Class 11 Accounts Chapter 1 PDF

# Characteristics of Accounting 1. **Accounting is an art as well as a science** - Accounting is an art of recording, classifying and summarizing business transactions with a view to ascertain the net profit and financial position of the business enterprise. - Any organized body of knowled...

# Characteristics of Accounting 1. **Accounting is an art as well as a science** - Accounting is an art of recording, classifying and summarizing business transactions with a view to ascertain the net profit and financial position of the business enterprise. - Any organized body of knowledge which is based on certain specified principles is called science. In this respect accountancy is also a science since it is also an organized body of knowledge based on certain specified principles and accounting standards. 2. **Recording of Financial Transactions only** - Only those transactions and events are recorded in accounting which are of a financial character. 3. **Recording in terms of Money** - Each transaction is recorded in the books in terms of money only. - For example, if a businessman purchases 200 Chairs and 10 Tables, their value in terms of money will be recorded in the books. 4. **Classifying** - After recording the transactions in Journal or subsidiary books, the transactions are classified. - Classification is the process of grouping the transactions of one nature at one place, in a separate account. 5. **Summarizing** - Summarizing is the art of presenting the classified data in a manner which is understandable and useful to management. 6. **Interpretation of the Results** - In Accounting, the results of the business are presented in such a manner (i.e., by preparing Trading and Trading and Profit & Loss Account and Balance Sheet) that the parties interested in the business. 7. **Communicating** - Accounting attributes also include the communication of financial data to the users who analyze them as per their needs. # Objectives of Accounting - To keep systematic record of business transactions. The main objective of accounting is to beep complete record of business transactions according to specified rules. - To calculate profit or loss. The second main objective of accounting is to ascertain the net profit earned or loss suffered on account of business transactions during a particular period. - To know the exact reasons leading to net profit or net loss. - To ascertain the financial position of the business. After preparing the Profit & Loss Account a statement called "Balance Sheet' is prepared which shows the assets and their values on the one hand and the liabilities and capital on the other hand, it helps in ascertaining financial position. - To ascertain the progress of the business from year to year - To prevent and detect errors and frauds - To provide information's to various parties. Another main objective of accounting is to communicate the accounting Information to various Interested parties like owners, Investors, creditors, banks, employees and government authorities etc. # Scope or Branches (Types or Sub-fields) of Accounting - **Financial Accounting** - The main purpose of this branch of accounting is to record the business transactions in a systematic manner, to ascertain the profit or loss of the accounting period by preparing a Profit & Loss Account and to present the financial position of the business by preparing a Balance Sheet. - **Cost Accounting** - The main purpose of cost accounting is to ascertain the total cost and per unit cost of goods produced and services rendered by a business. - **Management Accounting** - The main purpose of management accounting is to present the accounting Information in such a way as to assist the management in planning and controlling the operations of a business. - **Tax Accounting** - The branch of accounting which is used for tax purposes is called Tax Accounting. Income tax and GST are computed on the basis of this accounting. - **Social Responsibility Accounting** - The society provides the Infrastructure and the facilities without which business cannot operate at all. Hence the business also has a responsibility to the society. There is growing demand for reports on activities which reflect the contribution of an enterprise to the society. # Advantages or Uses of Accounting - **Helpful in Management of Business:** Management needs a lot of Information for the efficient running of the business. - **a) Helpful in Planning -** Management would like to know whether the sales are increasing or decreasing and also the speed of Increase in the cost of production. - **b) Helpful in Decision Making** - At times, the Management has to take a number of decisions. - **c) Helpful in Controlling** - Management would like to see that the cost Incurred is reasonable and that no department is overspending. Accounting provides Information to the management In this regard. - **Provides Complete and Systematic Record:** Business transactions have grown in size and complexity and it is not possible to remember each and every transaction. - **Information Regarding Profit or Loss:** The Profit & Loss Account prepared at the end of each accounting period discloses the net profit earned or loss suffered during the period. - **Information Regarding Financial Position:** Accounting reports the financial position of the business by preparing a Balance Sheet at the end of each accounting period. - **Enables Comparative Study:** By keeping a systematic record accounting helps the owners to compare one year's costs, expenses, sales and profit etc. with those of other years. Such a comparison provides the useful information's on the basis of which important decisions can be taken more judiciously. - **Helpful in Assessment of Tax Liability:** Properly maintained records will be of great help when the firm is assessed to Income Tax or GST. - **Evidence in legal matters:** Properly maintained accounts, supported by authenticated documents are accepted by the courts as a firm evidence. # Limitations of Accounting - **Influenced by Personal Judgement:** Accounting is not an exact science and accountant has to exercise his personal Judgement in respect of various items. For example, it is extremely difficult to predict with any degree of accuracy the actual life of an asset which is needed for calculating depreciation. - **Based on Accounting Concepts and Conventions:** Accounts are prepared on the basis of a number of accounting concepts and conventions. Hence, the profitability and the financial position disclosed by it may not be realistic. - **Incomplete Information:** Accounting statements provide only the incomplete Information because the actual profit or loss of a business can be known only when the business is closed down. - **Omission of Qualitative Information's:** Accounts contain only those information which can be expressed in terms of money. Qualitative aspects of business units are completely omitted from the books as these cannot be expressed in monetary terms. - **Based on Historical Costs:** Accounts are prepared on the basis of historical costs (i.e., the original costs) and as such the figures given in financial statements do not show the effects of changes in price level. - **Affected by Window Dressing:** Window dressing refers to the practice of manipulating accounts, so that the financial statements may disclose a more favorable position than the actual position. - **Unsuitable for Forecasting:** Financial Accounts are only a record of past events. Continuous changes take place in the demand of the product, policies adopted by the firm, the position of competition etc.