ACCOUNTANCY

CLASS XI
CHAPTER-1 INTRODUCTION OF ACCOUNTING
Q.1. Define Accounting.

Ans. Accounting is the process of collecting, recording,

classifying,summarising and communicating financial information to the
users.

Q.2. Define Book keeping.

Ans. Book keeping is a part of accounting. The process of recording financial

transaction in a systematic manner and classifying them into ledgers is termed as Book
keeping. Book keeping thus involves:

(i) Identify financial transactions and events,

(ii) Measuring them in terms of money,
(iii) Recording the identified financial transactions and events in the books of
accounts, and
(iv) Classifying, i.e., posting them into ledger accounts.

Q.3. Meaning of Accountancy.

Ans. Accountancy is a systematic knowledge of accounting, i.e., it educates how to

maintain the books of accounts.

Q.4. What is meant by Income statement ?

Ans. Income statement refers to Trading, and Profit and Loss Account (statement of
profit and loss, in case of companies). It shows the profit earned or loss incurred by the
enterprise during the accounting year.

Q.5. What is meant by Position statement ?

Ans. Position statement refers to balance sheet which shows the financial position of
the enterprise on a particular date.

Q.6. Define Accounting Information.

Ans. Accounting Information is used for forecasting, comparing and evaluating the
earning capacity and financial position of the business.

Q.7. What is meant by Double Entry System of Accounting ?

Ans. Double Entry System of Accounting means a system of accounting whereby

both, debit and credit, aspects of a transaction are recorded.
 Q.8. What is Single Entry Sysytem of Accounting ?

Ans. Single Entry System of Accounting is a system under which both aspects of the
transactions are not recorded in all the cases. In some cases both aspects are recorded,
while in others either one aspect is recorded or a transaction is not recorded at all. This,
is also known as Incomplete Double Entry System.

Q.9. Define Accounting and main characteristics of it.

Ans. Accounting is an art of recording, classifying and summarizing in terms of money

transactions and events of a financial nature and interpreting the results thereof. In
other words, it is the process of collecting, recording, summarising and communicating
financial information.

Characteristics of (Attributes) an Accounting are as follows.

1. Identification of Financial Transactions and Events : Accounting records only those

transactions and events which are of financial nature as they bring change in the
resources of a firm.

2. Measuring the Identified Transactions : Accounting measures the transactions

and events in terms of a common measurement unit, i.e., the currency of the
country.

3. Recording : Accounting is an art of recording business transaction in the books of

accounts. Recording is the process of recording business transactions of financial
character in the book of original entry, i.e., Journal.

4. Classifying : Accounting is an art of classifying business transactions. Classification is

the process of collecting similar transactions at one place by opening accounts in the
Ledger Book.

5. Summarising : Accounting is an art of summarising financial transactions. This

involves presenting the classified data in a manner which is understandable and useful
to internal as well as external users of accounting statements.

6. Analysis and Interpretation : Financial data is analysed and interpreted so that the
users of financial data can make a meaningful judgement of the financial performance
(profit) and financial position of the business.

7. Communicating : Finally, accounting function involves communicating the financial

data, i.e., financial statements to its users.

Q.10. Is Accounting a Science or an Art. Explain ?

Ans. 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 profitabilityand 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 organized knowledge based on certain basic principles.

Q.11. What are the steps of Accounting Process ?

Ans. The steps of accounting process are as follows:

(i) Financial transactions

(ii) Recording

(iii) Classifying

(iv) Summarising

(v) Analysis and Interpreting and

(vi) Communicating

Q.12. Define Financial Accounting.

Ans. Financial accounting is that branch of accounting which records financial transactions
and events, summarises and interprets them and communicates the results to the users.

Q.13. Define Cost Accounting.

Ans. The limitation of Financial Accounting in respect of information relating to the cost of
products or services led to the development of a specialized branch, i.e., Cost Accounting.

Q.14. Define Management Accounting.

Ans. 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.

Q.15. Define the terms ‘Book Keeping, Accounting’ and ‘Accountancy’.

Ans. The terms ‘Book keeping’ and ‘Accounting’ are often considered as same. But it is not
so. The two terms are distinct from each other. Accounting is a wider concept and includes
Book Keeping.

Q.16. What is the meaning of Book Keeping ?

Ans. Book keeping is a part of accounting being a process of recording of financial
transactions and events in the books of accounts. 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 accounts,and
4. Classifying recorded transaction and events, i.e., position them into
Ledger accounts.

Q.17. Distinguish between Book Keeping and Accounting.

Ans.

B
a
s
i
s Book Keeping Accounting

Scope Book Keeping is concerned with

1. indentifying Accounting is concerned with
financial transaction; measuring
them in money summarising the recorded
terms; recording them in the books
of accounts transactions, interpreting them and

and classifying them. Communicating the results

Stage It is primary stage. It is the basis for

2. accounting. It is a secondary stage. It begins

where Book Keeping ends.

Objective The objective of book keeping is to

3. maintain The objective of accounting is to
Systematic records of financial
transactions. Ascertain net results of operations

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 junior staff performs this function. Senior staff performs this function.

6. Special skills Book Keeping is mechanical in nature Accounting requires special skills and
and, thus, does not require special
skills. ability to analyse and interpret.

Q. 18. Define Accountancy.

Ans. 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 accounts and
how to summarise the accounting information and communicate it to the users. In other
words of Kohler, accountancy refers to the entire body of the theory and practice of
accounting.

Q.19.What are the Main Objectives and functions of accounting ?

Ans. The main objectives of accounting are:-

1. Record of Financial Transactions and Events: The objective of accountancy is to

record financial transactions and events of the organisation in the books of accounts
following the principles of accounting in a systematic manner.
2. Determine Profit or Loss: Another objective of accounting is to determine
the financial performance, i.e., profit earned or loss incurred, for the
accounting period.
3. Determine 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.
4. Assisting the management : Another objective of accounting is to assist the
management by providing financial information to it. The management often
requires financial information for decision-making, exercising control, budgeting
and forecasting.
5. Communicating Accounting Information to users : Another objective of accounting
is to provide accounting information to users who analyse them as per their
individual requirements.
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.

The main functions of accounting are:-

1. Maintaining Systematic Accounting Records. The primary function of accounting is
to maintain systematic accounting records of financial transactions and events.
2. Preparation of Financial Statements. Financial statements means final accounts
prepared at the end of the accounting period. It includes Income Statement and
(Profit and Loss Account or Statement of Profit and Loss, in the case of companies)
and position statement (Balance Sheet).
3. Meeting Legal Requirements. Accounting records are accepted as evidence by the
court of law if they are maintained systematically following the accounting
principles and concepts.
4. Communicating the Financial Data. It is yet another function of accounting to
communicate the financial data to the users.
5. Assistance to Management. Management often requires information beyond the
information conveyed by the financial data.

Q.20. State the advantages of accounting.

Ans. Advantages of accounting are:-

1. Financial Information about business : Financial performances during the

accounting period, i.e., profit or loss 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. Facilities 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. Facilities Settlement of Tax Liabilities : A systematic accounting record immensely
helps in settlement of income tax, sales tax, VAT and exercise duty liabilities, since
it is a good evidence of the correctness of transactions.
6. Facilities 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. Facilities sale of business : If someone desires to sell his business, the accounts
maintained by him enable the ascertainment of the proper purchase price.
9. Helps 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.

Q.21. What are the Limitations of Accounting ?

Ans. Limitations of Accounting are :-

 1. Accounting is not Fully Exact : Although most of the transactions are recorded on
the basis of evidence such as sale or purchase or receipt of cash, yet some
estimates are also made for
ascertaining profit or loss. Examples of these are providing depreciation on
the basis of estimated useful life of an asset, possible bad debts etc.
2. Accounting does not Indicate the Realisable Value : The Balance sheet does
not show the amount of cash which the firms may realize by the sale of all the
assets.
3. Accounting Ignores the Qualitative Elements : Since accounting is confined to
monetary matters only, qualitative elements like quality of 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. It
does not remain stable.
5. Accounting may Lead to Window Dressing : The term window dressing means
manipulation of accounts so as to conceal vital facts and present the financial
statements in such a way as to show 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.

Q.22. What is Accounting Information and its types ?

Ans. “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”.

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 decisions. The
information made available by these statements can be categorized into the following
:

1. Information Relating to Profit or surplus;

2. Information Relation 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 and loss
incurred as a result of business operations or otherwise during an
accounting period.
 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
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.

Q.23. Explain the users of Accounting Information.

Ans. Users of Accounting Information may be categorized into Internal Users and External
Users.

Internal Users

(i) Owners: Owners contribute capital in the business and thus are exposed to
maximum risk.
(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, 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.

External Users

(i) Banks and Financial Institutions: Banks and financial institutions are an essential
part of any business as they provide loans to businesses.
(ii) Investors and Potential Investors: Investment involves risk and also the
investors do not have direct control over the business affairs.
(iii) Creditors: Creditors are those parties who supply goods or services on credit. It is
a common business practice that a large number of supplier remain invested in
credit sales.
(iv) Government and its Authorities : The government makes use of financial
statements to compile national income accounts and other information.
(v) Researchers: Researches use accounting information in their research work.
(vi) Consumer: Consumers require accounting information for estabilishing good
accounting control so that cost of production may be reduced with the resultant
reduction in the prices of products they buy.
(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 supplier etc.

Q.24. Explain the Qualitative Characteristics Of Accounting Information.

 Ans. Qualitative characteristics are attributes that makes 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 material error and bias.
2. Relevance: Accounting information must be televant 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.
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.

Q.25. Write the main features and advantages of Double Entry System.

Ans. The main features of Double Entry System are:-

1. It maintains a complete record of each transaction.

2. It recognise 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 creadited 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 all credits. It helps in estabilishing arithmetical
accuracy by preparing the Trial Balance.

Advantages of the Double Entry System are:-

(i) Scientific System: Double Entry System is a scientific system of recording

business transactiona as compared as compared to other systems of Book
Keeping. It helps attain the objectives of accounting.
(ii) Complete Record of Transaction: 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) A check on the Accuracy of Accounts: By the use of this system, accuracy of the
accounting work can be established Profit and Loss Account.
(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.
(ix) Frauds and Misappropriations: Frauds and misappropriations are minimised
since complete information about all assets and liabilities is available.

Q.26. Define Single Entry System.

Ans. Single entry system of recording transactions in the books of accounts may be
defined as an incomplete Double Entry System. In this system, all transactions are not
recorded on double entry basis. The single entry system is also known as Accounts
from Incomplete Records.