CHAPTER

1
Introduction to Accounting
(Meaning and Objectives of Accounting and Accounting Information)

LEARNING OBJECTIVES
This Chapter would enable you to understand:
 Meaning and Definitions of Accounting  Accounting Process
 Attributes (Characteristics) of Accounting  Branches of Accounting
 Objectives of Accounting  Book Keeping, Accounting and Accountancy
 Functions of Accounting  Accounting Information and its Types
 Advantages of Accounting  Qualitative Characteristics of Accounting Information
 Limitations of Accounting  Users of Accounting Information
 Role of Accounting in Business  Systems of Accounting

MEANING AND DEFINITIONS OF ACCOUNTING

Accounting is a systematic process of identifying, measuring, recording, classifying,

summarising, interpreting and communicating financial information to the users. It
gives information on:
(i) the resources available;
(ii) how the available resources have been employed; and
(iii) the results achieved by their use.
It shows the profit earned or loss incurred during the accounting period, value and
nature of assets, liabilities and owners’ equity, i.e., capital.
Since accounting is a medium of communication, it is called the language of business.
“Accounting is the art of recording, classifying and summarising 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.”
—American Institute of Certified Public Accountants
‘‘Accounting is the science of recording and classifying business transactions and
events, primarily of a financial character, and the art of making significant summaries,
analysis and interpretations of those transactions and events and communicating the
results to persons who must make decisions or form judgment.”
—Smith and Ashburne
“Accounting is the process of identifying, measuring and communicating economic
information to permit informed judgments and decisions by users of the information.”
—American Accounting Association
1.2 Double Entry Book Keeping—CBSE XI

ATTRIBUTES (CHARACTERISTICS) OF ACCOUNTING

The definitions of accounting bring to light the following characteristics of accounting:

1. Identification of Financial Transactions and Events: Accounting records only
those transactions and events which can be measured in terms of money. This involves
identifying transactions and events that are part of economic activity, for example,
purchase of raw material or sale of finished goods by a firm. Such transactions are
identified with the help of bills and receipts as evidence of the transactions.
2. Measuring the Identified Transactions: Accounting measures the transactions
and events in terms of a common measurement unit (that is the currency of a country).
In other words, financial transactions and events are measured in terms of money.
Note: An event which cannot be measured in terms of money is not recorded in the books of account.
For example, event like the calibre or quality of management team or appointment of a manager
are not recorded in the books of account.
3. Recording: Accounting is an art of recording business transactions in the books
of account. Recording is the process of recording business transactions of financial
character in the book of original entry, i.e., Journal. This book is further sub-
divided into subsidiary books such as Cash Journal or Cash Book (for recording cash
transactions), Purchases Journal or Purchases Book (for recording credit purchases of
goods), Sales Journal or Sales Book (for recording credit sales), etc.
4. Classifying: Classification is the process of grouping transactions or entries of one
nature at one place. The transactions recorded in the ‘Journal’ or the subsidiary books
are classified or posted to the main book of account known as the Ledger. This book
contains individual account heads under which all financial transactions of a similar
nature are collected. For example, in Rahul’s Account in the Ledger, all business
transactions related to Rahul are posted so that what is ultimately due to Rahul or
due from Rahul can be ascertained.
5. Summarising: This involves presenting the classified data in a manner which
is understandable and useful for internal as well as external users of accounting
statements. This process leads to the preparation of the following statements:
(i) Trial Balance,
(ii) Trading and Profit and Loss Account or Statement of Profit and Loss (in case of
Companies) and
(iii) Balance Sheet.
The above statements are collectively known as Final Accounts or Financial
Statements.
6. Analysis and Interpretation: Analysis and interpretation of the financial data
are carried out so that the users of financial data can make a meaningful judgement
of the profitability and financial position of the business. This helps in planning for
the future in a better way.
7. Communicating: Finally, the accounting function involves communicating the
financial data, i.e., financial statements, to its users. The accounting information must
be provided in time and presented to the users so that appropriate decisions may be
taken at the right time.
Introduction to Accounting 1.3

OBJECTIVES OF ACCOUNTING

The objectives of accounting are:

1. Maintaining Accounting Records: The objective of accounting is to record
financial transactions and events of the organisation in the books of account in a
systematic manner following the principles of accountancy.
2. Determining Profit or Loss: Another objective of accounting is to determine the
net result of transactions for a period. In other words, to determine whether during
the accounting period, the firm has earned a profit or incurred a loss. For this purpose,
a statement called an Income Statement or the Trading and Profit and Loss
Account is prepared. Revenues resulting from the transactions of the period are
recorded in the credit and expenses in the debit. The difference between the two sides
is either profit or loss.
3. Determining Financial Position: Another objective of accounting is to determine
financial position. It is known from the Balance Sheet. Financial position of the
business is as relevant for the users of financial statements as is the Income Statement,
i.e., Profit and Loss Account (Statement of Profit and Loss, in the case of Companies).
4. Facilitating Management: The management often requires financial information
for decision-making, effective control, budgeting and forecasting. Accounting provides
financial information to assist the management in discharging this function.
5. Providing Accounting Information to Users: Yet another objective of accounting
is to provide accounting information to users, both internal and external, who analyse
them as per their needs.
6. Protecting Business Assets: Another objective of accounting is to have records of
assets owned by the business. Accounting maintains record of assets owned by the
business which enables the management to protect them and exercise control.

FUNCTIONS OF ACCOUNTING

1. Maintaining Systematic Accounting Records: The primary function of accounting

is to maintain systematic accounting records of financial transactions and events. It
means that the accounting records should be maintained following the accounting
rules, principles and concepts. It is so because reliable financial statements can be
drawn if proper accounting records are maintained.
2. Preparation of Financial Statements: Financial statements means final accounts
prepared at the end of the accounting period. It includes Income Statement (Profit and
Loss Account) and Position Statement (Balance Sheet). It is an important function of
accounting because the financial statements show the financial performance, i.e., profit
earned or loss incurred during the accounting year and the financial position, i.e.,
Balance Sheet as at the end of the accounting year. Both the statements are important
for all the users for taking decisions.
1.4 Double Entry Book Keeping—CBSE XI

3. Meeting Legal Requirements: Accounting records are accepted as evidence by

the court of law if they are maintained systematically following the accounting rules,
principles and concepts. Besides, the law such as the Companies Act, Income Tax Act,
GST Act, etc., require submissions of returns in the form and period as is prescribed
in the law. The returns can be submitted if the accounting records are maintained
systematically and timely. A systematic accounting record maintained following the
accounting principles and concepts is accepted by the authorities to be correct. Thus,
it is a function of accounting to meet the legal requirements.
4. Communicating the Financial Information: It is yet another function of accounting
to communicate the financial information to the users, which may be internal users or
external users, such as management, banks, employees, government authorities, etc.
5. Assistance to Management: Management often requires financial information
which is given by the accounting records which in turn helps the management in
decision-making. Accounting record should be maintained in such a manner that the
assets owned are known. It will assist the management in protecting the assets and
also exercising control.

ADVANTAGES OF ACCOUNTING

1. Financial Information about Business: Financial performance during the

accounting period, i.e., profit earned or loss incurred and also the financial position at
the end of the accounting period is known through accounting.
2. Assistance to Management: The management makes business plans, takes
decisions and exercises control over the affairs on the basis of accounting information.
3. Replaces Memory: A systematic and timely recording of transactions obviates the
necessity to remember transactions. The accounting record provides the necessary
information.
4. Facilitates Comparative Study: A systematic record enables a businessman to
compare one year’s results with those of other years and locate significant factors
leading to change, if any.
5. Facilitates Settlement of Tax Liabilities: A systematic accounting record
immensely helps in settlement of income tax and Goods and Services Tax (GST)
liabilities, since it is a good evidence of the correctness of transactions.
6. Facilitates Loans: Loan is granted by the banks and financial institutions on the
basis of growth potential which is supported by the performance. Accounting makes
available the information with respect to performance.
7. Evidence in Court: Systematic record of transactions is often accepted by the
Courts as good evidence.
8. Facilitates Sale of Business: If someone desires to sell his business, the accounts
maintained by him will enable the ascertainment of the proper purchase price.
9. Assistance in the Event of Insolvency: Insolvency proceedings involve explaining
many transactions that have taken place in the past. Systematic accounting records
assist a great deal in such situation.
Introduction to Accounting 1.5

10. Helpful in Partnership Accounts: At the time of admission or retirement or

death of a partner or in case of dissolution of the firm, the accounting record is of vital
importance and use because it provides the basis to reach a settlement.
11. Helpful in Decision-making: Accounting helps in taking a large number of
decisions like the amount to be withdrawn by proprietor, the price at which goods
should be sold, etc.

LIMITATIONS OF ACCOUNTING

1. Accounting is not Fully Exact: Accounting is not fully exact in spite of the fact
that most transactions are recorded on the basis of evidence, yet some estimates are
also made for ascertaining profit or loss, for examples, estimating the useful life of an
asset, providing for doubtful debts, net realisable value of closing stock, etc.
2. Unrealistic Information: Accounting information may not be realistic since
accounting statements are prepared following the accounting concepts and conventions.
For example, under the Going Concern Concept, it is taken that business will continue
for a foreseeable future. Accordingly, assets are recorded at cost and depreciated over
their useful life. The assets may not be actually realisable at book value.
3. Accounting Ignores the Qualitative Elements: Accounting is confined to monetary
matters only, therefore, qualitative elements like quality or skills of management and
staff, industrial relations and public relations are ignored.
4. Accounting Ignores the Effect of Price Level Changes: Accounting statements
are prepared at historical cost. Money, as a measurement unit, changes in value
frequently, i.e., it does not remain stable. Accounting, however, presumes that value
of money remains stable. Unless price level changes are considered, accounting
information will not show correct financial results.
5. Accounting May Lead to Window Dressing: The term window dressing means
manipulation of accounts in a way so as to conceal vital facts and present the financial
statements to show a better position than what it actually is. In this situation, income
statement (i.e., Profit and Loss Account) fails to provide a true and fair view of the
result of operations and the Balance Sheet fails to provide a true and fair view of the
financial position of the enterprise.

ROLE OF ACCOUNTING IN BUSINESS

Accounting is a process of identifying, measuring, recording, classifying, summarising,

analysing, interpreting and communicating the financial transaction of a business in
a useful manner.
Following points highlight the role of accounting in the field of business:
1. Maintenance of Systematic Records: The primary role of accounting is to maintain
systematic records of financial transactions in order to ascertain the net profit or loss
for the accounting period and financial position of the business as on a particular date.
1.6 Double Entry Book Keeping—CBSE XI

2. Assistance to Management: Accounting provides assistance to management by

providing financial information for its effective functioning and taking rational
decisions.
3. Facilitates Comparative Study: A systematic record of financial transactions enables
a businessman to compare one year’s results with those of other years and locate
significant reasons leading to change, if any.
4. Evidence in Court: Accounting records are often accepted by courts as good evidence.
5. Others:
(i) Proper accounting records obviates the necessity to remember business transactions.
(ii) Facilitiates Raising Loans.
(iii) Facilitates sale of Business by ascertaining the proper purchase price.
(iv) Facilitates settlement of tax liabilities.

ACCOUNTING PROCESS
Based on the attributes of accounting, the steps of accounting process are as follows:
(i) Identifying Financial Transactions and Events, (ii) Recording, (iii) Classifying,
(iv) Summarising, (v) Analysing and Interpreting and (vi) Communicating.
The accounting process may be explained with the help of a diagram:
Accounting Process
Financial Transactions
Communicating
and Events
to Users

Analysis and Journal

Interpretation 1. Cash Book
2. Purchases Book
3. Sales Book
Summarising 4. Purchases Return Book
1. Trial Balance 5. Sales Return Book
6. Bills Payable Book* Recording
2. Trading and Profit and Loss Account
7. Bills Receivable Book*
(Statement of Profit and Loss)
8. Journal Proper
3. Balance Sheet
Classifying (Posting into Ledger)
*Not in Syllabus.

BRANCHES OF ACCOUNTING

With the changing times, following specialised branches of accounting have emerged
to meet the changed requirements:
Branches of Accounting

Financial Accounting Cost Accounting Management Accounting

Introduction to Accounting 1.7

Financial Accounting
Financial Accounting is that branch of accounting which records financial transactions
and events, summarises and interprets them before communicating the results to the
users. It determines profit earned or loss incurred during an accounting period (usually
a year) and the financial position on the date when the accounting period ends. The
end-product of financial accounting is the Profit and Loss Account for the period ended
(which shows the profit earned or loss incurred) and the Balance Sheet as on the last
day of the accounting period (which shows the financial position).
In short, financial accounting is confined to the preparation of financial statements,
i.e., the Profit and Loss Account and the Balance Sheet, for the users of accounting
information.

Cost Accounting
This branch of accounting is concerned with ascertaining cost of products, operations,
processes or activities. It is that branch of accounting which deals with recording costs
with the objective of ascertaining, reducing and controlling costs.

Management Accounting
Management Accounting is the most recently developed branch of accounting. It is
concerned with generating accounting information relating to funds, costs, profits, etc.,
as it enables the management in decision-making. We may say that Management
Accounting addresses the needs of a single user group, i.e., the management.

BOOK KEEPING, ACCOUNTING AND ACCOUNTANCY

The terms ‘Book Keeping’ and ‘Accounting’, often considered as same is not correct. The
two terms are different from each other. Accounting is a wider concept and includes
Book Keeping.
Meaning of Book Keeping
Book Keeping is a part of accounting being a process of recording financial transactions
and events in the books of account. Thus, Book Keeping involves:
1. Identifying financial transactions and events,
2. Measuring them in terms of money,
3. Recording the identified financial transactions and events in the books of account,
and
4. Classifying recorded transactions and events, i.e., posting them into Ledger accounts.
Definitions of Book Keeping
“Book Keeping is an art of recording in the books of account the monetary aspect of
commercial and financial transactions.” —Northcott
“Book Keeping is an art of recording business dealings in a set of books.” —J.R. Batliboi
1.8 Double Entry Book Keeping—CBSE XI

“Book Keeping is the science and art of recording correctly in the books of account all those
business transactions that result in the transfer of money or money’s worth.” —R.N. Carter
“Book Keeping is the art of recording business transactions in a systematic manner.”
—A.N. Rosen Kampff
Accounting
Accounting is a wider concept than Book Keeping. It starts where Book Keeping ends.
In other words, Book Keeping is a part of accounting.
Difference between Book Keeping and Accounting

Basis Book Keeping Accounting

1. Scope Book Keeping is concerned with identifying financial Accounting is concerned with summarising the
transactions and events; measuring them in money recorded transactions and events, interpreting them
terms; recording them in the books of account and and communicating the results thereof.
classifying them.
2. Stage It is a primary stage. It is the basis for accounting. It is a secondary stage. It begins where Book
Keeping ends.
3. Objective The objective of Book Keeping is to maintain The objective of Accounting is to ascertain net
systematic records of financial transactions. results of operations and financial position and to
communicate information to the interested parties.
4. Nature of Job This job is routine in nature. This job is analytical and dynamic in nature.

5. Performance It being a routine work is performed by junior It being a specialised function is performed by
staff. senior staff.
6. Special Book Keeping is mechanical in nature and, thus, Accounting requires special skills and ability to
Skills does not require special skills. analyse and interpret.

Accountancy
Accountancy is a systematic knowledge of accounting. It explains how to deal with
various aspects of accounting. It educates us how to maintain the books of account
and how to summarise the accounting information and communicate it to the users.
In the words of Kohler, accountancy refers to the entire body of the theory and practice
of accounting.
Accounting and Accountancy
Accountancy is knowledge whereas accounting is the action or process. Accounting
process is carried out on the basis of the rules and principles framed by accountancy.
Thus, it may be said that accountancy is knowledge of accounting and accounting is
the application of accountancy.

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 economic decisions.” —Accounting Principles Board
Introduction to Accounting 1.9

As an information system, accounting collects financial data, records it in the books

of account, classifies and summarises it to produce financial information that is
communicated to its users. Accounting begins with the identification of transactions of
financial nature and ends with the preparation of financial statements (i.e., Income
Statement and Balance Sheet). Each step in the process of accounting generates
information. Generation of information is not an end in itself, it is a way to facilitate
the communication of information to users of accounting information.
Types of Accounting Information
Accounting information refers to the financial statements generated through the process
of Book Keeping, use of which helps the users to arrive at decisions. The financial
statements so generated are the Income Statement, i.e., Profit and Loss Account and
the Position Statement, i.e., Balance Sheet. The information made available by these
statements can be categorised into the following:
1. Information Relating to Profit or Surplus;
2. Information Relating to Financial Position; and
3. Information about Cash Flow.
Let us now discuss these in detail.
1. Information Relating to Profit or Surplus: The Income Statement makes
available the accounting information about the profit earned or loss incurred as a
result of business operations or otherwise during an accounting period.
A firm prepares Trading Account, a part of the Profit and Loss Account, which provides
information about Gross Profit or Gross Loss and Profit and Loss Account provides
information about the Net Profit or Net Loss.
2. Information Relating to Financial Position: The Position Statement, i.e.,
the Balance Sheet makes available the information about the financial position of
the entity. The Position Statement provides information about the assets owned by
the entity, amounts receivable and the cash and bank balances held by it. These are
represented in the liabilities by the amounts owed by the entity towards loans, creditors
and amounts payable, and capital.
3. Information about Cash Flow: Cash Flow Statement is a statement that shows flow,
both inflow and outflow, of cash during a specific period. It is of immense use as many
decisions such as payment of liabilities, payment of dividend and expansion of business,
etc., are based on availability of cash.

QUALITATIVE CHARACTERISTICS OF ACCOUNTING INFORMATION

Qualitative characteristics are attributes that make the accounting information useful
to users. The qualitative characteristics are:
1. Reliability: Accounting information must be reliable. Reliability of information
means it is verifiable, free from bias and material error.
2. Relevance: Accounting information must be relevant to the user. Information is
relevant if it meets the needs of the users in decision-making.
3. Understandability: Understandability means that the information provided
through the financial statements must be presented in a manner that the users are
able to understand it.
1.10 Double Entry Book Keeping—CBSE XI

4. Comparability: Comparability means that the users should be able to compare

the accounting information of an enterprise of the period either with that of other
periods, known as intra-firm comparison or with the accounting information of
other enterprises, known as inter-firm comparison.

USERS OF ACCOUNTING INFORMATION

Users of Accounting Information may be categorised into Internal Users and

External Users.
Internal Users
(i) Owners: Owners contribute capital in the business and thus are exposed to
maximum risk. Naturally, they are interested in knowing the profit earned or loss
incurred by the business besides the safety of their capital. The financial statements
give the information about profit or loss and financial position of the business.
(ii) Management: The management makes extensive use of accounting information
to arrive at informed decisions such as determination of selling price, cost
controls and reduction, investment into new projects, etc.
(iii) Employees and Workers: Employees and workers are entitled to bonus at
the year-end, which is linked to the profit earned by an enterprise. Therefore,
the employees and workers are interested in financial statements. Besides, the
financial statements also reflect whether the enterprise has deposited its dues
towards Employees’ Provident Fund and Employees’ State Insurance, etc., or not
with the appropriate authorities.

External Users
(i) Banks and Financial Institutions: Banks and financial institutions are an
essential part of any business as they provide loans to businesses. Naturally, they
watch the performance of the business to know whether it is making progress as
projected to ensure the safety and recovery of the loan advanced and payment
of interest. They assess it by analysing the accounting information.
(ii) Investors and Potential Investors: Investment involves risk and also the
investors do not have direct control over the business affairs. Therefore, they
rely on the accounting information available to them and seek answers to
questions such as—what is the earning capacity of the enterprise and how safe
is their investment?
(iii) Creditors: Creditors are those parties who supply goods and/or services on
credit. It is a common business practice that a large number of suppliers remain
invested in credit sales. Before granting credit, creditors satisfy themselves
about the credit-worthiness of the business. The financial statements help them
immensely in making such an assessment.
(iv) Government and its Authorities: The government makes use of financial
statements to compile national income accounts and other information. The
information available to it enables it to take policy decisions.
Introduction to Accounting 1.11

Government levies varied taxes such as custom duty, GST and income tax.
These government authorities assess correct tax dues after an analysis of the
financial statements.
(v) Researchers: Researchers use accounting information in their research work.
(vi) Consumers: Consumers require accounting information for establishing good
accounting control so that cost of production may be reduced with the resultant
reduction in the prices of products they buy. Sometimes, prices of some products
are fixed by the government, so it needs accounting information to fix fair prices
so that consumers and producers are not exploited.
(vii) Public: They want to see the business running since it makes substantial
contribution to the economy in many ways, e.g., employment of people, patronage
to suppliers, etc. Thus, financial accounting provides useful financial information
to various user groups for decision-making.

IS ACCOUNTING AN ART OR A SCIENCE?

Accounting is an Art as well as a Science. Art is the technique which helps us to achieve
our desired objectives. Accounting is an art of recording, classifying and summarising
financial transactions. It helps us in knowing the profitability and financial position
of the business.
Any organised knowledge based on certain basic principles is a ‘science’. Accounting is
also a science as it is an organised knowledge based on certain basic principles.

SYSTEMS OF ACCOUNTING

The systems of recording transactions in the books of account are two namely:
1. Double Entry System, and 2. Single Entry System.
1. Double Entry System
Double Entry System of accounting is a system of accounting under which both, debit
and credit, aspects of accounting are recorded. A transaction has two aspects—Debit
and Credit—and at the time of recording a transaction, one aspect is recorded on the
debit side and other aspect is recorded on the credit side. For example, at the time of
cash purchases, goods are received and in return cash is paid. In the transaction, two
aspects are involved, i.e., receiving goods and paying cash and under the Double Entry
System, both these aspects are recorded. One part, i.e., the receipt of goods, is debited
and the second part, i.e., payment of cash, is credited. In other words, if only two
accounts are affected (as in the purchase of building for cash), one account, Building,
is debited and the other account, Cash, is credited for the same amount. If more than
two accounts are affected by a transaction, the sum of the debit entries must be equal
to the sum of the credit entries. Thus, on any day, total amount debited is equal to
the total amount credited.
Thus, we can define Double Entry System as: “The system which recognises and records
both aspects of a transaction. The Double Entry System has proved to be a scientific
and complete system of accounting.”
1.12 Double Entry Book Keeping—CBSE XI

Features of the Double Entry System

1. It maintains a complete record of each transaction.
2. It recognises two-fold aspect of every transaction, viz., the aspect of receiving (value
in) and the aspect of giving (value out).
3. In this system, one aspect is debited and the other aspect is credited following the
rules of debit and credit.
4. Since one aspect of a transaction is debited and the other is credited, the total of
all debits is always equal to total of all credits. It helps in establishing arithmetical
accuracy by preparing the Trial Balance.

Stages of Double Entry System

A complete system of double entry book keeping has following three stages:
1. Recording the transactions in the Journal.
2. Classifying transactions in the Journal by posting them to the appropriate ledger
accounts and then preparing the Trial Balance.
3. Closing the books and preparing the final accounts.
All these stages shall be discussed one by one in succeeding chapters.

Advantages of the Double Entry System

The advantages of Double Entry System are:
(i) Scientific System: Double Entry System is a scientific system of recording
business transactions as compared to other systems of Book Keeping. It helps
attain the objectives of accounting.
(ii) Complete Record of Transactions: Under the system, both sides of a
transaction are recorded. It is a complete record as it results in showing correct
income or loss, assets and liabilities.
(iii) Arithmetical Accuracy of Accounts is Ensured: By the use of this system,
arithmetical accuracy of the accounting work can be established through the
Trial Balance.
(iv) Determining Profit or Loss: Profit earned or loss incurred during a period
can be determined by preparing Profit and Loss Account.
(v) Knowledge of Financial Position: Financial position of the firm or the institution
can be ascertained at the end of each period by preparing the Balance Sheet.
(vi) Full Details for Purposes of Control: The system permits accounts to be
maintained in as much detail as necessary and, therefore, provides significant
information for purposes of control, etc.
(vii) Comparative Study is Possible: Results of one year may be compared with
those of previous years and reasons for the change may be ascertained.
(viii) Helps Management in Decision-making: Management may be able to obtain
good information for its work, especially in making decisions.
Introduction to Accounting 1.13

(ix) Detection of Frauds and Misappropriations: Frauds and misappropriations

are minimised since complete information about all assets and liabilities is available.
It is because of these advantages that the Double Entry System is used extensively
in all countries.

2. Accounts from Incomplete Records or Single Entry System

Account from Incomplete Records or Single Entry System of recording transactions in
the books of account may be defined as an incomplete Double Entry System. In this
system, all transactions are not recorded on double entry basis. In some transactions,
both aspects of the transactions are recorded, while in others, either one aspect is
recorded or not recorded at all. Instead of maintaining all the accounts, only Personal
Accounts and Cash Book are maintained under this system. The accounts maintained
under this system are incomplete and unsystematic and, therefore, not reliable.
Since all transactions are not recorded under this system on double entry basis, it is
not possible to prepare a Trial Balance. As a result, the Profit and Loss Account and
the Balance Sheet cannot be prepared.

QUESTIONS

Higher Order Thinking Skills (HOTS) Questions

Q. 1. Accounting records transactions and events that can be measured in money terms.
Is this, in your opinion, a limitation of accounting or an advantage? Give reasons.
Ans. Yes. Accounting records only financial transactions and events. It is an advantage as
transactions of diverse nature are recorded using a common yardstick, i.e., money.
But there are other important transactions and events which may have far-reaching
effect on business. They are not recorded because they cannot be measured in money
terms. For example, production loss due to labour strike. Thus, it is a limitation to
that extent.
Q. 2. Resignation by a Marketing Manager is not recorded in the books of account. Why?
Ans. It is not recorded because it cannot be measured in money terms.
Q. 3. Book Keeping is not a part of accounting. Do you agree with the statement?
Ans. No. Book Keeping is a part of accounting. Two processes of accounting, i.e., collecting and
recording of financial transactions and events are the processes of Book Keeping.
Q. 4. Is the basic objective of Book Keeping to maintain systematic records or to ascertain net
results of operations of financial transactions? (MSE Chandigarh 2011)
Ans. The basic objective of Book Keeping is to maintain systematic records of financial transactions.
Q. 5. Recording the transactions and events correctly and preparing financial statements are
the only objectives of accounting. Do you agree?
Ans. No. Besides recording them correctly and preparing financial statements, accounting has
the objectives of facilitating management control and communicating financial information
to the users.
1.14 Double Entry Book Keeping—CBSE XI

Q. 6. Which type of accounting information shows profit earned or loss incurred?

Ans. Profit and Loss Account (in case of firms) and Statement of Profit and Loss (in case of
Companies) shows profit earned or loss incurred during the accounting period.
Q. 7. State whether the following statements are True or False with reason:
(i) Accounting may be influenced by the personal judgment.
(ii) Financial Statements are not comparable.
(iii) Accounting Information must be presented in such a way that only accounting
people understand it.
(iv) Accounting Information must be reliable.
Ans. (i) True: Accountant has to exercise his personal judgment in respect of various items
such as estimating useful life of an asset to charge depreciation.
(ii) False: Financial Statements of two or more years are comparable or of different

firms in the same industry if they adopt the same accounting policies year to year.
(iii) False: Accounting Information must be presented in a simple and logical manner
that they are understood easily by the users.
(iv) True: Accounting Information must be reliable, i.e., the information must be
factual and verifiable.

Multiple Choice Questions (MCQs)

Select the correct alternative:

(i) Book Keeping and Accounting
(a) means same and are used interchangeably.
(b) does not mean same and are not used interchangeably.
(c) means both (a) and (b).
(d) None of the above.
(ii) Accounting
(a) includes Book Keeping. (b) does not include Book Keeping.
(c) may or may not include Book Keeping. (d) None of these.
(iii) Which of the following will not be recorded in the books of account?
(a) Sales of goods (b) Payment of salary
(c) Quality of staff (d) Purchase of Goods
(iv) Book Keeping is concerned with
(a) recording financial data relating to business operations.
(b) designing for systems recording, classifying and summarising recorded data.
(c) interpreting data for internal and external users.
(d) All of the above.
(v) Which is the last step of accounting as a process of information?
(a) Recording the transaction
(b) Preparation of financial statements
(c) Communication of information
(d) Analysis and interpretation of information
Introduction to Accounting 1.15

(vi) Basic function of financial accounting is to

(a) record all business transactions. (b) interpret financial data.
(c) assist the management. (d) None of these.
(vii) Transactions are posted into Ledger Account from
(a) Vouchers. (b) Journal book.
(c) Bank Statement. (d) None of these.
(viii) Which of the following is not a business transaction?
(a) Purchase of goods for resale amounted to ` 50,000
(b) Paid salaries and wages amounted to ` 10,000
(c) Paid rent for office premises ` 5,000
(d) Purchased a LCD for personal use
(ix) Which of the following transactions will not be recorded in the books of account?
(a) Purchased a LCD for personal use, paying the amount from personal bank account.
(b) Purchased machinery for manufacture.
(c) Purchased machinery for resale.
(d) Paid salaries and wages.
(x) Accounting does not show the realisable value of business. It is a/an
(a) limitation of Accounting. (b) advantage of Accounting.
(c) Both (a) and (b). (d) None of these.
(xi) Which of the following is not an internal user of financial statements?
(a) Board of Directors (b) Managers
(c) Employees (d) Lenders
(xii) Which of the following is not a characteristic of accounting?
(a) Recording non-monetary transactions (b) Classifying
(c) Analysis (d) Summarising
(xiii) Which of the following is a limitation of accounting?
(a) Assistance to Management (b) Replaces Memory
(c) Unrealistic Information (d) Evidence in Court
(xiv) Cost of Goods Manufactured is determined by
(a) Financial Accounting. (b) Cost Accounting.
(c) Management Accounting. (d) Human Resource Accounting.
(xv) Qualitative characteristic of Accounting includes
(a) Reliability and Relevance.
(b) Understandability and Comparability.
(c) Both (a) and (b).
(d) None of the above.
(xvi) Which of the following is not a qualitative characteristic of accounting information?
(a) Reliability (b) Understandability
(c) Comparability (d) Materiality
1.16 Double Entry Book Keeping—CBSE XI

(xvii) Which qualitative characteristic of accounting information is reflected when accounting

information is clearly presented?
(a) Reliability (b) Relevance
(c) Comparability (d) Understandability
(xviii) Which external user of accounting information is most interested in knowing the
long-term solvency position of the firm?
(a) Employees (b) Management
(c) Bank and Financial Institutions (d) Researchers
[(i) (b); (ii) (a); (iii) (c); (iv) (a); (v) (c); (vi) (a); (vii) (b); (viii) (d);
(ix) (a); (x) (a); (xi) (d): (xii) (a); (xiii) (c); (xiv) (b); (xv) (c); (xvi) (d); (xvii) (d); (xviii) (c).]

Very Short Answer Type Questions

Q. 1. Give the meaning of ‘Accounting’. (Delhi 2011)

Ans. Accounting is a process of identifying financial transactions, measuring them in
money terms, recording them in primary books, classifying, summarising, analysing,
interpreting them and communicating the results to the users.
Q. 2. List any two functions of Accounting.
Ans. Two functions of accounting are:
(i) Identifying financial transactions; and (ii) Recording them in the books of account.
Q. 3. What are the steps involved in the process of accounting?
Ans. The steps involved in the process of accounting are:
(i) Identifying financial transactions and events;
(ii) Recording in the books of account;
(iii) Classifying the recorded entries;
(iv) Preparation of Trial Balance;
(v) Preparation of Final Accounts;
(vi) Analysis and Interpretation of Financial Statements; and
(vii) Communicating to the users.
Q. 4. Name the branch of commerce, which keeps a record of monetary transactions in a set
of books. (MSE Chandigarh 2009)
Ans. Book Keeping.
Q. 5. Define Book Keeping.
Ans. Book Keeping is an art of recording in the books of account the monetary aspect of
commercial and financial transactions.
Q. 6. What is the function of Book Keeping?
Ans. The function of Book Keeping is to identify financial transactions and events, measuring
them in money terms, recording them in the books of account and classifying the recorded
transactions.
Introduction to Accounting 1.17

Q. 7. Name any two objectives of Accounting. (KVS 2010)

Ans. The two objectives of Accounting are:
(i) Ascertaining profit or loss; and (ii) Ascertaining financial position.
Q. 8. What are the advantages of Accounting? (Any Two)
Ans. Two advantages of Accounting are:
(i) Financial performance and position is known; and
(ii) Assist management in making business plans, take decisions and exercise control.
Q. 9. What are the limitations of Accounting? (Any Two) (Delhi 2008, KVS 2010)
Ans. The limitations of Accounting are:
(i) Non-financial informations are not recorded; and
(ii) It ignores price level changes.
Q. 10. Name any one external user of Accounting information. (Delhi 2009)
Ans. Creditors.
Q. 11. What are the two accounting systems to record financial transactions in the books of account?
Ans. The two accounting systems are:
(i) Double Entry System; and
(ii) Accounts from Incomplete Records or Single Entry System.
Q. 12. Name the external user of accounting information from whom the firm purchases goods
on credit. (KVS 2012)
Ans. Supplier of goods.
Q. 13. Is the basic objective of Book Keeping to maintain systematic records or to ascertain net
results of operations of financial transactions? (MSE Chandigarh 2012)
Ans. The basic objective of Book Keeping is to maintain systematic records of financial transactions.
Q. 14. Name the external users directly concerned with accounting information.
(MSE Chandigarh 2015)
Ans. (i) Creditors, (ii) Bankers or Financial Institutions, and
(iii) Government and its Authorities.

Short Answer Type Questions

1. Explain the meaning of Accounting. (Delhi 2011)

2. What is the process of Accounting?
3. Define Book Keeping. What is the function of Book Keeping?
4. What is the difference between Book Keeping and Accounting? (KVS 2003, 2006)
5. Discuss briefly the types of Accounting Information.
6. Why the following parties are interested in Accounting Information:
(a) Investors; (b) Government? (MSE Chandigarh 2011)
1.18 Double Entry Book Keeping—CBSE XI

7. State what is the end-product of Financial Accounting. (MSE Chandigarh 2008)

[Hint: Financial Statements, i.e., (i) Income Statement, (ii) Balance Sheet.]
8. What are the attributes (features) of Accounting? (MSE Chandigarh 2006)
9. What do you mean by Accounting? What are its main objectives? (KVS 2007)
10. What are the advantages of Accounting? (MSE Chandigarh 2003; Delhi 2004)
11. Explain the primary objectives of Accounting. (MSE Chandigarh 2009)
12. Explain any four objectives of Accounting. (KVS 2012)
13. Define Accounting. Explain any two limitations of Accounting.
(MSE Chandigarh 2007; KVS 2008)
14. What is Accounting? Explain four of its functions. (Delhi 2001, 2002)
15. What do you mean by Accounting? Explain in brief any four advantages of Accounting.
(Delhi 2010)
16. What do you mean by Financial Accounting? Explain the four main limitations of Financial
Accounting. (Delhi 2004)
17. Accounting provides information about the profitability and financial soundness of a concern.
In addition, it provides various other valuable information also. However, accounting has
certain limitations. Explain any three of such limitations. (KVS 2015; KVS 2016)
18. What do you mean by Financial Accounting? Explain its one main function. (Delhi 2008)
19. Write a short note on Double Entry System of Accounting.

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