Introduction to Accounting - Class 11th Accountancy

Meaning of Accounting

• Systematic process: Involves systematic steps.
• Steps involved:
  • Identifying: Determine which financial events to record.
  • Measuring: Assign money value to events.
  • Recording: Initially documented in the primary book (Journal).
  • Classifying: Segregate records into different accounts (Ledger).
  • Summarizing: Create financial statements like Profit & Loss Account, Balance Sheet.
  • Analyzing and Interpreting: Study financial data for performance and decision-making.
  • Communicating: Share financial information with internal and external users.

Financial Statements

• Types of statements:
  • Profit & Loss Account: Known as Income Statement in companies.
  • Balance Sheet: Known as Position Statement, lists assets and liabilities.
  • Purpose: Understand business performance, financial position, assets, and liabilities.

Characteristics of Accounting

• Functions included:
  • Identifying, Measuring, Recording, Classifying, Summarizing, Analyzing, Interpreting, and Communicating.
• Qualitative ignoring: Focuses only on measurable monetary values.
• Bias and Limitations:
  • Personal bias: Different methods preferred by different managers.
  • Ignorance of price level changes: Historical costs not adjusted for inflation.
  • Window dressing: Presentation to hide negative aspects.

Objectives of Accounting

• Maintain records: Keep all financial transactions documented.
• Determine profit or loss: Understand overall profitability or loss.
• Financial position: Assess assets and liabilities.
• Protect business assets: Ensure safety and accuracy of recorded assets.

Advantages of Accounting

• Provides comprehensive business information.
• Assists management in decision-making.
• Facilitates comparison with other business periods or entities.
• Helps in obtaining loans, taxation, and business valuation.
• Can be used as evidence in audits or legal matters.

Limitations of Accounting

• Relies on certain assumptions and approximations.
• Ignores qualitative elements and price level changes.
• Possibility of personal bias affecting recording methods.
• Potential for window dressing to mislead stakeholders.

Branches of Accounting

• Financial Accounting: Focuses on financial statements and profit/loss assessments.
• Cost Accounting: Aims at reducing costs and optimizing resources.
• Management Accounting: Assists managers in strategic decision-making.

Bookkeeping

• Functions: Identifying, Measuring, Recording, and Classifying.
• Scope: Primary focus on creating records, often considered a subset of accounting.
• Nature: Routine-based and handled by junior staff.
• Skills needed: Basic recording and documentation.

Accounting as both Art and Science

• Art: Involves following principles and best practices.
• Science: Systematic recording and analysis of financial transactions.

Users of Financial Statements

• Internal Users:
  • Owners: Interested in profit, loss, and overall financial health.
  • Management: Needs financial data for making strategic decisions.
• External Users:
  • Banks/Financial institutions: Evaluate financial health for loans.
  • Employees/Workers: Interested in bonuses, salaries, and job security.
  • Investors: Assess investment potential and decide on continued investment.
  • Creditors: Evaluate repayment capacity.
  • Customers: Interested primarily when making large purchases.
  • Government and Tax authorities: Assess for tax purposes.
  • Researchers/Public: Analyze company performance and trends.

Differences Between Bookkeeping and Accounting

• Scope:
  • Bookkeeping: Limited to recording and classifying transactions.
  • Accounting: Includes summarizing, analyzing, interpreting, and communicating.
• Stage:
  • Bookkeeping: Initial step.
  • Accounting: Subsequent stage involving analysis and reporting.
• Objective:
  • Bookkeeping: Keep records accurate.
  • Accounting: Determine financial results and communicate them.
• Nature:
  • Bookkeeping: Routine and handled by junior staff.
  • Accounting: Involves specialized skills and is analytical in nature.
• Skills required:
  • Bookkeeping: Basic documentation skills.
  • Accounting: Specialized knowledge and analytical skills.

Conclusion

• Integration of bookkeeping and accounting provides a thorough documentation and analysis framework.
• Importance: Both are essential for accurate financial tracking and strategic decision-making.