Class 11

Accountancy
Chapter - 1

INTRODUCTION TO
ACCOUNTING

Ajith Kanthi Wayanad

www.hssplustwo.blogspot.com
 Meaning & Definition of Accounting
Accounting is an information system which
receives data inputs, process the same and give
its output in the form of information which is
useful for decision making

Accounting is also called the language of business

Father of Accounting

Luca Pacioli
Italian Mathematician
 Meaning & Definition of Accounting

Accounting is the art of recording, classifying,

summarizing, analyzing and interpreting the
financial transactions and communicating the
results to the interested persons
 Some relevant aspects of Accounting

1. Economic events
It means the business transactions
It may be external or internal

a. External Event b. Internal Event

 Some relevant aspects of Accounting

a) External event
Transfer of something of value between two or
more entities

Examples: Payment of wages to employees, Purchase of

goods from a supplier, Sale of goods to a customer,
Receipt of income by way of commission etc.
 Some relevant aspects of Accounting

b) Internal event
It is an economic event takes place within the
organization

Examples: Issue of raw materials from stores to production

department, Supply of stationery items to the office, Return of
raw materials from production department to stores etc.
 Some relevant aspects of Accounting

2. Identification, measurement, recording and

communication
a) Identification:
It involves the identification of events that are to be recorded
in the books

Identification of events

It implies observing and selecting the events that may be recorded

 Some relevant aspects of Accounting

2. Identification, measurement, recording and

communication
b) Measurement
Transactions that can be measured in terms of
money are only recorded

Measurable
Eg., Sale of goods, Purchase of goods, Purchase of Machinery etc.
 Some relevant aspects of Accounting

2. Identification, measurement, recording and

communication
c) Recording
After identification and measurement of economic
events, they are recorded in a chronological order

Recording
 Some relevant aspects of Accounting

2. Identification, measurement, recording and

communication
d) Communication
After identification and measurement of economic
events, they are recorded in a chronological order

Communication
 Some relevant aspects of Accounting

3. Organisation
It means an entity that stands for performing business
activities either for profit or for not-for-profit

It can be a sole proprietorship, partnership, co-operative society,

company, Municipal Corporation or any other association of persons
 Some relevant aspects of Accounting

4. Interested users of Accounting Information

Many users need financial information for decision
making purposes

Investors Management

These users can be divided into two categories such as Internal

Users and External Users
 Some relevant aspects of Accounting

a) Internal Users:
It includes Chief Executive, Financial Officer, Vice
President, Business Unit Managers, Plant Managers,
Store Managers, Line Supervisors, etc.
 Some relevant aspects of Accounting

b) External Users:
1. Present and potential investors (shareholders),
2. Creditors (Banks and other Financial Institutions,
Debenture holders and other lenders),
3. Tax Authorities, Regulatory Agencies (Department of
Company Affairs, Registrar of Companies, Securities
Exchange Board of India),
4. Labour Unions, Trade Associations,
5. Stock Exchanges,
6. Customers etc Lenders
Branches of Accounting

Ajith Kanthi Wayanad

www.hssplustwo.blogspot.com
 Branches of Accounting

a) Financial Accounting
It is the original form of accounting, which is used to find out
the results of operations (success or failure or Profit / Loss)
and to provide information about the financial position
(soundness or weakness) of the business

Financial
Accounting
 Branches of Accounting

b) Management Accounting
It is concerned with accounting information that is useful to
management for decision making

Cost
Accounting

It may include the reports of available cash, monthly sales,

amount of orders in hand, state of accounts payable and
receivables, stock of raw materials etc.
 Branches of Accounting

c) Cost Accounting
It is the process of accounting for cost, by which costs of
products or services are ascertained and controlled

Management
Accounting
Qualitative Characteristics of
Accounting Information
Qualitative Characteristics of Accounting Information

1. Reliability
Accounting information is considered to be
reliable if it is free from bias and faithfully
represents the facts
Qualitative Characteristics of Accounting Information

2. Relevance
The information to be relevant and it must be
available in time
Qualitative Characteristics of Accounting Information

3. Understandability
It must be understood by those to whom it is
communicated
Qualitative Characteristics of Accounting Information

4. Comparability
It means that the accounting reports should be
comparable with other firms to identify similarities or
differences

To achieve this, the period, the format, unit of

measurement etc. should be the same
Objectives of
Accounting
Ajith Kanthi Wayanad
www.hssplustwo.blogspot.com
 Objectives of Accounting

1. To maintain business records

Business managers cannot remember every transaction
or event that has taken place in their business, hence it
is to be recorded, which will be helpful in taking
decisions and to find out errors if any in future
Loss of memory
 Objectives of Accounting

2. Calculation of profit or loss

Accounting helps in ascertaining profit or loss to the
enterprise by preparing a profit and loss account
 Objectives of Accounting

3. Ascertainment of financial position

It implied the financial strength of the business in term of
assets and liabilities and it is revealed by preparing a
balance sheet
 Objectives of Accounting

4. Providing information to users

The accounting information obtained from records
should be communicated to interested parties like
owners, creditors, bankers, government, employees etc.
Role of Accounting

Ajith Kanthi Wayanad

www.hssplustwo.blogspot.com
 Role of Accounting
Accounting as an information system collects and
communicates economic information about an
enterprise to a wide variety of interested parties
 Role of Accounting
Accounting information relates to the past
transactions and is quantitative and financial in
nature, it does not provide qualitative and non-
financial information

These limitations of accounting must be kept in view while

making use of the accounting information
Basic Accounting Terms
 Basic Accounting Terms
1. Entity
Entity means a reality that has a definite individual existence
Business entity means a specifically identifiable business
enterprise like Super Bazaar, Jewellers, ITC Limited, etc.

An accounting system is always devised for a specific business

entity (also called accounting entity).
 Basic Accounting Terms
2. Transaction
The dealing of a businessman with an external party
which can be expressed in monetary terms is called
business transactions

In other words, all economic events in a business

organization is known as transactions
 Basic Accounting Terms
3. Assets
These are the economic resources or material things or
properties of the business including the amounts due
from others which can be expressed in monetary terms

It can be broadly classified into two, current assets and

non-current assets
 Basic Accounting Terms
4. Liabilities
Liabilities are the obligations which an enterprise owes
It represents the amount payable by the business in future

Short Term Liability Long Term Liability

Liabilities are classified as current liabilities and non-

current liabilities. Eg: Creditors, Bank Loan etc.
Distinction between current and non-
current items:
1. Current assets or liabilities are involved in
operating cycle.
2. Current assets or liabilities are
realised/settled within 12 months.
3. Current items are primarily for trading.
4. Current items are cash or cash equivalent.
 Basic Accounting Terms
5. Capital
It is the investment made by the owners for use in
the business

It is also called owner’s equity

 Basic Accounting Terms
6. Sales
It represents total revenue earned by a business
through sale of goods or services to customers

It includes cash sales and credit sales

 Basic Accounting Terms
7. Revenues (Income)
It represents the amount, a business earns through the
sale of its products or providing services to customers

It also includes earnings like interest received, dividend

received, rent received, commission received, discount
received etc.
 Basic Accounting Terms
8. Expenses
It represents the amount spent to earn revenue

Salary Stationery

Eg; rent, wages, salaries etc.

 Basic Accounting Terms
9. Expenditure
Spending money or incurring a liability for some benefit,
service or property received is called expenditure

Eg: Purchase of machinery, purchase of furniture, etc.

If the benefit of expenditure is exhausted within
a year, it is treated as an expense (also called
revenue expenditure)
On the other hand, the benefit of expenditure
lasts for more than a year; it is treated as an
asset (also called capital expenditure) such as
purchase of machinery, furniture, etc.
 Basic Accounting Terms
10. Profit
It is the excess of revenue over expenses in an
accounting year

It represents increase in capital

 Basic Accounting Terms
11. Gain
A profit that arises from events or transactions which are
incidental to business such as sale of fixed assets,
winning a court case, appreciation in the value of an
asset etc.
 Basic Accounting Terms
12. Loss
It is the excess of expenses over revenue in an
accounting year

It represents reduction in owners’ equity or capital investment

 Basic Accounting Terms
13. Discount
Discount is the deduction in the price of the goods sold
It may be of two types; trade discount and cash discount

Trade discount is the deduction of price at the time of selling

goods, whereas cash discount means a deduction in the
amount payable by a debtor within a stipulated period
 Basic Accounting Terms
14. Voucher
The documentary evidence in support of a transaction is
known as voucher

Eg: If we buy goods for cash, we get cash memo, if we buy on

credit, we get an invoice, when we make a payment we get a
receipt
 Basic Accounting Terms
15. Goods
It refers to commodities, products, articles or things in which
a trader deals

They refer to commodities which are purchased and are

meant for resale
 Goods
For a stationary merchant, stationary articles like pen,
pencil books etc. are his goods but for other business,
it is an expense

Likewise, for a furniture dealer, furniture items like

tables, chairs etc. are his goods, but for others it is an
asset
 Goods

They also include commodities purchased for

manufacture and sale
In accounting they are called by different name,
such as purchases, sales, purchases returns,
sales returns and stock.
 Basic Accounting Terms
16. Drawings
It represents the amount of cash or other assets
withdrawn by the owner for his personal use
 Basic Accounting Terms
17. Purchases
It is an expense incurred for procurement of goods in a
business

It includes both cash purchase and credit purchase

 Basic Accounting Terms
18. Stock
It represents the unsold goods at the end of accounting
year

It includes unsold goods, raw materials, semi finished

goods etc.
 Stock
Stock is also called inventory
Inventory at the end of the accounting year is called
closing stock, while the same at the beginning of
the year is called opening stock
 Basic Accounting Terms
19. Debtors / Accounts receivable
A debtor is a person who owes money to the business
as he has received some benefit from the business

The amounts due from different persons are totalled on the

close of the accounting period and are shown under the
heading Sundry Debtors or Accounts Receivable on the
asset side of the balance sheet
 Basic Accounting Terms
20. Creditors / Accounts payable
A creditor is a person to whom the business owes
money as he has given some benefit to the business

The amounts due to various persons are totalled on the close of

the accounting period and are shown under the head Sundry
Creditors or Accounts Payable on the liability side of the
balance sheet
Prepared by:
Ajith Kanthi @ Ajith P P
SKMJ HSS Kalpetta Wayanad Kerala
Ph: 9446162771, 7907712665
www. hssplustwo.blogspot.com

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