Saturday, 2 June 2018

CBSE Notes and Study Materials for Accounts class 11 Chapter 1. Introduction to Accounting.


Defintion: 
"Accounting is the process of collecting, recording, summarising and comunicating financial information." 

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Attributes of Accounting:

1. Accounting is an art as well as a Science:
2. Accounting Records only those events and transactions which are of financial character:
3. Accounting records transactions by expressing them in term of money:
4. Functions of accounting:
5. Service activity:

Accounting Process: 

Accounting process are as follows:
(i)    Financial Transactions or Events,
(ii)   Recording,
(iii)  Classifying,
(iv)  Summarising
(v)   Analysis
(vi)  Interpretaion
(vii) Reporting or Communicating

Branches of Accounting : 



(i)   Financial Accounting : Financial Accounting is concerned with recording financial transactions, summarising and interpreting them and communicating the results to users.

(ii)  Cost Accounting: THe limitation of financial accounting in respect of information relating to the cost of products or services led to the development of a specialised branch, i.e Cost Accounting.

(iii)  Management Accounting: Management Accounting is the most recently developed branch of accounting. It is concerned with generating accounting information relating to funds, costs profits, etc. as it enables the management in decision making.


Book Keeping:

Book Keeping: Book keeping is a branch of knowledge that educates us as to how financial records are to be maintained. Book keeping is a part of accounting and is concerned with the recording of financial data in the book of accounts.

A knowledge that educates us to maintain the financial records.
  • It is the part of accounting. 
  • Recording of financial data in the books of accounts. 
  • Identifying financial transactions and events.
  • Measuring them in terms of money. 
  • Classifying recorded transactions and events, i.e posting them into ledger accounts. 

Accountancy: 

Accountancy is a systematic knowledge of accounting. It explain how to deal with Various aspects of accounting.
It educate us
(i) How to maintain the books of accounts
(ii) How to summarise the accounting information.
(iii) How to comunicate it to the users:

Objectives of accounting:

1.  Record of financial transactions and events:
2. Determine profit or loss.
3. Determine financial position
4. Assisting the management
5. Communicating accounting information to users
6. Protecting Bussiness assets:

Users of Accounting Informations:

(1) Internal or Primary Users: of accounting information:

(i) Management: For analyzing the organization's performance and position and taking appropriate measures to improve the company results.

(ii) Employees: for assessing company's profitability and its consequence on their future remuneration and job security.

(iii) Owners: for analyzing the viability and profitability of their investment and determining any future course of action.

(2) External users (Secondary Users) of accounting information:

(i) Creditors: for determining the credit worthiness of the organization.
(ii) Tax Authourities: for determining the credibility of the tax returns filed on behalf of the company.
(iii) Investors: for analyzing the feasibility of investing in the company. Investors want to make sure they can earn a reasonable return on their investment before they commit any financial resources to the company.
(iv) Customers: for knowing the financial position of its suppliers which is necessary for them to maintain a stable source of supply in the long term.
(v) Regulatory Authorities: for ensuring that the company's disclosure of accounting information is in accordance with the rules and regulations set in order to protect the interests of the stakeholders who rely on such information in forming their decisions.

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Advantage And Limitation Of Accounting


Functions of Accounting:

(i) It helps to maintain systematic accounting records of financial transactions and evants.
(ii) It helps for preparation of financial statements at the end of financial year included profit and loss and balance sheet.
(iii) Meeting legal requirements : it is also helpful to fulfil the legal requirements and it is also accepted as evidence by the court of law if they are maintained systemically following the accounting principles and concepts.
(iv) Communicating the financial

  Accounting Informations:

1. Information rellating to profit:
2. Information Relating to financial position.
3. Cash flow statement
Ussers of Accounting information
(1)  Internal Users
a.  Owners
b.   Management
(2)  External Users
a.   Banks and financial Institutes
b.   Investors and potencial Investors
c.  Creditors
d.  Governments and its authority
e.  Emplyees and Workers
f.  Researchers
g.  Society


Basic Terms in Accounting


(1) Entity: Entity means a reality that has a definite individual existence.
Business entity: It means a specifically identifiable business enterprise like Super Bazaar, Hira Jewellers, ITC Limited, etc. An accounting system is always devised for a specific business entity (also called accounting entity).

(2) Transaction: A event involving some value between two or more entities or parties. The financial transaction is made or recorded in the books of accounts in the term of money. It can be a purchase of goods, receipt of money, payment to a creditor, incurring expenses, etc. It can be a cash transaction or a credit transaction.

(3) Capital : Amount invested by the owner and partner in the firm is known as capital. Which may be in the form of money or assets having monetary value.

(4) Account: Account is summarised record of financial expenditures and receipts or transactions relating to a particular period or purpose at one place.

(5) Drawings: The money which is withdrawn by owner for personal uses is known as drawings.

(6) Assets : Assets are valuable or economic resources of an enterprise that can be usefully expresses in monetary terms. Assets are items of value used by the business in its operations. Examples: land, building, machinery, stock, bill recievable, furniture, goods etc.

Assets can be classified into three parts:

(i) Non-current Assets : Non current Assets are those assets which are made by a bussiness firm for a long-term of view.
(ii) Current Assets
(iii) Fictitious Assets

(7) Banking: Continuing financial relationship between a customer and a bank in the term of money or a special kind of asset within a framework of established rules and procedures by making deposits and debts.

(8) Commerce: It is a accounting term which is used for going contractual relationship between a buyer and a seller whereby payment is made for goods received within a time period.

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Top Most Basic Accounting Terms, Acronyms and Abbreviations Students Should Know

Basic accounting terms, acronyms, abbreviations and concepts to remember
Check out these basic accounting terms and start to commit them to memory. That way, when you start your degree journey, you’ll already feel like you’re a step ahead and speaking the language. 

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1. Accounts receivable (AR)
Accounts receivable (AR) definition: The amount of money owed by customers or clients to a business after goods or services have been delivered and/or used.

2. Accounting (ACCG)
Accounting (ACCG) definition: A systematic way of recording and reporting financial transactions for a business or organization.

3. Accounts payable (AP)
Accounts payable (AP) definition: The amount of money a company owes creditors (suppliers, etc.) in return for goods and/or services they have delivered. 

4. Assets (fixed and current) (FA, CA)
Assets (fixed and current) definition: Current assets (CA) are those that will be converted to cash within one year. Typically, this could be cash, inventory or accounts receivable. Fixed assets (FA) are long-term and will likely provide benefits to a company for more than one year, such as a real estate, land or major machinery. 

5. Asset classes
Asset class definition: An asset class is a group of securities that behaves similarly in the marketplace. The three main asset classes are equities or stocks, fixed income or bonds, and cash equivalents or money market instruments.

6. Balance sheet (BS)
Balance sheet (BS) definition: A financial report that summarizes a company's assets (what it owns), liabilities (what it owes) and owner or shareholder equity at a given time.

7. Capital (CAP)
Capital (CAP) definition: A financial asset or the value of a financial asset, such as cash or goods. Working capital is calculated by taking your current assets subtracted from current liabilities—basically the money or assets an organization can put to work.

8. Cash flow (CF)
Cash flow (CF) definition: The revenue or expense expected to be generated through business activities (sales, manufacturing, etc.) over a period of time.

9. Certified public accountant (CPA)
Certified public accountant (CPA) definition: A designation given to an accountant who has passed a standardized CPA exam and met government-mandated work experience and educational requirements to become a CPA.

10. Cost of goods sold (COGS)
Cost of goods sold (COGS) definition: The direct expenses related to producing the goods sold by a business. The formula for calculating this will depend on what is being produced, but as an example this may include the cost of the raw materials (parts) and the amount of employee labor used in production.

11. Credit (CR)
Credit (CR) definition: An accounting entry that may either decrease assets or increase liabilities and equity on the company's balance sheet, depending on the transaction. When using the double-entry accounting method there will be two recorded entries for every transaction: A credit and a debit.

12. Debit (DR)
Debit (DR) definition: An accounting entry where there is either an increase in assets or a decrease in liabilities on a company's balance sheet.

13. Diversification
Diversification definition: The process of allocating or spreading capital investments into varied assets to avoid over-exposure to risk.

14. Enrolled agent (EA)
Enrolled agent (EA) definition: A tax professional who represents taxpayers in matters where they are dealing with the Internal Revenue Service (IRS).

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15. Expenses (fixed, variable, accrued, operation) (FE, VE, AE, OE)
Expenses (FE, VE, AE, OE) definition: The fixed, variable, accrued or day-to-day costs that a business may incur through its operations.

Fixed expenses (FE): payments like rent that will happen in a regularly scheduled cadence.
Variable expenses (VE): expenses, like labor costs, that may change in a given time period.
Accrued expense (AE): an incurred expense that hasn’t been paid yet.
Operation expenses (OE): business expenditures not directly associated with the production of goods or services—for example, advertising costs, property taxes or insurance expenditures.
16. Equity and owner's equity (OE)
Equity and owner's equity (OE) definition: In the most general sense, equity is assets minus liabilities. An owner’s equity is typically explained in terms of the percentage of stock a person has ownership interest in the company. The owners of the stock are known as shareholders.

17. Insolvency
Insolvency definition: A state where an individual or organization can no longer meet financial obligations with lender(s) when their debts come due.

18. Generally accepted accounting principles (GAAP)
Generally accepted accounting principles (GAAP) definition: A set of rules and guidelines developed by the accounting industry for companies to follow when reporting financial data. Following these rules is especially critical for all publicly traded companies.

19. General ledger (GL)
General ledger (GL) definition: A complete record of the financial transactions over the life of a company.

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20. Trial balance
Trial balance definition: A business document in which all ledgers are compiled into debit and credit columns in order to ensure a company’s bookkeeping system is mathematically correct.

21. Liabilities (current and long-term) (CL, LTL)
Liabilities (current and long-term) definition: A company's debts or financial obligations incurred during business operations. Current liabilities (CL) are those debts that are payable within a year, such as a debt to suppliers. Long-term liabilities (LTL) are typically payable over a period of time greater than one year. An example of a long-term liability would be a multi-year mortgage for office space.

22. Limited liability company (LLC)
Limited liability company (LLC) definition: An LLC is a corporate structure where members cannot be held accountable for the company’s debts or liabilities. This can shield business owners from losing their entire life savings if, for example, someone were to sue the company.

23. Net income (NI)
Net income (NI) definition: A company's total earnings, also called net profit. Net income is calculated by subtracting total expenses from total revenues.

24. Present value (PV)
Present value (PV) definition: The current value of a future sum of money based on a specific rate of return. Present value helps us understand how receiving $100 now is worth more than receiving $100 a year from now, as money in hand now has the ability to be invested at a higher rate of return. See an example of the time value of money here.

25. Profit and loss statement (P&L)
Profit and loss statement (P&L) definition: A financial statement that is used to summarize a company’s performance and financial position by reviewing revenues, costs and expenses during a specific period of time, such as quarterly or annually.

26. Return on investment (ROI)
Return on investment (ROI) definition: A measure used to evaluate the financial performance relative to the amount of money that was invested. The ROI is calculated by dividing the net profit by the cost of the investment. The result is often expressed as a percentage. See an example here.

27. Individual retirement account (IRA, Roth IRA)
Individual retirement account (IRA) definition: IRAs are savings vehicles for retirement. A traditional IRA allows individuals to direct pre-tax dollars toward investments that can grow tax-deferred, meaning no capital gains or dividend income is taxed until it is withdrawn, and, in most cases, it’s tax deductible. Roth IRAs are not tax-deductible; however, eligible distributions are tax-free, so as the money grows, it is not subject to taxes upon with-drawls.

28. 401K & Roth 401K
401k & Roth 401k definition: A 401K is a savings vehicle that allows an employee to defer some of their compensation into an investment-based retirement account. The deferred money is usually not subject to tax until it is withdrawn; however, an employee with a Roth 401K can make contributions after taxes. Additionally, some employers chose to match the contributions made by their employees up to a certain percentage.

29. Subchapter S corporation (S-CORP)
Subchapter S corporation (S-CORP) definition: A form of corporation (that meets specific IRS requirements) and has the benefit of being taxed as a partnership versus being subject to the “double taxation” of dividends with public companies.

30. Bonds and coupons (B&C)
Bonds and coupons (B&C) definition: A bond is a form of debt investment and is considered a fixed income security. An investor, whether an individual, company, municipality or government, loans money to an entity with the promise of receiving their money back plus interest. The “coupon” is the annual interest rate paid on a bond.


What are Assets & Liabilities in Accounting? Definition & EXAMPLE

The words “asset” and “liability” are two very common words in accounting/bookkeeping.
Some people simply say an asset is something you own and a liability is something you owe. In other words, assets are good, and liabilities are bad. That’s not wrong, but there’s a little more to it than that. Let’s look at a complete definition.

What is Assets in Accounting?

Assets are defined as resources that help generate profit in your business. You have some control over it.
To make your famous cream cake, you need your oven. These two things are examples of assets.
To be an asset it has to satisfy three requirements:
  • It’s something you have control over
  • You have control as a result of a past event
  • It has a future economic benefit
Now, let’s say after you got your loan of $10,000, you went out and bought a new oven. But not just any oven. You bought the latest and greatest model. You bought the Bakemaster X Series 3000.
Let’s see if your new Bakemaster fits the requirements of an asset.
Something you have control over?
You paid for it didn’t you? You can keep it, you can sell it, you can even bake your shoes in it if you want to! Yep, it’s in your control.
As a result of a past event?
In this case, going to the store and handing over your cash will constitute a past event.
Has a future economic benefit?
With your new Bakemaster, you’re going to be baking some serious cream cakes which customers are going to pay top dollar for. That’s definitely a future economic benefit.
Because your new oven meets three requirements, it’s an asset.
Now let’s take a look at an example, where something might not fit the definition of an asset.

Example

A customer calls your store and says he had a dream about your cakes. He says he’s coming in tomorrow to spend $1,000 in your bakery on every lemonade buttercream flavored treat he can find.
You think the $1,000 should be recorded as an asset in your records.
Let’s see if it fits the definition of an asset.
Something you have control over?
Sorry, you don’t have the $1,000 yet. You can’t spend it. You can’t even touch it! not in your control.
As a result of a past event?
The event needed for you to gain control of that cash will be when he comes in and hands it to you. Hasn’t happened yet though! So in this case, no event has taken place.
Has a future economic benefit?
$1,000 can buy a lot of things. Of course, it has a future economic benefit.
Sorry, but this time you’re only 1 for 3. The $1,000 holds a future benefit, However you do not have control of the money and the past events needed for you to gain control have not occurred yet.
 Therefore, the $1,000 is not an asset.

Another example:

Your friend lets you borrow his car as a delivery vehicle. However, one night the road is slippery and your driver crashes into a tree. The car is completely damaged and is no longer drivable. Let’s see if the car is an asset:
Something you have control over?
The car doesn’t belong to you. It was lent to you by a friend, and you didn’t sign a lease or contract giving you any rights to the car. Therefore, the car is not in your control.
As a result of a past event?
The event needed for you to gain control of the car is you signing an agreement and paying to purchase the car or rent it. Sorry, but no such event has taken place.
Has a future economic benefit?
The car is completely damaged and cannot be driven. It won’t be providing a future economic benefit for anyone.
Sorry, but this time you’re 0 for 3. The car is not an asset.
Hopefully, that gives you an understanding of assets and when you recognize them. But what about liabilities?
Let’s take a look.

What is Liabilities in Accounting?

Liability is defined as obligations that your business needs to fulfill. In simple words, Liability means credit.
A liability requires three things:
  • Presents the business with an obligation
  • The Obligation is a result of past events
  • Settling the obligation will require an outflow of valuable resources
Remember when Anne decided to give you that loan? Well, before you walked out of the bank, she said to you, “You’re going to need to pay $1,000 each month until the whole $10,000 is paid back!”
Let’s see if the loan from Anne fits the definition of a liability.
Presents the business with an obligation?
You took the money. Now you’re required to pay it back! presents an obligation.

As a result of past events?
You signed the loan agreement. The obligation comes as a result of this past event.
Requires an outflow of valuable resources?
Paying back the loan requires the outflow of money. Money is valuable! That’s certainly an outflow of valuable resources.
Bingo! The loan satisfies all the requirements, so we’ll be recording it in our books as a liability.

Example

The sink in your store is leaking. One of your staff takes a look at it and tells you that you’ll definitely need a plumber to come in and fix it, which will cost you around $200. You want to list the $200 as a liability in your records.
Let’s see if the $200 fits the definition of a liability.

Presents the business with an obligation?
You are not obliged to pay anybody at this stage. The leaking sink is simply an inconvenience which you can either choose to fix or not to fix. Therefore there’s no obligation to the business...yet.
As a result of past events?
You’ll need to call the plumber and receive the $200 invoice before any liability can be recognized. This event hasn’t occurred yet!
Requires an outflow of valuable resources?
With no obligation to pay anybody just yet, no outflow of resources should be expected.
Luckily for you, the $200 doesn’t fit the requirements for liability. You can keep this one off your records!

Activity:

Think about the stuff you have in your life. Perhaps you drive a Ferrari, or maybe you simply ride a bicycle. Maybe you own a mansion, or maybe you live at the bottom of the ocean in a submarine. Either way, you probably needed a mortgage for it. In this case, your Ferrari would be an example of an asset whereas your mortgage is a liability. Use the worksheet below and list at least 3 assets and 3 liabilities you have in your business or your personal life. Use the checklist to make sure they fit the definition of an asset.
  Assets Interactivity
Enter name of asset: 

Liability Interactivity
Enter name of LIABILITY: 

  Below is a list of everyday thing you come across. Classify them as Asset, Liability or perhaps neither
    AssetsLiabilityNeitherStatus
  1. Bank
  1. Loan
  1. Building
  1. Hired furniture
  1. Rented property
  1. Mortgage
  1. Car
  1. Lawyer’s fees
  1. Bank account
  1. Credit Debit Card
  1. Investments
  1. Bonds
  1. Job
  1. Unpaid bills
  1. House
  1. Hire purchase contracts
  1. Future bills
  1. Computer
  1. Cellphone
  1. Past bills
  1. Television
  1. Furniture