Quick Revision Notes & Formula Sheet

Class 11 Accountancy Chapter: Introduction to Accounting

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1. Meaning and Definition of Accounting

Accounting is a systematic process of identifying, measuring, recording, classifying, summarizing, interpreting, and communicating financial information to interested users.

• American Institute of Certified Public Accountants (AICPA) Definition: "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."

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2. Characteristics / Features of Accounting

1. Identification of Financial Transactions: Identifying events that have a financial character.
2. Measuring in Terms of Money: Recording transactions in monetary terms (Rupees, Dollars, etc.).
3. Recording: Entering business transactions in the primary book called Journal.
4. Classifying: Grouping similar transactions at one place in a ledger called Ledger.
5. Summarizing: Presenting data in a understandable form (Trial Balance, Trading and Profit & Loss Account, Balance Sheet).
6. Analysis and Interpretation: Drawing conclusions from financial data.
7. Communicating: Providing financial information to users (internal and external).

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3. Objectives of Accounting

• To maintain systematic records of business transactions.
• To calculate profit or loss for a specific accounting period.
• To determine the financial position of the business.
• To provide information to various users for decision-making.
• To protect business properties and assets.

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4. Basic Accounting Terms

• Business Transaction: An economic activity that changes the financial position of a business (e.g., purchase of goods, payment of salaries).
• Capital: Amount invested by the owner in the business (Capital = Assets - Liabilities).
• Drawing: Cash or goods withdrawn by the owner for personal use.
• Liability: Amount which the business owes to outsiders (Liabilities = Assets - Capital).
  • Internal Liabilities: Capital owed to the owner.
  • External Liabilities: Debts owed to outsiders (Creditors, Bank Loan).
• Asset: Economic resources of an enterprise owned in monetary terms.
  • Current Assets: Assets held for a short period (Cash, Debtors, Stock).
  • Non-Current Assets: Long-term assets (Land, Building, Machinery).
• Expenditure: Spending money or incurring a liability for acquiring assets, goods, or services.
  • Capital Expenditure: Benefit extends beyond one accounting year (e.g., buying machinery).
  • Revenue Expenditure: Benefit expires within the current accounting year (e.g., rent, salaries).
• Expense: Cost incurred in generating revenue (e.g., electricity bill, wages).
• Revenue: Amount received from the sale of goods or rendering services.
• Income: Profit earned during a period (Income = Revenue - Expenses).
• Gain: Profit arising from irregular transactions (e.g., sale of fixed assets).
• Loss: Excess of expenses over revenues.
• Goods: Physical items dealt in by the trader for resale purposes.
• Debtor: A person or entity who owes money to the business for goods/services bought on credit.
• Creditor: A person or entity to whom the business owes money for goods/services bought on credit.

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5. Book-Keeping, Accounting, and Accountancy

Feature	Book-Keeping	Accounting	Accountancy
Stage	Primary stage (Recording & Classifying).	Secondary stage (Summarizing & Interpreting).	Body of knowledge (Theory & Rules).
Nature	Routine and clerical in nature.	Analytical and decision-making nature.	Includes designing the accounting system.
Performed By	Junior staff.	Senior staff.	Accountants / Decision Makers.

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6. Users of Accounting Information

• Internal Users:
  • Owners / Shareholders
  • Management
  • Employees and Workers
• External Users:
  • Banks and Financial Institutions
  • Creditors / Suppliers
  • Government and Tax Authorities
  • Investors and Potential Investors
  • Public / Researchers

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7. Systems of Accounting

1. Double Entry System: Every transaction has two-fold effects—Debit one aspect and Credit another aspect. It is the most scientific and widely accepted system.
2. Single Entry System: Incomplete system of recording where both aspects of transactions are not recorded for all entries (maintained usually by small businesses).

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8. Basic Accounting Equation

The entire system of accounting is based on this fundamental equation: Assets = Liabilities + Capital

Alternatively:

• Capital = Assets - Liabilities
• Liabilities = Assets - Capital