Introduction to Accounting - Class 11 Accountancy PDF Download

 Page 1


LESSON  1    INTRODUCTION TO ACCOUNTING  
Contents 
1.0 Aims and Objectives  
1.1 Introduction  
1.2 Book- Keeping  
1.2.1  Meaning  
1.2.2  Definition  
1.2.3  Objectives  
1.3 Accounting  
1.3.1  Meaning  
1.3.2  Definition  
1.3.3  Objectives  
1.3.4  Importance  
1.3.5  Functions  
1.3.6  Advantages  
1.3.7  Limitations  
1.4  Methods of Accounting 
  1.4.1  Single Entry 
  1.4.2  Double Entry 
  1.4.3  Steps involved in double entry system 
  1.4.4  Advantages of double entry system 
1.5  Meaning of Debit and Credit  
1.6  Types of Accounts and its rules 
  1.6.1  Personal Accounts 
  1.6.2  Real Accounts 
  1.6.3  Nominal Accounts 
1.7 Distinction between Book Keeping and Accounting  
1.8 Branches of Accounting  
1.8.1  Financial Accounting  
1.8.2  Cost Accounting  
1.8.3  Management Accounting  
1.9  Let us Sum Up 
1.10  Lesson-End Activities 
1.11 Check your Progress 
1.12 Points for Discussion 
1.13 References 
1.0  AIMS  AND  OBJECTIVES 
i) To know the Meaning ,Definition and objective of Book- Keeping  
ii) To study the objectives, functions, importance and limitations of 
Accounting  
iii) To understand the methods of Accounting, kinds of Accounts and 
Accounting rules. 
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Page 2


LESSON  1    INTRODUCTION TO ACCOUNTING  
Contents 
1.0 Aims and Objectives  
1.1 Introduction  
1.2 Book- Keeping  
1.2.1  Meaning  
1.2.2  Definition  
1.2.3  Objectives  
1.3 Accounting  
1.3.1  Meaning  
1.3.2  Definition  
1.3.3  Objectives  
1.3.4  Importance  
1.3.5  Functions  
1.3.6  Advantages  
1.3.7  Limitations  
1.4  Methods of Accounting 
  1.4.1  Single Entry 
  1.4.2  Double Entry 
  1.4.3  Steps involved in double entry system 
  1.4.4  Advantages of double entry system 
1.5  Meaning of Debit and Credit  
1.6  Types of Accounts and its rules 
  1.6.1  Personal Accounts 
  1.6.2  Real Accounts 
  1.6.3  Nominal Accounts 
1.7 Distinction between Book Keeping and Accounting  
1.8 Branches of Accounting  
1.8.1  Financial Accounting  
1.8.2  Cost Accounting  
1.8.3  Management Accounting  
1.9  Let us Sum Up 
1.10  Lesson-End Activities 
1.11 Check your Progress 
1.12 Points for Discussion 
1.13 References 
1.0  AIMS  AND  OBJECTIVES 
i) To know the Meaning ,Definition and objective of Book- Keeping  
ii) To study the objectives, functions, importance and limitations of 
Accounting  
iii) To understand the methods of Accounting, kinds of Accounts and 
Accounting rules. 
This watermark does not appear in the registered version - http://www.clicktoconvert.com
 1 
iv) To study the difference between Book- keeping and Accounting  
v) To study the various branches of Accounting  
 
1.1  INTRODUCTION  
 In all activities (whether business activities or non-business activities) and in 
all organizations (whether business organizations like a manufacturing entity or 
trading entity or non-business organizations like schools, colleges, hospitals, libraries, 
clubs, temples, political parties) which require money and other economic resources, 
accounting is required to account for these resources. In other words, wherever money 
is involved, accounting is required to account for it. Accounting is often called the 
language of business. The basic function of any language is to serve as a means of 
communication. Accounting also serves this function.  
1.2. MEANING AND DEFINITION OF BOOK- KEEPING  
1.2.1 Meaning  
Book- keeping includes recording of journal, posting in ledgers and balancing 
of accounts. All the records before the preparation of trail balance is the whole subject 
matter of book- keeping. Thus, book- keeping many be defined as the science and art 
of recording transactions in money or money’s worth so accurately and systematically, 
in a certain set of books, regularly that the true state of businessman’s affairs can be 
correctly ascertained. Here it is important to note that only those transactions related 
to business are recorded which can be expressed in terms of money.    
1.2.2  Definition 
 “Book- keeping is the art of recording business transactions in a systematic 
manner”.  A.H.Rosenkamph. 
 “Book- keeping is the science and art of correctly recording in books of 
account all those business transactions that result in the transfer of money or money’s 
worth”.  R.N.Carter  
1.2.3   Objectives  of  Book- keeping  
i) Book- keeping provides a permanent record of each transactions.  
ii) Soundness of a firm can be assessed from the records of assets and abilities 
on a particular date.  
iii) Entries related to incomes and expenditures of a concern facilitate to know 
the profit and loss for a given period.  
iv) It enables to prepare a list of customers and suppliers to ascertain the amount 
to be received or paid.  
v) It is a method gives opportunities to review the business policies in the light 
of the past records.  
vi) Amendment of business laws, provision of licenses, assessment of taxes etc., 
are based on records. 
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Page 3


LESSON  1    INTRODUCTION TO ACCOUNTING  
Contents 
1.0 Aims and Objectives  
1.1 Introduction  
1.2 Book- Keeping  
1.2.1  Meaning  
1.2.2  Definition  
1.2.3  Objectives  
1.3 Accounting  
1.3.1  Meaning  
1.3.2  Definition  
1.3.3  Objectives  
1.3.4  Importance  
1.3.5  Functions  
1.3.6  Advantages  
1.3.7  Limitations  
1.4  Methods of Accounting 
  1.4.1  Single Entry 
  1.4.2  Double Entry 
  1.4.3  Steps involved in double entry system 
  1.4.4  Advantages of double entry system 
1.5  Meaning of Debit and Credit  
1.6  Types of Accounts and its rules 
  1.6.1  Personal Accounts 
  1.6.2  Real Accounts 
  1.6.3  Nominal Accounts 
1.7 Distinction between Book Keeping and Accounting  
1.8 Branches of Accounting  
1.8.1  Financial Accounting  
1.8.2  Cost Accounting  
1.8.3  Management Accounting  
1.9  Let us Sum Up 
1.10  Lesson-End Activities 
1.11 Check your Progress 
1.12 Points for Discussion 
1.13 References 
1.0  AIMS  AND  OBJECTIVES 
i) To know the Meaning ,Definition and objective of Book- Keeping  
ii) To study the objectives, functions, importance and limitations of 
Accounting  
iii) To understand the methods of Accounting, kinds of Accounts and 
Accounting rules. 
This watermark does not appear in the registered version - http://www.clicktoconvert.com
 1 
iv) To study the difference between Book- keeping and Accounting  
v) To study the various branches of Accounting  
 
1.1  INTRODUCTION  
 In all activities (whether business activities or non-business activities) and in 
all organizations (whether business organizations like a manufacturing entity or 
trading entity or non-business organizations like schools, colleges, hospitals, libraries, 
clubs, temples, political parties) which require money and other economic resources, 
accounting is required to account for these resources. In other words, wherever money 
is involved, accounting is required to account for it. Accounting is often called the 
language of business. The basic function of any language is to serve as a means of 
communication. Accounting also serves this function.  
1.2. MEANING AND DEFINITION OF BOOK- KEEPING  
1.2.1 Meaning  
Book- keeping includes recording of journal, posting in ledgers and balancing 
of accounts. All the records before the preparation of trail balance is the whole subject 
matter of book- keeping. Thus, book- keeping many be defined as the science and art 
of recording transactions in money or money’s worth so accurately and systematically, 
in a certain set of books, regularly that the true state of businessman’s affairs can be 
correctly ascertained. Here it is important to note that only those transactions related 
to business are recorded which can be expressed in terms of money.    
1.2.2  Definition 
 “Book- keeping is the art of recording business transactions in a systematic 
manner”.  A.H.Rosenkamph. 
 “Book- keeping is the science and art of correctly recording in books of 
account all those business transactions that result in the transfer of money or money’s 
worth”.  R.N.Carter  
1.2.3   Objectives  of  Book- keeping  
i) Book- keeping provides a permanent record of each transactions.  
ii) Soundness of a firm can be assessed from the records of assets and abilities 
on a particular date.  
iii) Entries related to incomes and expenditures of a concern facilitate to know 
the profit and loss for a given period.  
iv) It enables to prepare a list of customers and suppliers to ascertain the amount 
to be received or paid.  
v) It is a method gives opportunities to review the business policies in the light 
of the past records.  
vi) Amendment of business laws, provision of licenses, assessment of taxes etc., 
are based on records. 
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1.3 ACCOUNTING 
1.3.1  Meaning of Accounting 
Accounting, as an information system is the process of identifying, measuring 
and communicating the economic information of an organization to its users who need 
the information for decision making.  It identifies transactions and events of a specific 
entity.  A transaction is an exchange in which each participant receives or sacrifices 
value (e.g. purchase of raw material).  An event (whether internal or external) is a 
happening of consequence to an entity (e.g. use of raw material for production).  An 
entity means an economic unit that performs economic activities.  
1.3.2  Definition of Accounting 
American Institute of Certified Public Accountants (AICPA) which defines 
accounting as “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”. 
1.3.3   Objective of Accounting 
Objective of accounting may differ from business to business depending upon 
their specific requirements. However, the following are the general objectives of 
accounting. 
i) To keeping systematic record: It is very difficult to remember all the 
business transactions that take place.  Accounting serves this purpose of record 
keeping by promptly recording all the business transactions in the books of account. 
ii) To ascertain the results of the operation: Accounting helps in 
ascertaining result i.e., profit earned or loss suffered in business during a particular 
period. For this purpose, a business entity prepares either a Trading and Profit and 
Loss account or an Income and Expenditure account which shows the profit or loss of 
the business by matching the items of revenue and expenditure of the some period. 
iii) To ascertain the financial position of the business: In addition to profit, 
a businessman must know his financial position i.e., availability of cash, position of 
assets and liabilities etc.  This helps the businessman to know his financial strength. 
Financial statements are barometers of health of a business entity. 
iv) To portray the liquidity position: Financial reporting should provide 
information about how an enterprise obtains and spends cash, about its borrowing and 
repayment of borrowing, about its capital transactions, cash dividends and other 
distributions of resources by the enterprise to owners and about other factors that may 
affect an enterprise’s liquidity and solvency. 
v) To protect business properties: Accounting provides upto date 
information about the various assets that the firm possesses and the liabilities the firm 
owes, so that nobody can claim a payment which is not due to him. 
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Page 4


LESSON  1    INTRODUCTION TO ACCOUNTING  
Contents 
1.0 Aims and Objectives  
1.1 Introduction  
1.2 Book- Keeping  
1.2.1  Meaning  
1.2.2  Definition  
1.2.3  Objectives  
1.3 Accounting  
1.3.1  Meaning  
1.3.2  Definition  
1.3.3  Objectives  
1.3.4  Importance  
1.3.5  Functions  
1.3.6  Advantages  
1.3.7  Limitations  
1.4  Methods of Accounting 
  1.4.1  Single Entry 
  1.4.2  Double Entry 
  1.4.3  Steps involved in double entry system 
  1.4.4  Advantages of double entry system 
1.5  Meaning of Debit and Credit  
1.6  Types of Accounts and its rules 
  1.6.1  Personal Accounts 
  1.6.2  Real Accounts 
  1.6.3  Nominal Accounts 
1.7 Distinction between Book Keeping and Accounting  
1.8 Branches of Accounting  
1.8.1  Financial Accounting  
1.8.2  Cost Accounting  
1.8.3  Management Accounting  
1.9  Let us Sum Up 
1.10  Lesson-End Activities 
1.11 Check your Progress 
1.12 Points for Discussion 
1.13 References 
1.0  AIMS  AND  OBJECTIVES 
i) To know the Meaning ,Definition and objective of Book- Keeping  
ii) To study the objectives, functions, importance and limitations of 
Accounting  
iii) To understand the methods of Accounting, kinds of Accounts and 
Accounting rules. 
This watermark does not appear in the registered version - http://www.clicktoconvert.com
 1 
iv) To study the difference between Book- keeping and Accounting  
v) To study the various branches of Accounting  
 
1.1  INTRODUCTION  
 In all activities (whether business activities or non-business activities) and in 
all organizations (whether business organizations like a manufacturing entity or 
trading entity or non-business organizations like schools, colleges, hospitals, libraries, 
clubs, temples, political parties) which require money and other economic resources, 
accounting is required to account for these resources. In other words, wherever money 
is involved, accounting is required to account for it. Accounting is often called the 
language of business. The basic function of any language is to serve as a means of 
communication. Accounting also serves this function.  
1.2. MEANING AND DEFINITION OF BOOK- KEEPING  
1.2.1 Meaning  
Book- keeping includes recording of journal, posting in ledgers and balancing 
of accounts. All the records before the preparation of trail balance is the whole subject 
matter of book- keeping. Thus, book- keeping many be defined as the science and art 
of recording transactions in money or money’s worth so accurately and systematically, 
in a certain set of books, regularly that the true state of businessman’s affairs can be 
correctly ascertained. Here it is important to note that only those transactions related 
to business are recorded which can be expressed in terms of money.    
1.2.2  Definition 
 “Book- keeping is the art of recording business transactions in a systematic 
manner”.  A.H.Rosenkamph. 
 “Book- keeping is the science and art of correctly recording in books of 
account all those business transactions that result in the transfer of money or money’s 
worth”.  R.N.Carter  
1.2.3   Objectives  of  Book- keeping  
i) Book- keeping provides a permanent record of each transactions.  
ii) Soundness of a firm can be assessed from the records of assets and abilities 
on a particular date.  
iii) Entries related to incomes and expenditures of a concern facilitate to know 
the profit and loss for a given period.  
iv) It enables to prepare a list of customers and suppliers to ascertain the amount 
to be received or paid.  
v) It is a method gives opportunities to review the business policies in the light 
of the past records.  
vi) Amendment of business laws, provision of licenses, assessment of taxes etc., 
are based on records. 
This watermark does not appear in the registered version - http://www.clicktoconvert.com
 2 
 
    
1.3 ACCOUNTING 
1.3.1  Meaning of Accounting 
Accounting, as an information system is the process of identifying, measuring 
and communicating the economic information of an organization to its users who need 
the information for decision making.  It identifies transactions and events of a specific 
entity.  A transaction is an exchange in which each participant receives or sacrifices 
value (e.g. purchase of raw material).  An event (whether internal or external) is a 
happening of consequence to an entity (e.g. use of raw material for production).  An 
entity means an economic unit that performs economic activities.  
1.3.2  Definition of Accounting 
American Institute of Certified Public Accountants (AICPA) which defines 
accounting as “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”. 
1.3.3   Objective of Accounting 
Objective of accounting may differ from business to business depending upon 
their specific requirements. However, the following are the general objectives of 
accounting. 
i) To keeping systematic record: It is very difficult to remember all the 
business transactions that take place.  Accounting serves this purpose of record 
keeping by promptly recording all the business transactions in the books of account. 
ii) To ascertain the results of the operation: Accounting helps in 
ascertaining result i.e., profit earned or loss suffered in business during a particular 
period. For this purpose, a business entity prepares either a Trading and Profit and 
Loss account or an Income and Expenditure account which shows the profit or loss of 
the business by matching the items of revenue and expenditure of the some period. 
iii) To ascertain the financial position of the business: In addition to profit, 
a businessman must know his financial position i.e., availability of cash, position of 
assets and liabilities etc.  This helps the businessman to know his financial strength. 
Financial statements are barometers of health of a business entity. 
iv) To portray the liquidity position: Financial reporting should provide 
information about how an enterprise obtains and spends cash, about its borrowing and 
repayment of borrowing, about its capital transactions, cash dividends and other 
distributions of resources by the enterprise to owners and about other factors that may 
affect an enterprise’s liquidity and solvency. 
v) To protect business properties: Accounting provides upto date 
information about the various assets that the firm possesses and the liabilities the firm 
owes, so that nobody can claim a payment which is not due to him. 
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 3 
vi)  To facilitate rational decision – making: Accounting records and 
financial statements provide financial information which help the business in making 
rational decisions about the steps to be taken in respect of various aspects of business. 
vii) To satisfy the requirements of law: Entities such as companies, societies, 
public trusts are compulsorily required to maintain accounts as per the law governing 
their operations such as the Companies Act, Societies Act, and Public Trust Act etc. 
Maintenance of accounts is also compulsory under the Sales Tax Act and Income Tax 
Act. 
1.3.4  Importance  of  Accounting 
i) Owners: The owners provide funds or capital for the organization.  They 
possess curiosity in knowing whether the business is being conducted on sound lines 
or not and whether the capital is being employed properly or not.  Owners, being 
businessmen, always keep an eye on the returns from the investment. Comparing the 
accounts of various years helps in getting good pieces of information. 
ii) Management: The management of the business is greatly interested in 
knowing the position of the firm.  The accounts are the basis, the management can 
study the merits and demerits of the business activity.  Thus, the management is 
interested in financial accounting to find whether the business carried on is profitable 
or not.  The financial accounting is the “eyes and ears of management and facilitates 
in drawing future course of action, further expansion etc.” 
iii) Creditors: Creditors are the persons who supply goods on credit, or 
bankers or lenders of money.  It is usual that these groups are interested to know the 
financial soundness before granting credit.  The progress and prosperity of the firm, 
two which credits are extended, are largely watched by creditors from the point of 
view of security and further credit.  Profit and Loss Account and Balance Sheet are 
nerve centres to know the soundness of the firm.  
iv) Employees: Payment of bonus depends upon the size of profit earned by 
the firm. The more important point is that the workers expect regular income for the 
bread.  The demand for wage rise, bonus, better working conditions etc. depend upon 
the profitability of the firm and in turn depends upon financial position.  For these 
reasons, this group is interested in accounting. 
v) Investors: The prospective investors, who want to invest their money in a 
firm, of course wish to see the progress and prosperity of the firm, before investing 
their amount, by going through the financial statements of the firm.  This is to 
safeguard the investment.  For this, this group is eager to go through the accounting 
which enables them to know the safety of investment. 
vi)  Government: Government keeps a close watch on the firms which yield 
good amount of profits.  The state and central Governments are interested in the 
financial statements to know the earnings for the purpose of taxation.  To compile 
national accounting is essential.  
vii) Consumers: These groups are interested in getting the goods at reduced 
price.  Therefore, they wish to know the establishment of a proper accounting control, 
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Page 5


LESSON  1    INTRODUCTION TO ACCOUNTING  
Contents 
1.0 Aims and Objectives  
1.1 Introduction  
1.2 Book- Keeping  
1.2.1  Meaning  
1.2.2  Definition  
1.2.3  Objectives  
1.3 Accounting  
1.3.1  Meaning  
1.3.2  Definition  
1.3.3  Objectives  
1.3.4  Importance  
1.3.5  Functions  
1.3.6  Advantages  
1.3.7  Limitations  
1.4  Methods of Accounting 
  1.4.1  Single Entry 
  1.4.2  Double Entry 
  1.4.3  Steps involved in double entry system 
  1.4.4  Advantages of double entry system 
1.5  Meaning of Debit and Credit  
1.6  Types of Accounts and its rules 
  1.6.1  Personal Accounts 
  1.6.2  Real Accounts 
  1.6.3  Nominal Accounts 
1.7 Distinction between Book Keeping and Accounting  
1.8 Branches of Accounting  
1.8.1  Financial Accounting  
1.8.2  Cost Accounting  
1.8.3  Management Accounting  
1.9  Let us Sum Up 
1.10  Lesson-End Activities 
1.11 Check your Progress 
1.12 Points for Discussion 
1.13 References 
1.0  AIMS  AND  OBJECTIVES 
i) To know the Meaning ,Definition and objective of Book- Keeping  
ii) To study the objectives, functions, importance and limitations of 
Accounting  
iii) To understand the methods of Accounting, kinds of Accounts and 
Accounting rules. 
This watermark does not appear in the registered version - http://www.clicktoconvert.com
 1 
iv) To study the difference between Book- keeping and Accounting  
v) To study the various branches of Accounting  
 
1.1  INTRODUCTION  
 In all activities (whether business activities or non-business activities) and in 
all organizations (whether business organizations like a manufacturing entity or 
trading entity or non-business organizations like schools, colleges, hospitals, libraries, 
clubs, temples, political parties) which require money and other economic resources, 
accounting is required to account for these resources. In other words, wherever money 
is involved, accounting is required to account for it. Accounting is often called the 
language of business. The basic function of any language is to serve as a means of 
communication. Accounting also serves this function.  
1.2. MEANING AND DEFINITION OF BOOK- KEEPING  
1.2.1 Meaning  
Book- keeping includes recording of journal, posting in ledgers and balancing 
of accounts. All the records before the preparation of trail balance is the whole subject 
matter of book- keeping. Thus, book- keeping many be defined as the science and art 
of recording transactions in money or money’s worth so accurately and systematically, 
in a certain set of books, regularly that the true state of businessman’s affairs can be 
correctly ascertained. Here it is important to note that only those transactions related 
to business are recorded which can be expressed in terms of money.    
1.2.2  Definition 
 “Book- keeping is the art of recording business transactions in a systematic 
manner”.  A.H.Rosenkamph. 
 “Book- keeping is the science and art of correctly recording in books of 
account all those business transactions that result in the transfer of money or money’s 
worth”.  R.N.Carter  
1.2.3   Objectives  of  Book- keeping  
i) Book- keeping provides a permanent record of each transactions.  
ii) Soundness of a firm can be assessed from the records of assets and abilities 
on a particular date.  
iii) Entries related to incomes and expenditures of a concern facilitate to know 
the profit and loss for a given period.  
iv) It enables to prepare a list of customers and suppliers to ascertain the amount 
to be received or paid.  
v) It is a method gives opportunities to review the business policies in the light 
of the past records.  
vi) Amendment of business laws, provision of licenses, assessment of taxes etc., 
are based on records. 
This watermark does not appear in the registered version - http://www.clicktoconvert.com
 2 
 
    
1.3 ACCOUNTING 
1.3.1  Meaning of Accounting 
Accounting, as an information system is the process of identifying, measuring 
and communicating the economic information of an organization to its users who need 
the information for decision making.  It identifies transactions and events of a specific 
entity.  A transaction is an exchange in which each participant receives or sacrifices 
value (e.g. purchase of raw material).  An event (whether internal or external) is a 
happening of consequence to an entity (e.g. use of raw material for production).  An 
entity means an economic unit that performs economic activities.  
1.3.2  Definition of Accounting 
American Institute of Certified Public Accountants (AICPA) which defines 
accounting as “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”. 
1.3.3   Objective of Accounting 
Objective of accounting may differ from business to business depending upon 
their specific requirements. However, the following are the general objectives of 
accounting. 
i) To keeping systematic record: It is very difficult to remember all the 
business transactions that take place.  Accounting serves this purpose of record 
keeping by promptly recording all the business transactions in the books of account. 
ii) To ascertain the results of the operation: Accounting helps in 
ascertaining result i.e., profit earned or loss suffered in business during a particular 
period. For this purpose, a business entity prepares either a Trading and Profit and 
Loss account or an Income and Expenditure account which shows the profit or loss of 
the business by matching the items of revenue and expenditure of the some period. 
iii) To ascertain the financial position of the business: In addition to profit, 
a businessman must know his financial position i.e., availability of cash, position of 
assets and liabilities etc.  This helps the businessman to know his financial strength. 
Financial statements are barometers of health of a business entity. 
iv) To portray the liquidity position: Financial reporting should provide 
information about how an enterprise obtains and spends cash, about its borrowing and 
repayment of borrowing, about its capital transactions, cash dividends and other 
distributions of resources by the enterprise to owners and about other factors that may 
affect an enterprise’s liquidity and solvency. 
v) To protect business properties: Accounting provides upto date 
information about the various assets that the firm possesses and the liabilities the firm 
owes, so that nobody can claim a payment which is not due to him. 
This watermark does not appear in the registered version - http://www.clicktoconvert.com
 3 
vi)  To facilitate rational decision – making: Accounting records and 
financial statements provide financial information which help the business in making 
rational decisions about the steps to be taken in respect of various aspects of business. 
vii) To satisfy the requirements of law: Entities such as companies, societies, 
public trusts are compulsorily required to maintain accounts as per the law governing 
their operations such as the Companies Act, Societies Act, and Public Trust Act etc. 
Maintenance of accounts is also compulsory under the Sales Tax Act and Income Tax 
Act. 
1.3.4  Importance  of  Accounting 
i) Owners: The owners provide funds or capital for the organization.  They 
possess curiosity in knowing whether the business is being conducted on sound lines 
or not and whether the capital is being employed properly or not.  Owners, being 
businessmen, always keep an eye on the returns from the investment. Comparing the 
accounts of various years helps in getting good pieces of information. 
ii) Management: The management of the business is greatly interested in 
knowing the position of the firm.  The accounts are the basis, the management can 
study the merits and demerits of the business activity.  Thus, the management is 
interested in financial accounting to find whether the business carried on is profitable 
or not.  The financial accounting is the “eyes and ears of management and facilitates 
in drawing future course of action, further expansion etc.” 
iii) Creditors: Creditors are the persons who supply goods on credit, or 
bankers or lenders of money.  It is usual that these groups are interested to know the 
financial soundness before granting credit.  The progress and prosperity of the firm, 
two which credits are extended, are largely watched by creditors from the point of 
view of security and further credit.  Profit and Loss Account and Balance Sheet are 
nerve centres to know the soundness of the firm.  
iv) Employees: Payment of bonus depends upon the size of profit earned by 
the firm. The more important point is that the workers expect regular income for the 
bread.  The demand for wage rise, bonus, better working conditions etc. depend upon 
the profitability of the firm and in turn depends upon financial position.  For these 
reasons, this group is interested in accounting. 
v) Investors: The prospective investors, who want to invest their money in a 
firm, of course wish to see the progress and prosperity of the firm, before investing 
their amount, by going through the financial statements of the firm.  This is to 
safeguard the investment.  For this, this group is eager to go through the accounting 
which enables them to know the safety of investment. 
vi)  Government: Government keeps a close watch on the firms which yield 
good amount of profits.  The state and central Governments are interested in the 
financial statements to know the earnings for the purpose of taxation.  To compile 
national accounting is essential.  
vii) Consumers: These groups are interested in getting the goods at reduced 
price.  Therefore, they wish to know the establishment of a proper accounting control, 
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which in turn will reduce to cost of production, in turn less price to be paid by the 
consumers.  Researchers are also interested in accounting for interpretation. 
viii) Research Scholars: Accounting information, being a mirror of the 
financial performance of a business organization, is of immense value to the research 
scholar who wants to make a study into the financial operations of a particular firm.  
To make a study into the financial operations of a particular firm, the research scholar 
needs detailed accounting information relating to purchases, sales, expenses, cost of 
materials used, current assets, current liabilities, fixed assets, long-term liabilities and 
share-holders funds which is available in the accounting record maintained by the 
firm. 
Check Your Progress 1 
List out five objectives of Accounting.  
Notes:  (a)  Write your answer in the space given below.  
   (b)  Check your answer with the ones given at the end of this Lesson  
        (pp. 13). 
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1.3.5  Functions  of  Accounting 
i) Record Keeping Function: The primary function of accounting relates to 
recording, classification and summary of financial transactions-journalisation, posting, 
and preparation of final statements.  These facilitate to know operating results and 
financial positions.  The purpose of this function is to report regularly to the interested 
parties by means of financial statements.  Thus accounting performs historical 
function i.e., attention on the past performance of a business; and this facilitates 
decision making programme for future activities. 
ii) Managerial Function:Decision making programme is greatly assisted by 
accounting.  The managerial function and decision making programmes, without 
accounting, may mislead.  The day-to-day operations are compared with some pre-
determined standard.  The variations of actual operations with pre-determined 
standards and their analysis is possible only with the help of accounting. 
iii) Legal Requirement function: Auditing is compulsory in case of 
registered firms.  Auditing is not possible without accounting.  Thus accounting 
becomes compulsory to comply with legal requirements.  Accounting is a base and 
with its help various returns, documents, statements etc., are prepared. 
iv) Language of Business: Accounting is the language of business. Various 
transactions are communicated through accounting.  There are many parties-owners, 
creditors, government, employees etc., who are interested in knowing the results of the 
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