Notes Class 11 Chapter 1 Accountancy Maharashtra Board

Introduction to Book- Keeping and Accountancy

Introduction

Book-keeping is the process of recording all business transactions systematically. Businesses and organizations carry out activities that involve money or things of monetary value. These transactions are recorded to help make decisions about whether the business is profitable, sustainable, or needs changes. This information is useful not only to owners and managers but also to stakeholders like the government, investors, customers, employees, and researchers.

Evolution of Accounting

• Ancient India: During Chandragupta Maurya’s time, Kautilya’s book Arthashastra mentioned ways to maintain accounting records, later called “Deshi Nama.”
• Early Civilization: Agents managing wealthy people’s properties kept periodic accounts. Debit and credit records existed as early as the 12th century.
• 1494: Luca Pacioli, an Italian merchant, introduced the Double-Entry Book-keeping System, which became the foundation of modern accounting.
• Industrial Revolution (18th-19th Century): Large-scale businesses and Joint Stock Companies emerged, separating ownership from management. This led to the need for detailed financial records to protect owners and investors.
• 20th Century: Management Accounting developed to help managers analyze financial data for decision-making.
• 21st Century: Accounting evolved into Social Responsibility Accounting due to the growth of business activities, making it essential for modern businesses.

1.1 Meaning and Definition of Book-keeping

Book-keeping is the process of recording business transactions in an organized and systematic way. It involves documenting all financial transactions date-wise to get accurate results at the end of the accounting year.
Definitions:

• Richard E. Strahelm: Book-keeping is the art of analyzing, recording, reporting, and interpreting business transactions for effective control.
• J.R. Batliboi: It is the art of recording business dealings in a set of books.
• Nocth Cott: It involves recording the monetary aspects of financial transactions in the books of accounts.
• R.N. Carter: It is the science and art of correctly recording transactions involving money or money’s worth.

Features of Book-keeping:

• Records day-to-day business transactions.
• Only financial transactions are recorded.
• Records are prepared for a specific period and kept for future reference.
• Follows specific rules and regulations.
• Involves scientific and systematic recording.

Objectives of Book-keeping:

• Keep a complete and accurate record of financial transactions systematically.
• Record transactions date-wise and account-wise.
• Serve as a permanent record for evidence when needed.
• Determine the profit or loss of the business for the financial year.
• Track total assets and liabilities.
• Know what the business owes others and what others owe the business.
• Compare the current year’s performance with previous years or other businesses.

1.2 Importance of Book-keeping

Book-keeping is crucial because:

• Record Keeping: It permanently records transactions, as human memory cannot retain all details.
• Financial Information: Provides details about profits, losses, assets, liabilities, investments, and stock.
• Decision Making: Helps businessmen make informed decisions based on financial data.
• Control: Enables executives to monitor and control business activities.
• Evidence: Provides financial records as evidence in legal disputes.
• Tax Liability: Helps calculate taxes like Income Tax, Property Tax, and GST.

Utility of Book-keeping:

• Owner: Tracks profits, losses, assets, and liabilities.
• Management: Assists in planning, decision-making, and controlling business activities.
• Investors: Helps decide whether to invest based on financial health.
• Customers: Assures them about the business’s ability to supply goods.
• Government: Simplifies tax collection.
• Lenders: Helps assess whether the business is financially stable for loans.
• Development: Supports business growth through accurate financial insights.

1.3 Difference between Book-keeping and Accountancy

1.4 Meaning and Definition of Accountancy

Accountancy is the broader field that includes book-keeping. It involves recording, classifying, and reporting business transactions, following established accounting principles.
Definitions:

• Kohler: Accountancy is the entire body of accounting theory and processes.
• Prof. Robert N. Anthony: It is a system for collecting, summarizing, analyzing, and reporting business transactions in monetary terms.

1.5 Basis (Methods) of Accounting

There are three main methods of accounting:

Cash Basis:

• Records only actual cash receipts and payments.
• Revenue is recognized when cash is received, and expenses when cash is paid.
• Example: A doctor records fees only when patients pay in cash.
• Used by professionals (e.g., doctors, lawyers) and not-for-profit organizations.

Accrual (Mercantile) Basis:

• Records revenue when earned and expenses when incurred, regardless of cash flow.
• Example: A business records sales when goods are delivered, even if payment is due later.
• Commonly used in businesses for accurate financial reporting.

Mixed (Hybrid) Basis:

• Combines cash and accrual methods.
• Revenues and assets are recorded on a cash basis, while expenses are on an accrual basis.
• Note: This method is prohibited by law in India.

1.6 Qualitative Characteristics of Accounting Information

Accounting information must have the following qualities:

• Reliability: Information must be accurate and trustworthy for decision-making. For example, current assets may be more reliable than plant and machinery due to less uncertainty.
• Relevance: Information should influence decisions and include only useful data, avoiding irrelevant details.
• Understandability: Information should be clear and easy to understand for users with varying levels of knowledge.
• Comparability: Information should allow comparisons between different businesses or time periods to assess financial strengths and weaknesses.

1.7 Basic Accounting Terminologies

Understanding key terms is essential for accounting:

1.7.1 Transactions

A transaction is an exchange of goods or services between two parties for money or money’s worth.

Monetary Transactions:

• Involve money or money’s worth.
• Recorded in books of accounts.
• Cash Transactions: Immediate cash payment or receipt (e.g., buying goods for ₹15,000 cash).
• Credit Transactions: Payment or receipt is delayed (e.g., selling goods on credit for ₹8,000).

Non-Monetary Transactions:

• Do not involve money (e.g., barter transactions, exchanging goods for goods).
• Not recorded in books of accounts.
• Entry: Recording a transaction in the books of accounts.
• Narration: A brief explanation of the transaction, written below the journal entry (starts with “Being” or “For”).
• Goods: Items a trader deals in for sale (e.g., medicines for a chemist, vegetables for a vendor).

1.7.2 Capital and Drawings

• Capital: The amount invested by the owner in the business. It is a liability as the business owes it to the owner. Formula: Capital = Assets – Liabilities.
• Drawings: Cash or goods withdrawn by the owner for personal use (e.g., paying personal expenses like college fees from business funds).

1.7.3 Debtors and Creditors

• Debtor: A person who owes money to the business for goods or services bought on credit.
• Creditor: A person to whom the business owes money for goods or services received on credit.
• Bad Debts: Amounts owed by debtors that cannot be recovered, treated as a loss.

1.7.4 Expenditure

An expenditure is money spent by the business for benefits received.

• Capital Expenditure: Spent on acquiring or improving fixed assets, providing long-term benefits (e.g., buying machinery).
• Revenue Expenditure: Spent on day-to-day operations, providing short-term benefits (e.g., rent, salaries).
• Deferred Revenue Expenditure: Revenue expenditure with benefits extending beyond one year, written off over time (e.g., heavy advertising costs).

1.7.5 Cash Discount and Trade Discount

• Trade Discount: A reduction on the catalogue price of goods at the time of sale. Not recorded separately in books (e.g., ₹1,000 goods sold at 5% trade discount = ₹950 recorded).
• Cash Discount: A reduction offered to encourage prompt payment within a specified period. Recorded in books as it affects the final amount.

1.7.6 Solvent and Insolvent

• Solvent: A person whose assets are equal to or more than their liabilities, capable of paying all debts (e.g., assets ₹50,00,000, liabilities ₹30,00,000).
• Insolvent: A person whose liabilities exceed their assets, unable to pay debts (e.g., assets ₹20,00,000, liabilities ₹50,00,000).

1.7.7 Accounting Year

The 12-month period for which accounts are maintained, typically April 1 to March 31 in India for tax purposes. At the end, businesses prepare Trading Account, Profit and Loss Account, and Balance Sheet.

1.7.8 Goodwill

Goodwill is the reputation of a business valued in monetary terms. It arises from factors like location, skilled employees, product quality, or customer satisfaction. It is an intangible asset.

1.7.9 Profit or Loss

• Profit: When selling price exceeds cost price (e.g., goods sold for ₹50,000, expenses ₹30,000 = ₹20,000 profit).
• Loss: When cost price exceeds selling price (e.g., goods sold for ₹50,000, expenses ₹60,000 = ₹10,000 loss).
• Income: Revenue from business transactions (e.g., interest, dividends).
• Revenue: Income from normal business activities, like sales of goods or services.

1.7.10 Assets, Liabilities, and Net Worth

• Assets: Items or rights owned by the business with monetary value.
• Fixed Assets: Long-term assets (e.g., land, machinery).
• Current Assets: Short-term, easily convertible to cash (e.g., debtors, cash).
• Fictitious Assets: Imaginary assets with no realizable value (e.g., deferred advertising expenses).
• Liabilities: Amounts owed by the business to others.
• Fixed Liabilities: Long-term debts (e.g., loans, capital).
• Current Liabilities: Short-term debts payable within a year (e.g., creditors).
• Net Worth (Owner’s Equity/Capital): The owner’s investment or the excess of assets over liabilities. Formula: Net Worth = Assets – Liabilities.
• Contingent Liabilities: Potential liabilities that may arise based on future events (e.g., a pending lawsuit). Shown as a footnote in the Balance Sheet.

1.8 Accounting Concepts, Conventions, and Principles

Accounting follows certain concepts to ensure reliable and uniform financial reporting.
Importance of Accounting Concepts:

• Ensures reliable financial statements.
• Maintains uniformity in presentation.
• Provides a generally accepted basis for measurement.
• Delivers proper information to stakeholders.
• Based on valid assumptions.

Key Accounting Concepts:

• Business Entity: The business is separate from its owner. Only business transactions are recorded, not personal ones (e.g., only half the rent is recorded if the building is used partly for business).
• Money Measurement: Only transactions measurable in money are recorded (e.g., 5 computers = ₹1,50,000, not just “5 computers”).
• Cost Concept: Assets are recorded at their acquisition cost, adjusted for depreciation (e.g., furniture bought for ₹3,00,000 is recorded at that cost, not market value).
• Consistency Concept: Accounting policies should remain consistent unless circumstances require change (e.g., using the same depreciation method every year).
• Conservatism: Anticipate no profits but provide for all possible losses (e.g., value stock at cost price ₹25,000, not market price ₹35,000).
• Going Concern: Assumes the business will continue operating in the future, influencing asset valuation and depreciation.
• Realization: Revenue is recorded when earned, not when cash is received (e.g., sales recorded when goods are delivered).
• Accrual: Revenues and expenses are recorded when earned or incurred, not when cash changes hands (e.g., interest earned but not yet received).
• Dual Aspect: Every transaction has two effects (debit and credit). Basis of double-entry book-keeping. Formula: Capital + Liabilities = Assets.
• Disclosure: Financial statements must disclose all material information honestly.
• Materiality: Only significant items affecting decisions are disclosed (e.g., minor expenses may be ignored).
• Matching Concept: Revenues are matched with expenses incurred to earn them during the same period (e.g., adjusting for prepaid expenses).

1.9 Accounting Standards (AS) and IFRS

Accounting Standards (AS) provide guidelines to ensure consistency, comparability, and reliability in financial reporting.
Definition (Kohler): AS are codes of conduct set by professional bodies or laws for accountants.
Need for Accounting Standards:

• Improve understanding of financial statements.
• Ensure uniform accounting practices.
• Enable comparison between businesses.
• Enhance reliability of financial data.
• Meet legal requirements.

International Financial Reporting Standards (IFRS):

• Issued by the International Accounting Standards Board (IASB).
• Globally accepted standards to improve financial reporting.

Accounting Standards in India:

• Issued by the Institute of Chartered Accountants of India (ICAI) through the Accounting Standards Board (ASB), formed on April 21, 1977.
• AS are modified to align with Indian practices, resulting in Ind AS (Indian Accounting Standards), which are converged with IFRS.
• Large companies must follow Ind AS, while smaller businesses can use AS. In the future, all businesses may adopt Ind AS.

Key Accounting Standards (AS):

• AS-1: Disclosure of Accounting Policies – Policies must be disclosed in financial statements.
• AS-2: Valuation of Inventories – Inventories valued at lower of cost or net realizable value.
• AS-3: Cash Flow Statements – Prepared alongside Profit and Loss Account.
• AS-6: Depreciation Accounting – Depreciation allocated systematically over an asset’s life.
• AS-8: Accounting for Research and Development – R&D costs treated as expenses when incurred.
• AS-9: Revenue Recognition – Specifies conditions for recognizing revenue.
• AS-10: Accounting for Fixed Assets – Fixed assets recorded at cost, removed when no longer useful.
• AS-12: Accounting for Government Grants – Grants recognized when conditions are met.
• AS-13: Accounting for Investments – Distinguishes between current and long-term investments.
• AS-22: Accounting for Taxes on Income – Includes current and deferred taxes in profit/loss.