Class 11 Accountancy Notes
AHSEC Class 11 Notes
Unit – 1: Introduction to Accounting
Q.1. Define Book Keeping and
Accounting. Mention their merits and demerits. Distinguish between them.
Ans: Book keeping (1997, 1998, 2002, 2004)
Book keeping is an activity concerned with the recording of
financial data relating to business operation in a significant and orderly
manner.
According to the R.N carter “Book –
keeping is the science and arts of correctly recording in the book of accounts
all those business transactions that result in the transfer of money or money’s
worth “.
Thus we can say that it is an art of
recording business transaction in a systematic manner in the book of business.
Accounting (2001, 2003,
2005, 2007, 2008, 2009, 2015, 2018, 2019)
Accounting is the analysis and interpretation of book-keeping
records. It includes not only maintains of accounting records but also the
preparation of financial and economic information Which
involves the measurement of transaction and other events
pertaining to a business.
According to the American institute of certified public accounts”
The arts of recordings, classifying and summarizing in a significant manner and
in terms of money transaction and events which in parts, at least of a
financial charter and interpreting the result there of”.
Advantages and
limitations of Accounting
The main
advantages of accounting are mentioned below: 2000,
2006, 2017
a)
Accounting
information is used by the management in taking various menageries at decision.
b)
It shows the
financial position of business on a particular data.
c)
Accounting data
are accepted by the tax authorities as authentic and reliable. Hence they can
be used as the basis for discharging tax liabilities.
d)
Accounting
supplies financial data which are accepted by the insurance company as reliable
figure for settlement of insurance claim.
Following are the
limitations of accounting: 1999,
2003
a)
According to
records only those transactions which can be measured in monetary terms. There
may be certain important non-monitory transaction but are not recorded.
b)
Effects of price
level changes are not considered.
c)
Personal bias of
accountant affects the accounting statement.
Difference Between book keeping and
accountancy 1997,
2000, 2003, 2005, 2008, 2016
|
Basis of Difference |
Book –
Keeping |
Accountancy |
|
a.
Functions |
Its function is to record business
transaction. |
The function of accounting is the recording,
classifying, summarizing, interpreting business transaction and communicating
result. |
|
b.
Transactions |
Recording of transactions in books of
original entry. |
To examine these recorded transactions in
order to find out their accuracy. |
|
c.
Posting |
To make posting in ledger. |
To examine this posting in order to ascertain
its accuracy. |
|
d. Income Statement and Balance Sheet |
Preparation of trading, Profit & loss
account and balance sheet is not book keeping. |
Preparation of trading, profits and loss
account and balance sheet is included in it. |
|
e. Special skill and knowledge |
It does not require special skill and
knowledge. |
It requires special skill and knowledge. |
Q.2. What
are the objectives and features of book keeping and accounting? 2007, 2009,
Ans: Objectives of Book- keeping: A businessman records the transaction in a set of book in order to
ascertain the following objects: 1999, 2002, 2005, 2007, 2017
a)
To have a
permanent records of each transaction of the business.
b)
To show the
financial effect on the entity of each transaction recorded.
c)
To know the
financial position of the business on a particular data.
d)
For prevention of
frauds and errors.
The mean objectives
of accounting are as follow: 2001,
2004, 2019
a)
To keep
systematic and authentic records of all the financial transaction of a
business.
b)
To ascertain the
net profit or loss suffered on account of carrying the business.
c)
To ascertain the
financial position of business on a particular date.
d)
To determine tax
liability.
Features
of Book Keeping
a) Book
Keeping is a Science.
b) Book
keeping is an art.
c) It involves
the recording of pecuniary (Relating to or consisting of money) transactions.
d) Recording
of transaction is done in proper set of books.
Features
of Accounting: 2007
a)
It is an art of recording of transactions.
b)
Accounting’s main feature is
also classifying all business transactions.
c)
Summarising of business transactions by
preparing trial balance.
d)
Interpretation of financial results.
Q.3. What
is source document? What are its various types? Mention its features. 2006, 2010, 2019
Ans: A source document is a written document that provides
details of a transaction and the evidence that the transaction has taken place.
Features of Source Documents: Source documents contain the following
information:
Ø
Date of
transaction.
Ø
Names and
addresses of parties involved in the transaction.
Ø
Description of
the goods or services.
Ø
Amount involved.
Ø
Terms and
conditions related to trade discounts, cash discount and other details related
to delivery.
Ø
Signature of the
concerned parties
Types of Source Document: Invoice, Credit
note, Debit note, Payment voucher, Cheque counterfoil, Bank statement, Cash
memo
Q.4. Name the parties who are
interested in accounting information. 2010,
2015, 2018
Ans: Parties interested in accounting information:
a)
Owners: The owners
provide funds or capital for the organization. Owners, being businessmen,
always keep an eye on the returns from the investment.
b)
Management: The
management of the business is greatly interested in knowing the position of the
firm. The accounts are the basis with the help of which the management can
study the merits and demerits of the business activity.
c)
Creditors: Creditors
are the persons who supply goods on credit, or bankers or lenders of money. It
is usual that these groups are interested to know the financial soundness
before granting credit.
d)
Employees: Payment of
bonus depends upon the size of profit earned by the firm. The more important
point is that the workers expect regular income for living. The increase in
wages, Bonus, better working conditions etc. depend upon the profitability of
the firm.
e)
Other users are: Investors,
Government, Consumers, Research
Scholars.
Q.5.
Mention any four process of accounting. 2008,
2009
Ans: Functions
(Process) of accounting:
a)
Record Keeping
Function: The primary function of accounting relates to recording,
classification and summary of financial transactions-journalisation, posting,
and preparation of final statements. These facilitate to know operating results
and financial positions.
b)
Managerial Function: Decision
making programme is greatly assisted by accounting. The managerial function and
decision making programmes, without accounting, may mislead.
c)
Legal Requirement
function: Auditing is compulsory in case of registered firms. Auditing is
not possible without accounting. Thus accounting becomes compulsory to comply
with legal requirements.
d)
Language of
Business: Accounting is the language of business. Various transactions are
communicated through accounting. There are many parties-owners, creditors,
government, employees etc., who are interested in knowing the results of the
firm and this can be communicated only through accounting.
Q.6. What
is accounting information? What are its characteristics? Mention its types. 2006, 2007, 2009, 2015, 2018, 2019
Ans: Accounting Information is a set of financial data indicating an organization's resources,
revenues, debts or expenses. Accounting information must possess the following qualitative characteristics:
a)
Reliability: Reliability means the users must be able to depend on the
information.
b)
Relevance: To be relevant, information must be available in time, must
help in prediction and feedback.
c)
Understandability: Understandability means decision-makers must
interpret accounting information in the same sense as it is prepared and
conveyed to them.
d)
Comparability: The users of the
accounting information must be able to compare various aspects of an entity over different time period and
with other entities.
e)
Timeliness: Timeliness is how quickly information is
available to users of accounting information. The less timely (thus resulting
in older information), the less useful information is for decision-making.
Timeliness matters for accounting information because it competes with other
information.
Types of accounting
information: Accounting information are presented in the following form:
a)
Income statement (Trading and Profit &
Loss account)
b)
Position Statement (Balance Sheet)
c)
Statement of Changes in financial statement
(Cash flow and funds flow statement)
d)
Vale added Statement.
e)
Social performance report etc.
Q.7. What is Transactions? What are
its characteristics? Mention its various types. 1999, 01, 03, 04, 06,
Ans: Transaction: Transaction
means the exchange of money or money’s worth from one account to another
account. Events like purchase and sale of goods, receipt and payment of cash
for services or on personal accounts, loss or profit in dealings etc., are the
transactions”. It is an economic activity of the business that causes a change
in an organization’s financial position or net worth, resulting from normal
business activity.
The following are the characteristics of transaction.
a)
There must be two
parties in a transaction.
b)
The events must
be measurable in terms of money.
c)
The event
involves the transfer of property or service.
d)
The event must
charge the financial position of a person or an institution.
e)
Change may be
qualitative or quantitative.
Types of transaction: Transactions
may be classified on the following basis:
a)
On the basis of mode of payment:
1.
Cash transaction
2.
Credit transaction
3.
Paper transaction
b)
On the basis of exchange:
1.
Exchange transaction
2.
Non-Exchange transaction
c)
On the basis of entity involved:
1.
External transaction
2.
Internal transaction.
Q.8. What is an event? Distinguish
between transactions and events. 2017
Ans: Event:
An event is a happening indicating a business transaction requiring a journal
entry to be passed. Only monetary events are regarded as transactions. So, all
transactions are events though all events are not transactions.
Difference
between transaction and event
|
Transaction |
Event |
|
1.
It is the consequence of exchange. 2.
It can be internal as well as external. 3.
It is an economic activity. 4.
All transactions are events. 5.
It can involve more than two party. |
1.
It is consequence of occasion. 2.
It is always internal activity. 3.
It is a historical activity. 4.
All events are not transactions. 5.
Only one party is involved. |
Q.9.
Mention three branches of accounting.
Ans: The branches of accounting are:
a)
Financial accounting;
b)
Cost accounting; and
c)
Management accounting.
a)
Financial
Accounting: It is the original form of accounting. It is mainly concerned with
the preparation of financial statements for the use of outsiders like
creditors, debenture holders, investors and financial institutions.
b)
Cost Accounting: It is that
branch of accounting which is concerned with the accumulation and assignment of
historical costs to units of product and department, primarily for the purpose
of valuation of stock and measurement of profits.
c)
Management Accounting:
It
is an accounting for the management i.e., accounting which provides necessary
information to the management for discharging its functions.
Q.10. What is Capital and Revenue
Expenditure? Explain the rules for determining Capital expenditure. Distinguish
between capital and revenue expenditure. 1999,
2002, 2004, 2005, 2015, 2017, 2018, 2019
Ans: Capital Expenditure: The
transactions of capital expenditure give benefits for more than one accounting
period, such as acquisition and improvement of assets, acquisition of special
rights, increasing of earning capacity, restoration of operating efficiency. It
is non-recurring in nature. Therefore, they are shown on the assets side of the
Balance Sheet.
Rules for
Determining Capital Expenditure
Ø An
expenditure incurred to acquire long term assets (at least more than one
accounting period).
Ø Such Long
term assets must be uses in business to earn profits and not meant for resale.
Ø Expenditure
incurred to keep the assets in working condition.
Ø Expenditure
is incurred to increase earning capacity of a business.
Ø Preliminary
expenses incurred before the commencement of business is considered capital
expenditure.
Some examples of capital expenditure: (i)
Purchase of land, building, machinery or furniture; (ii) Cost of leasehold land
and building; (iii) Cost of purchased goodwill; (iv) Preliminary expenditures;
(v) Cost of additions or extensions to existing assets; (vi) Cost of
overhauling second-hand machines; (vii) Expenditure on putting an asset into
working condition; and (viii) Cost incurred for increasing the earning capacity
of a business.
Revenue
Expenditure: It is incurred for generating revenue in the current accounting
period and its benefit expires with such period. It helps to maintain the
normal working condition of a business. It is charged as expenses in Trading /
Profit & Loss Account on debit side.
Rules for
Determining Revenue Expenditure
Any expenditure which cannot be recognised as
capital expenditure can be termed as revenue expenditure. A revenue expenditure
temporarily influences only the profit earning capacity of the business. An
expenditure is recognised as revenue when it is incurred for the following
purposes :
Ø Expenditure
for day-to-day conduct of the business.
Ø Expenditure
for the benefits of less than one year.
Ø Expenditure
on consumable items, on goods and services for resale.
Ø Expenditures
incurred for maintaining fixed assets in working order. For example, repairs,
renewals and depreciation.
Some examples of Revenue Expenditure: (i)
Salaries and wages paid to the employees; (ii) Rent and rates for the factory
or office premises; (iii) Depreciation on plant and machinery; (iv) Consumable
stores; (v) Inventory of raw materials, work-in-progress and finished goods;
(vi) Insurance premium; (vii) Taxes and legal expenses; and (viii)
Miscellaneous expenses. The
accounting treatment of capital and revenue expenditure are as under:
Ø Revenue expenditures – Debited to Profit and Loss Account.
Ø Capital Expenditures – Shown as assets in the Balance Sheet.
The following are the points of distinction between Capital
Expenditure and Revenue Expenditure :
|
Basis |
Capital
Expenditure |
Revenue
Expenditure |
|
1. Benefits |
Its benefit
realised for more than one accounting period. |
Its
benefits enjoyed within a particular accounting period. |
|
2. Nature |
It is
non-recurring (Irregular) in nature. |
It is
Recurring (Regular) in nature. |
|
3.
Conversion |
All Capital
Expenditures eventually become Revenue Expenditures like depreciation |
Revenue
Expenditures are not generally capital expenditures. |
|
4. Matching |
These are
not matched with Capital Receipts. |
These are
matched with Revenue Receipts. |
|
5. Shown |
These are
shown in balance sheet. |
These items
are shown in income statement. |
Ans: Assets: Any
physical thing or right owned that has a money value is an asset. In other
words, an asset is that expenditure which results in acquiring of some property
or benefits of a lasting nature. Assets
can be broadly classified into three types:
a)
Fixed Assets
b)
Current Assets 2015, 2018
c)
Fictitious Assets
a)
Fixed Assets are
assets held on a long-term basis usually for more than one year, such as land,
buildings, machinery, plant, furniture and fixtures. These assets are used for
the normal operations of the business. Fixed assets are further classified into
three parts:
Tangible assets: It refers to those
assets which can be touched and seen. For example, vehicle, plant and
machinery, equipments.etc.
Intangible assets: It refers to those
assets which cannot be touched and seen. For example, goodwill, trademark,
patents, copyright etc.
Wasting assets or Depleting assets: It
refers to those assets which exhausted in value by way of depletion. For
example, Oil well, coal mines.
b)
Current Assets
are assets held on a short-term basis such as debtors (accounts receivable),
bills receivable (notes receivable), stock (inventory), temporary marketable
securities, cash and bank balances.
c)
Fictitious
assets: It refers to those assets which do not have any physical form and
realisable value such as preliminary expenses, discount on issue of shares etc.
Liabilities: It means
the amount which the firm owes to outsiders except the proprietors. In the
words of Finny and Miller, “Liabilities are debts; they are amounts owed to
creditors; thus the claims of those who ate not owners are called liabilities”.
In simple terms, debts repayable to outsiders by the business are known as
liabilities. Liabilities are classified as
a)
long-term
liabilities or Fixed liabilities
b)
Short-term
liabilities or current liabilities 2015,
2018
c)
Contingent
liabilities.
a)
Long-term
liabilities are those that are usually payable after a period of one year, for
example, a term loan from a financial institution or debentures (bonds) issued
by a company.
b)
Short-term liabilities
are obligations that are payable within a period of one year, for example,
creditors, bills payable, bank overdraft.
c)
Contingent
Liabilities are those which may or may not become payable in future. For
example, financial cases pending, guarantee given, bills discounted from bank
etc.
Q.12.
Explain the term accounting cycle.
Ans:
The
sequence of accounting procedures used to record, classify, and summarize
accounting information is often termed the accounting cycle. At
this point, we have illustrated a complete accounting cycle as it relates to
the preparation of a balance sheet for a service-type business with a manual
accounting system. The accounting procedures discussed to this point may be
summarized as follows.
a)
Recording
transaction in the journal
b)
Post to ledger
accounts
c)
Prepare a trial
balance
d)
Prepare financial
statements: It includes Trading Account, Profit and Loss Account and Balance
Sheet.
Q.13.
Explain the following accounting term.
Ø
Debtor: A person
to whom goods have been sold on credit or who owes money to the firm is called
a debtor.
Ø
Creditor: A person from whom goods have been
purchased or to whom money owes by the firm is called creditor.
Ø
Capital: It means
the amount (in terms of money or assets having money value) which the
proprietor has invested in the firm or can claim from the firm. It is also
known as owner’s equity, Proprietor’s claim or net worth. Owner’s equity means
owner’s claim against the assets. It will always be equal to assets less
liabilities, say: Capital = Assets - Liabilities.
Ø
Goods: It is a
general term used for the articles in which the business deals; that is, only
those articles which are bought for resale for profit are known as Goods.
Ø
Revenue: It is
defined as the inflow of assets form business operations which result in an
increase in the owner’s equity. It includes all incomes like sales receipts,
interest, commission, brokerage etc.
However, receipts of capital nature like additional capital, sale of
assets etc., are not a part of revenue. 1998,
2000
Ø
Income: It is an increase in the net worth of
the business from business or non-business transactions. It is a wider term
which includes profit also. 1998
Ø
Expense: The terms
‘expense’ refers to the amount incurred in the process of earning revenue. If
the benefit of an expenditure is limited to one year, it is treated as an
expense (also know is as revenue expenditure) such as payment of salaries and
rent. 1998
Ø
Expenditure: Expenditure
takes place when an asset or service is acquired. The purchase of goods is
expenditure, where as cost of goods sold is an expense. Similarly, if an asset
is acquired during the year, it is expenditure, if it is consumed during the
same year; it is also an expense of the year.
Ø
Purchases: Buying of
goods by the trader for selling them to his customers is known as purchases.
Purchases can be of two types. Viz, cash purchases and credit purchases. If
cash is paid immediately for the purchase, it is cash purchases, if the payment
is postponed, it is credit purchases.
Ø
Sales: When the
goods purchased are sold out, it is known as sales. It can be of two types,
viz., cash sales and credit sales. If the sale is for immediate cash payment,
it is cash sales. If payment for sales is postponed, it is credit sales.
Ø
Stock: The goods
purchased are for selling, if the goods are not sold out fully, the remaining
unsold part said to be a stock. If there is stock at the end of the accounting
year, it is said to be a closing stock. This closing stock at the end of the
year will be the opening stock for the next year.
Ø Drawings: It is the amount of money or the value
of goods which the proprietor takes for his domestic or personal use. It is
usually subtracted from capital. 2008
Ø
Losses: Loss
really means something against which the firm receives no benefit. It
represents money given up without any return. It may be noted that expense
leads to revenue but losses do not. (e.g.) loss due to fire, theft and damages
payable to others. 1998
Ø
Account: It is a
statement of the various dealings which occur between a customer and the firm.
It can also be expressed as a clear and concise record of the transaction
relating to a person or a firm or a property (or assets) or a liability or an
expense or an income.
Ø
Invoice: While
making a sale, the seller prepares a statement giving the particulars such as
the quantity, price per unit, the total amount payable, any deductions made and
shows the net amount payable by the buyer. Such a statement is called an
invoice.
Ø
Voucher: A voucher
is a written document in support of a transaction. It is a proof that a
particular transaction has taken place for the value stated in the voucher.
Voucher is necessary to audit the accounts.
Ø
Proprietor: The person
who makes the investment and bears all the risks connected with the business is
known as proprietor. 2010
Ø
Discount: When
customers are allowed any type of deduction in the prices of goods by the
businessman that is called discount. When some discount is allowed in prices of
goods on the basis of sales of the items, that is termed as trade discount, but
when debtors are allowed some discount in prices of the goods for quick
payment, that is termed as cash discount.
Ø
Solvent: A person
who has assets with realizable values which exceeds his liabilities is
insolvent.
Ø
Insolvent: A person
whose liabilities are more than the realizable values of his assets is called
an insolvent.
Ø
Capital: It means
the amount (in terms of money or assets having money value) which the
proprietor has invested in the firm or can claim from the firm. It is also
known as owner’s equity, Proprietor’s claim or net worth. Owner’s equity means
owner’s claim against the assets. It will always be equal to assets less
liabilities, say: Capital = Assets - Liabilities.
Ø
Debit Note: It is a simple statement sent by a
person to another person showing the amount debited to the account of the
latter along with a brief explanation. The debit notes are issued by a trader
relating to purchase returns in order to put up his claim for abatement of his
dues to the other party. 2002
Ø
Credit Note: It is
nothing but a statement sent by one person to another person showing the amount
credited to the account of the latter along with a brief explanation. The
credit notes are used for sales return in order to intimate related
abatement.
Ø
Deferred
Revenue Expenditures: Deferred revenue expenditures represent
certain types of assets whose usefulness does not expire in the year of their
occurrence but generally expires in the near future. These type of expenditures
are carried forward and are written off in future accounting periods.
Ø
Capital
receipts: are defined as “non-recurring receipts’ from the owner of the
business or lender of money creating a liability to either of them”. Which
include proceeds out of sale of assets: capital, bank loan, issue of
debentures, loan, sale of assets.
Ø
Revenue
receipts: Revenue receipts are defined as “ a recurring receipt against
sale of goods in the normal course of business. It may be a non-trading income
of regular or recurring nature.
Ø
Capital
and Revenue Profits: If profit arises out of an ordinary nature
such as sale of goods, it is termed as ‘Revenue Profit’. But, when a profit
arises out of a casual and non-recurring transaction such as sale of assets, it
is termed as Capital Profit.
Ø
Contra
entry: When both the debit and credit aspects of a transaction are
recorded simultaneously in the same book but in different columns, each entry
on the debit side and on the credit side is called a contra entry. 2015, 2018