XI

Accountancy
Chapter-1
Introduction to Accounting
1. Characteristics / Attributes of Accounting
a. Recording of financial transaction which can be measured in terms of money only.
 Financial transactions that cannot be recorded in terms of money are Value of human
resources, change in managerial policy, dispute between sales and production personal etc.
 Financial transactions that can be recorded in terms of money are Sale of goods, purchase of
goods, acquisition of assets, payment for expenses etc.
b. Recording of business transaction
 Transaction are recorded in a book called Journal as per specified rules
 Journal may be further subdivided into various subsidiary books
 Subsidiary books – Cash Book, Purchase Book, Sales Book, Purchase Return Book, Sales
Return Book and Journal Proper.
c. Classifying
 Grouping of similar transaction
 in a separate account (for each customer, supplier, asset, liability, expense and revenue)
called ledger
 in chronological order (date wise)
d. Summarising
 It involves Balancing of ledger
 Preparation of trial balance
 Preparation of final account or financial statement (Trading A/c, P&L A/c, Balance Sheet)
 Summarised data is used by management and other user of accounts
e. Analysis and Interpretation
 Provide useful information about operating and financial performance of business
 Helps in decision making to creditors, bankers proprietor etc.
f. Communication
 Accounting “language of business”
 It provides profitability position, solvency position and efficiency of business to end user.

Financial Transaction Communication

Journal
(Original
Entry Book)
Recording

Analysis & Interpretation

Subsidiary
books
Classifying - Ledger

Summarising – Trial Balance Financial Statements

1.1 Accounting Process Flow Chart

Trading A/c

Profit & Loss A/c

2. Branches / Types of Accounting Balance Sheet
 a. Financial Accounting
 It involves identifying financial transaction, recording, classifying, summarising and
interpreting them
 To communicate useful information to various user of accounting.
 It provides information about operating performance and financial soundness of business.
b. Cost Accounting - It helps in
 ascertaining the cost of product or services provided by entity
 determining the selling price of product
 exercising control over cost of product & services
c. Management Accounting
 Concerned with managerial decision making
 Tools such as ratio analysis, cash flow statement, fund flow statement, budgetary controls etc
are used for decision making at all levels
 Helps in planning and controlling business operations.
d. Tax Accounting
 Preparation of accounts to compute various direct and indirect taxes (Income Tax, Sales
Tax/Value added tax, Excise duty, Custom duty).

e. Social Responsibility Accounting

Employee Human
a. Fair wages Shareholders Resource
b. Facility- House, Consumers a. Regular return Society Accounting
schools for on investment a. Workers useful
a. Quality a. Open
children, b. Capital assets
product & Hospitals,
hospitals appreciation b. Good
services Schools etc.
community c. Right shares & employee
b. Reasonable b. Pollution
centre bonus shares employer
price control
c. Promotion relationship
c. Service centre c. Tree
opportunities
for repairs plantation
d. Grievances
redressal cell

3. Difference between Accountancy and Accounting (Code: BMS)

Basis Accountancy Accounting

Meaning Refers to entire body of theory & Deals with the practice of accountancy
practice of accounting

Scope Area of knowledge Action taken on the basis of knowledge

of accountancy

Broad/Narrow Broad term and includes accounting Narrow term and part of accountancy
4. Difference between Book keeping and Accounting

Basis Book-keeping Accounting

Scope It includes the process of: Apart from processes of book keeping, it
a. Identifying of FT includes the process of:
b. Measuring FT in money a. Summarising (TB & Final A/c)
c. Recording FT b. Analysing & Interpreting
d. Classifying FT c. Communicating to various users

Stage Primary stage a. Secondary stage

b. Starts where book-keeping ends

Nature of Job a. Routine a. Analytical

b. Clerical b. Logical

Objective To keep and maintain systematic records To determine profit and financial
of financial transacton soundness and to communicate it to end
user
Performance Performed by Junior staff Performed by senior staff

Level of Skill Mechanical in nature and require normal Technical in nature and require
skill specialised skill

5. Objectives of Accounting (Code: complete & systematic financial performance & position help
management in decision making & control and end users in analysis and comparison)
a. To keep complete and systematic record of financial transaction by recording them
chronologically and then further classifying and summarising them.
b. To represent financial performance of business by preparing
- Trading A/c (to compute gross profit) and
- Profit & Loss A/c (to compute net profit)
c. To represent financial position of the business by preparing
-Balance Sheet (to know financial soundness, assets, liabilities & capital of business)
d. To help management
-in decision making and
-exercising control
e. To provides accounting information to end users such as creditors, bankers, shareholder etc so as
to enable them to analyse and interpret the performance and position.
f. To help similar firm to compare the operating and financial soundness.

6. Advantages / Uses of Accounting

a. Complete and systematic record – huge number of transacton – not possible to remember all
b. Represent financial performance – complete record – easy to determine profit or loss – useful for
management and end users
c. Represent financial position – summarised position of assets, liabilities & capital – help in
determining financial soundness
d. Comparison of financial statements – one year with previous years – inter firm comparison
e. Managerial decision making – provides operating performance and financial soundness – helpful
in planning and controlling
f. Settlement of tax liability – complete and systematic records – used by tax auditor – to determine
tax liability
 g. Facilitates in taking loan – banks and financial institution grant loan on basis of financial
statements
h. Act as proof in court of law – claim against/of the firm can be easily settled
i. Detection of errors and frauds by clerks can be easily done- minimisation of reoccurrence of
fraud and error in future.
j. Helpful in computing net worth and goodwill of business

7. Limitation of accounting
a. Based on accounting concepts and conventions – results are not realistic – e.g. valuation of fixed
assets at historical cost, provisions for doubtful debts based on prudence.
b. Based on personal judgement – method of depreciation, provision for bad debts may varies from
person to person
c. Based on historical cost – fixed assets do not disclose true and fair view
d. Lack of qualitative information such as goodwill of firm, employee employer relationship,
efficiency of management, loyalty of workers etc – accounts are prepared on quantitative info
e. Suffers from window dressing – management may manipulate financial statements by showing
more or less profit/loss.
f. Not suitable for forecasting – provides information about past.

8. Users/Parties interested Accounting Information

Name of User Purpose

A) Internal User
1) Management Decision Making, Planning, Controlling Business, and Taking
Corrective Actions, Preparation of Budget
2) Owner / Proprietor / Return (Profit) on Capital Invested, Safety of Capital Invested,
Partner / Shareholder Growth in Earning
B) External User
3)Banks/Financial Institution to ensure safety and recovery of Loans Provided
regularity in payment of Installments and Interest
4) Employee Expecting Higher Salary/Wages, Bonus, Deposit of TDS and
PF deducted from Salary etc. Promotion Oppourtunity
5) Potential Investors Earning Capacity, Safety of Investment, Growth oppourtutnity
6) Government To assess tax Liability and its timely Payment, Regulate
business entities, to calculate national income
7) Creditors to Check Financial Position, Creditworthiness, to determine /
review Credit Policy
8) Researchers To conduct research related to business
9) Consumer to ensure fair price is charged for product sold to them
10) Public to ensure contribution of business towards society