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Introduction to Accounting Chapter Notes | Accountancy Class 11 - Commerce PDF Download

Introduction

  • According to the American institute of certified public accountants, “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.”
  • Accounting principles board (APB) defines accounting as follows, “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 making reasoned choices among alternative courses of action.”
  • In simple words, accounting is the process of identifying, recording, classifying, summarizing, interpreting, and communicating financial information to the users for judgment and decision marking.

Introduction to Accounting Chapter Notes | Accountancy Class 11 - Commerce

Objectives of Accounting

  1. To keep a systematic and complete record of business transactions in the books of accounts according to specified principles and rules to avoid the possibility of omissions 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 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.

Introduction to Accounting Chapter Notes | Accountancy Class 11 - Commerce


Question for Chapter Notes - Introduction to Accounting
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What is the main purpose of accounting?
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Importance of Accounting:

  1. Facilitates decision-making: Helps in making informed decisions based on financial data.
  2. Measuring performance: Evaluates the financial performance and position of a business.
  3. Legal compliance: Ensures compliance with legal and regulatory requirements.
  4. Accountability: Provides accountability to stakeholders such as investors, creditors, and government authorities.

Advantages and Limitations of Accounting

Introduction to Accounting Chapter Notes | Accountancy Class 11 - Commerce


Window dressing refers to the manipulation of financial statements or other accounting records by a company in order to make its financial performance or position appear more favorable than it actually is. This practice is often done with the intention of misleading investors, creditors, or other stakeholders about the true financial health of the company. 

Bookkeeping - The basis of Accounting

  • Bookkeeping 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. 
  • Bookkeeping is the recording phase, while accounting is concerned with the summarizing phase of an accounting system. 
  • The distinction between the two is as under:

Introduction to Accounting Chapter Notes | Accountancy Class 11 - Commerce

Types of accounting Information

Accounting information can be categorized into the following:

  1. Information relating to profit or loss i.e., income statement. It shows the net result of the 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 form part of the balance sheet and income statement to give details of various items shown in the Profit and loss statement and Balance sheet.

Question for Chapter Notes - Introduction to Accounting
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Which subfield/branch of accounting is concerned with presenting accounting information to help management in decision making?
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Sub-fields/Branches of Accounting

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

1. Cost Accounting:- It is that subfield/branch of accounting which is concerned with the ascertainment of total cost and per unit cost of goods or services produced/provided by a business firm.

2. 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.

Interested users/parties of accounting information and their needs

There are a number of users interested in knowing about the financial soundness and profitability of the business.

Introduction to Accounting Chapter Notes | Accountancy Class 11 - Commerce

 Tax Authorities in order to make the assessment of due taxes require true and fair disclosure of accounting information.

Employees concerned with Profitability of concern about claiming higher wages and bonuses, whether their dues (PF, ESI, etc.) are deposited regularly.

Others Customers, researchers, etc., may seek different information for different reasons.

Qualitative characteristics of accounting information

Accounting information is useful for interested users only if it possesses the following characteristics:

  1. Reliability: This means the information must be based on facts and be verified through source document 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 years figures of business itself and other firm’s data.

Accounting Equation and Financial Statements

Accounting Equation

  • Assets = Liabilities + Equity 
  • Assets: Resources owned by the business.
  • Liabilities: Debts and obligations of the business.
  • Equity: Represents the owner's claim on the assets after deducting liabilities.

Financial Statements

  • Balance Sheet: Presents the financial position of a business at a specific point in time, showing assets, liabilities, and equity.
  • Income Statement: Reports the financial performance of a business over a period, showing revenues, expenses, and net income.
  • Cash Flow Statement: Summarizes the cash inflows and outflows from operating, investing, and financing activities.

Question for Chapter Notes - Introduction to Accounting
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What is the term used for an economic activity that affects the financial position of a business and can be measured in terms of money?
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Basic accounting Terms

  1. Business transaction- An economic activity that affect financial position of the business and can be measured in terms of money e.g., purchase of goods for use in business.
  2. Account- Account refers to a summarized record of relevant transaction 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.
  3. 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.
  4. Drawings- The money or goods or both withdrawn by owner from business for personal use is known as drawings. Example: purchase of car for personal use by withdrawing money from business.
  5. 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 held 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.
  6. 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.
  7. Owner's Equity: Owner's equity, also known as shareholder's equity or net assets, represents the owner's claim on the assets of a business after deducting its liabilities. It is one of the fundamental components of the balance sheet, which provides a snapshot of a company's financial position at a specific point in time. 
  8. 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 operation like money received by sale of fixed assets.
  9. Expenses- Costs incurred by a business for earning revenue are known as expenses. For example: rent, wages, salaries, interest etc.
  10. Expenditure- Spending money or incurring a liability for acquiring assets, goods or services is called expenditure. The expenditure is classified as:
    1. Revenue expenditure: If the benefit of expenditure is received within a year, it 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.
  11. Profit- The excess of revenues over its related expenses during an accounting year is profit.
    Profit=Revenue-Expenses
  12. Gain- A non- recurring profit from event or transaction incidental to business such as sale of fixed assets, appreciation in the value of an assets etc.
  13. Loss- The excess of expenses of a period over its related revenue is termed as loss.
    Loss= Expenses -Revenue
  14. 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.
  15. Purchase- The term 'purchase' 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 concerns, it is purchase of raw materials. Purchases may be cash purchases or credit purchases.
  16. Purchase return- When purchased goods are returned to the suppliers, these are known as purchase return.
  17. Sales- Sales are total revenues from goods sold or serviced provided to customers. Sales may be cash sales or credit sales.
  18. Sales return- When sold goods are returned from customer due to any reasons is known as sales return.
  19. 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.
  20. 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.
  21. 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.
  22. 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.
  23. 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.
  24. Income- Income is a wider term which includes profit also. Income means increase in the wealth of the enterprise over a period of time.
  25. Stock- The goods available with the business for sale on a particular date is known as stock.
  26. Cost- Cost refers to expenditures incurred in acquiring manufacturing and processing goods to make it saleable.
  27. 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.

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FAQs on Introduction to Accounting Chapter Notes - Accountancy Class 11 - Commerce

1. What are the objectives of accounting?
Ans. The objectives of accounting are to provide financial information about a business entity, to assist in decision-making, to facilitate the monitoring and control of financial resources, and to ensure compliance with legal and regulatory requirements.
2. What are the advantages of accounting?
Ans. Accounting provides several advantages such as providing a clear financial picture of a business, enabling effective decision-making, facilitating financial planning and budgeting, ensuring transparency and accountability, and aiding in the prevention and detection of fraud.
3. What are the limitations of accounting?
Ans. Accounting has certain limitations, including the reliance on historical data, the subjectivity and judgment involved in the preparation of financial statements, the inability to measure certain intangible assets accurately, the lack of consideration for non-financial factors, and the possibility of manipulation or misinterpretation of financial information.
4. What is the role of bookkeeping in accounting?
Ans. Bookkeeping is the recording, organizing, and classifying of financial transactions of a business. It serves as the foundation of accounting by providing accurate and systematic records of financial activities. Bookkeeping involves tasks such as maintaining journals, ledgers, and financial statements, reconciling accounts, and ensuring the accuracy of financial data.
5. What are the types of accounting information?
Ans. The types of accounting information include financial statements (such as the balance sheet, income statement, and cash flow statement), budgets and forecasts, cost reports, tax returns, management reports, and audit reports. These different types of information serve various purposes and provide insights into the financial performance and position of a business.
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