Holy Convent School
Class 11 Accountancy
Chapter-1 Introduction to Accounting
Introduction
Accounting is the process of collecting, recording, classifying, summarising and
communicating financial information to the users for judgment and decision-making.
Basic accounting terms
Business Transaction
An Economic activity that affects financial position of the business and can be measured in
terms of money e.g., purchase of goods for use in business.
Account: Account refers to a summarized record of relevant transactions of particular head
at one place. All accounts are divided into two sides. The left side of an account is called debit
side and the right side of an account is called credit side.
Capital: Amount invested by the owner in the business is known as capital. It may be brought
in the form of cash or assets by the owner.
Drawings: The money or goods or both withdrawn by owner from business for personal use,
is known as drawings. Example: Purchase of car for wife by withdrawing money from
business.
Assets: Assets are valuable and economic resources of an enterprise useful in its operations.
Liabilities: Liabilities are obligations or debts that an enterprise has to pay after some time
in the future.
Accountancy: A sytstematic study of accounting is called accountancy. It educates us how to
maintain a books of accounts , how to summarise the accounting information and
communicating it to the users.
Accounting period: It is the period for which accounting statements are prepared . Calender year:
1st Jan to 31st Dec.
Financial year: 1st April to 31st March
Objectives of Accounting
1. To keep systematic and complete records of financial transactions in the books of
accounts .
2. To ascertain the profit earned or loss incurred during a particular accounting period
which further help in knowing the financial performance of a business.
3. To ascertain the financial position of the business by the means of financial statement i.e.
balance sheet which shows assets on one side and Capital & Liabilities on the other side.
4. To provide useful accounting information to users who analyze them as per their
requirements.
5. To provide financial information to the management which help in decision making,
budgeting and forecasting.
6. To prevent frauds by maintaining regular and systematic accounting records.
Advantages of Accounting
1. It provides information which is useful to management for making economic decisions.
2. It help owners to compare one year’s results with those of other years to locate the
factors which leads to changes.
3. It provide information about the financial position of the business by means of balance
sheet .
4. It help in keeping systematic and complete records of business transactions in the books
of accounts .
5. Properly maintained accounts help a business entity in determining its proper purchase
price.
Limitations of Accounting
1. It is historical in nature; , the figures given in financial statements ignore the effects of changes
in price level.
2. It contains only those informations which can be expressed in terms of money. It ignores
qualitative elements such as efficiency of management, quality of staff, customers
satisfactions etc.
3. It may be affected by window dressing i.e. manipulation in accounts to present a more
favorable position of a business firm than its actual position.
4. It is not free from personal bias and personal judgment of the people dealing with it.
Book Keeping - The Basis of Accounting
Book keeping is concerned with the recording of financial transactions and events
relating to business in a orderly manner.
The distinction between Book keeping and Accounting are as under.
Book keeping Accounting
1. It is the recording phase of an accounting 1. It is the summarizing phase of an
system. accounting system.
2. It is a primary stage and basis for 2. It is a Secondary Stage which begins
accounting. where the Book keeping process ends.
3. It is routine in nature and does not require 3. It is analytical in nature and required
any special skill or knowledge special skill or knowledge.
4. It is done by senior staff called
4. It is done by junior staff called book-keepers
accountants.
5. It does not give the complete picture of the 5. It gives the complete picture of the
financial conditions of the business unit. financial conditions of the business unit.
Interested users/parties of Accountings information’s and their Needs
There are number of users interested in knowing about the financial soundness and the
profitability of the business.
Users Classification Information the user want
Return on their investment, financial health of their
1. Owner
Internal company/business.
2. Management To evaluate the performance to take various decisions.
1. Investors and Safety and growth of their investments, future of the
potential investors business.
Assessing the financial capability, ability of the business to
2. Creditors
pay its debts.
3. Lenders Repaying capacity, credit worthiness.
External Assessment of due taxes, true and fair disclosure of
4. Tax Authorities
accounting information.
Profitability to claim higher wages and bonus, whether
5. Employees
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