Accountancy Chapter 1 Notes NCERT Class 11th

Luca Pacioli’s 1494 book, Summa de Arithmetica, was the first to explain double-entry bookkeeping, introducing the concepts of debits, credits, ledgers, and balance sheets. It laid the foundation for modern accounting, earning him the title “Father of Accounting.”

Debit ← Debito (Italian) ← Debeo (Latin) → “owed to someone.”

Credit ← Credito (Italian) ← Credo (Latin) → “trust or belief.”

Definition

Accounting is the process of identifying, measuring, recording and communicating the required information relating to the economic events of an organisation to the interested users of such information.

Process or Constituents of Accounting

Transaction

A transaction is a transfer of a thing of value from one holder to another.
OR
A transaction is a value shift from one account to another that can be measured in monetary terms.

Economic Events

An economic event is an event in a business organisation which is a transaction and can be measured in monetary terms.

Process of Accounting

Identifying: Recognising financial transactions that affect the business.
Measuring: Determining the value of the transaction in terms of money.
Recording: Writing down every transaction in a place (Journal) in chronological order.
Classifying: Organising transactions into different accounts.
Summarizing: Grouping the organised information into simple reports.
Analyzing: Examining the reports to understand the financial health and performance of business.
Communicating/Reporting: Sharing the financial information (reports) with the interested users.

Interested Users of Accounting

Accounting information is useful to a wide range of people, commonly referred to as the users of accounting. These users may be categorized into two groups:

Internal Users: These are individuals within the organization.
- Owners: To know the profitability and financial status.
- Management: For planning, controlling, and decision-making.
- Employees: To know about the company’s stability and profitability for job security and future growth.
External Users: These are individuals or entities outside the organization.
- Investors: To assess the profitability and decide on investing.
- Creditors/Lenders: To evaluate the company’s creditworthiness.
- Government: To ensure proper tax compliance and regulations.
- Consumers: To check product pricing and ethical practices.
- Researchers: For economic and business studies.
- Public: To understand the impact of the company on the economy.

Types of Accounting

Financial Accounting: Financial accounting is accounting which deals with all financial transactions of a business in order to report the business’s financial health.
OR
Financial Accounting is the process of recording, summarizing, and reporting a business’s financial transactions to provide an accurate picture of its financial health.
Cost Accounting: Cost accounting is the process of tracking, recording, analyzing, and controlling costs associated with the production or acquiring of goods or services.
Management Accounting: Management accounting is the process of collecting, analyzing, interpreting, and presenting financial and non-financial information to help managers make decisions, plan, control operations, and achieve business goals.

Objectives of Accounting

To maintain systematic records of business transactions
To determine profit or loss
To ascertain financial position
To provide information to users
To assist in decision making

Advantages of Accounting

Helps in decision making
Provides evidence in legal matters
Helps in tax computation
Helps in comparing business position
Assists in obtaining loans
Helps in detecting frauds and errors

Limitations of Accounting

Based on historical data
Ignores non-monetary factors
Possibility of manipulation (window dressing)
Affected by personal judgements

Qualitative Characteristics of Accounting

Relevance: Timeliness, Materiality
Reliability: Verifiability, Neutrality, Completeness
Comparability: Consistency, Standard Methods
Understandability: Clear Presentation and Format, Simple Language, Not too technical terms

Basic Accounting Terms

1. Entity

Entity means a reality that has a definite individual existence. Business entity means a specifically identifiable business enterprise.

2. Transaction

A transaction is a transfer of a thing of value from one entity to another.

3. Assets

Economic resources owned by a business that can provide future benefits.

Types of Assets:

Current Assets: Expected to be converted into cash, sold, or consumed within 12 months or one business cycle.
- Cash in hand
- Bank balance
- Accounts receivable (Debtors)
- Inventory (Stock)
- Bills receivable
- Short-term investments
- Prepaid expenses
Non-Current Assets: Assets not expected to be converted into cash or consumed within a year.
- Land and building
- Machinery
- Furniture
- Long-term investments
- Patents, trademarks (Intangible assets)

4. Liabilities

Obligations or debts that the business has to pay to outsiders.

Current Liabilities: Obligations payable within 12 months.
- Creditors
- Bills payable
- Bank overdraft
- Outstanding expenses (like unpaid rent/salary)
- Short-term loans
- Unearned revenue (received in advance)
Non-Current Liabilities: Obligations not due within one year.
- Long-term loans from banks
- Debentures
- Mortgage loans
- Deferred tax liabilities

5. Capital

The amount invested by the owner in the business to start and run the operations.

6. Drawings

The amount of cash or goods withdrawn from the business by the owner for personal use.

7. Revenue

The amount received or receivable from the sale of goods and services or from other business activities.

8. Sales

Sales are total revenues from goods or services sold to customers.

9. Expenditure

Spending money or incurring a liability for receiving some benefit, service, or property is called expenditure.

Revenue Expenditure: Expenditure whose benefit is exhausted within a year.
Capital Expenditure: Expenditure whose benefit lasts more than a year.

10. Expense

Costs incurred by a business in the process of earning revenue.

11. Profit

The excess of revenue over expenses during an accounting period.

12. Loss

The excess of expenses over revenue during an accounting period.

13. Gain

A profit that arises from events or transactions which are incidental or non-recurring to business.

14. Voucher

A voucher is any documentary evidence that proves a transaction has occurred.

15. Discount

Discount is the deduction in the price of the goods sold.
OR
A deduction in the listed price of goods or in the amount payable is called a discount.

Trade Discount: Given at the time of sale based on the list price.
• Not shown in the books of accounts.
• Given by manufacturers to wholesalers, or wholesalers to retailers.
• Example: A ₹10,000 TV sold with 10% trade discount → invoice amount becomes ₹9,000.
Cash Discount: Given at the time of payment, especially when payment is made early or within a stipulated period.

16. Goods

Goods are the products or items in which the business regularly deals — that is, what it buys or produces and sells.

17. Purchases

Purchases refer to the total amount of goods procured by a business (either in cash or on credit).

18. Stock

Stock (also called inventory) refers to the goods or items that a business holds on hand for sale or production at any given time.

Opening Stock: Stock at the beginning of the year
Closing Stock: Stock at the end of the year

Types of Stock (in a manufacturing business):

Raw Materials
Work-in-Progress (WIP)
Finished Goods

19. Debtors

Debtors are people or businesses who owe money to the enterprise, usually because they bought goods or services on credit.

20. Creditors

Creditors are people or businesses to whom the enterprise owes money, usually for purchasing goods or services on credit.

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