NOTES ON CHAPTER-1 (2021- 22)

CHAPTER NAME: INTRODUCTION TO ACCOUNTING

CLASS : XI SUBJECT : ACCOUNTANCY
Accountancy: Accountancy is the science or study of accounting. It explains the need and
purpose of accounting and also explains various principles and conventions that are used in the
accounting process and imparts know-how of preparing accounts and presenting and
communicating accounting information in a summarised form to various users of accounting
information.
The American Institute of Certified Public Accountants (AICPA) has defined Accounting as
“Accounting is the art of recording, classifying &summarizing, 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.”
Features of Accounting: Accounting is a process of
 identifying the events of financial nature,
 recording them in Journal,
 classifying in their respective ledgers,
 summarizing them in Profit and Loss Account and Balance Sheet
 and communicating the results to the users of such information, viz. owner/s, government,
creditors, investors etc
DIAGRAMATICALLY:
Business Events – Those events which occur in the normal operation of a business like, Sale and
purchase of goods are called business events.

Types of Business Events – There are two types of business events.

Monetary Events – Those business events that can be expressed in monetary terms are called monetary

events. These affect the financial position of the business. For example, sale and purchase of goods these

are categorized as internal events and external events.

Non-Monetary Events – Those events that cannot be expressed in monetary terms like, recruitment of an

employee are called non-monetary events.

NOTE: In accountancy, only monetary events are recorded in the books of account, ignoring the non-monetary events.

Business Transactions: Those financial transactions or events which are measured and recorded in monetary terms in
the books of account are called business transactions. These can be:

A) External Transactions: transaction between outsider and organization as in purchase of goods.

B) Internal Transactions: Transactions that occur entirely between the internal wings i.e between

organization and employees, between two departments is internal transactions.

These transactions affect the financial position of an enterprise.

The main objectives of accounting are given below:

 To keep a systematic record of all business transactions
 To determine the profit earned or loss incurred during an accounting period by preparing profit and loss
account
 To ascertain the financial position of the business at the end of each accounting period by preparing
balance sheet
 To assist management for decision making, effective control, forecasting, etc.
 To assess the progress and growth of business from year to year
 To detect and prevent frauds and errors To communicate information to various users Organisation:
 It refers to a business unit/ enterprise whether for making profit / not for making profit.
 Forms of business organisation depends upon size of activities,Level of operations
Eg sole proprietor, partnership, cooperative society, company, local authority, municipal corporation.

Branches of accounting:
Financial accounting: It provides financial information to the stakeholders. It keeps systematic records

of financial transactions, prepares and presents financial reports to find out the profitability and financial

soundness.

Cost accounting is that branch which ascertains the cost per unit of manufacturing a product or rendering

a service. It also helps to control cost and reduce cost

Management accounting is concerned with providing necessary accounting information to the people

within the organisation to help them in decision making, planning and controlling business operations

Users Of Accounting Information:

  INTERNAL USERS
 EXTERNAL USERS
Who are the internal users of accounting Information?
Owners:

 They are interested to know Return on capital and profit or loss made:

Reason:

 To assess the profitability and viability of the capital invested by them in the business.

Management:

 Return on investment, expenditure, assets and liabilities Reason:

 To draft various policies measures, facilitating planning and decision making process.
 Also helps the management for cost controlling and to remove inefficiencies.
 Assists in decision making and business planning
 Preparing reports related to funds, costs and profits to ascertain the soundness of the business
 Comparing current financial statements with its own historical financial statements and of Other similar
 firms to assess the operational efficiency of the business

Employees and workers

 They are interested to know about the amount of profit earned

Reason:
 Timely payment of wages and salaries,
 bonus,
 increment in wages and salaries.