Notes-Class-11-Commerce-Book Keeping and Accountancy-Chapter-1-Introduction to Book- Keeping and Accountancy-Maharashtra Board

Topics to be Learn :  Meaning, Definition and Objectives Importance of Book-keeping. Difference between Book-keeping and Accountancy. Meaning and Definition of Accountancy Basis of Accounting System. Qualitative characteristics of accounting information Basic Accounting Terminologies. Accounting Concepts, Conventions and Principles. Accounting Standards (AS) and IFRS

Introduction :

Book-keeping and accountancy are very important for managing the finances of a business.

• Book-keeping means recording all money-related transactions of a business in a proper and systematic way, in the order in which they happen.
• Accountancy is a wider process. It involves classifying, summarizing, and analysing these recorded transactions to understand the financial position of the business and to help in making correct decisions.

Foundations of Book-keeping :

Definitions and History :

Book-keeping is defined as the process of recording business transactions in the books of accounts in a systematic, date-wise manner.

Historical Context: Records of accounting in India date back to the 12th century in Kautilya's Arthashastra, where it was referred to as "Deshi Nama." The modern Double Entry Book-keeping system was introduced in 1494 by Luca De Bargo Pacioli.

Formal Definitions:

• R. Batliboi: "Book-keeping is an art of recording business dealings in a set of books."
• N. Carter: "Book-keeping is the science and art of correctly recording in the books of accounts, all those business transactions that result in transfer of money or money's worth."

Importance of Book-keeping :

1. Record: It is not possible to remember all business transactions. Book-keeping keeps permanent and systematic records of all transactions.
2. Financial Information: It provides information about profit, loss, assets, liabilities, investments, stock, etc., at any time.
3. Decision Making: It helps the businessman to take proper financial decisions.
4. Controlling: It helps management to control and monitor business activities.
5. Evidence: It provides financial records that can be used as legal evidence in court in case of disputes.
6. Tax Liability: It helps in calculating various taxes such as Income Tax, GST, Property Tax, etc.

Utility of Book-keeping :

1. Owner: The owner can know the profit or loss, assets and liabilities of the business at any time.
2. Management: It helps management in planning, decision-making and controlling business activities.
3. Investors: Investors can decide whether to invest in the business or not.
4. Customers: Customers can understand the financial position of the business and feel assured about the supply of goods.
5. Government: The government can determine the taxes payable by the business.
6. Lenders: Lenders can check the financial position of the business before lending money.
7. Development: It helps the business to grow and develop with proper financial management.

Difference between Book-keeping and Accountancy :

Point	Book-keeping	Accountancy
1) Meaning	It deals with recording and classifying business transactions.	It deals with recording, classifying, summarising, analysing and interpreting financial data.
2) Stage	It is the primary stage and the base of accounting.	It includes analysis and interpretation after book-keeping.
3) Objective	To keep systematic records of all financial transactions.	To prepare financial statements and communicate information to concerned authorities.
4) Responsibility	Done by junior staff.	Done by senior staff or accountants.
5) Outcome	Results in preparation of Journal and Ledger.	Results in preparation of Trading Account, Profit & Loss Account and Balance Sheet.
6) Period	Provides day-to-day details.	Provides yearly financial details.
7) Analysis	No analysis is required.	Involves analysis and interpretation of data.
8) Decision Making	Does not help directly in decision-making.	Helps management in taking important business decisions.
9) Skill Required	Analytical skill is not required.	Analytical skill is required.

Meaning and Definition of Accountancy :

Meaning of Accountancy : Accountancy means the practice of recording, classifying and reporting business transactions in a systematic manner.

Accounting principles are the basic rules and assumptions that form the foundation of the accounting system.

Definitions of Accountancy :

1. Kohler: “Accountancy refers to the entire body of the theory and process of accounting.”
2. Robert N. Anthony: “Nearly every business enterprise has an accounting system. It is a means of collecting, summarising, analysing and reporting in monetary terms information about business transactions.”

Methods or Basis of Accounting System :

The basis of accounting refers to the rules that determine when financial transactions are recorded in the books of accounts. There are mainly two recognized methods, with one hybrid approach sometimes discussed.

(1) Cash Basis of Accounting :

• Transactions are recorded only when cash is actually received or paid.
• No credit transactions are considered.
• Profit = Cash receipts – Cash payments.
• Example: If a business sells goods worth ₹10,000 on credit, it will be recorded only when the cash is received.

(2) Accrual (Mercantile) Basis of Accounting :

• Transactions are recorded when they are incurred, not when cash is received or paid.
• Recognizes income when earned and expenses when incurred.
• Provides a more accurate picture of financial position.
• Example: If rent of ₹5,000 is due in March but paid in April, it is recorded in March itself.

(3) Mixed/Hybrid Basis of Accounting (Not permitted in India)

• Combines both cash and accrual basis.
• Example: Income recorded on cash basis, expenses on accrual basis.

Qualitative Characteristics of Accounting Information :

Accounting information should have certain qualities to make it useful for decision-making. The main qualitative characteristics are as follows:

(1) Reliability : Reliability means the information should be true, accurate and free from bias.

• Reliable information helps users to judge the earning capacity and financial position of the business.
• Example: Assets recorded at their actual purchase price rather than inflated values ensure reliability.

(2) Relevance : Relevance means the information should be useful for decision-making.

• It should help users in predicting future outcomes or confirming past decisions.
• Example: Reporting expected losses from a pending lawsuit is relevant for investors assessing risk.

(3) Understandability : Understandability means the information should be clear and easy to understand.

• It should be presented in simple language and proper format so that users can easily know its meaning.
• Example: Notes to accounts explaining complex accounting policies make financial statements easier to understand.

(4) Comparability : Comparability means financial information should allow comparison between different firms or different accounting periods of the same firm.

• Similar items should be reported in the same way, and different items should be reported differently.
• This helps users to compare financial performance and take proper decisions.
• Example: Using the same depreciation method year after year allows comparison of profits across years.

Basic Accounting Terminologies :

To understand accounting clearly, it is important to know the basic terms used in it.

(1) Transactions & Entries:

Transaction means an exchange of goods and services between two persons or parties for money or money's worth.

 (i) Monetary Transactions : Transactions that involve the exchange of money (cash, bank transfer, cheque, etc.) as a medium of settlement.

• Key Feature: They affect the financial position directly because money is exchanged.

Two types of monetary transactions are as follows :

 (a) Cash Transactions : A business transaction in which cash is paid or received immediately is known as cash transaction.

Examples,

• Purchase of goods for cash at ₹15,000/-
• Payment of salary at ₹ 5,000/-

(b) Credit Transaction : In a business transaction when payment or receipt is not made immediately but postponed to future date, it is known as credit transaction.

Examples,

• Goods of ₹ 2,000 purchased from Mr. xyz,
• Goods of ₹ 5,000 sold to Mr. xyz.

(ii) Non-Monetary Transactions : Transactions where money is not exchanged directly; instead, goods, services, or benefits are exchanged.

• Key Feature: They may not immediately affect cash flow but still hold economic value.

Examples:

• Barter system: Exchanging 10 kg of wheat for 5 kg of rice.
• Providing free training to employees (benefit but no money involved).
• Donation of books to a school.
• Exchange of assets: A company gives old machinery in return for new equipment.

(a) Entry : Recording a business transaction in the books of accounts in the proper format.

• Example: If a shopkeeper buys goods worth ₹5,000 on credit, the entry is recorded in the journal showing purchase and liability.

(b) Narration : A short explanation of the transaction written below the journal entry.

• Feature: Usually starts with the word “Being” or “For”.

Example:

Journal Entry: Purchases A/c Dr.         5,000 To Creditors A/c                    5,000 (Being goods purchased on credit from Mr. Sharma)

(c) Goods : Items or commodities in which a trader deals, purchased or manufactured for resale and profit.

Examples:

• Medicines are goods for a chemist.
• Vegetables are goods for a vegetable vendor.
• Tyres, engines, and gearboxes are goods for a vehicle manufacturer like Bajaj Auto or Hero Motors.

(2) Capital and Drawings :

(a) Capital : Capital is the amount invested by the owner (proprietor) in the business.

• It can be in the form of cash, goods, or assets.
• Capital shows the owner’s stake in the business.
• From accounting view point, an excess of assets over liabilities is capital.

Capital = Assets - Liabilities

Examples:

• A shopkeeper invests ₹50,000 cash to start his shop.
• A trader contributes furniture worth ₹20,000 to his business.
• A farmer gives land for cultivation as part of his business capital.

(Capital is a liability of the business as this amount is payable by the business enterprise to the owner at the time of closure of the business.)

(b) Drawings : Drawings are the withdrawals made by the owner from the business for personal use.

• It reduces the owner’s capital in the business.
• Drawings can be in the form of cash, goods, or assets.

Examples:

• The owner withdraws ₹5,000 cash from the business for household expenses.
• A trader takes goods worth ₹2,000 from his shop for personal use.
• A proprietor uses the company’s car for personal travel.

(3) Debtors and Creditors:

(a) Debtors : A debtor is a person or business that owes money to another party.

• In accounting, debtors are shown as assets because the business expects to receive money from them.

Examples:

• If a shop sells goods worth ₹10,000 on credit to Mr. Sharma, then Mr. Sharma is the debtor of the shop.
• A company that has taken a loan from a bank is a debtor to the bank.

(b) Creditors : A creditor is a person or business to whom money is owed.

• In accounting, creditors are shown as liabilities because the business has to pay them in the future.

Examples:

• If a shopkeeper buys goods worth ₹15,000 on credit from Mr. Verma, then Mr. Verma is the creditor of the shopkeeper.
• A supplier who provides raw materials on credit is a creditor to the manufacturing company.

(c) Bad Debts : An irrecoverable amount from a debtor is known as "Bad Debts". It is a revenue loss to the business.

(4) Expenditure and Types of Expenditure :

Expenditure : Expenditure is the act of spending money or incurring a liability to acquire goods, services, or assets.

• It represents the outflow of funds from a business.
• Example: Paying ₹10,000 for office furniture, or ₹5,000 for electricity bill.

Types of Expenditure :

(i) Capital Expenditure : Money spent on acquiring or improving fixed assets that will benefit the business for a long period.

• Feature: Provides long-term benefit; shown as an asset in the balance sheet.

Examples:

• Buying machinery for ₹2,00,000.
• Constructing a new office building.
• Purchasing land for factory use.

(ii) Revenue Expenditure : Money spent on day-to-day operations of the business.

• Feature: Provides short-term benefit;

• Appear on the debit side of Trading A/c or Profit and Loss A/c.

Examples:

• Paying salaries and wages.
• Electricity and water bills.
• Repairing machinery.

 (iii) Deferred Revenue Expenditure : Large expenditure that is incurred in one year but whose benefit extends over several years.

• Feature: Initially treated as an asset and gradually written off over years.
• It is shown on debit side of Profit and Loss A/c if it is written off in that year and balance amount is carried forward and shown on the assets side of the Balance Sheet.

Examples:

• Heavy advertising expenses for launching a new product.
• Research and development costs.

(5) Cash Discount and Trade Discount :

Discount is a concession or allowance given by the seller to purchaser.

There are two types of discounts.

(i) Cash Discount : Cash Discount is a discount given by the seller to the buyer for making early payment.

• It is given to encourage quick payment.
• Shown separately in the books of accounts.

Example:
If the bill amount is ₹10,000 and the seller offers 5% cash discount for payment within 10 days,

5% of ₹10,000 = ₹500

So, the buyer will pay ₹9,500.

(ii) Trade Discount : Trade Discount is a discount given by the seller to the buyer at the time of sale.

• It is usually given to wholesalers or regular customers to increase sales.
• It is deducted from the list price of goods.
• Not shown separately in the books; only the net amount after discount is recorded.

Example:
If the list price of goods is ₹10,000 and 10% trade discount is allowed,
10% of ₹10,000 = ₹1,000

So, the buyer will pay ₹9,000.

(6) Solvent and Insolvent:

(a) Solvent: A person or business is said to be solvent when they are able to pay their debts on time. Their assets are more than their liabilities.

• Example: If a person has ₹5,00,000 assets and ₹3,00,000 liabilities, they are solvent.

(b) Insolvent: A person or business is said to be insolvent when they are unable to pay their debts. Their liabilities are more than their assets.

• Example: If a person has ₹2,00,000 assets and ₹4,00,000 liabilities, they are insolvent.

(7) Accounting Year:

• Accounting Year is the period of 12 months for which financial statements of a business are prepared.
• It helps in measuring profit or loss of the business for a fixed period.
• In India, the accounting year usually starts on 1st April and ends on 31st March of the next year.

(8) Trading Concern and Not for Profit Concerns :

(a) Trading Concern: A Trading Concern is a business organization formed to earn profit. It buys and sells goods or services to make profit.

• Example: Grocery shop, clothing store, company, etc.

(b) Not-for-Profit Concern: A Not-for-Profit Concern is an organization formed to provide services and not to earn profit. Its main aim is social welfare or service.

• Example: Schools, hospitals, charities, clubs, etc.

(9) Goodwill :

Goodwill : Goodwill is an intangible asset that represents the value of a business’s reputation, customer loyalty, brand strength, and other non-physical advantages.

• It arises when one company acquires another and pays more than the fair value of its net assets (assets minus liabilities).
• In simple words, it’s the extra amount paid for the business because of its good name, reputation, or strong customer base.
• Not a fictitious asset: Even though it cannot be touched or seen, goodwill has real value in a profit-making concern.

Types of Goodwill :

• Purchased Goodwill: Arises when goodwill is paid for during acquisition (recorded in accounts).
• Self-generated Goodwill: Built over time through reputation, customer satisfaction, and brand value (not recorded in accounts).

(10) Profit or Loss :

(a) Profit: Profit is the gain earned by a business when its income is more than its expenses.

• Formula: Profit = Income – Expenses
• Example: If income is ₹50,000 and expenses are ₹40,000, profit is ₹10,000.

(b) Loss: Loss occurs when the expenses of a business are more than its income.

• Formula: Loss = Expenses – Income
• Example: If income is ₹30,000 and expenses are ₹40,000, loss is ₹10,000.

(c) Income: Income is the money earned by a business from its activities after deducting expenses. It shows the profit earned during a period.

• Example: If a business earns ₹1,00,000 and spends ₹80,000, the income (profit) is ₹20,000.

 (d) Revenue: Revenue is the total amount of money received from selling goods or services before deducting any expenses. It is also called sales or turnover.

• Example: If a shop sells goods worth ₹1,00,000, that amount is revenue.

(11) Assets, Liabilities, Net Worth:

(a) Assets : The property of every description owned and possessed by the business, having monetary value, is known as Assets.

Types of Assets :

(i) Fixed assets/Non-current assets : Those assets which have real existence and are fixed by nature and give benefits to the business for a long period of time are known as fixed assets.

• Examples: Land, buildings, machinery, furniture.

(ii) Current assets : Those assets which are used to manage day-to-day activities and keep on changing their form and are easily converted into cash are called current assets.

• Examples: Cash, accounts receivable (debtors), inventory, prepaid expenses.

(ii) Fictitious assets : Fictitious assets are not real assets. They are actually expenses or losses that are not written off in the year they occur, but are shown on the asset side of the balance sheet temporarily.

• Purpose: To spread a large expense over several years instead of charging it all in one year.

Examples :

• Heavy advertising expenses for launching a new product (benefit lasts for years).
• Preliminary expenses of starting a company.
• Discount allowed on issue of shares or debentures.
• Loss incurred on issuing debentures.

(b) Liabilities:: Liabilities means debts payable by the enterprise in the future in the form of money or goods for the benefit received by the business unit.

Liabilities = Assets - Capital

• Examples : bank overdraft, creditors, etc.

Types of Liabilities :

(i) Fixed Liabilities : One of the major sources of funds in the business is fixed liabilities. Its benefits will be made available to the business for a long period.

• Examples : capital, secured loan, long term loans from banks and financial institutions, etc.

(ii) Current Liabilities : Due to regular activities of the business, some amount is payable to third parties within a period of one year, are known as current liabilities.

• Examples : bank overdraft, creditors, bills payable, etc.

(c) Net worth or Owners Equity or Capital : The total amount of fund provided by the proprietor in his business is called net worth or owner's fund. Net worth includes capital and reserves.

Net worth = Owner's Equity = Capital

Net worth = Capital + Various provisions and reserves + retained earning

Owner's Equity (Capital) = Total Equity (Asscts)-Creditor's Equity (Liabilities)

(d) Contingent Liabilities : Liabilities that arises only after the occurrence of certain events whose occurrence is not certain and its amount is not certain are called Contingent Liabilities.

• As it is not confirmed, it is not shown on the liability side of the balance sheet, but given as foot note to balance sheet.
• Examples: Guarantee given for another company’s loan, pending lawsuits.

Accounting Concepts, Conventions and Principles :

Meaning of Accounting Concepts : Accounting concepts are the basic rules, assumptions, and principles that guide how financial transactions are recorded and reported.

• They form the foundation of accounting practices, ensuring that all businesses follow a uniform method.

Importance of Accounting Concepts:

1. They provide a proper framework for accounting.
2. They ensure uniformity and consistency in accounts.
3. They help in preparing accurate financial statements.
4. They make accounting information reliable and comparable.
5. They help users in making correct business decisions.

Accounting Standards (AS) and IFRS :

International Financial Reporting Standards (IFRS) :

The International Financial Reporting Standards (IFRS) are globally recognized accounting standards developed by the International Accounting Standards Board (IASB) under the IFRS Foundation.

• They aim to bring consistency, transparency, and comparability to financial reporting across countries.
• Example : If an Indian company reports under IFRS, its financial statements can be easily compared with a UK or US company also using IFRS, making global investment decisions smoother

Accounting Standards (AS) : The Accounting Standards (AS) are guidelines issued by the Institute of Chartered Accountants of India (ICAI) to standardize accounting practices across the country. They ensure consistency, transparency, and comparability in financial reporting.

Definition : Accounting Standards are written documents that specify how financial transactions should be recognized, measured, presented, and disclosed in financial statements.

• They act as a framework to ensure uniformity in accounting practices.

Objectives :

• To bring uniformity in accounting policies.
• To ensure true and fair view of financial statements.
• To enhance comparability across companies and industries.
• To protect the interests of investors and stakeholders.

Examples of AS in India :

• AS 1: Disclosure of Accounting Policies
• AS 2: Valuation of Inventories
• AS 3: Cash Flow Statements
• AS 10: Property, Plant, and Equipment
• AS 11: Effects of Changes in Foreign Exchange Rates

Benefits :

• Improves credibility of financial reporting.
• Helps in decision-making for investors and regulators.
• Reduces chances of manipulation in accounts.

Accounting Standards in India : In India, accounting standards are made by the Accounting Standards Board (ASB). The ASB was set up by the Institute of Chartered Accountants of India (ICAI) on 21st April 1977.

The main work of ASB is to prepare and issue accounting standards. While making these standards, it considers:

• Indian laws
• Business customs and practices
• Business environment
• International Accounting Standards

To make Indian financial statements similar and comparable with those of other countries, Ind AS (Indian Accounting Standards) was introduced.

Ind AS is a modified version of International Accounting Standards. It is adjusted according to Indian accounting practices, customs, and traditions.