabilities
5. Capital: Amount invested in an enterprise in the form of money or assets by its owner is known as
capital.
6. Sales: Sales are total revenues from goods or services sold or provided to customers. It may be cash
sales or credit sales.
7. Revenues: Amounts which business earned or received. Revenue in accounting means the income of
a recurring nature from any source.
8. Expenses: Costs incurred by a business in the process of earning revenue are known as expenses.

9. Expenditure: Spending money or incurring liability for some benefits, service, or property received is
called expenditure. It is of two types: Revenue expenditure and Capital expenditure.
10. Profit: The excess of revenue of a period over its related expenses during the accounting year is
profit.
11. Gain: It is a monetary benefit, profits, or advantages resulting from events or transactions which are
incidental to the business.
12. Loss: In accounting, this term conveys two different meanings:
1. The result of the business for a period when total expenses exceed the total revenue.
2. Some facts or activities against which the firm receives no benefit.
13. Discount: Discount is the deduction in the price of the goods sold. It is of two types:
1. Trade discount and
2. Cash discount.
14. Voucher: The documentary evidence in support of a transaction is known as a voucher.
15. Goods: It refers to the products in which the business unit is dealing, i.e. in terms of which it is buying
and selling or producing and selling.
16. Drawings: Withdrawal of money and/or goods by the owner from J the business for personal use is
known as drawings.
17. Purchases: Purchases are the total amount of goods procured by a business on credit and on cash,
for use or sale.
18. Stock: Stock is a measure of something on hand – goods, spares, and other items in a business.
19. Debtors: They are persons and/or other entities who owe to an enterprise an amount for buying
goods and services on credit.
20. Creditors: They are persons and/or other entities who have to be paid by an enterprise an amount for
providing the enterprise goods and services on credit.
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Accountancy Notes PDF

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1. It provides information which is useful to management for making economic decisions.

1. It is historical in nature; it does not reflect the current worth of a business.

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Book Keeping – The Basis of Accounting

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

Types of accounting information

Accounting information can be categorized into following:

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1. Financial Accounting:- It is that subfield/Branch of accounting which is concerned with recording

Qualitative Characteristics of Accounting Information

Basic Terms in Accounting

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