NCERT Solutions for Class 11 Accountancy Financial Accounting I Chapter 1: Introduction to Accounting

Chapter at a glance

Test Your Understanding

Question TYU – I

Complete the following sentences with appropriate words:
(a) Information in financial reports is based on …………………
(b) Internal users are the ………………… of the business entity.
(c) A ………………… would most likely use an entities financial report to determine whether or not the business entity is eligible for a loan.
(d) The Internet has assisted in decreasing the ………………… in issuing financial reports to users.
(e) ………………… users are groups outside the business entity, who uses the information to make decisions about the business entity.
(f) Information is said to be relevent if it is ………………….
(g) The process of accounting starts with ………… and ends with …………
(h) Accounting measures the business transactions in terms of ………… units.

Answer

1. Information in financial reports is based on economic transactions (business events measured in money).
   2. Internal users are the management / employees (owners) of the business entity.
   3. A creditor (lender, such as a bank) would use the financial report to decide whether to grant a loan.
   4. The Internet has decreased the time-gap in issuing financial reports.
   5. External users are groups outside the business entity.
   6. Information is relevant if it is useful for decision making and timely; the NCERT checklist also accepts “free from bias” for the reliability-related blank.
   7. Accounting starts with identifying the transactions and ends with communicating the information to users.
   8. Accounting measures transactions in monetary units.

1. economic transactions (b) management/employees (c) creditor (d) time-gap (e) external (f) free from bias (g) identifying transactions … communicating information (h) monetary

Question TYU – 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?
[Hint : Refer to qualitative characteristics of accounting information]

Answer

The three steps follow the qualitative characteristics of accounting information:

1. Make the information reliable: record transactions on the basis of verifiable documents (vouchers, invoices) and present them faithfully and without bias.
2. Make it relevant: prepare and publish the statements on time, so that the figures can influence the decisions of users.
3. Make it understandable and comparable: present data in a clear, simple language with common units of measurement and a common format, and apply the same accounting policies from year to year.

Reliability (verifiable, faithful, neutral), relevance (timely) and understandability with comparability.

Question TYU – III

Which stakeholder group… would be most interested in
(a) the VAT and other tax liabilities of the firm
(b) the potential for pay awards and bonus deals
(c) the ethical or environmental activities of the firm
(d) whether the firm has a long-term future
(e) profitability and share performance
(f) the ability of the firm to carry on providing a service or producing a product.

Answer

1. Government (b) Management/employees (c) Social responsibility groups (d) Lenders (e) Owners/investors (f) Customers

Question TYU – IV

Tick the Correct Answer
1. Which of the following is not a business transaction?
a. Bought furniture of ₹ 10,000 for business
b. Paid for salaries of employees ₹ 5,000
c. Paid sons fees from her personal bank account ₹ 20,000
d. Paid sons 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 his decision?
a. Similar business acquired the required building in 2000 for ₹ 10,00,000
b. Building cost details of 2003
c. Building cost details of 1998
d. Similar building cost in August, 2005 ₹ 25,00,000
3. Which is the last step of accounting as a process of information?
a. Recording of data in the books of accounts
b. Preparation of summaries in the form of financial statements
c. Communication of information
d. Analysis and interpretation of information
4. Which qualitative characteristics of accounting information is reflected when accounting information is clearly presented?
a. Understandability b. Relevance c. Comparability d. Reliability
5. Use of common unit of measurement and common format of reporting promotes;
a. Comparability b. Understandability c. Relevance d. Reliability

Answer

1 – c, 2 – a, 3 – c, 4 – a, 5 – a

Question TYU – 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.
2. What are the fixed assets he bought?
3. What is the value of the goods purchased?
4. Who is the creditor and state the amount payable to him?
5. What are the expenses?
6. What is the gain he earned?
7. What is the loss he incurred?
8. Who is the debtor? What is the amount receivable from him?
9. What is the total amount of expenses and losses incurred?
10. Determine 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.

Answer

No.	Question	Answer
1	Capital	₹ 5,00,000 (the initial investment)
2	Fixed assets bought	Furniture ₹ 1,00,000 (machinery is mentioned only when a part is sold)
3	Goods purchased	₹ 2,00,000 for cash at the start, and ₹ 1,50,000 later on credit (total purchases ₹ 3,50,000)
4	Creditor	Mr. Peace, ₹ 1,50,000 payable
5	Expenses	Salaries ₹ 5,000
6	Gain	Sale of machinery: ₹ 5,000
7	Loss	Stationery lost in fire: ₹ 30,000
8	Debtor	Mr. Ravi, ₹ 1,00,000 receivable
9	Total expenses and losses	₹ 35,000

10. Classification

Capital ₹ 5,00,000; fixed asset – furniture ₹ 1,00,000; creditor Mr. Peace ₹ 1,50,000; debtor Mr. Ravi ₹ 1,00,000; gain ₹ 5,000; loss ₹ 30,000; expenses and losses ₹ 35,000.

Questions for Practice – Short Answers

Question SA – Q1

Define accounting.

Answer

Accounting is the process of identifying, measuring, recording, classifying, summarising, analysing, interpreting and communicating financial information so that users can make informed decisions. Put simply, it is the art of keeping a systematic record of the money-related transactions of a business.

Accounting = identifying, measuring, recording, summarising and communicating financial information to users.

Question SA – Q2

State the end product of financial accounting.

Answer

The end product is the set of financial statements: the Income Statement (Profit and Loss Account), the Balance Sheet and, for companies, the Cash Flow Statement. These are communicated to users for decision making.

Financial statements (profit and loss account and balance sheet).

Question SA – Q3

Enumerate main objectives of accounting.

Answer

1. Maintaining systematic records of all business transactions.
2. Ascertaining the profit or loss of the business.
3. Ascertaining the financial position (assets and liabilities).
4. Providing information to the interested users.
5. Supplying information that helps in decision making and planning, and in meeting legal requirements such as tax.

Systematic records, profit or loss, financial position, and information to users.

Question SA – Q4

Who are the users of accounting information.

Answer

Internal users (owners, management, employees) and external users (investors, lenders, creditors, customers, government, public).

Question SA – Q5

State the nature of accounting information required by long-term lenders.

Answer

Long-term lenders (banks, debenture holders) need information about the long-term solvency of the business: its ability to pay interest regularly and repay the principal on the due date. So they look at the profitability, the capital structure, the long-term assets that act as security and the cash flows of the business.

Information on the long-term solvency, profitability and security available for repayment of loan and interest.

Question SA – Q6

Who are the external users of information?

Answer

External users are groups outside the business who use its financial information. Examples: investors, lenders (banks), suppliers and creditors, customers, government and regulatory authorities, tax authorities, researchers and the general public.

Investors, lenders, creditors, customers, government and the public.

Question SA – Q7

Enumerate information needs of management.

Answer

Management needs information to plan, organise, control and take decisions. It needs:

1. Profit or loss, sales, costs and expenses of each product or department.
2. Financial position: cash, stock, debtors, creditors and loans.
3. Comparison of actual performance with plans and with earlier periods.
4. Cash flow position and the capacity to raise funds.

Information on profitability, financial position, costs, cash flows and performance against plans.

Question SA – Q8

Give any three examples of revenues.

Answer

Revenue is the income earned from business operations. Three examples: sales of goods, commission received, and interest received (also rent, dividend and fees for services).

Sales, commission received, interest received.

Question SA – Q9

Distinguish between debtors and creditors; profit and gain

Answer

Debtors and creditors

Profit and gain

Debtor owes the business; creditor is owed by the business. Profit comes from regular operations, gain from incidental events.

Question SA – Q10

‘Accounting information should be comparable’. Do you agree with this statement. Give two reasons.

Answer

Yes, I agree. Comparable information helps users judge the business properly:

1. It lets users compare the business’s performance over time (this year with last year), which shows the trend of growth or decline. This needs consistent accounting policies.
2. It lets users compare the business with other similar businesses, and so judge its relative position. This needs a common unit of measurement and a common format of reporting.

Yes. Comparability shows trends over years and relative performance against other firms.

Question SA – Q11

If the accounting information is not clearly presented, which of the qualitative characteristic of the accounting information is violated?

Answer

The characteristic violated is understandability. Information must be presented clearly and in simple terms so that users with reasonable knowledge can understand it.

Understandability

Question SA – Q12

“The role of accounting has changed over the period of time”- Do you agree? Explain.

Answer

Yes. Accounting started as simple book-keeping of transactions, but its role has widened:

1. Earlier: a historical record of transactions, mainly to find profit or loss and to keep the owner informed.
2. Later: an information system serving many users, such as investors, lenders, government and customers, with the growth of companies and the separation of owners from managers.
3. Today: a tool for decision making, planning and control, used with computers and the Internet to give quick, reliable and comparable information, and also serves social responsibility reporting.

Yes. From a historical record of transactions, it has become an information system that helps many users to take decisions.

Question SA – Q13

Giving examples, explain each of the following accounting terms :
• Fixed assets • Revenue • Expenses • Short-term liability • Capital

Answer

Terms explained with examples in the table above.

Question SA – Q14

Define revenues and expenses?

Answer

• Revenue: the gross inflow of money or money’s worth arising from the ordinary activities of a business, such as sale of goods and services, interest and commission. It increases the owner’s capital.
• Expenses: the costs incurred to earn revenue, such as salaries, rent and depreciation. They reduce the owner’s capital (or profit).

Revenue is the income from business activities; expenses are the costs incurred to earn it.

Question SA – Q15

What is the primiary reason for the business students and others to familiarise themselves with the accounting discipline?

Answer

Accounting is the language of business. Everyone who deals with a business (owners, managers, investors, lenders, employees) must understand its financial reports to take sound decisions. Familiarity with accounting also helps in planning personal and business finances, understanding tax and legal obligations, and judging the health of any organisation.

To understand the financial information of a business and take informed decisions.

Questions for Practice – Long Answers

Question LA – Q1

What is accounting? Define its objectives.

Answer

Meaning. Accounting is the process of identifying, measuring, recording, classifying, summarising, interpreting and communicating financial information about an entity to its users so that they can make informed decisions.

Objectives

1. Maintaining records: to keep a complete and systematic record of all transactions in books of account, so that nothing is forgotten.
2. Ascertaining profit or loss: to find the result of operations of an accounting period through the income statement.
3. Ascertaining financial position: to show the assets, liabilities and capital on a given date through the balance sheet.
4. Providing information to users: both internal and external users need reliable information for decisions.
5. Meeting legal requirements: such as the preparation of books for tax and company law purposes, and use as evidence in disputes.

Accounting is the process of recording and communicating financial information; its objectives are records, profit or loss, financial position, information to users and legal compliance.

Question LA – Q2

Explain the factors which necessitated systematic accounting.

Answer

Systematic accounting became necessary because of these factors:

1. Growth in the size and complexity of business: a large number of transactions cannot be remembered or handled without proper records.
2. Separation of ownership and management: owners (shareholders) need regular reports to check the work of the managers.
3. Need to ascertain profit and financial position: the owner must know how the business is doing.
4. Credit transactions: dealings on credit need records of who owes what and when.
5. Legal requirements: tax and company laws require proper books.
6. Need for decision making and planning: reliable data about the past is needed to plan the future.
7. Many interested users: lenders, investors, government and others need standard information.

Business growth, separation of ownership and management, credit dealings, legal requirements and the needs of many users made systematic accounting necessary.

Question LA – Q3

Describe the informational needs of external users.

Answer

Each external user group needs different information, such as profit for investors, repayment ability for lenders and compliance for the government.

Question LA – Q4

What do you mean by an asset and what are different types of assets?

Answer

Meaning. An asset is a resource owned by the business, with a measurable money value, that is expected to give future economic benefit. Examples: cash, stock, debtors, machinery.

Types

1. Fixed (non-current) assets: held for long-term use, not for resale.
   • Tangible: can be seen and touched, such as land, building, furniture, machinery.
   • Intangible: no physical form but has value, such as goodwill, patents, trademarks, software.
2. Current assets: cash and other assets that will be converted to cash or used up within one year (or the operating cycle), such as cash in hand, cash at bank, stock, debtors, bills receivable, prepaid expenses.
3. Investments: long-term (non-current) and short-term (current) investments in shares, bonds etc.
4. Fictitious assets: deferred losses that have no real value, shown as assets until written off (e.g. preliminary expenses).

An asset is a resource owned by the business that gives future benefit; assets are fixed (tangible, intangible), current, investments and fictitious.

Question LA – Q5

Explain the meaning of gain and profit. Distinguish between these two terms.

Answer

Profit is the excess of revenue over expenses earned from the regular operations of the business in an accounting period. Gain is an increase in the owner’s wealth arising from incidental or non-recurring events, not from the main business activity, for example, a profit on sale of a fixed asset or a lottery win.

Profit comes from regular business operations, gain from incidental events such as a sale of a fixed asset.

Question LA – Q6

Explain the qualitative characteristics of accounting information.

Answer

Qualitative characteristics are the attributes that make accounting information useful:

1. Reliability: the information must be free from material error and bias, so that users can depend on it. It rests on three features: verifiability (independent persons would reach the same figures), faithfulness (shows what it claims to show) and neutrality (no bias towards any user).
2. Relevance: the information must influence the decisions of users and be available in time. It has a predictive and a feedback value, and timeliness.
3. Understandability: the information is presented clearly, in simple language, so users with reasonable knowledge can follow it.
4. Comparability: the information can be compared with that of earlier years and with other firms, which needs consistent policies, a common unit and a common format.

Reliability, relevance, understandability and comparability make accounting information useful.

Question LA – Q7

Describe the role of accounting in the modern world.

Answer

Accounting plays several roles:

1. As a language: it is the language of business used to communicate information about an enterprise.
2. As a historical record: it keeps a systematic record of past transactions, so that results can be checked.
3. As a current economic reality: it shows the present financial position through balance sheet and income statement.
4. As an information system: it collects, processes and communicates information to many users.
5. As a service to users: it helps owners, managers, investors, lenders, government and society to take decisions.
6. Beyond business: it supports taxation, planning at the national level, social responsibility reporting and control of public funds.

In the modern world accounting acts as the language of business, a record of history and present position, an information system and a service to all users.

Topic checklist

• ☒ Meaning and objectives of accounting (SA Q1, Q3; LA Q1)
• ☒ Users of accounting information and their needs (TYU I, III; SA Q4 – Q7; LA Q3)
• ☒ Accounting terms: asset, liability, capital, revenue, expense, gain, profit (TYU V; SA Q8, Q9, Q13, Q14; LA Q4, Q5)
• ☒ Qualitative characteristics (TYU II, IV; SA Q10, Q11; LA Q6)
• ☒ Role and need for accounting (SA Q12, Q15; LA Q2, Q7)

Total questions answered: 27 of 27