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NCERT Class 11 Accountancy Chapter 1 Introduction to Accounting
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Introduction to Accounting
Chapter: 1
| PART – I |
| Short Answers |
1. Define accounting.
Ans: Accounting is a process of identifying, measuring, recording the business transactions and communicating thereof the required information to the interested users.
2. State the end product of financial accounting.
Ans: The end product of financial accounting is the profit & loss account, trading account, and balance sheet.
3. Enumerate main objectives of accounting.
Ans: Objective of accounting: The primary objectives of accounting are to:
(i) Maintain records of business.
(ii) Calculate profit or loss.
(iii) Depict the financial position. and
(iv) Make information available to various groups and users.
4. Who are the users of accounting information?
Ans.: Accounting plays a significant role in society by providing information to management at all levels and to those having a direct financial interest in the enterprise, such as present and potential investors and creditors. Accounting information is also important to those having indirect financial interest, such as regulatory agencies, tax authorities, customers, labour unions, trade associations, stock exchanges and others.
5. State the nature of accounting information required by long-term lenders.
Ans: Accounting information required by the long term lenders are repaying capacity of the business, probability , liquidity , operational efficiency, potential growth of business.
6. Who are the external users of information?
Ans: External users of information present and potential Investors (shareholders), Creditors (Banks and other Financial Institutions, Debenture-holders and other Lenders), Tax Authorities, Regulatory Agencies (Department of Company Affairs, Registrar of Companies, Securities Exchange Board of India, Labour Unions, Trade Associations, Stock Exchange and Customers, etc.
7. Enumerate information needs of management.
Ans: Needs of management are:
(i) Operational information: Operational information is information the agency holds to assist it to perform or exercise its functions or powers in making decisions or recommendations affecting members of the public.
(ii) Sales and Revenue Data: Sales revenue is the income received by a company from its sales of goods or the provision of service.
(iii) Strategic information: Strategic information system used to create and maintain an organisation’s competitive strategy.
(iv) Human Resources information: Companies use an HRIS to manage and automate core HR processes, such as payroll, time tracking, and the administration of employee benefits.
8. Give any three examples of revenues.
Ans: The amounts of the business earned by selling its products or providing services to customers, called revenue.
The three example of revenue are:
(i) Rent received.
(ii) Amount received from one time sale of an asset.
(iii) Interest received from a bank account.
9. Distinguish between debtors and creditors; profit and gain.
Ans: Distinguish between debtors and creditors given below:
| Basic of difference | Debtors | creditors |
| Meaning | Persons or organisations that are liable to pay money to a firm are called debtors. | Persons or organisations to whom the firm is liable to pay money are called creditors. |
| Nature | They have debit balance to the firm. | They have credit balance to the firm. |
| Payment | Payments are received from them | Payment are made to them. |
| Shown | They are shown as assets in the Balance sheet under Current Assets. | They are shown as liabilities in the Balance Sheet under Current Liabilities. |
GainThe excess of revenues of a period over its related expenses during an accounting year is profit. Profit increases the investment of the owners.
Gain A profit that arises from events or transactions which are incidental to business such as sale of fixed assets, winning a court case, appreciation in the value of an asset.
10. ‘Accounting information should be comparable’. Do you agree with this statement. Give two reasons.
Ans: Yes, I do agree accounting information should be comparable.
(i) Comparable accounting Information helps in inter- firm comparisons.
(ii) The importance of ratio analysis is to evaluate the performance and also the growth of inter-firm and intra-firm comparisons.
11. If the accounting information is not clearly presented, which of the qualitative characteristic of the accounting information is violated?
Ans: If the accounting information is not clearly presented, the qualitative characteristic like comparability, reliability, and understandability is violated. Understandability refers to the extent to which information is comprehensible to users who have a reasonable knowledge of business and economic activities. This characteristic ensures that users can easily interpret and use the information provided in financial reports. When information is not clearly presented, it becomes difficult for users to understand, analyse, and make informed decisions based on that information.
12. “The role of accounting has changed over the period of time”- Do you agree? Explain.
Ans: Yes, I agree that the role of accounting has changed over time. This evolution can be attributed to various factors such as technological advancements, regulatory changes, globalisation, and shifts in business practices. The role of accounting has now shifted from that of a mere recording of business transactions to that of providing information to managers and other interested persons in order to help them to make appropriate decisions. It is now regarded as an information system.
13. Giving examples, explain each of the following accounting terms.
(i) Fixed assets.
(ii) Revenue.
(iii) Expenses.
(iv) Short-term liability.
(v) Capital.
Ans: (i) Fixed assets: Fixed assets, also known as non-current assets or tangible assets, are long-term resources owned by a business that are used in its operations to generate income and are not expected to be converted into cash within a year. These assets are typically physical in nature and have a useful life of more than one year. They are subject to depreciation, which spreads the cost of the asset over its useful life.
(ii) Revenue: The amounts of the business earned by selling its products or providing services to customers, called sales revenue. Other items of revenue common to many businesses are: commission, interest, dividends, royalties, rent received, etc. Revenue is also called income.
(iii) Expenses: Costs incurred by a business in the process of earning revenue are known as expenses. Generally, expenses are measured by the cost of assets consumed or services used during an accounting period. The usual items of expenses are: depreciation, rent, wages, salaries, interest, cost of heater, light and water, telephone, etc.
(iv) Short-term liability: Short-term liability, also called current liability, is a firm’s financial obligations that are expected to be paid off within a year. It is listed under the current liabilities portion of the total liabilities section of a company’s balance sheet. These liabilities are typically settled using the company’s current assets, which include cash or other assets that are expected to be converted into cash within the same period.
(v) Capital: Amount invested by the owner in the firm is known as capital. It may be brought in the form of cash or assets by the owner for the business entity capital is an obligation and a claim on the assets of business. It is, therefore, shown as capital on the liabilities side of the balance sheet.
14. Define revenues and expenses?
Ans: Revenue: The amounts of the business earned by selling its products or providing services to customers, called sales revenue. Its, also called income. Other items of revenue common to many businesses are: commission, interest, dividends, royalties, rent received, etc. Revenue is also called income.
Expenses: Costs incurred by a business in the process of earning revenue are known as expenses. Generally, expenses are measured by the cost of assets consumed or services used during an accounting period. The usual items of expenses are: depreciation, rent, wages, salaries, interest, cost of heater, light and water, telephone, etc.
15. What is the primary reason for the business students and others to familiarise themselves with the accounting discipline?
Ans: Every economic transaction have to be recorded in such a manner that diverse accounting customers must understand and interpret these effects inside the identical way with none ambiguity. The reasons for why business college students and others need to familiarise themselves with the accounting field are given below.
(i) It enables in studying the various aspects of accounting.
(ii) It enables learning how to maintain books of bills.
(iii) It facilitates studying how to summarise accounting data.
| Long Types Questions and Answers |
1. What is accounting? Define its objectives.
Ans: Accounting as the art of recording, classifying, and summarising in a significant manner and in terms of money, transactions and events which are, in part at least, of financial character, and interpreting the results thereof’. With greater economic development resulting in changing role of accounting, its scope, became broader. In 1966, the American Accounting Association (AAA) defined accounting as ‘the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of information’.
As an information system, the basic objective of accounting is to provide useful information to the interested group of users, both external and internal. Besides these, the management is provided with additional information from time to time from the accounting records of business. Thus, the primary objectives of accounting include the following:
(i) Maintenance of Records of Business Transaction: Accounting is used for the maintenance of a systematic record of all financial transactions in book of accounts. Even the most brilliant executive or manager cannot accurately remember the numerous amount of varied transactions such as purchases, sales, receipts, payments, etc. that takes place in business everyday. Hence, a proper and complete records of all business transactions are kept regularly.
(ii) Calculation of Profit and Loss: The owners of business are keen to have an idea about the net results of their business operations periodically, i.e. whether the business has earned profits or incurred losses. Thus, another objective of accounting is to ascertain the profit earned or loss sustained by a business during an accounting period which can be easily workout with help of record of incomes and expenses relating to the business by preparing a profit or loss account for the period.
(iii) Depiction of Financial Position: Accounting also aims at ascertaining the financial position of the business concern in the form of its assets and liabilities at the end of every accounting period. A proper record of resources owned by business organisation (Assets) and claims against such resources (Liabilities) facilitates the preparation of a statement known as balance sheet position statement.
(iv) Providing Accounting Information to its Users: The accounting information generated by the accounting process is communicated in the form of reports, statements, graphs and charts to the users who need it in different decision situations. As already stated, there are two main user groups, viz. internal users, mainly management, who needs timely information on cost of sales, profitability, etc. for planning, controlling and decision-making and external users who have limited authority, ability and resources to obtain the necessary information and have to rely on financial statements (Balance Sheet, Profit and Loss account).
2. Explain the factors which necessitated systematic accounting.
Ans: Systematic accounting emerged as a necessity due to several factors that arose as business and economic activities became more complex and interconnected systematic accounting was necessitated by the increasing complexity of business operations, the need for accurate financial information for decision making and control, regulatory requirements, and the demands of external stakeholders for transparent and credible financial reporting.
(i) Business Expansion and Complexity: As businesses grew in size and scope, manual methods of recording transactions became inadequate. Systematic accounting was needed to handle larger volumes of transactions efficiently and accurately.
(ii) Need for Financial Control: Business owners and managers required accurate financial information to monitor and control their operations effectively. Systematic accounting provided a structured way to track income, expenses, assets, and liabilities.
(iii) Art of recording: Transactions are recorded in the order of their occurrence.
(iv) Classification of transaction: Business transactions of similar nature are classified and posted under their respective accounts. For example, all the transactions relating to machinery will be posted in the Machinery Account.
(v) Summarising of data: All business transactions are summarised in the form of Trial Balance, Trading Account, Profit and Loss Account and Balance Sheet that provides necessary information to various users.
3. Describe the informational needs of external users.
Ans: External users who have limited authority, ability and resources to obtain the necessary information and have to rely on financial statements (Balance Sheet, Profit and Loss account).
Primarily, the external users are interested in the following:
(i) Investors and potential investors-information on the risks and return on investment.
(ii) Unions and employee groups-information on the stability, profitability and distribution of wealth within the business.
(iii) Lenders and financial institutions-information on the creditworthiness of the company and its ability to repay loans and pay interest.
(iv) Suppliers and creditors-information on whether amounts owed will be repaid when due, and on the continued existence of the business.
(v) Customers-information on the continued existence of the business and thus the probability of a continued supply of products, parts and after sales service.
(vi) Government and other regulators- information on the allocation of resources and the compliance to regulations.
(vii) Social responsibility groups, such as environmental groups-information on the impact on environment and its protection.
(viii) Competitors-information on the relative strengths and weaknesses of their competition and for comparative and benchmarking purposes. Whereas the above categories of users share in the wealth of the company, competitors require the information mainly for strategic purposes.
4. What do you mean by an asset and what are different types of assets?
Ans: Assets are economic resources of an enterprise that can be usefully expressed in monetary terms. Assets are items of value used by the business in its operations. For example, Super Bazar owns a fleet of trucks, which is used by it for delivering foodstuffs; the trucks, thus, provide economic benefit to the enterprise. This item will be shown on the asset side of the balance sheet of Super Bazaar.
Assets can be broadly classified into two types:
(i) Current assets. and
(ii)Non-current assets.
(i) Current assets and: Current assets are a company’s short-term assets; those that can be liquidated quickly and used for a company’s immediate needs.current assets are inventory, accounts receivable or other liquid assets. Current assets are those that you can convert into cash within one year, such as short-term investments and accounts receivable. Examples of current assets include cash, marketable securities, inventory, and accounts receivable.
(ii)Non-current assets: Non-current assets are assets and property owned by a business that are not easily converted to cash within a year. They may also be called long-term assets. Non-current assets are for long-term use by the business and are expected to help generate income. Non-current assets are longer-term assets with a full value that you cannot recognize until after one year, such as property and machinery.
5. Explain the meaning of gain and profit. Distinguish between these two terms.
Ans: A profit that arises from events or transactions which are incidental to business such as sale of fixed assets, winning a court case, appreciation in the value of an asset.
The excess of revenues of a period over its related expenses during an accounting year is profit. Profit increases the investment of the owners.
Distinguish between gain and profit are as follows:
| Gain | Profit |
| A profit that arises from events or transactions which are incidental to business such as the sale of fixed assets, winning a court case, appreciation in the value of an asset. | The excess of revenues of a period over its related expenses during an accounting year is termed as profit. |
6. Explain the qualitative characteristics of accounting information.
Ans: Following are the qualitative characteristics of accounting information:
(i) Reliability: Reliability means the users must be able to depend on the information. The reliability of accounting information is determined by the degree of correspondence between what the information conveys about the transactions or events that have occurred, measured and displayed. A reliable information should be free from error and bias and faithfully represents what it is meant to represent. To ensure reliability, the information disclosed must be credible, verifiable by independent parties using the same method of measuring, and be neutral and faithful independent parties use the same method of measuring, and be neutral and faithful.
(ii) Relevance: To be relevant, information must be available in time, must help in prediction and feedback, and must influence the decisions of users by:
(a) helping them form prediction about the outcomes of past, present or future events; and
or
(b) confirming or correcting their past evaluations.
(iii)Understandability: Understandability means decision-makers must interpret accounting information in the same sense as it is prepared and conveyed to them. The qualities that distinguish between good and bad communication in a message are fundamental to the understandability of the message. A message is said to be effectively communicated when it is interpreted by the receiver of the message in the same sense in which the sender has sent. Accountants should present the comparable information in the most intelligible manner without sacrificing relevance and reliability.
(iv) Comparability: It is not sufficient that the financial information is relevant and reliable at a particular time, in a particular circumstance or for a particular reporting entity. But it is equally important that the users of the general purpose financial reports are able to compare various aspects of an entity over different time period and with other entities. To be comparable, accounting reports must belong to a common period and use common unit of measurement and format of reporting.
7. Describe the role of accounting in the modern world.
Ans: The role of accounting has been changing over the period of time. In the modern world, the role of accounting is not only limited to record financial transactions but also to provide a basic framework for various decision making, providing relevant information to various users and assists in both short run and long run planning. The role of accounting in the modern world are given below. Accounting plays a fundamental role in the modern world across various sectors and industries.
Here are several key aspects of its role:
(i) Financial Reporting and Transparency: Accounting provides a structured framework for recording, summarising, and presenting financial information. This information is crucial for stakeholders, including investors, regulators, and government agencies, to make informed decisions. It ensures transparency and accountability in business operations.
(ii) Assisting management: Management uses accounting information for short term and long term planning of business activities, to predict the future conditions, prepare budgets and various control measures.
(iii) Decision Making: Managers use accounting information to analyse the financial health of a company and make strategic decisions. Financial statements, budgeting, and cost analysis help in assessing profitability, identifying areas for improvement, and planning for future growth.
(iv) Comparative study: In the modern world, accounting information helps us to know the performance of the business by comparing current year’s profit with that of the previous years and also with other firms in the same industry.
(v) Substitute of memory: In the modern world, every business incurs large number of transactions and it is beyond human capability to memorise each and every transaction. Hence, it is very necessary to record transactions in the books of accounts.
