Introduction to Accounting

Chapter 1

Class 11 Accountancy
As per NCERT/Karnataka PUC Syllabus

Presented by:
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Class: _____________________
Learning Objectives

Understand Accounting Identify Features Evaluate Benefits

Define accounting and explain its importance in Recognize the key characteristics and functions Analyze the advantages and limitations of
business and daily life of accounting systems accounting information

Identify Users Explore Branches Master Terminology

Distinguish between internal and external users Differentiate between financial, cost, and Learn and apply basic accounting terms and
of accounting information management accounting concepts

By the end of this chapter, you will have a solid foundation in accounting principles that will prepare you for more
advanced topics.
Need for Accounting

For Businesses In Daily Life

Tracks financial transactions and performance Helps manage personal finances and budgets
Helps in decision-making and planning Tracks income and expenses
Ensures legal compliance and tax reporting Assists in financial planning and saving
Provides information to stakeholders Helps in filing personal tax returns

Example: Example:
A shop owner needs accounting to track daily sales, manage A student tracking monthly allowance, expenses, and savings to
inventory, and calculate profits. manage pocket money effectively.

Key Takeaway: Accounting is essential for both businesses and individuals to track, manage, and make informed decisions about financial
resources.
Meaning and Definition of Accounting

What is Accounting?
Accounting is the process of recording, classifying, summarizing, analyzing, and interpreting financial transactions and communicating the results
to users for decision-making.

Recording Classifying Summarizing Communicating

Definition by AICPA
"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."
- American Institute of Certified Public Accountants

Simple Explanation
Features of Accounting

Monetary Measurement Business Entity Concept Historical Record

Only transactions that can be expressed in The business is treated as a separate entity Accounting records transactions that have already
monetary terms are recorded. Non-monetary distinct from its owners. Owner's personal occurred. It maintains a chronological record of all
events, however important, are not recorded. transactions are kept separate. financial events.

Example: Purchase of ₹5,000 worth of goods is recorded, Example: Owner's personal expenses are not considered Example: Sales made last month are recorded with their
but hiring a talented employee is not. business expenses. actual date.

Dual Aspect Going Concern Verifiable Evidence

Every transaction has two aspects - debit and Assumes that the business will continue to All accounting entries are supported by objective
credit. For every debit, there is an equal credit operate for the foreseeable future without evidence like receipts, invoices, and bank
(Assets = Liabilities + Capital). significant reduction in operations. statements.

Example: When goods are purchased on credit, both Example: Assets are recorded at cost rather than Example: A purchase is recorded only when there is an
inventory and accounts payable increase. liquidation value. invoice to support it.
Functions of Accounting

Recording Classifying
Systematic recording of financial transactions in the books of accounts. Grouping similar transactions and posting them to appropriate accounts.

Example:
Recording a sale of ₹10,000 in the sales journal with date, customer Example:
Grouping all sales transactions in the Sales Account and all purchase
name, and invoice number. transactions in the Purchases Account.

Summarizing Analyzing & Interpreting

Presenting classified data in a manner useful to internal and external users. Establishing relationships between different items and drawing meaningful
conclusions.
Example:
Preparing financial statements like Income Statement and Balance
Sheet at the end of an accounting period. Example:
Calculating profit margin ratio to understand business profitability or
comparing current year's sales with previous year's sales.
Advantages and Limitations

Advantages Limitations

Provides Financial Information Records Only Monetary Transactions

Offers systematic record of all financial transactions Non-monetary factors like employee satisfaction are not recorded

Aids Decision Making Based on Historical Cost

Helps management make informed business decisions Does not consider current market values or inflation

Legal Requirement Possibility of Manipulation

Fulfills statutory requirements for businesses Financial statements can be manipulated within accounting rules

Comparative Analysis Ignores Qualitative Aspects

Allows comparison of performance over different periods Quality of products, customer satisfaction not reflected

Evidence in Legal Matters Requires Technical Knowledge

Accounting records serve as evidence in legal disputes Understanding accounting requires specialized knowledge

Balancing Perspective
Despite its limitations, accounting remains essential for business operations. Understanding both its strengths and weaknesses helps users interpret financial
information more effectively and make better decisions.
Accounting Information & Users

Internal Users External Users

People within the organization who use accounting information for planning, People outside the organization who use accounting information to make
organizing, and controlling daily operations. decisions related to the business.

Owners/Shareholders Creditors/Lenders
Assess business performance and return on investment Assess creditworthiness and ability to repay loans

Management Investors
Make decisions about operations and future strategies Evaluate potential investment opportunities

Employees Government Agencies

Assess company stability and growth prospects Ensure compliance with regulations and tax laws

Suppliers
Determine whether to extend credit for purchases

Customers
Assess stability and longevity of the business
Branches of Accounting

Financial Accounting Cost Accounting Management Accounting

Records, classifies, and summarizes financial Analyzes and records costs associated with Provides accounting information to managers
transactions to prepare financial statements for production of goods and services. for planning, organizing, and decision-making.
external users.
Determines cost of products/services Forward-looking and predictive
Follows standardized principles (GAAP) Helps in cost control and reduction No fixed rules or formats
Focuses on historical data Assists in pricing decisions Includes budgeting and forecasting
Mandatory for all businesses Primarily for internal management use Focuses on specific segments of business

Prepares Balance Sheet, Income Statement

Qualitative Characteristics

Relevance Reliability
Information must be capable of making a difference in the decisions made Information must be free from material error and bias, and faithfully
by users. It should help in predicting future outcomes or represent what it purports to represent. Users must be able to depend on it.
confirming/correcting past evaluations.
Example:
Financial statements audited by independent accountants are considered
Example: more reliable than unaudited statements.
Current sales figures are relevant for predicting future revenue, while 10-year-old
sales data may not be as relevant for current decisions.

Comparability Understandability
Information should be presented in a way that enables users to identify Information should be presented clearly and concisely to make it
similarities and differences between two sets of economic phenomena. comprehensible to users who have reasonable knowledge of business and
economic activities.
Example:
Accounting as an Information Source

How Accounting Provides Information

Accounting serves as a vital information system that collects, processes, and communicates financial data to help users make informed decisions. It transforms raw
financial data into meaningful information.

Raw Financial Data Accounting Process Financial Information Informed Decisions

(Invoices, Receipts) (Recording, Classifying) (Reports, Statements) (Actions, Strategies)

Business Example Personal Example

A student uses accounting principles to manage personal finances.
A retail store owner uses accounting information to make business decisions.

Scenario:
Scenario:
The student tracks monthly expenses and income in a personal budget.
The store owner reviews monthly sales reports and inventory records.

Information:
Sales of winter clothing decreased by 30% compared to last year, while Information:
Entertainment expenses are 40% of monthly allowance, while savings are
summer clothing sales increased by 20%. only 10%.
Basic Accounting Terms (1/2)

Assets Liabilities Capital/Owner's Equity

Resources owned by a business that have Obligations or debts that a business owes to The owner's investment in the business plus
economic value and are expected to provide others and must pay in the future. accumulated profits minus withdrawals.
future benefits.
Example: Bank loans, accounts payable, mortgages Example: Initial investment, retained earnings

Example: Cash, inventory, buildings, equipment, vehicles

Revenue/Income Expenses Accounting Equation

Inflow of assets resulting from the sale of goods Costs incurred in the process of earning revenue The fundamental relationship that forms the basis
or services to customers. or running the business. of the double-entry accounting system.

Example: Sales revenue, commission earned, rent Assets = Liabilities + Owner's Equity
Example: Rent paid, salaries, utilities, advertising costs
received
Basic Accounting Terms (2/2)

Journal Ledger Voucher

The book of original entry where transactions are A book containing accounts where transactions A document that serves as evidence of a
recorded chronologically before being posted to from journals are posted and classified according transaction and contains details about it.
ledger accounts. to their nature.
Example: Cash receipt, invoice, payment slip
Example: Recording a ₹5,000 cash sale in the sales Example: Cash account, Sales account, Rent expense
journal account

Financial Statements Drawings Trial Balance

Reports that summarize a company's financial Withdrawals of cash or other assets from the A statement of all debit and credit balances from
position, operations, and cash flows. business by the owner for personal use. the ledger to check the arithmetical accuracy of
the books.
Example: Balance Sheet, Income Statement, Cash Flow Example: Owner takes ₹10,000 from business for
Statement personal expenses
Example: List of all account balances to verify that debits
equal credits
Conclusion

Key Takeaways

Accounting is Essential
Accounting serves as the language of business and is crucial for both businesses and individuals to track financial activities.

Systematic Process
Accounting follows a systematic process of recording, classifying, summarizing, and interpreting financial information.

Multiple Users
Accounting information serves various internal and external users, each with different information needs.

Quality Matters
The usefulness of accounting information depends on its relevance, reliability, comparability, and understandability.

Foundation for Further Study

Understanding basic accounting concepts and terminology provides the foundation for more advanced accounting topics.
Thank You & Q&A

Thank You!
For your attention and participation in this introduction to accounting.

Questions & Answers

Please feel free to ask any questions about the concepts covered in this presentation.

Space for Q&A session

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