NCERT Solutions for Class 11 Accountancy – Chapter 1: Introduction to Accounting

Q.1 Define accounting.

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Accounting is a process of identifying, measuring, recording the business transactions and communicating thereof the required information to the interested users.

Q.2 State the end product of financial accounting.

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End product of accounting are the financial statements (i.e. Profit & Loss account and Balance Sheet) and reports which provide information that are useful to a variety of users who want to know the profitability and financial position of an enterprise.

Q.3 Enumerate main objectives of accounting.

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Objectives of Accounting:

• Maintenance of records of Business Transactions.
• Calculation of Profit and Loss.
• Depiction of Financial Position.
• Providing Accounting information to its users.

Q.4 Who are the users of accounting information?

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Users of accounting information can be divided into two categories: Internal and External users.

Internal users include: Chief Executive, Financial Officer, Vice President, Business Unit Managers, Store Managers and Line Supervisors etc.

External users include: Present and Potential investors (shareholders), Creditors (Banks and other Financial Institutions, Debenture-holders and other Lenders), Tax Authorities, Regulatory Agencies (Dept. of Company Affairs, SEBI, Trade Associations and Customers etc.

Q.5 State the nature of accounting information required by long-term lenders.

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Long-term lenders want information about the creditworthiness and the ability of the enterprise to pay interest and repayment of their loans.

Q.6 Who are the external users of information?

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External users are potential investors, creditors, lenders, employee unions, customers and Government etc.

Q.7 Enumerate information needs of management.

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Management needs timely information regarding sales, costs, profitability etc for planning, controlling and decision making.

Q.8 Give any three examples of revenue.

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Examples of Revenue are commission, interest, dividend, royalties, rent received etc.

Q.9 Distinguish between debtors and creditors; profit and gain.

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Debtors are persons and/or other entities who owe to an enterprise an amount for buying goods and services on credit, while Creditors are persons and/or other entities who have to be paid by an enterprise an amount for providing the enterprise goods and services on credit.

The excess of revenues of a period over its related expenses during an accounting year is profit while gain is a profit that arises from events or transaction which are the operating activities of the business such as sale of fixed assets or winning a court case.

Q.10 ‘Accounting information should be comparable’. Do you agree with this statement? Give two reasons.

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Comparability means that the users should be able to compare the accounting information of an enterprise of the period either with that of other periods, known as intra-firm comparison or with the accounting information of other enterprises, known as inter-firm comparison.

Q.11 If the accounting information is not clearly presented, which of the qualitative characteristics of the accounting information is violated?

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If the accounting information is not clearly presented, Reliability characteristics are violated.

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 transaction that have occurred, measured and displayed.

Q.12 “The role of accounting has changed over the period of time”. Do you agree? Explain.

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For centuries, the role of accounting has been changing with the changes in economic development and increasing societal demands. It describes and analyses a mass of data of an enterprise through measurement, classification and summarization and reduces those date into reports and statements.

Q.13 Giving examples, explain each of the following accounting terms:

1. Fixed assets;
2. Revenue;
3. Expenses;
4. Short-term liability;
5. Capital

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1. Fixed assets: Fixed assets held on a long-term basis such as land, buildings, machinery, plant and furniture, etc.
2. Revenue: Revenues are the amounts of the business earned by selling its products or providing services. The common items of revenue are Commission, interest, dividends, royalties, rent received, etc.
3. Expenses: Costs incurred by a business in the process of earning revenue are known as expenses. The usual items of expense are Depreciation, rent, wages, salaries, interest, light and water, telephone, etc.
4. Short-term liability: These are obligations that are payable within a period of one year, for example, Creditors, Bills payable and bank overdraft etc.
5. 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.

Q.14 Define revenues and expenses.

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Revenues are the amounts of the business earned by selling its products or providing services to customers called sales revenue. While 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..

Q.15 What is the primary reason for the business students and others to familiarise themselves with the accounting discipline?

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In present scenario, everybody is required to get familiarized with accounting discipline, because accounting today is much more than just book-keeping and preparation of financial reports. With the help of accounting, now we are capable of working in exciting new growth areas such as forensic accounting (solving crimes such as computer hacking and the theft of large amounts of money on the internet), e-commerce (designing web-based payment system), financial planning, environmental accounting etc.

This realization came due to the fact that accounting is capable of providing the kind of information that managers and other interested persons need in order to make better decisions. This aspect of accounting gradually assumed so much importance that it has now been raised to the level of an information system.

Q.16 What is accounting? Define its objectives.

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Accounting is a process of identifying, measuring, recording the business transactions and communicating thereof the required information to the interested users.

Objectives of Accounting:

• Maintenance of Records of Business Transactions: Accounting is used for the maintenance of a systematic record of all financial transactions in book of accounts.
• 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.
• 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.
• Communicating accounting information to 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, users such as investors, unions and employee groups, Lenders and financial institutions, suppliers and creditors, customers, Government and competitors.
• Protecting business assets: Another objective of accounting is to have records of assets owned by the business. Accounting maintains record of assets owned by the business which enables the management to protect them and exercise control.

Q.17 Explain the factors which necessitated systematic accounting.

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A systematic accounting is the demand of time. Now the time has changed, this is the age of industrial advancement. Now the recording of business transaction is not only necessary from an owner’s point of view.

On the other hand, demand for corporate social responsibility is increased day by day. In such a situation, if systematic accounting is not followed, we will not able to save our face in case of any unfavourable circumstances.

The factors that are necessitated systematic accounting are:

• Identification of financial transactions: Accounting records only those transactions and events which are of financial nature as they bring in the resources of a firm.
• Measuring the identified transaction: Accounting measures the transactions and events in terms of a common measurement unit, i.e., the currency of the country.
• Recording: Accounting is an art of recording business transaction in the books of accounts. Recording is the process of recording business transactions of financial character in the book of original entry, i.e. journal.
• Classifying: Accounting is an art of classifying business transaction. Classification is the process of collecting similar transactions at one place by opening accounts in the ledger book.
• Summarising: Accounting is an art of summarizing financial transactions. This involves presenting the classified data in a manner which is understandable and useful to internal as well as external users of accounting statements.
• Analysis and interpretation: Financial data is analysed and interpreted so that the users of financial data can make a meaningful judgement of the financial performances (profit) and financial position of the business.
• Communicating: Accounting function involves communication the financial data, i.e., financial statement to its users. The accounting information must be provided in time and presented to the users so that decisions are taken at the appropriate time.

Q.18 Describe the informational needs of external users.

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The external users are interested in the following:

• Investors and potential investors: Information on the risks and return on investment.
• Unions and employee groups: information on the stability, profitability and distribution of wealth with in the business.
• Lenders and financial institutions: information on the creditworthiness of the company and its ability to repay loans and pay interest.
• Suppliers and Creditors: information on whether amounts owed will be repaid when due and on the continued existence of the business.
• Customers: information on the continued existence of the business and thus the probability of a continued supply of products, parts and after sales service.
• Government and other regulators: information on the allocation of resources and the compliance to regulations.
• Competitors: information on the relative strengths and weaknesses of their competition and for comparative and bench-marking purposes.

Q.19 What do you mean by an asset and what are different types of assets?

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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 Bazar.

Assets can be broadly classified into two types: Fixed and Current Assets.

1. Fixed assets are assets held on a long-term basis, such as land, buildings, machinery, plant, furniture and fixtures. These assets are used for the normal operations of the business.
2. Current assets are assets held on a short term basis such as debtors (accounts receivable), bills receivable (notes receivable), stock (inventory), cash and bank balances.

Q.20 Explain the meaning of gain and profit. Distinguish between these two terms.

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Profit: The 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 court case, appreciation in the value of an asset.

Q.21 Explain the qualitative characteristics of accounting information.

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Qualitative characteristics are the attributes of accounting information which tend to enhance its understandability and usefulness.

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.

Relevance:

• To be relevant, information must be available in time, must help in prediction and feedback and must influence the decisions of users by:
• Helping them form prediction about the outcomes of past, present or future events;
• Confirming or correcting their past evaluations.

Understandability:

• It 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.
• Accountants should present the comparable information in the most intelligible manner without sacrificing relevance and reliability.

Comparability:

• 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.

Q.22 Describe the role of accounting in the modern world.

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For centuries, the role of accounting has been changing with the changes in economic development and increasing societal demands. It describes and analyses a mass of data of an enterprise through measurement, classification and summarization and reduces those date into reports and statements, which show the financial condition and results of operations of that enterprise. Hence it is regarded as a language of business.

It also performs the service activity by providing quantitative financial information that helps the users in various ways.

Accounting as an information system collects and communicates economic information about an enterprise to a wide variety of interested parties.