Introduction to Accounting

This page contains the CBSE accountancy class 11 chapter Introduction to Accounting notes. You can find the questions/answers/solutions for the chapter 1 of CBSE class 11 accountancy in this page. So is the case if you are looking for CBSE class 11 Commerce related topic Introduction to Accounting
Test Your Understanding – I
Complete the following sentences with appropriate words:

  1. Information in financial reports is based on ………….. transactions. (Economic)
  2. Internal users are the …………… of the business entity. (Management/Employees)
  3. A ………………. would most likely use an entity’s financial report to determine whether or not the business entity is eligible for a loan. (Creditor)
  4. The Internet has assisted in decreasing the …………… in issuing financial reports to users. (Time-gap)
  5. ……………. users are groups outside the business entity, who uses the information to make decisions about the business entity. (External)
  6. Information is said to be relevant if it is …………. (Free from bias)
  7. The process of accounting starts with ………… and ends with …………… (Identifying the transactions and communicating information)
  8. Accounting measures the business transactions in terms of ……….. units. (Monetary)
  9. Identified and measured economic events should be recorded in …………… order. (Chronological)
Test Your Understanding – II
You are a senior accountant of Ramona Enterprises Limited. What three steps would you take to make your company’s financial statements understandable and decision useful?
We should take the following measures to ensure that the financial statements are understandable and useful in decision making.

  1. Reliability: It must be verifiable, faithful and neutral in nature
  2. Relevance: The information should be presented on time.
  3. Understand ability and Comparability
Test Your Understanding – III
Which stakeholder group… would be most interested in
(Government and other regulators) (a) the VAT and other tax liabilities of the firm.
(Management) (b) the potential for pay awards and bonus deals
(Social responsibility groups) (c) the ethical or environmental activities of the firm
(Lenders) (d) whether the firm has a long-term future
(Suppliers and Creditors) (e) profitability and share performance
(Customers) (f) the ability of the firm to carry on providing a service or producing a product
Test Your Understanding – IV
Tick the Correct Answer.

  1. Which of the following is not a business transaction?
    1. Bought furniture of ₹ 10,000 for business
    2. Paid for salaries of employees ₹ 5,000
    3. Paid son’s fees from her personal bank account ₹ 20,000 ✔
    4. Paid son’s fees from the business ₹ 2,000
  2. Deepti wants to buy a building for her business today. Which of the following is the relevant data for her decision?
    1. Similar business acquired the required building in 2000 for ₹ 10,00,000 ✔
    2. Building cost details of 2003
    3. Building cost detials of 1998
    4. Similar building cost in August, 2005 ₹ 25,00,000
  3. Which is the last step of accounting as a process of information?
    1. Recording of data in the books of accounts
    2. Preparation of summaries in the form of financial statements
    3. Communication of information ✔
    4. Analysis and interpretation of information
  4. Which qualitative charactersistics of accounting information is reflected when accounting information is clearly presented?
    1. Understandability ✔
    2. Relevance
    3. Compatibility
    4. Reliability
  5. Use of common unit of measurement and common format of reporting promotes:
    1. Comparability ✔
    2. Understandability
    3. Relevance
    4. Reliability
Test Your Understanding – V
Mr. Sunrise started a business for buying and selling of stationery with ₹ 5,00,000 as an initial investment. Of which he paid ₹ 1,00,000 for furniture, ₹ 2,00,000 for buying stationery items. He employed a sales person and clerk. At the end of the month he paid ₹ 5,000 as their salaries. Out of the stationery bought he sold some stationery for ₹ 1,50,000 for cash and some other stationery for ₹ 1,00,000 on credit basis to Mr.Ravi. Subsequently, he bought stationery items of ₹ 1,50,000 from Mr.Peace. In the first week of next month there was a fire accident and he lost ₹ 30,000 worth of stationery. A part of the machinery, which cost ₹ 40,000, was sold for ₹ 45,000.
From the above, answer the following:

  1. What is the amount of capital with which Mr.Sunrise started business? (₹ 5,00,000)
  2. What are the fixed assets he bought? (₹ 1,00,000)
  3. What is the value of the goods purchased? (₹ 2,00,000)
  4. Who is the creditor and state the amount payable to him? (Mr.Peace, ₹ 1,50,000)
  5. What are the expenses? (₹ 5,000)
  6. What is the gain he earned?(₹ 5,000)
  7. What is the loss he incurred? (₹ 30,000)
  8. Who is the debtor? What is the amount receivable from him? (Mr.Ravi, ₹ 1,00,000)
  9. What is the total amount of expenses and lossed incurred? (₹ 35,000)
  10. Determin if the following are assets liabilities, revenues, expenses or none of these: sales, debtors, creditors, salary to manager, discount to debtors, drawings by the owner.
    Assets: debtors
    Liabilities: creditors; drawings; revenues; sales expenses; discount; salary
Short Answers





1. Define accounting.
Accounting is the process of

  1. identifying
  2. measuring
  3. recording
  4. and communicating

the required information related to the economic events of an organization, to the interested users of this information.

2. State what is the end product of financial accounting.
The end product of financial accounting is

  1. Income statement: The income statement includes the trading and/or profit and loss account. It ascertains the financial results of any business in terms of gross (or net) profit or loss.
  2. Balance Sheet: Balance sheet provides the true financial position of a business. It presents the information in terms of assets and liabilities of a business unit to the users.
3. Enumerate main objectives of accounting.
The main objectives of accounting are:

  1. Maintenance of Records of Business Transactions.
  2. Calculation of Profit and Loss
  3. Depiction of financial position.
  4. Providing accounting information to the users interested in the information.
4. Who are the users of accounting information?
The following are the users of accounting information.

  1. Internal users: Chief Executive, Financial Officer, Vice President, Business Unit Managers, Plant Managers, Store Managers, Line Supervisors etc
  2. External users: Shareholders, creditors, Tax authorities, regulatory agencies, labour unions, trade associations, stock exchange and customers.
5. State the nature of accounting information required by long-term lenders.
The long-term lenders seek the following accounting information.

  1. Liquidity
  2. Operational Efficiency
  3. Potential growth prospects
  4. Profitability
  5. Repaying capacity of the business.
6. Who are the external users of information?
External users of information are the users who are not part of the business but are interested in the accounting information. They include:

  1. Creditors: Banks and other financial institutions, debenture holders and other lenders.
  2. Customers
  3. Labour Unions
  4. Regulatory Agencies: Department of Company Affairs, Registrar of Companies, Securities Exchange Board of India
  5. Shareholders: present and potential investors.
  6. Trade Associations
  7. Tax authorities
7. Enumerate information needs of management.
The management needs the following information which helps in:

  1. Budgeting
  2. Business planning
  3. Capital Expenditure decisions
  4. Decision making
  5. Pricing decisions
  6. Profitability assessment
8. Give any three examples of revenues.
The following are few examples of revenue.

  1. Commission
  2. Dividends
  3. Royalties
  4. Rent Received
9. Distinguish between debtors and creditors; profit and gain.
The following are the differences between debtors and creditors.

Debtors Creditors
Debtors are the persons and/or other entities who owe to an enterprise certain amount for buying goods and services on credit. Creditors are the persons and/or other entities to whom the an enterprise has to pay an amount after purchasing the goods and service on credit.
The total amount standing against the debtors on closing date is recorded in the balance sheet as sundry creditors on the assets side. The total amount standing to the favour of creditors on the closing date is recorded in the balance sheet as sundry creditors on the liabilities side
To encourage the debtors to pay the amount within stipulated period, a cash discount is offered to them as incentive. To receive the payments on time, the creditors offer cash discount incentives.
Profit Loss
Profit represents the excess of revenue of a period over expenses, during an accounting year. Loss represents the excess of expenses of a period over revenue/income, during an accounting year.
Profit increases the owner’s equity Loss decreases the owner’s equity
Events or transactions which are incidental to business such as sale of fixed assets, winning a court case, appreciation in the value of an asset will result in profit. Events or transactions which are incidental to business such as loss of value without receiving any benefit in return(due to theft or fire accident), loss on sale of fixed assets result in a loss.
10. ‘Accounting information should be comparable’. Do you agree with this statement. Give two reasons.
Accounting information should be comparable due to the following reasons. Lack of comparability will make these aspects erroneous/difficult.

  1. It enables the interested uses to assess how a firm is performing as compared to other entities.
  2. It also helps in assessing how a firm has performed during different periods by comparing the financial reports of different periods.
11. If the accounting information is not clearly presented, which of the qualitative characteristic of the accounting information is violated?
The lack of clear presentation will result in the violation of the qualitative characteristics namely

  1. Reliability: The data will be erroneous/biased and loses faithfulness.
  2. Relevance: The information loses the validity
  3. Understand-ability:It will be difficult to understand and is prone to errors.
  4. Comparability: Comparison will other reports will be difficult/erroneous resulting in biased interpretations.
12. “The role of accounting has changed over the period of time” – Do you agree? Explain.
I agree with the fact that the role of accounting had changed over a period of time. Especially the advancements in economic development greatly contributed to changing the role of accounting and its scope at a broader level.

  1. Initially accounting was looked upon as the art of recording, classifying and summarizing in
    1. significant manner
    2. in terms of money
    3. transactions and events

    which are at-least partially financial in nature and interpreting the results thereof.

  2. Then accounting became the process of
    1. identifying
    2. measuring
    3. communicating

    economic information to allow informed judgments and decisions by users of information.

  3. And then accounting assumed the role of providing quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions.
13. Giving examples, explain each of the following accounting terms:

  1. Fixed assets
  2. Revenue
  3. Expenses
  4. Short-term liability
  5. Capital
Fixed Assets: Fixed assets are the assets held on a long-term basis for the normal operations of the business. Examples

  1. Land
  2. Buildings
  3. Furniture
  4. Fixtures
  5. Plant
  6. Machinery

Revenue: Revenue, also called as income, is the amount that the business has earned through its normal business activities by selling its products and/or providing services to the customers.
Examples are:

  1. Commission
  2. Dividends
  3. Royalties
  4. Rent Received

Expenses: The cost incurred by the business during the process of earning revenue is called as expenses. Usually, the expenses are measured by the cost of assets consumed or services used during an accounting period.
Examples are:

  1. Cost of heater, light, water, telephone
  2. Depreciation
  3. Rent
  4. Salaries
  5. Wages

Short-term liabilities: Short term liabilities are those liabilities that are payable within a period of one year.
Examples are:

  1. bank Overdraft
  2. Bills Payable
  3. Creditors

Capital: Capital is the amount invested by the owner in the business. The capital may be invested in the form of cash or assets. The capital is an obligation and is a claim on the assets of the business (the owner can claim this later on). It is recorded on the liabilities side of the balance sheet.
Examples are:

  1. Buildings
  2. Land
  3. Cash
  4. Machinery
  5. Equipment
14. Define revenues and expenses?
Revenues: Revenue, also called as income, is the amount that the business has earned through its normal business activities by selling its products and/or providing services to the customers.
Examples are:

  1. Commission
  2. Dividends
  3. Royalties
  4. Rent Received

Expenses: The cost incurred by the business during the process of earning revenue is called as expenses. Usually, the expenses are measured by the cost of assets consumed or services used during an accounting period.
Examples are:

  1. Cost of heater, light, water, telephone
  2. Depreciation
  3. Rent
  4. Salaries
  5. Wages
15. What is the primary reason for the business students and others to familiarize themselves with the accounting discipline?
The students of business studies and entrepreneurship familiarize themselves with the accounting principles as accounting is the language of the business. It also help them to

  1. understand the various principles of accounting
  2. maintain records of business information
  3. summarize accounting information and there by understand the financial position of the business
  4. accurately interpret the accounting information
Long Answers





1. What is accounting? Define its objectives.
Accounting: Accounting is the process of

  1. identifying
  2. measuring
  3. recording
  4. and communicating

the required information related to the economic events of an organization, to the interested users of this information.
The following are the objectives of accounting:

  1. Maintenance of records of business transactions: As it is beyond the control of humans to remember the various transactions taking place in the business, accounting is used for systematic maintenance of all the financial transactions in books of accounts. Apart from storing the data, it serves as an evidence and allows verification when required.
  2. Calculation of profit and loss: To provide profit and loss account prepared by considering the various incomes and expenses. This information gives the the net results of the business to the owners, periodically. This helps them to know whether the business is running with profits or not.
  3. Depiction of financial position: Provide the balance sheet by considering the assets owned and liabilities owed. This gives the financial position of the business.
  4. Providing accounting information to its users: After accounting information is generated by the accounting process, it is communicated to the interested users namely internal users and external users to serve them as the basis in various decision making processes, planning controlling.
2. Explain the factors which necessitated systematic accounting.
The following are the factors that have led to systematic accounting.

  1. Recording only those transactions which are financial in nature: Among all the transactions and events that occur in the organization, only those transactions which are financial in nature are recorded. Non-financial events like hiring, promotion, holding conferences etc are not recorded.
  2. Recording the transactions always in the monetary terms: Each of the economic events are recorded in terms of currency. For instance, furniture is recorded as worth Rs.75,000. In other-words the recorded information is always expressed in monetary units.
  3. Recording the information: The recording of information is an art. The information should be carefully and accurately segregated keeping the recording rules under consideration. In addition the economic events are recorded in chronological order. In small to medium firm accountants maintain journals for this purpose. As the size of the firm increases, it might be necessary to further segregate the journal into subsidiary records.
  4. Classification: The economic transactions from the journals/subsidiary records are then skillfully classified and recorded into the respective account records namely ledgers.
  5. Summation: The summarized business transactions take the form of trading account, profit and loss account, balance sheet and traial balance depending on the intended users for whom these accounts are prepared.
  6. Analyzing and interpreting the data: When accounting records are prepared using this systematic procedure, it helps the users to analyze and interpret the accounting information efficiently and accurately. When presented in various formats like charts, graphs, accounting statements, report it becomes easier to communicate it to the users and also it improves the understand-ability and comparability. The users use this information for controlling, decision making and planning
3. Describe the informational needs of external users.
The following are the various needs of external users.

  1. Customers: Customers need the information to ensure the continuity of the business so that they have good probability of supply of products, parts and after sales service.
  2. Competitors: Competitors need the information on the relative strengths and weaknesses of their competition and for comparative and bench-marking purposes. Their information need is strategic in nature.
  3. Government and other regulatory agencies: They need information to decide about the allocation of resources and to ensure that the business is complying with the regulations.
  4. Investors and potential investors: They need information to assess the risks and the return on their investment.
  5. Lenders and financial institutions: Information on the creditworthiness of the business and its ability to repay loans.
  6. Social responsibility groups: They need information to assess the impact on environment and its protection.
  7. Unions and employee groups: They need this information to understand the stability, profitability and distribution of wealth within the business.
4. What do you mean by an asset and what are different types of assets?
Assets are the economic resources of an enterprise which can be expressed in monetary ters. In other words assets are items that have monetary value and are used by the business in its day to day operations. Assets shown on the asset side of the balance sheets. Assets are broadly classified into two types.

  1. Fixed Assets: Fixed assets are the assets that are held on a long-term basis. They are used for the normal operations of the business. Examples includes
    1. Land
    2. Buildings
    3. Furniture
    4. Fixtures
    5. Plant
    6. Machinery
  2. Current Assets: Current assets are the assets that are held on a short-term basis. Examples are :
    1. Bank Balances
    2. Bills Receivable(notes receivable)
    3. Cash balances
    4. Debtors(accounts receivable)
    5. Stock(inventory)
    6. Temporary marketable securities
5. Explain the meaning of gain and profit. Distinguish between these two terms.
Gain: Gain is the profit that results from the events or transactions that are incidental to business such as the sale of fixed assets, winning a court case, appreciation in the value of an asset.
Profit: Profit is the excess of revenues of a period over its related expenses during an accounting year. Profit increases the investment of the owner.
Gain Profit
Gain arises from the events or transactions which are incidental to business. Profit is the excess of revenues of a period over its related expenses during an accounting year.
The transactions that yield the gain are not part of the core business. The transactions that yield the profit are part of the core business.
Gain is not repetitive in nature. Profit arises as the number of products sold increases. The more the number of products sold or the lesser the expenses, the more is the profit.
Examples include sale of fixed assets, winning a court case, appreciation in the value of an asset. Excess of income after deducting the expenses.
6. Explain the qualitative characteristics of accounting information.
The following are the qualitative characteristics of accounting information. The are the attributes of the accounting information that improve the understand-ability and usefulness.

  1. Reliability: The information becomes reliable when the users are able rely on it. It is determined by the degree of correspondence between what the information conveys about the transactions or events that have
    1. occurred
    2. measured
    3. and displayed

    To be more reliable, the information must be

    1. credible
    2. verifiable by independent parties
    3. use the same method of measuring
    4. be neutral and faithful.
  2. Relevance: The information is relevant, when it is
    1. available on time
    2. helpful in prediction and feedback
    3. influence the decisions of the users

    When it meets the above requirements, it will

    1. help the users to predict about the outcome of past, present and future events.
    2. confirming or correcting their past evaluations.
  3. Understand-ability: The information is said to be understandable when the users/decision-makers will interpret it in the same sense as the ones who have prepared it. In other-wards it should not have any communication gap. Thus the understand-ability necessitates that the accountants should present the comparable information in the most intelligible manner without sacrificing relevance and reliability.
  4. Comparability: The information apart from being relevant and reliable at a particular time, in a particular circumstance or for a particular reporting entity, should also enable the general users to compare various aspects of an entity with those of other entities over different periods of time. When the accounting reports
    1. belong to a common period
    2. use common unit of measurement
    3. use common format of reporting

    they can be easily compared.

7. Describe the role of accounting in the modern world.
  1. Language of a business: The accounting process describes and analyzes huge amount of data belonging to an enterprise by
    1. measuring
    2. classifying
    3. and summarizing

    It also presents this information in the form of reports and statements. This information helps the users to gauge the financial condition and results of operation of a business. Thus accounting plays the role of the language of business.

  2. Historical record: Accounting provides a detailed overview of the past transactions and serves to maintain historical recording of the information. This helps the users to make intra-period comparison and evaluate how the business is doing. It also serve as a valid proof in case of any conflicts arising.
  3. Current economic reality: It provides reliable and relevant financial information about the current position of the business. Various users thus rely on this information and use it as a guideline to set their strategy towards the business.
  4. Information System: Being the information system it collects and communicates economic information about the enterprise to various users. The information provided is both relevant and reliable. Thus the users rely on this information system to change their strategies towards the business.
  5. Service to Users: Accounting makes it easy for the users to understand, compare and judge the business by presenting the information in the relevant and reliable manner. The users rely on this information to make various decisions and plan and in many other ways. This it performs the service activity to the users.

Need more material?



You might also want to refer the following pages.

  1. Theory Base of Accounting
  2. Recording of Transactions – I
  3. Recording of Transactions – II
  4. Bank Reconciliation Statement