1.

INTRODUCTION TO ACCOUNTING
1.1 Why is accounting required for todays world?

All activities such as business activities or non-business activities carried out by

business entity or non-business entity requires money and economic resources, accounting
helps to keep track on these resources. In other words, wherever money is involved
accounting is required to account for it. Accounting helps to determine whether it is the
revenue or the expenses for the entity. Now-a-days the properly maintained accounts give
the answer of a number of questions, such as: What is the cost of production? , What
should the selling price should be? , Is the cost affordable or not?. Thus business owners
can take important decisions with the help of the information provided by accounting data.
Accounting is a service activity. Hence, Accounting is also called The language of
business.

1.2 Meaning and Definition of Book Keeping

1.2.1. Meaning

Book keeping is the science and art of systematic recording and organizing
financial transactions for a company or firm. Book keeping is recorded on day to day basis.
It includes recording of journal, ledger posting and balancing of accounts. Book keeping is
also called quality control because it helps for timely and accurate records. Accountant
shows the business results from such records at the end of the every financial year which
ends on 31st March.

1.2.2 Definition

A.H.Rosenkamph Book- keeping is the art of recording business transactions in

a systematic manner.

R.N.Carter Book- keeping is the science and art of correctly recording in books of
account all those business transactions that result in the transfer of money or moneys
worth .

1.2.3 Objectives of Book- keeping

i) Book- keeping gives a permanent record of each transactions.

ii) Soundness of a firm can be assessed from the records of assets and abilities on a
particular date.

iii) Entries related to incomes and expenditures of a concern facilitate to know the profit
and loss for a given period.
iv) It enables to prepare a list of customers and suppliers to ascertain the amount to be
received or paid.

v) It is a method gives opportunities to review the business policies in the light of the
past records.

vi)Amendment of business laws, provision of licenses, assessment of taxes etc., are based
on records.

1.2.4 Features of Book Keeping

i) It records transactions scientifically.

ii) It must have a documentary support for each transaction.

iii) The recording system must be universal.

iv) The transaction must be only in monetary terms.

1.3 Meaning and Definition of Accounting

1.3.1 Meaning

Accounting is a systematic process of identifying, recording, measuring, interpreting

and communicating financial information. It provides profit and loss for a specific period
of time. It helps to take business decisions for the company.

It identifies transactions and events of a specific organization. An event (whether

internal or external) is a happening of consequence to an organization.

1.3.2 Definition

Definition of Accounting American Institute of Certified Public Accountants

(AICPA) which defines accounting as 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.

1.3.3 Objectives

i)To keep systematic records.

ii) To ascertain the results of the business activities.

iii) To understand the liquidity position

iv) To protect the business assets

v) To satisfy requirement by law

vi) To understand the financial position of the company.

1.3.4 Features

i) It is the art of recording and classification of all business transactions

ii) It is the art of summarizing

iii)It interprets the financial data

iv) It records transactions of financial nature

1.4. Difference between Book keeping And Accounting

Basis of difference Book Keeping Accounting

Transactions Recording of transactions in To examine these recorded
books of original entry. transactions in order to find
out their accuracy.
Object It is to prepare original books of It is to set the principles
accountancy for recording business
transactions
Level of Management It is done by the middle level of It depends on book keeping
management
Scope It is limited in scope It is wider in scope
Dependence It depends on accounting It depends on book keeping
Stage It the primary stage of It is the secondary stage of
recording transactions recording transactions
Income Statement and Preparation of trading, Profit & Preparation of trading,
Balance Sheet loss account and balance sheet is profits and loss account and
not book keeping balance sheet is included in
it
Rectification of errors These are not included in book- These are included in
keeping accounting

Skill It does require any special skills It requires analytical skills

Nature It is clerical in nature It is analytical in nature

1.6 Branches of Accounting

 As a result of economic, industrial, and technological developments, different
specialized fields in accounting have emerged.

Following are main types of accounting

Financial Accounting

Financial accounting is the periodic reporting of a companys financial position. It is

concerned only with the financial state of affairs and financial results of operations. It
is the origin of accounting. It is concerned with preparation of financial statements for
outsider such as creditor, government, shareholders etc. The financial statement i.e
Profit and Loss account and the Balance sheet showing the financial position of the
company for a specific period.

1. Management Accounting

Management Accounting is an accounting which provides necessary information to

the management to help them to perform their function. It is used for internal
management purpose. It is concerned with the preparation of financial analysis,
cost sheet, budgeting etc. It allocates the cost to certain items

According to the Anglo-American Council on productivity, Management

accounting is the presentation of accounting information is such a way as to assist
management in the creation of policy and the day-to-day operation of an
undertaking.

2. Cost Accounting

Cost accounting is the records of all the costs incurred in a business in a way that can
be used to improve its accounts. It is a process of collecting, recording, classifying,
analyzing, summarizing, allocating and control of cost. It generally relates to the future
and involves an estimation of future costs to be incurred. The process of cost
accounting based on the data provided by the financial accounting. This data is then
summarized and analyzed to arrive at a selling price, or to determine where savings are
possible. It is concerned primarily for the purpose of valuation of stock and
measurement of profits.
1.7 Parties Interested in Accounting Information

i) Owners: The owner provides capital for the organization to start the business.
They want to know about the profitability and financial soundness of the business.
Comparing the accounts of various years helps in getting information to improve
performance.
ii) Management: The management is interested in knowing the financial position of the
firm. The accounts are the base from which the management can understand the
business activity. Thus, the management is interested in financial accounting to
find whether the business is earning profits or no.
iii) Creditors: Creditors are the persons who supply goods on credit. Before granting
loan, creditor wants to know about the creditworthiness of the company .The
financial accounts helps to understand whether the company will be able to pay its
creditor.
iv) Lenders: Lenders are interested to know the financial soundness before granting
credit. Such information provided by financial accounts only.

v) Employees: Payment of salary depends upon the size of profit earned by the firm.
The more important point is that the workers expect regular income. For these
reasons, this group is interested in accounting.
vi) Investors: The prospective investors, who want to invest their money in a firm, of
course wish to see the progress and prosperity of the firm, before investing their
amount, by going through the financial statements of the firm. This is to safeguard
the investment.
vii) Government: Government keeps a close watch on the firms which yield good
amount of profits. The state and central Governments are interested in the
financial statements to know the earnings for the purpose of taxation.
viii) Consumers: These groups are interested in getting the goods at reduced price.
Therefore, they wish to know the establishment of a proper accounting control,
which in turn will reduce to cost of production, in turn less price to be paid by the
consumers.
ix) Researchers: Accounting information, being a mirror of financial performance of a
business enterprise, is of important value to the research scholar who wants to
make an indepth study of the financial operation of an enterprise.

1.8 Advantage of Accounting

 1) Helpful to management: Management needs a lot of information for the efficient
running of the business. Management wants to know whether sales have increased
or decreased? , what is the profit for the year? Etc. Such information can be
provided by financial accounts.
2) Complete and Systematic Record: Business transactions have grown in size and
complexity and it is not possible to remember each and every transactions.
Accounting helps in keeping a prompt and systematic record of all transactions and
thus shows a true picture of business activities
3) Comparative Study: By keeping a systematic record accounting helps the owners to
compare one years costs, expense, sales etc. with those of other years. Such
comparison helps understand the changes in the business activities and so
important decisions can be taken.
4) Evidence in legal matters: Properly maintained accounts, supported by
authenticated documents are accepted by the courts as a firm evidence.
5) Provides Sale of business: If a business entity is being sold, the accounting
information can be utilized to determine the purchase value .
6) Helps to get loan: Accounting information provides the creditworthiness of the
business, which helps the company to get loan from banks or lenders.

1.9 Limitations of Accounting

1) Incomplete information: Accounting statements provide only incomplete

information as the actual profit or loss can be ascertained only when the business
closes.
2) Influenced by personal judgements: An accountant needs to have high intellectual
levels to decisions like determining the accurate actual useful life of an asset for
calculating depreciations, valuing stock etc. Different persons have different
opinions regarding the same.
3) Based on historical Cost: Accounts are prepared on the basis of historical cost
(original cost). It does not include the effect of changes in the price level and so
many assets remain undervalued in many cases. It does not shows the true picture
of business
4) Window Dressing: Many times the accounts are manipulated, so that the financial
statements show a more favourable position than the actual position. So correct
decisions cannot be taken.
5) Not useful in forecasting: Business environment is changing continuously and so it
is important to forecast the changes that take place in terms of demand,
competition, etc. Since, Financial Accounts show only past events, it is not useful in
forecasting.
 6) Omission of qualitative information: Accounts contain only monetary information.
The qualitative information is omitted as it cannot be expressed in terms of money.
Example efficiency of management, satisfaction of customers etc. Omission of such
vital information does not reveal the true picture of business.

1.10 Functions of Accounting

1) Identifying Function: The first function of accounting is to identify the

transactions of a financial nature and measure them in terms of monetary value.

2) Recording Function: Accounting is the art of recording business transactions. This

provides operating results and financial position of the company or firm. This is
based on historical events only. All transactions are recording in a book called
Journal.
3) Managerial Function: Accounting helps to take management as well as financial
decisions with the help of financial statements. The day-to-day operations are
compared with some predetermined standard. The variations of actual operations
with pre-determined standards and their analysis is possible only with the help of
accounting.
4) Legal Function: Financial Accounts must be maintained as per the law prescribed.
Auditing is compulsory in case of a registered company or firm. Auditing is not
possible without accounting. Accountant is the base and helps in various items
such as documents , statements etc
5) Language of Business: Accounting is also called 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. The accounting shows a real and true position of the firm or the
business.
6) Classifying Function: Classifications is the process of grouping the transactions of
one nature at one place, in a separate account. The book in which various accounts
are opened is called ledger.
7) Interpretation of the results: In Accounting, the results of business are
presented in such a manner (i.e., by preparing Trade Account ,Profit or Loss
Accounts and Balance Sheet) that the parties are interested such as owners ,
employees etc. can have full information about the profitability and the financial
position of the business.

1.11 Basic Accounting Terminology

It is necessary to understand some basic accounting terms which are daily in business
world. Before recording the transactions in the books, it is essential to understand these
terms have their specific meaning in Accounting. These terms are called accounting
terminology. :

1) Transactions: Exchange id goods and services for money or moneys worth between
two or more persons or parties is knows as transactions
There are two types of transactions
a) Cash Transactions: It is transaction is one where cash receipt or payment is
involved in the exchange.

b) Credit Transactions: It is a transaction which will not have cash either received
or paid for exchange of goods and services. Payment will be made on later date.

Transactions can be classified again in two types such as External and Internal
transaction.

External transaction is when company purchases or sells any goods and services.

Internal transaction is when company transaction is one where the question of receipt or
payment of cash does not at all arise, e.g. Depreciation, return of goods etc.

2) Event: An event is the consequence or results of a transaction.

3) 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.
4) Voucher: A voucher is a document which provides the authorization to pay and on the
basis of which the business transactions are, first of all recorded in the books of
accounts. A voucher is an accounting document representing an internal intent to
make a payment to an external entity, such as a vendor or service provider.
A voucher is produced usually after receiving a vendor invoice, after the invoice is
successfully matched to a purchase order.
5) Debtors: A person who owes money to the firm mostly on account of credit sales of
goods is called a debtor. For example, when goods worth Rs 60,000 sold to Mihir on
credit that person pays the price in future, he is called a debtor because he owes the
amount to the firm.
6) Receivables: Amount due from debtors and Bills Receivable (B/R) is jointly termed as
Receivables or Accounts Receivables
7) Creditors: A person to whom an amount is payable for the purchase of goods or
services on credit and payment has not paid to them. For example, when goods worth
 Rs50,000 is purchased from Dhyay on credit that persons will receive the price in
future, he is called a creditor because he to whom money is owned.
8) Payables: Amount due to creditors and for Bills Payable(B/P) is jointly termed as
Payables or Accounts Payable.
9) Purchase: The term purchase is used only for the purchase of goods in which the
business deals. Buying of goods by the trader for selling them to his customers is
known as purchases. Purchases can be divided into two types :
a) Cash Purchase Cash is paid immediately for the purchase of goods or services.
b) Credit Purchase- When goods and services are purchased but payment will be
done later.
10)Purchase Return: When purchased goods are returned to the suppliers this is
termed as purchase return as well as return outwards
11)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.

12)Discount: Discount allowed is an allowance allowed or received for carrying out

business transactions. Following are two types of discount:
a) Trade Discount: The discount is for trading purpose is known as trade discount. It
is given by manufacture to wholesaler or by a wholesaler to a retailer. It is not
recorded in books of accounts
b) Cash Discount: The discount for spot payment is called cash discount. It is given
by creditor to his debtor if they pay immediately.

13)Sales: When the goods purchased are sold out, it is known as sales. Here, the
possession and the ownership right over the goods are transferred to the buyer.
Sales can be divided into two types:
a) Cash Sales: Cash is received immediately for a sale of goods and services.
b) Credit Sales: When goods and services is sold but payment will be received later.
The term sale is not used for sell of an asset.
14)Sales Return: When some customers return the goods sold to them for any reason it
is termed as sales return as well as return inward.
15)Stock/Inventory: The goods purchased are for selling, if the goods are not sold out
fully, part of the total goods purchased is kept with the trader unlit it is sold out, it
is said to be a stock. Following are two kinds of stock
a) Opening Stock: The value of unsold goods lying at the beginning of the accounting
year.
 b) Closing Stock: The value of unsold goods lying at the end of the accounting year.
16)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.
17)Revenue: Revenue in accounting means the income of a recurring nature from any
source. It is related to the day to day business activities. It means the amount which,
as a result of operations, is added to the capital
18)Expenses: The terms expense refers to the amount incurred in the process of
earning revenue. It is the cost incurred in production and sell of the goods and
services. It is recurring in nature.
19)Income: Income and Revenue are not same. The amount received from sale of goods
is revenue and the amount paid sold of goods is expense. The surplus of revenue
over expense is called income

Income= Revenue -Expense

20)Expenditure: Expenditure takes place when an asset or service is acquired. 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. It means that any type of payment for the
receipt of a benefit is called as expenditure. Following are the types of expenditure:

i) Capital Expenditure: Any expenditure which is incurred in acquiring or

increasing the value of a fixed asset is termed as capital expenditure. The
benefit is over a long period of time. This is non-recurring in nature.
ii) Revenue Expenditure: Any expenditure which is incurred to acquire or
produce goods for resale is termed as revenue expenditure. This is recurring
in nature and generally paid out regularly. It does not bring into existence
asset of an enduring nature.
 iii) Deferred Revenue Expenditure: An expenditure is of a revenue nature but
the benefit of the expenditure is available for following two or more ears, this
is termed ad Deferred Revenue Expenditure. Example-Advertising Expenses.

21) Capital: The amount invested by the owner or the proprietor to start the
business .It can be in form of cash or other asset. It is also known as owners equity
or net worth. Owners equity means owners claim against the assets.
Capital = Assets - Liabilities.

22)Drawings: It is the amount of money or the value of goods which the proprietor
takes for his personal use. It reduces the capital.
23)Solvent: When a persons assets are more than his liabilities, he is known as solvent.
It means a person is able to pay off his liabilities
24)Insolvent: When a persons assets are less than his liabilities, he is known asa
insolvent. It means a person is notable to pay off his liabilities.
25) Asset: Any physical thing or right owned that has 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.
Example-Stock, Plant and Machinery, Building etc
Following are the types of assets
a) Fixed Asset: Asset purchased for continuous use for producing goods and
services and not meant for resale is termed as fixed asset.
Example- Furniture, Plant, Vehicles etc.
b) Current Asset: Assets which gets converted into cash within one year with a
purpose of sale.
For example- Cash in hand, debtors, bill receivables etc.
c) Tangible Asset: The assets that can be seen, touched and felt are called
tangible asset. For example- Motor car, Cash etc
d) Intangible Asset: The assets which cannot be seen, touched and felt are
called intangible asset. For example Goodwill, Trade mark, Patent etc.
26) Goodwill: Goodwill is the value of reputation of a firm in respect of profits expected
in future over and above the normal rate of profit. It is an intangible asset.
27)Liabilities: -It means the amount which the firm owes to outsiders that is, excepting
the proprietors.

Liabilities= Assets- Capital

a) Fixed Liabilities: Owing of business towards outsider which is long term is termed as
fixed liabilities. For example Loan, Bonds, Capital etc.
b) Current Liabilities: Owing of business towards outsider which is short term is
termed as current liabilities. For example- Creditors, Bills payable, Overdraft etc.
 c) Contingent Liabilities: These are liabilities which may arise on happening or non-
happening of a specific event in future. These liabilities are not recorded in the
books of accounts until they arise. For example- If a suit against the firm is pending
in the court, the actual liability in this respect will arise only if the suit is decided
against the firm.

1.12. Accounting Concepts ,Conventions and Principles

Accounting is known as language if business which means it communicates the
business activities to the interested users of the company. It is necessary that it
should be based on certain uniform rules and assumptions theories, it is termed as
accounting principles.
Accounting Principles are two types
(I) Accounting Concepts
(II) Accounting Conventions

1.12.1 Accounting Concepts

In order to make the accounting language convey the same meaning to all people and
to make it more meaning, most of the accounts have agreed on a number of concepts
which are usually followed for preparing the financial statements. The term concept
is used to denote accounting postulates, i.e., basic assumptions or conditions upon the
edifice of which the accounting super-structure is based.
Concepts are two types:
1) Idea Concept: It is established for the purpose of theoretical discussion.
2) Real Concept: It represents ideas in the real world, such as the concept
of a motor car, machine etc.

The following are the common accounting concepts adopted by many business concerns:

1) Business Entity Concept /Accounting Entity Concept: A business unit is an

organization of persons established to accomplish an economic goal. According to
this concept, business is treated as a unit separate and distinct from its owner or
proprietor. The owner is treated as a creditor of the business to the limit of
capital invested by him. The capital is treated as a liability of the business entity.
This concept can be expressed through an accounting equation, viz.,
Assets = Liabilities + Capital.

Example If Mr. Jay is a proprietor who invest Rs 100,000 as capital and uses the
business vehicle partly for personal use, the capital is treated as a liability and the
personal use is treated as drawings.
2) Money Measurement Concept: Money is base for all work. Only those transactions
and events are recorded in accounting which can be expressed or valued in
monetary terms. Without money measurement it is difficult to calculate the value
or result f any business activity. Hence, the accounting does not give a complete
picture of all the transactions of a business unit. This concept does not also take
care of the effects of inflation because it assumes a stable value for measuring.

For example- Raju Sandwich stores owns 25 chairs, 20 tables, 2 computers etc ,
this things cannot be recorded in accounts unless it is valued in money
measurement. If it is expressed in terms of money such 25 chairs Rs25000, 20
tables Rs15000, 2 computers Rs 30000. As such, to make accounting records
relevant, simple, understandable and homogeneous.

3) Going Concern Concept: One of the basic feature of business is continuity. It is

assumed that the business activities will continue to exist for a long period of time
in the future. On this concept only we record fixed asset on their original cost and
depreciate is charged on these assets irrespective of its market value. This
assumption supports the concept of valuing the assets at historical cost or
replacement cost. This concept also supports the treatment of prepaid expenses as
assets, although they may be practically unsaleable.
4) Realization Concept: Assets are recorded in the books of accounts at the value at
which they were purchased less depreciation, if any. Value of certain such land and
building may be increased in the future as their market value increases.

5) Accounting Period Concept: the company or firm is assumed to carry out business
on continuous bases due this it is divided into time intervals for the measurement
of the profits of the business. Twelve months period is usually adopted for this
purpose. As per income tax law, it is compulsory to maintain accounting period as
per the financial year, which begins from 1st April and ends on 31st March.

6) Revenue Recognition Concept: Revenue means the amount which is added to the
capital as a result of business activities. As per the concept, it determines the time
or particular period in which the revenue is earned. Sale is considered to be
complete when the ownership and property are transferred from the seller to the
buyer and the consideration is paid in full. However, there are two exceptions to
this concept, viz., 1. Hire purchase system where the ownership is transferred to
the buyer when the last instalment is paid and 2. Contract accounts, in which the
contractor is liable to pay only when the whole contract is completed, the profit is
calculated on the basis of work certified each year. Revenue in case of incomes
such as rent , interest , brokerage, etc is recognized on time basis.

7) Cost Concept: This concept is in accordance to going concern concept, it assumed

that an asset is original recorded in books of accounts at the price it was acquired.
 Since the acquisitions cost is related to past, it is referred as historical cost. This
cost is the basis of valuations of asset in the financial statements. However, in the
light of inflationary conditions, the application of this concept is considered highly
irrelevant for judging the financial position of the business. For example A
company purchases a building for Rs 50, 00, 000 but the market value is Rs40, 00,
000. In the books of accounts building will be valued at Rs50, 00, 000 only.

8) Dual Aspects Concept: According to this basic concept of accounting, every

transaction has a two-fold aspect, Viz., 1.giving certain benefits and 2.Receiving
certain benefits. The basic principle of double entry system is that every debit has
a corresponding and equal amount of credit. In other words, every transaction
affects at least two accounts. If one of the transactions is debit, than the other
transactions is credit. Due to this principle the two sides of Balance Sheet are
always equal and following is the assumption:

ASSETS=LIABILITES +CAPITAL
OR
CAPITLA =ASSETS-LIABILITIES
For example-Miss Tanya starts a business with Rs 25Lakh as capital and borrows Rs
30Lakh as bank loan.
ASSETS=LIABILITES +CAPITAL
55Lakh=30Lakh +25Lakh

9) Accrual Concept: According to this concept the revenue is recognized on its

realization and not on its actual receipt. Similarly the costs are recognized when
they are incurred and not when payment is made. It provides more appropriate
information about the performance of business activities as compared to cash
basis. This concept is applied equally to revenue and expenses. This concept helps
to calculate the profit or loss for a particular period of time.

10) Matching Concept: The essence of the matching concept lies in the view that all
costs which are associated to a particular period should be compared with the
revenues associated to the same period to obtain the net income of the business.
This concept is very important for correct determination of net profit. Expense
incurred in an accounting period should be matched with the revenues recognized in
that period.

11) Verifiable Objective or Objective Evidence Concept: This concept ensures that
all accounting must be based on objective evidence, i.e., every transaction recorded
in the books of account must have a verifiable document in support of its,
existence. Only then, the transactions can be verified by the auditors and declared
as true or otherwise.
1.12.2 Accounting Conventions
 The accounting conventions may be defined as a custom or generally accepted practice
which is generally adopted either by an agreement or common consent among
accountants. Accounting system have been developed in responses to the needs of the
management and the outside creditors for making decisions. The financial statements
namely the Profit and Loss Account and the Balance Sheet are based on this accounting
conventions.

The following conventions are to be followed to have a clear and meaningful information
and data in accounting:

i) Consistency: The convention of consistency refers to the state of accounting rules,

concepts, principles, practices and conventions being observed and applied constantly, i.e.,
from one year to another there should not be any change. If consistency is there, the
results and performance of one period can he compared easily and meaningfully with the
other. It also prevents personal bias as the persons involved have to follow the consistent
rules, principles, concepts and conventions. This convention, however, does not completely
ignore changes. It admits changes wherever indispensable and adds to the improved and
modern techniques of accounting.
ii) Disclosure: The convention of disclosure stresses the importance of providing
accurate, full and reliable information and data in the financial statements which is of
material interest to the users and readers of such statements. Various items which cannot
find place in accounting statements are shown in the Balance Sheet by ways of footnote
(Contingent Liability). However, the term disclosure does not mean all information that one
desires to get should be included in accounting statements. It is enough if sufficient
information, which is of material interest to the users, is included.
iii) Conservatism: In the prevailing present day uncertainties, the convention of
conservatism has its own importance. This convention follows the policy of caution or
playing safe. It takes into account all possible losses but not the possible profits or
gains. .Provisions is made for all known losses and liabilities even though the amount cannot
be determined. It is directly opposing to the convention of full disclosure. Thus, the
convention of conservatism should be applied very cautiously. For example-
a) closing stock is valued at cost price or market price whichever is lower.
b) Provision for doubtful debts is created in anticipation of actual bad debts

iv) Materiality: An accountant must always keep in mind that he must record only the
information which is significant and ignore insignificant details. This convention is an
exception to the convention of disclosure. Contingent liability which is shown as a
footnote in the balance sheet is through convention of materiality otherwise
accountants would have shown it as other liability. It should be noted that what is
material for one concern may be immaterial for other. Thus, the accountant should
judge the importance if each transactions to determine its materiality.
 Source
APC NEW ISC ACCOUTNING CLASS XI
CHETNA ACCOUTNING CLASS X1

I .Theory Questions

Q.1 .Why is accounting is called language of business? (Refer to section 1.1)

Q.2 .What is Accounting? Explain its merits and demerits. (Refer to section 1.8 and 1.9)
Q.3 .What are Accounting Concepts? Explain any five of them. (Refer to section 1.12.1)
Q.4. Who are the users of accounting and why they are interested? (Refer to section 1.7)
Q.5. What are the functions of accounting? (Refer Section 1.10)
Q.6. Explain Accounting Conventions. (Refer Section 1.12.2)
Q.7. Explain the importance and objects of book-keeping (Refer section 1.2)
Q.8. State the difference between book-keeping and accounting (Refer section 1.5)
Q.9. Explain why accounting has wider scope than book-keeping. (Refer section 1.5)

II. Short Notes

Q.1 .Explain what is transactions and its types with example.

Q.2.Explain is expenditure and its types.( Refer section 1.11)
Q.3. Conventions of Full disclosure and Materiality (Refer Section 1.12.2)
Q.4. Explain Assets and its types (Refer Section 1.11)
Q.5. Explain Liabilities and its types (Refer Section 1.11)
Q.6. Dual Match Concept (Refer Section 1.12.1)
Q.7. Business Entity Concept (Refer Section 1.12.1)
Q.8. Revenue Recognition Concept (Refer Section 1.12.1)
Q.9 Deferred Revenue Expenditure.(Refer Section 1.11)
III. Multiple choice questions

1. As per Income Tax Act, accounting period is :

a. From 1st January to 31st December
b. From 1st April to 31st March
c. From Diwali to Diwali
d. From 5th April to 6th April.

2. As per dual aspect concept , the equation :

a. Assets=Capital+ Liabilities
b. Assets =Liabilities-Capital
c. Capital=Asset+ Liabilities
d. Liabilities= Capital+ Assets
3. Money Value of the reputation of business is known as
a. Copyright
b. Trade mark
c. Goodwill
d. Surplus
4. A commodity in which a trader deals is known as
a. Goods
b. Deficit
c. Loss
d. Income
5. Current Assets do not include :
a. Debtors
b. Cash
c. Furniture
d. Prepaid Expenses
6. Current Liabilities includes:
a. Creditor
b. Capital
c. Loan
d. Bonds
7. Which is recorded in books of accounts
a. Only financial transactions
b. Financial and Non-financial transactions
c. Personal transactions of owner
d. Creditors transactions

Answers

1-b, 2-a, 3-c, 4-a, 5-c, 6-a, 7-a

IV. Fills in the books

 1. Accounting is called ________________
2. Everything a firm owns, it also owns out to somebody. This co-incidence is
explained by _____________Concept
3. Revenue means income of a _________nature.
4. __________ liabilities which is paid normally within one year.
5. Goodwill is a ________
6. Amount which the company owns to outsider is termed as _________
7. ________ is the cost of productions of goods and service

Answers

1-Language of business, 2-Dual Aspect, 3- Recurring, 4-Current, 5-Tangible Asset,

6-liability, 7-Expense

V) State whether true or false

1. The convection of prudence is to anticipate no profit and provide for all possible
losses
2. Assets are always to liabilities without capital
3. Goodwill is tangible asset
4. Accounting is helpful in raising loans
5. Accounting will not be affect by window dressing
6. All items or facts whether material or immaterial are recorded in accounting.
7. Materiality principle is an exception to the Full Disclousure Principle

Answers

True-1, 4, 6, 7

False-2, 3, 5