Class 11 Accountancy

Chapter - 1
Meaning &
Objectives of
Accounting
 Meaning of Accounting
―Accounting is the art of recording,
classifying and summarizing in a
significant manner and in terms of
money, transactions and events,
which are, in part at least, of a
financial character, and
interpreting the results thereof.‖
— American Institute of
Certified Public Accountants
 Characteristics of Accounting
1) Accounting is an Art as well as Science :
 Accounting is an art of recording, classifying and summarizing business transactions
with a view to ascertain the net profit and financial position of the business enterprise.
 Accountancy is also a science since it is also an organized body of knowledge based on
certain specified principles and accounting standards.

2) Recording of Financial Transactions only :

 Only those transactions and events are recorded in accounting which are of a financial character. There are so
many transactions in the business which are very important for business but which cannot be measured and
expressed in terms of money and hence such transactions will not be recorded.

3) Recording in terms of Money :

 Each transaction is recorded in the books in terms of money only.
 For example, if a businessman purchases 200 Chairs and 10 Tables, their value
in terms of money will be recorded in the books.

4) Classifying:
 After recording the transactions in journal or subsidiary books, the transactions are
classified. Classification is the process of grouping the transactions of one nature at
one place, in a separate account. The book in which various accounts are opened is called ―Ledger‖.
5) Summarizing :
 Summarizing is the art of presenting the classified data in a manner which is
understandable and useful to management and other users of such data.
 This involves the balancing of ledger accounts and the preparation of Trial Balance
with the help of such balances.

Recording, Classifying and Summarizing are also termed as ―Process of Accounting‖ or ―Accounting Cycle‖ :
Transaction
Books of Original Entry
1) Cash Book

Accounting Trading, Profit & Loss A/c Journal

2)
3)
Purchase Book
Sales Book
and Balance Sheet 4) Purchase Return Book
Cycle 5)
6)
Sales Return Book
Bills Receivable Book
7) Bills Payable Book
Trial 8) Journal Proper
Balance Ledger

6) Interpretation of the results :

 In Accounting, the results of the business are presented in such a manner (i. e., by preparing Trading and Trading
and Profit & Loss Account and Balance Sheet) that the parties interested in the business such as proprietors,
managers, banks, creditors, employees etc. can have full information about the profitability and the financial
position of the business.

7) Communicating :
 Accounting attributes also include the communication of financial data to the users who analyze them as per
their individual requirements.
 Objectives of Accounting
1) To keep systematic record of business transactions
The main objective of accounting is to keep complete record of business transactions according to specified rules.

2) To calculate profit or loss

The second main objective of accounting is to ascertain the net profit earned
or loss suffered on account of business transactions during a particular period.

3) To know the exact reasons leading to net profit or net loss

4) To ascertain the financial position of the business
For a businessman, merely ascertaining profit or loss of the business is not sufficient.
The businessman must also know the financial health of the business.

5) To ascertain the progress of the business from year to year

6) To prevent and detect errors and frauds

7) To provide information’s to various parties

Another main objective of accounting is to communicate the accounting information to various
interested parties like owners, investors, creditors, banks, employees and government authorities etc.
 Functions of Accounting
Main function of accounting is to maintain complete and systematic
Maintaining Complete and
records of business transactions, post them to ledger and to prepare
Systematic Records the financial statements i.e., Statement of Profit & Loss and the Balance Sheet.

Communicating the Financial Another main functions of accounting is to communicate the information
Results to Various Parties regarding net profit (or loss), assets, liabilities etc. to the interested parties.

Another function of accounting is to maintain proper records of various assets such as

Protecting the assets of the
Cash in hand, bank balance, inventory, debtors etc. It enables the management to
business keep proper control over them.

Providing Assistance to By providing timely information, accounting assists the management in the task of
Management planning, controlling and Decision – Making.

In case of Companies, the management is entrusted with the task of controlling the
Trusteeship resources of the enterprise. The management is expected to act as trustee of the
Company‘s funds and the accounting assists them to control the resources properly.

Under the provisions of various laws such as Companies Act, Income Tax Act, Goods
and Service Tax (GST) Act etc. a business firm has to submit various statements such as
Compliance of Legal Needs annual accounts, Income Tax and GST Returns etc. Accounting performs this function
by supplying the information to the government agencies.

Another function of accounting is to determine the profitability of each department of

Fixing Responsibility an enterprise. It facilitates the fixing of responsibility of each departmental head.
 Book – Keeping, Accounting & Accountancy
Book – Keeping :
―Book Keeping is the science and art of recording correctly
in the books of account all those business transactions that
result in the transfer of money or money‘s worth.‖

— R. N. Carter

It is mainly concerned with record keeping or maintenance of books of

accounts. The maintenance of books of accounts includes the following four
activities :
a) Identifying the transactions of financial nature from amongst the various transactions.
b) Measuring the identified transactions in terms of money.
c) Recording the identified transactions in the books of original entry.
d) Classifying them in to ledger.
 Accounting starts where Book – keeping ends. It includes the
following activities :
Accounting a) Summarizing the classified transactions in the form of
Profit & Loss Account and Balance Sheet etc.
b) Analysing and interpreting the summarized results. In
other words, drawing the meaningful information from
Profit & Loss Account and Balance Sheet etc.
c) Communicating the information to the interested parties.

Accountancy It refers to a systematic knowledge of accounting concerned with

the principles and techniques which are applied in accounting. It
tells us how to prepare the books of accounts, how to summarize
the accounting information and how to communicate it to the
interested parties. According to Kohler, ‗accountancy refers to the
entire body of the theory and practice of accounting.‘
Distinction between Book – Keeping and Accounting
Basis of Distinction Book-Keeping Accounting
1. Scope Book – keeping includes : Accounting in addition to Book – keeping includes :
a) Identifying the transactions of financial a) Summarizing the classified transactions;
nature; b) Analysing and interpreting the summarized results;
b) Measuring the identified transactions in and
terms of money; c) Communicating the results to parties interested in
c) Recording the measured transactions; and them.
d) Classifying them in to ledger.
2. Stage Book – keeping is primary stage. It is the secondary stage. Accounting starts where Book –
keeping ends.
3. Objective The main objective of Book – keeping is to Its main objective is to ascertain the net results and
maintain systematic records of transactions of financial position of the business and to communicate
financial nature. them to interested parties.
4. Nature of Job The Book – keeping function is routine and The Accounting function is analytical in nature.
clerical in nature.
5. Who Performs The Book – keeping function is performed by The Accounting function is performed by senior staff.
junior staff.
6. Knowledge Level It can be performed by persons having limited It is performed by persons having higher level of
level of knowledge. knowledge than that of Book – keeper.
7. Analytical Skill The Book – keeper is not required to possess The Accountant is required to possess analytical skill.
analytical skill.
Distinction between Accounting and Accountancy
Basis of Distinction Accounting Accountancy
It is a body of knowledge
It is concerned with recording, prescribing certain rules or
1. Meaning classifying and summarizing principles to be observed while
of transactions. recording, classifying and
summarizing of transactions
It is narrow in scope. It is much wider in scope and
2. Scope Accounting starts where Book includes Book – keeping as
– keeping ends. well as Accounting.
It depends on Book – It depends both on Book –
3. Relation Keeping. keeping and Accounting.
Its main function is to
It includes the decision making
ascertain the net results and
function also on the basis of
4. Function the financial position of the
information provided by book
business and to communicate
– keeping and Accounting.
them to interested parties.
 Types or Sub-fields of Accounting
Financial Accounting
The main purpose of this branch of accounting is to record the business transactions in a systematic manner, to ascertain the profit or
loss of the accounting period by preparing a Profit & Loss Account and to present the financial position of the business by preparing a
Balance Sheet.

Cost Accounting
The main purpose of cost accounting is to ascertain the total cost and per unit cost of goods produced and services rendered by a
business. It also estimates the cost in advance and helps the management in exercising strict control over cost.

Management Accounting
The main purpose of management accounting is to present the accounting information in such a way
as to assist the management in planning and controlling the operations of a business.

Tax Accounting
The branch of accounting which is used for tax purposes is called Tax Accounting. Income tax
and GST are computed on the basis of this accounting.

Social Responsibility Accounting

The society provides the infrastructure and the facilities without which business cannot operate
at all. Hence the business also has a responsibility to the society.
 Users of Accounting Information & Their Needs
Or
Parties Interested in Accounting Information

These users may be classified into two groups : -

1) Internal Users – Internal users are the persons who have a direct
interest in the business enterprise such as owners and management.
a) Owners : - Owners (or preset investors) contribute capital in the business and as such want to
know about the profitability and financial soundness of the business.
b) Management : - Management need accounting information for the efficient and smooth
running of the business enterprise. Their needs are met by the accounting information
provided by published reports of the business enterprise such as Profit & Loss Account,
Balance Sheet and Cash Flow Statement.
2) External Users - Individuals or organizations who have present
or future interest in the business enterprise but are not part of the
management are called external users of accounting information.
a) Potential Investors – For example, those who want to invest.
b) Short-term creditors – For example, suppliers of goods and
services on credit.
c) Long-term creditors – Such as Financial Institutions.
d) Employees
e) Tax Authorities
f) Government and their Agencies
g) Social responsibility groups – Such as environmental protection
groups.
h) Public
i) Competitors
 Advantages or Uses of Accounting
 Helpful in Management of Business : Management needs a lot of information for the efficient running of the business.
a) Helpful in Planning – Management would like to know whether the sales are increasing or decreasing and also the speed of
increase in the cost of production. All such information is provided by the accounting, which helps the management in
estimating the future sales and expenses. It also helps them to estimate the cash receipts and cash disbursements during the next
accounting period.
b) Helpful in Decision Making – At times, the Management has to take a number of decisions. Foe example, What should be the
selling price of the product? How much discount should be offered to the customers? Accounting provides all the information's
required for making such decisions.
c) Helpful in Controlling – Management would like to see that the cost incurred is reasonable and that no department is
overspending. Accounting provides information to the management in this regard.
 Provides Complete and Systematic Record : Business transactions have grown in size
and complexity and it is not possible to remember each and every transaction.
 Information Regarding Profit or Loss : Accounting reports the net result of business
activities of an accounting period. The Profit & Loss Account prepared at the end
of each accounting period discloses the net profit earned or loss suffered during the period.
 Information Regarding Financial Position : Accounting reports the financial position of the
business by preparing a Balance Sheet at the end of each accounting period.
 Enables Comparative Study : By keeping a systematic record accounting helps the owners
to compare one year‘s costs, expenses, sales and profit etc. with those of other years.
 Helpful in Assessment of Tax Liability : Properly maintained records will be of great help
when the firm is assessed to Income Tax or GST. Such records when audited are trusted by the taxation authorities.
 Limitations of Accounting
 Influenced by Personal Judgement : Accounting is not an exact science and accountant has
to exercise his personal judgement in respect of various items.
 Based on Accounting Concepts and Conventions : Accounts are prepared on the basis of a
number of accounting concepts and conventions. Hence, the profitability and the financial
position disclosed by it may not be realistic.
 Incomplete Information : Accounting statements provide only the incomplete information
because the actual profit or loss of a business can be known only when the business is closed down.
 Omission of Qualitative Information's : Accounts contain only those information which can be expressed in
terms of money. Qualitative aspects of business units are completely omitted from the books as these cannot
be expressed in monetary terms.
 Based on Historical Costs : Accounts are prepared on the basis of historical costs (i.e., the original costs) and
as such the figures given in financial statements do not show the effects of changes in price level.
 Affected by Window Dressing : Window dressing refers to the practice of manipulating accounts, so that the
financial statements may disclose a more favorable position than the actual position.
 Unsuitable for Forecasting : Financial Accounts are only a record of past events. Continuous changes take
place in the demand of the product, policies adopted by the firm, the position of competition etc. As such,
the financial analysis based on past events may not be of much use for forecasting.
Qualitative Characteristics (Attributes) of Accounting Information
• Reliability : Accounting information must be reliable. Reliability implies that the information must be
factual and verifiable. The accounting information is said to have verifiability if such information can be
verified from source documents.

• Relevance : Accounting information's depicted by financial statements must be relevant to the objectives
of the enterprise. Unnecessary and irrelevant information's should not be included in financial statements.

• Understandability : Accounting information's should be presented in such a simple and logical manner
that they are understood easily by their users such as investors, lenders, employees etc.

• Comparability : Comparability is a very useful quality of the accounting information. The financial
statements should contain the figures of previous year along with the figures of current year so that the
current performance can be compared with past performance.

• Faithful Presentation : Financial statements are required to show a True and

fair view of the profitability, financial position and cash flows of an enterprise.
Application of appropriate accounting standards normally results in financial
statements portraying true and fair view of information about an enterprise.
 Role of Accounting
Role of a Language
Accounting is viewed as a language of business because it prepares reports and statement
which communicate information regarding the business enterprise.

Role of Historical Record

Accounting is viewed as chronological record of all financial transactions in the books of accounts according to specified rules.

Role of Determining the Net Profit

It is also regarded as a means of determining the true profit or loss of a business enterprise.)

Role of Determining the Financial Position

It is also regarded as a means of showing the financial position of the business by the preparation of Balance Sheet.)

Role of Information System

Accounting is now regarded as an information system because it is capable of providing the kind
of information which managers and other interested parties require for taking appropriate decisions.

Role of Service Provider

Accounting is regarded as a service activity because it provides quantitative financial information
which is helpful to the users in different ways.