Accounting can be defined as a process of reporting, recording, interpreting and summarizing economic data. The introduction of accounting helps the decision-makers of a company to make effective choices, by providing information on the financial status of the business. Today, accounting is used by everyone and a good understanding of it is beneficial to all. Accountancy act as a language of finance. To understand accounting efficiently it is important to understand the aspects of accounting.
- Economic Events- It is a consequence of a company has to undergo when the number of monetary transactions is involved. Such as purchasing new machinery, transportation, machine installation on-site, etc.
- Identification, Measurement, Recording, and Communication- The accounting system should be outlined in such a way that the right data is identified, measured, recorded, and communicated to the right individual and at the right time.
- Organization-In refers to the size of activities and level of a business operation.
- Interested Users of Information- It is about communicating important financial information to the customers, according to which they will make the correct decision.
Fundamentals of Accounting
- Assets- The economic value of an item which is possessed by the enterprise is referred to as Assets. To put it in other words, assets are those items that can be transformed into cash or that generates income for the enterprise shortly. It is useful in paying any expenses of the business entity or debt.
- Liabilities- The economic value of an obligation or debt that is payable by the enterprise to other establishment or individual is referred to liability. To put it in other words, liabilities are the obligations that are rising out of previous transactions, which is payable by the enterprise, through the assets possessed by the enterprise.
- Owner’s Equity- Owner’s equity is one of the 3 vital segments of a sole proprietorship’s balance sheet and one of the main aspects of the accounting equation: Assets = Liabilities + Owner’s Equity. It depicts the owner’s investment in the trade minus the owner’s withdrawal from the trade + the net income since the business concern commenced.
Objectives of Accounting
- Maintaining Records- Unlike the human brain which cannot store unlimited information, accounting can take the charge and keep the records of all the monetary transactions with a company.
- Profit & Loss- In business, the profit and loss statement defines whether the company is in profit and loss. Here, expenditure and income determine profit and loss.
- The utility of Resources- Resources is an important and significant part of any business and for an organization to operate smoothly. It reports the company about the various projects along with its timing. Therefore, it becomes secure for the management to take a record of the project before putting in the money.
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|Important Questions for Class 11 Accountancy|
|Q.1 Define accounting.|
|(a)Definition of accounting||
|Q.2 State and explain the attributes or characteristics of accounting.|
|Following attributes or characteristics can be drawn from the definition of Accounting:|
|(1) Identifying financial transactions and events||
|(2) Measuring the transactions||
|(3) Recording of transactions||
|(4) Classifying the transactions||
|(5) Summarising the transactions||
|(6) Analysing and interpreting financial data||
|(7) Communicating the financial data or reports to the users||
|Q.3 Mention the steps of the accounting process.|
|(a)Steps of the accounting process||
For recording, we use ‘Journal’ or Subsidiary Books.
Classification means segregation of transactions on the basis of nature and posting them in a format known as Ledger Account.
It includes preparation of Trial Balance and Financial Statements.
It includes an assessment of the financial reports and making some meaningful conclusions.
It includes sharing the financial reports and interprets results to the users of financial statements.
|Q.4 What are the different branches of accounting?|
|Following are the main branches of accounting:|
|(a) Financial accounting||Financial Accounting is that branch of accounting which involves identifying, measuring, recording, classifying, summarising the business transactions i.e. it involves the steps from Identifying, Recording of transactions to Summarisation, and communicating the financial data.|
|(b) Cost accounting||Cost Accounting is that branch of accounting which is concerned with the process of ascertaining and controlling the cost of products or services.|
|(c) Management accounting||Management Accounting is that branch of accounting which is concerned with gathering and processing information relating to funds, cost, profit etc. to simplify the decision-making process of management.|
|Q.1 Define the term bookkeeping, accounting and accountancy.|
|(A) Bookkeeping||Book Keeping is a part of Accounting and it is the process of identifying, measuring, recording and classifying the financial transactions.|
|(B) Accounting||Accounting is a wider concept and actually, it begins where Book Keeping ends. It includes summarizing, interpreting and communicating the financial data to the users of financial statements.|
|(C) Accounting||Accountancy refers to systematic knowledge of the principles and the techniques which are applied in Accounting.|
|Q.5- What is the difference between bookkeeping and accounting?|
|(1) Scope||Bookkeeping involves identifying, measuring, recording & classifying financial transactions in the ledger accounts.||In addition to bookkeeping, Accounting also includes summarizing, interpreting and communicating the financial data to the users of financial statements.|
|(2) Objective||The main aim is to maintain systematic records of financial transactions.||The main aim is to ascertain the profitability and financial position of the business.|
|(3) Stage||It is a primary stage of accounting||It is a second stage and begins where book-keeping ends.|
|(4) Nature of job||This job is in routine and repetitive in nature.||This job is analytical in nature.|
|(5) Level of skills||Bookkeeping does not require special skills. It is performed by Junior Staff.||It requires specialized skill to analyze, so it is performed by senior staff.|
|Q.6 Discuss the main objectives of accounting.|
|Main objectives of accounting are:|
|1. To maintain a systematic record of business transactions||
|2. To ascertain profit and loss||
|3. To determine the financial position||
|4. To provide information to various users||
|5. To assist the management||
|Q.7 State the main advantages of accounting.|
Following are the main advantages of accounting :
|2. Provide assistance to management||
|3. Facilitates comparative study||
|4. Helps in settlement of tax liability||
|5. Helpful in raising loan||
|6. Helpful in decision making||
|Q.8 What are the limitations of accounting?|
Following are the limitations of accounting:
||Accounting is not completely free from personal bias or Judgment.|
|2. Accounting is done on historic values of assets.||Accounting records assets at their historical cost less depreciation. It does not reflect their current market value.|
|3. Ignore the effect of price level changes||Accounting statements are prepared at historical cost. So changes in the value of money are ignored.|
|4. Ignore the qualitative information||Accounting records only monetary transactions. It ignores the qualitative aspects.|
|5. Affected by window dressing||Window dressing means manipulation in accounting to present a more favourable position of the business than the actual position.|
|Q.9 Explain the users of accounting information?|
Users may be categorised into internal users and external users.
|(A) Internal users|
|(1) Owners||Owners contribute capital in the business and thus they are exposed to maximum risk. So, they are always interested in the safety of their capital.|
|(2) Management||Accounting information is used by management for taking various decisions.|
|(3) Employees||Employees are interested in the financial statements to assess the ability of the business to pay higher wages and bonus.|
|(B) External users|
|(1) Banks and financial institutions||Banks and Financial Institutions provide loans to business. So, they are interested in financial information to ensure the safety and recovery of the loan.|
|(2) Investors||Investors are interested to know the earning capacity of business and safety of the investment.|
|(3) Creditors||Creditors provide the goods on credit. So they need accounting information to ascertain the financial soundness of the firm.|
|(4) Government||The government needs accounting information to assess the tax liability of the business entity.|
|(5) Researchers||Researchers use accounting information in their research work.|
|(6) Consumers||They require accounting information for establishing good accounting control, which will reduce the cost of production.|
|Q. 10 Explain the term qualitative characteristics of accounting information?
Qualitative characteristics are the attributes of accounting information, which enhance its understandability and usefulness.
||Reliability implies that the information must be free from material error and personal bias.|
|2. Relevance||Accounting information must be relevant to the decision-making requirements of the users.|
|3. Understandability||Information should be disclosed in financial statements in such a manner that these are easily understandable.|
|4. Comparability||Both intra-firm and inter-firm comparison must be possible over different time periods.|
|Q.11 Explain the system of accounting?|
|(A) System of accounting||
|(B) Double-entry system||
|(C) Single entry system||
|Q.12- What are the advantages of the double-entry system of accounting?
|Following are the main advantages of the double entry system of accounting:|
|(1) Scientific system||
|(2) A complete record of the transaction||
|(3) Checks arithmetical accuracy of accounts||
|(4) Determination of profit/loss and depiction of financial position||
|(5) Helpful in decision making||
|Q.1- Which of the following is the first step in accounting?|
|a. Communicating to the interested parties.
c. Measurement of transactions
d. Identification & recording of Financial transactions and events
|Q.2- Which of the following is not a business transaction?|
|a. Purchases of goods from Amit of `5,000
b. Paid salaries `250.
c. Purchase a Car of `5,25,000 from his personal account.
d. Purchase a Laptop of `50,500 for Business.
The above mentioned is the concept, that is elucidated in detail about ‘Introduction to Accounting’ for the Commerce students. To know more, stay tuned to BYJU’S.