Tamil Nadu 11th Accountancy Textbook PDF

GOVERNMENT OF TAMILNADU HIGHER SECONDARY FIRST YEAR ACCOUNTANCY A publication under Free Textbook Programme of Government of Tamil Nadu Depar...

GOVERNMENT OF TAMILNADU HIGHER SECONDARY FIRST YEAR ACCOUNTANCY A publication under Free Textbook Programme of Government of Tamil Nadu Department of School Education Untouchability is Inhuman and a Crime First pages Higher.indd 1 12/12/2021 6:11:52 PM  Government of Tamil Nadu First Edition - 2018 Revised Edition - 2019, 2020, 2021, 2022 Reprint - 2023, 2024 (Published under New Syllabus) NOT FOR SALE Content Creation The wise possess all State Council of Educational Research and Training © SCERT 2018 Printing & Publishing Tamil NaduTextbook and Educational Services Corporation www.textbooksonline.tn.nic.in II First pages Higher.indd 2 14/12/2023 14:56:42  CONTENTS Accountancy Unit Title Page No. Month 1 INTRODUCTION TO ACCOUNTING 01 CONCEPTUAL FRAMEWORK 2 15 June OF ACCOUNTING 3 BOOKS OF PRIME ENTRY 26 4 LEDGER 64 July 5 TRIAL BALANCE 81 6 SUBSIDIARY BOOKS - I 99 August 7 SUBSIDIARY BOOKS - II 126 8 BANK RECONCILIATION STATEMENT 151 Sepetember 9 RECTIFICATION OF ERRORS 177 October 10 DEPRECIATION ACCOUNTING 202 11 CAPITAL AND REVENUE TRANSACTIONS 228 November 12 FINAL ACCOUNTS OF SOLE PROPRIETORS - I 239 13 FINAL ACCOUNTS OF SOLE PROPRIETORS - II 269 December 14 COMPUTERISED ACCOUNTING 316 E-Book Assessment III First pages Higher.indd 3 12/12/2021 6:11:52 PM  Dear Students! This Accountancy textbook is the source of knowledge to provide you with the basic understanding of Accountancy and to make use of your analytical ability to make you an excellent person in applying the accounting principles to real business situations through various activities given in the textbook. The book contains 14 units, within which the subdivisions and various student activities are given in an organised way to make learning easy, systematic and a pleasure. The method of using this book effectively to learn the concepts and methods contained in it and explanation of the important items included in the text book are given below to have a better learning experience. Units are the broad divisions of the book which contain several subdivisions in each of them so that the students can have understanding of the specific substance in various parts UNITS of Accountancy education. Each unit gives the specialised knowledge on the content discussed. The units are to be learnt in the order given in the book to have continuity of learning and proper understanding of the subject matter. SUBDIVISIONS HOW TO USE THE BOOK LEARNING OBJECTIVES POINTS TO RECALL KEY TERMS IV First pages Higher.indd 4 12/12/2021 6:11:53 PM  STUDENT ACTIVITY POINTS TO REMEMBER SELF-EXAMINATION QUESTIONS TO EXPLORE FURTHER GLOSSARY We wish you a meaningful and successful learning. Team of Authors. V First pages Higher.indd 5 12/12/2021 6:11:53 PM  SCOPE OF ACCOUNTANCY EDUCATION “Accountancy” as a field of knowledge is all pervasive in nature. It offers enormous opportunities for higher education and employment both in India and abroad. The scope after higher secondary programme in Accountancy is given below: EDUCATIONAL OPPORTUNITIES Any of the following Degree Any of the following Any of the following Any of the following Any of the research Programmes can be pursued professional courses/ programmes in India or professional courses/ programme after a by the students both on programmes abroad after a formal degree programmes after formal post graduation regular mode and distance programme anywhere in a formal degree education mode colleges, Universities programme B .Com–Bachelor of CA–Chartered M.Com– Indian Administrative M.Phil– Master of Commerce (General) Accountancy Master of Commerce Service (IAS) Philosophy B.Com–(Hons.) CMA–Cost and M.Com– Indian Police Service Ph.D– Doctor of B .Com–(Accounting & Management (Accounting and Finance) (IPS) Philosophy Finance) Accountancy M.Com–(Corporate Indian Foreign B.Com–(Corporate CS–Company Secretaryship) Service (IFS) Secretaryship) Secretaryship M.Com– (Computer Indian Revenue B.Com–(Computer BL–Bachelor of Law Applications) Service (IRS) Applications) – Five year Integrated M.Com– (International Indian Audit and Programme Business and Banking) Account Service B.Com–(International Business) CIMA (Chartered M.Com– (Co operative (IA&AS) Institute of Management) B.Ed., (Bachelor of B .Com–(Bank Management) Management M.B.A–Master of Business Education) and B .B.A–(Bachelor of Business Accountants followed by Administration) Administration ACCA (Association M .Ed., (Master B .B.M–(Bachelor of Bank of Chartered Certified M.B.A–(Finance) of Education) Management) Accountants (UK)) M.B.A–(Marketing) Programmes B.Com–(Co-operation) CPA (Certified Public M.B.A–(Human Resource PG Diploma M .Com–(Master of Accountant (USA)) Management) programme Commerce–Five year CFP–Certified M.B.A–(Advertisement and Integrated programme) Financial Salesmanship) Planner(USA) M.B.A–(Hospital Management) MHRM (Master of Human Resource Management) MLM (Master of Labour Management) EMPLOYMENT OPPORTUNITIES Accounts assistant Accountant Audit assistant Cost analyst Investment consultant Financial advisor Tax practitioner Chartered Accountant Company Secretary Cost and Management Accountant Teaching State and Central Government jobs VI First pages Higher.indd 6 12/12/2021 6:11:53 PM  Details of some of the professional courses in India Southern India Regional Office Professional course Name of the institute Chapters in Tamil Nadu address Chartered Accountancy The Institute of Chartered ICAI Bhawan, Coimbatore Accountants of India 122, Mahatma Gandhi Road Erode Post box No.3314 Madurai www.icai.org Nungambakkam, Salem Chennai - 600034 Tiruchirapalli Tirunelveli Tirupur Tuticorin Kanchipuram Kumbakonam Sivakasi Company Secretaryship The Institute of company 9,Wheat Crofts Road, Coimbatore secretaries of India Nungambakkam, Madurai www.icsi.edu Chennai-600034 Salem Cost and Management The Institute of Cost Accountants Southern India Regional Council, Coimbatore Accountancy of India CMA Bhawan Erode 4,Montieth Lane, Madurai www.icma.in Egmore Mettur-Salem Chennai - 600008 Nellai-Pearl Neyveli Ranipet-Vellore Tiruchirapalli SCOPE ABROAD Accountancy students have a wide range of scope abroad. 1. Higher studies 2. Employment opportunities as Teachers Accountants Auditors Financial consultants Export and Import consultants Tax advisors Project consultants. VII First pages Higher.indd 7 12/12/2021 6:11:53 PM  VIII First pages Higher.indd 8 12/12/2021 6:11:53 PM  Unit 1 INTRODUCTION TO ACCOUNTING Contents Points to recall 1.1 Introduction to Accounting 1.2 Evolution of Accounting The following points are to be recalled 1.3 Meaning and Definition of before learning introduction to Accounting Accounting: 1.4 Accounting cycle Barter system 1.5 Objectives of Accounting 1.6 Functions of Accounting Money as a medium of exchange 1.7 Importance of Accounting Activities involving transfer of money 1.8 Basic Accounting terminologies or money’s worth 1.9 Branches of Accounting 1.10 Bases of Accounting 1.11 Users of Accounting information 1.12 Role of an accountant Key terms to know Learning Objectives To enable the students to Accounting Understand the meaning and Accountant functions of accounting Cash basis Analyse the importance of Accrual basis accounting Understand the basic accounting terminologies Analyse the role of an accountant 1 Accountancy - Unit-01.indd 1 12/12/2021 6:12:34 PM  1.1 Introduction to Accounting Business entities and other organisations carry on activities which involve exchange of money or money’s worth or economic resources. Where the volume of these activities are large in number it is necessary that these are recorded for the purpose of taking important decisions as to whether the activities are viable, gainful and are to be continued or not. Information about the business and other organisations is required not only to the proprietors and managers of business and other organisations but also to various other interested users such as the government, investors, customers, employees and researchers. Raising and utilising of finance for various purposes must be recorded systematically, scientifically and uniformly. It is very important because finance is the most important resource next to the human element for any economic activity. Hence, there is a need for principles, methods and procedures to be followed to record all these information and to derive from these information, the feasibility and benefit of the activities carried out. Accountancy provides the basic theory, principles and methods to be followed to account for all financial activities taking place in an organisation. Accounting the financial activities in a systematic way helps in ascertaining the efficiency of performance of these activities and provides data about the state of affairs of the organisation for further analysis and planning. Accounting is the language of business. The most important function of a language is to facilitate communication. The information about business entities regarding their operating performance and financial status can be obtained from the financial information recorded in the accounting records. This information is communicated to the interested users of business information such as proprietors, management, investors, customers and the government. 1.2 Evolution of Accounting In India, 23 centuries ago, Chandragupta Maurya’s Minister Kautilya wrote a book named ‘Arthashastra’, wherein some references can be traced regarding the way of maintaining accounting records. In the earliest days of civilisation, accounting was done by stewards who managed the properties of wealthy people. They rendered accounts periodically to the owners of property. The stewardship accounting is said to be the root of accounting. Records of debit and credit were found in the 12th century itself. In 1494, Luca Pacioli an Italian developed double-entry book-keeping system. Due to the industrial revolution in the 18th and 19th centuries, large scale operations were carried on and joint stock companies emerged as an important form of organisation which required separation of ownership from management. Hence, to safeguard the interest of owners and investors, the business establishments required detailed information about business which paved the way for development of comprehensive financial accounting information system. In the 20th century, the need for analysis of financial information for managerial decision making caused emergence of Management Accounting as a separate branch of accounting. Though accounting was individual centric in the initial stage of evolution of accounting, it has gradually developed into Social Responsibility Accounting in the 21st century, due to the vast growth in business activities as a result of development in various fields. Thus, accounting has become inevitable in the modern world for business. 2 Accountancy - Unit-01.indd 2 12/12/2021 6:12:34 PM  1.3 Meaning and Definition of Accounting Student activity Think: Before the evolution of money, commodities were exchanged for commodities. In such situations, how would people have maintained their accounts? Accounting is the systematic process of identifying, measuring, recording, classifying, summarising, interpreting and communicating financial information. Accounting gives information on: (i) the resources available (ii) how the available resources have been employed and (iii) the results achieved by their use. The profit earned or loss incurred during the accounting period, value and nature of assets, liabilities and capital can be ascertained from the information recorded in accounts. According to the American Institute of Certified Public Accountants “Accounting is the art of recording, classifying and summarising 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 ”. American Accounting Association has defined accounting as “the process of identifying, measuring, and communicating economic information to permit informed judgements and decisions by users of the information”. From the above definitions, the following attributes of accounting emerge: (i) Accounting is an art. It requires the expertise and skill of accountants to design accounting system and policies, to decide the accounting process in order to suit the requirements of an organisation. (ii) The transactions or events of a business must be recorded in monetary terms. (iii) Accounting process involves recording, classifying and summarising of transactions and analysis and interpretation of the results. (iv) The results of such analysis must be communicated to the persons who are interested in such information. 1.4 Accounting cycle Accounting cycle is the sequence of steps involved in the accounting process. Accounting cycle starts with the identification and recording of financial transactions of an organisation and ends with the preparation of final accounts for the accounting year. The cycle continues for the next accounting year with the opening balances of assets and liabilities which are the closing balances of the preceding year. The steps involved are: (i) Identifying the transactions and journalising The first step in the accounting process is identifying the financial transactions of a business. All the monetary transactions are recorded in the books of original entry called journals. Recording the transactions in the journal is called journalising. Entries are made in the journals on the basis of source documents in the chronological order, i.e., the order of occurrence of the transactions. 3 Accountancy - Unit-01.indd 3 12/12/2021 6:12:34 PM  Preparing Balance Sheet Preparing Profit Transactions and loss Account Opening Preparing Entry Trading Journalising Account Preparing Posting and Trial Balancing Balance Accounting cycle (ii) Posting and balancing Transferring the entries from the journal to the ledger is called posting. In the ledger, entries are made in each account after classifying them under common heads. Finding the difference between the total of the debit column and credit column of all the ledger accounts is called balancing. (iii) Preparation of trial balance The list of ledger balances namely trial balance is prepared as the next step. On the basis of ledger balances the financial statements are prepared. (iv) Preparation of trading account Next step is preparation of trading account for a particular accounting period. All the direct revenues and direct expenses are transferred to trading account. The balance in the trading account is the gross profit or gross loss. (v) Preparation of profit and loss account Profit and loss account is prepared next for a particular accounting period. All the indirect revenues and indirect expenses along with gross profit or gross loss are transferred to profit and loss account. The balance in the profit and loss account is the net profit or net loss. (vi) Preparation of balance sheet A statement showing the balances of assets and liabilities namely balance sheet is prepared as the final step in the accounting process. It is prepared on a particular date, normally, on the last day of the accounting period. The closing balances of an accounting year are taken as the opening balances for the next accounting year. The transactions identified and recorded for the next year are followed by posting and other steps. The results are communicated to the users of accounting information for the purpose of analysis and decision making. 4 Accountancy - Unit-01.indd 4 12/12/2021 6:12:34 PM  1.5 Objectives of Accounting Following are the objectives of accounting: (i) To keep a systematic record of financial transactions and events (ii) To ascertain the profit or loss of the business enterprise (iii) To ascertain the financial position or status of the enterprise (iv) To provide information to various stakeholders for their requirements (v) To protect the properties of an enterprise and (vi) To ascertain the solvency and liquidity position of an enterprise 1.6 Functions of Accounting The main functions of accounting are as follows: (i) Measurement The main function of accounting is to keep systematic record of transactions, post them to the ledger and ultimately prepare the final accounts. Accounting works as a tool for measuring the performance of the business enterprises. It also shows the financial position of the business enterprises. (ii) Forecasting With the help of the various tools of accounting, future performance and financial position of the business enterprises can be forecasted. (iii) Comparison Accounting helps to compare the actual performance with the planned performance. It is also possible to compare with the accounting policies. Through comparison of the actual financial results of the business enterprises with projected figures and standards, effective measures can be taken to enhance the efficiency of various operations. (iv) Decision making Accounting provides relevant information to the management for planning, evaluation of performance and control. This will help them to take various decisions concerning cost, price, sales, level of activity, etc. Decision refers to choosing a desirable course of action from alternative courses of action. (v) Control As accounting works as a tool of control, the strengths and weaknesses are identified to provide feedback on various measures adopted. It serves as a tool for evaluating compliance of business policies and programmes. Control refers to comparison of actual performances with planned performances, measure deviation and take corrective action. (vi) Assistance to government Government needs full information on the financial aspects of the business for various purposes such as taxation, grant of subsidy, etc. Accounting provides relevant information about the business to exercise government control on business enterprises. 5 Accountancy - Unit-01.indd 5 12/12/2021 6:12:34 PM  1.7 Importance of Accounting ◆ Systematic records ◆ Preparation of financial statements Accounting is a basic necessity for all enterprises. IMPORTANCE ◆ Assessment of progress Importance of accounting is enumerated as below: ◆ Aid to decision making ◆ Satisfies legal requirements (i) Systematic records OF ◆ Information to interested groups All the transactions of an enterprise which are financial in nature are recorded in a systematic way in the books ◆ Legal evidence ◆ Computation of tax of accounts. The records are classified under common ACCOUNTING ◆ Settlement during merger heads and summaries are prepared. (ii) Preparation of financial statements Results of business operations and the financial position of the concern can be ascertained from accounting periodically through the preparation of financial statements namely, income statement or trading and profit and loss account and balance sheet. This helps in distribution of profits to the owners and to provide funds for future growth of the business. (iii) Assessment of progress Analysis and interpretation of financial data can be done to assess the progress made in different areas and to identify the areas of weaknesses. Management is provided with a complete picture of the liquidity, profitability and solvency of the business. (iv) Aid to decision making Management of a firm has to make routine and strategic decisions while discharging its functions. Accounting provides the relevant data to make appropriate decisions. Future policies and programmes can be planned by the management based on the accounting data provided. (v) Satisfies legal requirements Various legal requirements like maintenance of Provident Fund (PF) for employees, Employees State Insurance (ESI) contributions, Tax Deducted at Source (TDS), filing of tax returns are properly fulfilled with the help of accounting. Preparation of accounts and financial statements as per the legal requirements is also facilitated. (vi) Information to interested groups Accounting supplies appropriate information to different interested groups like owners, management,creditors, employees, financial institutions, tax authorities and the government. (vii) Legal evidence Accounting records are generally accepted as evidence in courts of law and other legal authorities in the settlement of disputes. (viii) Computation of tax Accounting records are the basic source for computation and settlement of income tax and other taxes. (ix) Settlement during merger When two or more business units decide to merger, accounting records provide information for deciding the terms of merger and any compensation payable as a consequence of merger. Two or more business units forming a single entity is known as merger. 6 Accountancy - Unit-01.indd 6 12/12/2021 6:12:34 PM  1.8 Basic Accounting terminologies Accounting is a versatile system which serves a large number of purposes in the modern business world. Hence, the following terminologies need to be understood. An activity which involves transfer of money or money’s worth (goods, Transaction services, ideas) from one person to another. It is a transaction which involves immediate cash receipt or immediate cash Cash transaction payment. It is a transaction in which cash is not received or paid immediately, but Credit transaction will be received or paid later. It is the basic unit for measurement in accounting. It is used for identifying a person, or an item in accounting. An account is opened individually for a Account person, asset, expense, income, etc. In ledger, an account is a summary of transactions under a head. Capital It is the amount invested by the owner or proprietor in an organisation. It is the amount of cash or value of goods, assets, etc., withdrawn from the Drawings business by the owner for the personal use of the owner. Any written or printed document in support of a business transaction is Voucher called a voucher. Examples: cash receipt, invoice, cash memo, bank pay- in- slip, etc. It is a statement prepared by a seller of goods to be sent to the buyer. It Invoice shows details of quantity, price, value, etc. of the goods and any discount given, finally showing the net amount payable by the buyer. It includes articles, things or commodities in which a business is dealing Goods with. Example: Furniture will be goods for those who deal in furniture. Purchases Buying of goods with the intention of resale is called purchases. Purchases returns When goods bought are returned to the suppliers, it is known as purchases or returns outward returns or returns outward. Sales When goods meant for resale are sold, it is called sales. Sales returns or When goods sold are returned by the customers, it is called as sales returns returns inward or returns inward. Stock Unsold goods lying in a business on a particular date are known as stock. It is the amount receivable or realised from sale of goods and earnings from Income interest, dividend, commission, etc. Expense It is the amount incurred in order to produce and sell the goods and services. Solvency Solvency is the capability of a person or an enterprise to pay the debts. Insolvency Insolvency is the incapability of a person or an enterprise to pay the debts. Asset Any physical thing or right owned that has a monetary value is called asset. Liability It refers to the financial obligation of the business. A person who receives a benefit without giving money or money’s worth Debtor immediately, but liable to pay in future or in due course of time. A person who gives a benefit without receiving money or money’s worth Creditor immediately but to claim in future. 7 Accountancy - Unit-01.indd 7 12/12/2021 6:12:34 PM  It refers to the gradual reduction in the value of fixed assets due to usage Depreciation and passage of time. It is a loss to the business arising out of failure of a debtor to pay the dues. Bad debt It is irrecoverable debt. 1.9 Branches of Accounting Financial Depending on the informational needs of various users Accounting of accounting information, several branches or subfields of accounting have been developed. Human Cost Resources The various branches of accounting are: Accounting Accounting Accounting (i) Financial Accounting It involves recording of financial transactions and events. It is historical in nature and records are maintained for Social Management transactions and events which have already occurred. Responsibility Accounting Accounting It provides financial information to the users for taking decisions. It is concerned with identification, recording, classifying and summarising of financial transactions and events and ends up with the preparation of financial statements, namely, trading and profit and loss account or income statement and balance sheet and communication of the same to the interested users. Trading and profit and loss account shows the profit or loss made during an accounting period and the balance sheet shows the financial position of the business as on a particular date. (ii) Cost Accounting It involves the collection, recording, classification and appropriate allocation of expenditure for the determination of the costs of products or services and for the presentation of data for the purposes of cost control and managerial decision making. (iii) Management Accounting It is concerned with the presentation of accounting information in such a way as to assist management in decision making and in the day-to-day operations of an enterprise. The information collected from financial accounting, cost accounting, etc. are grouped, modified and presented as per the requirements of management for discharging their functions and for decision making. (iv) Social Responsibility Accounting It is concerned with presentation of accounting information by business entities and other organisations from the view point of the society by showing the social costs incurred such as environmental pollution by the enterprise and social benefits such as infrastructure development and employment opportunities created by them. It arises because of corporate social responsibility. (v) Human Resources Accounting It is concerned with identification, quantification and reporting of investments made in human resources of an enterprise. Student activity Think: Do you think financial accounting, cost accounting and management accounting can be maintained by the same person? 8 Accountancy - Unit-01.indd 8 12/12/2021 6:12:34 PM  1.10 Bases of Accounting There are three bases of accounting in common usage, namely (i) Cash basis (ii) Accrual or mercantile basis (iii) Mixed or hybrid basis. (i) Cash basis Under cash basis of accounting, actual cash receipts and actual cash payments are recorded. In this basis, revenue is recognised when cash is received and expenses are recognised when cash is paid. Credit transactions are not recorded till cash is actually received or paid. Under this basis, (a) Any income received (b) Any expenditure paid (c) Any asset purchased for which cash is paid (d) Any liability paid during the accounting period whether related to the past, present or future is taken into account. (ii) Accrual or mercantile basis Under accrual basis of accounting, the revenue whether received or not, but has been earned or accrued during the accounting period and expenses incurred whether paid or not are recorded. In other words, revenue is recognised when it is earned or accrued and expenses are recognised when these are incurred. Under this basis, (a) Any income earned whether received or not (b) Any expenditure incurred whether paid or not (c) Any asset purchased whether cash is paid or not (d) Any liability incurred whether paid or not during the accounting period is recorded. Under section 128(1) of the Indian Companies Act, 2013, all the companies are required to maintain the books of accounts according to the accrual basis of accounting. (iii) Hybrid or mixed basis This basis is a combination of cash basis and accrual basis of accounting. Under mixed basis of accounting, both cash basis and accrual basis are followed. Revenues and assets are generally recorded on cash basis whereas expenses and liabilities are generally taken on accrual basis. 1.11 Users of Accounting information Student activity Think: ‘Accounting is useful only to the owner of the business’ – Do you agree? There are several persons who need the accounting information for various purposes. They can be classified into two: (A) Internal users and (B) External users 9 Accountancy - Unit-01.indd 9 12/12/2021 6:12:34 PM  A) Internal Users The internal users are owners, management and employees who are within the organisation. (i) Owners The owners of a business provide capital to be used in the business. They are interested to know whether the business has earned profit or not during a particular period and also its financial position on a particular date. They want accounting reports in order to have an appraisal of performance and also for an assessment of future prospects to ensure that they will get their expected returns from the business and get back their capital safely. (ii) Management Users of accounting information Accounting data are the basis for most of the decisions made by the management. The trends in sales and Internal External purchases, relationship of expenses to the sales, efficiency of employees, i. Owners i. Creditors and financial institutions comparative profitability of different ii. Management ii. Investors departments, capital structure and iii. Customers solvency position are some of the iii. Employees iv. Tax authorities and regulatory bodies vital data required by management for v. Government planning and controlling the business vi. Researchers operations. Financial statements and vii. General public other reports prepared under financial accounting provide this information to the management. Capital structure refers to the mix of a firm’s permanent long-term financing represented by debt, preference share capital and equity shareholders’ funds. (iii) Employees The employees are interested in the profit earning capacity of the business which will affect their remuneration, working conditions and retirement benefits and stability and growth of the enterprise. B) External users External users are the persons who are outside the organisation but make use of accounting information for their purposes. They are: (i) Creditors and financial institutions Suppliers of goods and services, commercial banks, public deposit holders and debentureholders are included in this category. They are interested in knowing the liquidity position and repaying capacity of the business to ensure the safety of getting the amount due to them or interest and the principal amount. (ii) Investors Persons who are interested in investing their funds in an organisation should know about the financial condition of a business unit while making their investment decisions. They are more concerned about future earnings and risk bearing capacity of the organisation which will affect the return to the investors. 10 Accountancy - Unit-01.indd 10 12/12/2021 6:12:35 PM  (iii) Customers Customers who buy and use the products and services of business enterprises are interested in knowing the details of the products and the prices charged to them. They are interested in knowing the stability and profitability of an enterprise to ensure continued supply of the products or services by the enterprise. (iv) Tax authorities and other regulatory bodies Accounting information helps the tax authorities in computing income tax and taxes on goods and services and other taxes to be collected from business units. Other regulatory bodies also require information about revenues, expenses and other financial aspects of business to ensure that the enterprises comply with statutory requirements. (v) Government The scarce resources of the country are used by business enterprises. Information about performance of business units in different industries helps the government in policy formulation for development of trade and industry, allocation of scarce resources, grant of subsidy, etc. Government also administers prices of certain commodities. In such cases, government agencies have to ensure that the guidelines for pricing are followed. (vi) Researchers Researchers to carry out their research can use accounting information and make use of the published financial statements for analysis and evaluation. (vii) General public From accounting information, the general public at large can get a view of the earning capacity and stability of the enterprise as well as the social responsibility measures undertaken by the enterprise particularly in its area of operation and also the employment opportunities provided to the local people. 1.12 Role of an accountant ROLE OLE ROLE OLE OF AN ACCOUNTANT ROLE OLE OFOF ANAN ACCOUNTANT ACCOUNTANT An accountant designs the accounting procedures for an enterprise. He plays several Provider der Protector Protector Protector ofofof Record Record Record Provider Provider der ofofof der business business roles in an organisation as follows: keeper keeper mation information mation information business keeper mation information assets assets assets (i) Record keeper Tax Tax Public Public Public The accountant maintains a systematic record Financial ncial Financial ncial Financial ncial Tax manager manager relation relation relation visor advisor advisor visor advisor visor manager of financial transactions. He also prepares the officer officer officer financial statements and other financial reports. (ii) Provider of information to the management The accountant assists the management by providing financial information required for decision making and for exercising control. (iii) Protector of business assets The accountant maintains records of assets owned by the business which enables the management to protect and exercise control over these assets. He advises the management about insurance of various assets and the maintenance of the same. 11 Accountancy - Unit-01.indd 11 12/12/2021 6:12:35 PM  (iv) Financial advisor The accountant analyses financial information and advises the business managers regarding investment opportunities, strategies for cost savings, capital budgeting, provision for future growth and development, expansion of enterprise, etc. (v) Tax manager The accountant ensures that tax returns are prepared and filed correctly on time and payment of tax is made on time. The accountant can advise the managers regarding tax management, reducing tax burden, availing tax exemptions, etc. (vi) Public relation officer The accountant provides accounting information to various interested users for analysis as per their requirements. Points to remember Accounting is termed as the language of the business.  There are various branches of accounting such as financial accounting, cost accounting, management accounting, social responsibility accounting and human resource accounting. There are three bases of accounting namely cash basis, accrual or mercantile basis and mixed or hybrid basis. There are several persons who need the accounting information - internal users and external users. Accountants have several roles and responsibilities. Self-examination questions I Multiple choice questions Choose the correct answer 1. The root of financial accounting system is (a) Social accounting (b) Stewardship accounting (c) Management accounting (d) Responsibility accounting 2. Which one of the following is not a main objective of accounting? (a) Systematic recording of transactions (b) Ascertainment of the profitability of the business (c) Ascertainment of the financial position of the business (d) Solving tax disputes with tax authorities 3. Which one of the following is not a branch of accounting? (a) Financial accounting (b) Management accounting (c) Human resources accounting (d) None of the above. 4. Financial position of a business is ascertained on the basis of (a) Journal (b) Trial balance (c) Balance Sheet (d) Ledger 12 Accountancy - Unit-01.indd 12 12/12/2021 6:12:35 PM  5. Who is considered to be the internal user of the financial information? (a) Creditor (b) Employee (c) Customer (d) Government Answers 1 (b) 2 (d) 3 (d) 4 (c) 5 (b) II Very short answer questions 1. Define accounting. 2. List any two functions of accounting. 3. What are the steps involved in the process of accounting? 4. Who are the parties interested in accounting information? 5. Name any two bases of recording accounting information. III Short answer questions 1. Explain the meaning of accounting. 2. Discuss briefly the branches of accounting. 3. Discuss in detail the importance of accounting. 4. Why are the following parties interested in accounting information? (a) Investors (b) Government 5. Discuss the role of an accountant in the modern business world. A Self-Help Group (SHG) is an informal, self-managed voluntary group of 5-20 individuals, who come together to address their common problems and are generally engaged in credit and savings activities operating on principles of mutuality and solidarity. Most SHG members are minimally educated. Regardless, every SHG should be aware of the status of its outstanding loans to members, the status of its loans from external institutions and the member payments due. Book-keeping is a difficult task for SHGs. Now, discuss on the following points: How do SHGs maintain their accounting? Do you think that financial accounting system is suitable for all businesses? To explore further Can each business unit follow its own way for maintaining accounting records? Will it serve the requirements of different users of accounting information? Reference 1. M C Shukla, T S Grewal and S C Gupta, Advanced Accounts, 19th ed., 2017, S.Chand Publishing, New Delhi. 2. R L Gupta and V K Gupta, Financial Accounting, 11th ed., 2014, Sultan Chand and Sons, New Delhi. 3. S P Jain and K L Narang, Advanced Accountancy Vol – I, 2016, Kalyani Publishers, New Delhi. 4. Dalston L Cecil and Jenitra L Merwin, Financial Accounting, 3rd ed., 2017, Learntech Press, Trichy. 5. Fundamentals of Accounting, 2017, The Institute of Chartered Accountants of India, New Delhi. 13 Accountancy - Unit-01.indd 13 12/12/2021 6:12:35 PM  ICT CORNER INTRODUCTION TO ACCOUNTANCY Lets get introduced to Basic Accounting Steps: This is an Android app activity. Open the Browser and type the URL given (or) Scan the QR Code. (Or) search for “Basic Accounting” in google play store. Install and open the app. This is Hands on Lesson. S elect any one of the topic you want to learn. Open “Introduction to Accounting. In the Next page you have sub menus. Select one by one and go through the lesson. Step1 Step2 Step3 Pictures are indicatives only* URL: https://play.google.com/store/apps/details?id=com.paradigmsc.basicaccounting (or) scan the QR Code 14 Accountancy - Unit-01.indd 14 12/12/2021 6:12:36 PM  Unit 2 CONCEPTUAL FRAMEWORK OF ACCOUNTING Contents Points to recall 2.1 Book-keeping – An introduction The following points are to be recalled 2.2 Book- keeping Vs. Accounting before learning conceptual framework of 2.3 Relationship among Book-keeping, accounting: Accounting and Accountancy Meaning and definition of 2.4 Accounting Principles Accounting 2.5 Accounting Standards (AS) Functions of Accounting Users of Accounting 2.6 International Financial Reporting Basic Accounting terminologies Standards (IFRS) 2.7 Accounting Standards in India Key terms to know Learning Objectives Book-keeping To enable the students to Accountancy Understand the meaning, definition Accounting concepts and features of book-keeping Accounting Standards Evaluate the advantages and limitations of book-keeping Understand the accounting concepts and conventions Understand the meaning of and need for Accounting Standards 15 Accountancy Unit-02.indd 15 12/12/2021 6:13:01 PM  2.1 Book-keeping-An introduction The first tstep in the accounting process is identifying and recording of transactions in the books of accounts. This is necessary for any business as the transactions happening in a business entity must be recorded so that the information is available for further analysis. Book-keeping forms the base for the preparation of financial statements and interpretation which are the important functions of accounting. In a broad sense, accounting includes book-keeping also. In a small business, the entire accounting work may be performed by a single accountant. In a large firm, there may be a separate person or department for book-keeping work. 2.1.1 Meaning of book-keeping Book-keeping is the process of recording financial transactions in the books of accounts. It is the primary stage in the accounting process. It includes recording the transactions and classifying the same under proper heads. Book-keeping work is of routine nature. Transactions may be recorded in the accounting note books and ledgers or may be recorded in a computer. 2.1.2 Definition of book-keeping “Book-keeping is an art of recording business dealings in a set of books”. - J.R.Batliboi. “Book-keeping is the science and art of recording correctly in the books of account all those business transactions of money or money’s worth”. -R.N.Carter. 2.1.3 Features of book-keeping Following are the features of book-keeping: (i) It is the process of recording transactions in the books of accounts. (ii) Monetary transactions only are recorded in the accounts. (iii) Book-keeping is the primary stage in the accounting process. (iv) Book-keeping includes journalising and ledger posting. 2.1.4 Objectives of book-keeping Following are the objectives of book-keeping: (i) To have a complete and permanent record of all business transactions in chronological order and under appropriate headings. (ii) To facilitate ascertainment of the profit or loss of the business during a specific period. (iii) To facilitate ascertainment of financial position. (iv) To know the progress of the business. (v) To find out the tax liabilities. (vi) To fulfil the legal requirements. 2.1.5 Advantages of Book-keeping Book-keeping has the following advantages: (i) Transactions are recorded systematically in chronological order in the book of accounts. Thus, book-keeping provides a permanent and reliable record for all business transactions. (ii) Book-keeping is useful to get the financial information. (iii) It helps to have control over various business activities. (iv) Records provided by business serve as a legal evidence in case of any dispute. (v) Comparison of financial information over the years is possible. Also comparison of financial information of different business units is facilitated. (vi) Book-keeping is useful to find out the tax liability. 16 Accountancy Unit-02.indd 16 12/12/2021 6:13:01 PM  2.1.6 Limitations of book-keeping Book-keeping has the following limitations: (i) Only monetary transactions are recorded in the books of accounts. (ii) Effects of price level changes are not considered. (iii) Financial data recorded are historical in nature, i.e., only past data are recorded. 2.2 Book-keeping Vs. Accounting Following are the differences between book-keeping and accounting: S. No Basis of distinction Book-keeping Accounting 1 Scope It is concerned with recording It is concerned with recording, and classifying the business classifying, summarising, transactions. analysing and interpreting the financial data. 2 Stage Book-keeping is the primary Apart from the primary stage, stage in accounting. It is the it includes secondary stage of base for accounting. analysis and interpretation. 3 Nature of job It is routine and clerical in It is analytical in nature. nature. 4 Knowledge required It requires basic knowledge of It requires thorough the principles of journalising knowledge of accounting and posting. principles, procedures and practices. 5 Skill required Analytical skill is not required It requires analytical skill. for book-keeping. 2.3 Relationship among Book-keeping, Accounting and Accountancy Book-keeping is part of Accounting. It is the primary stage in accounting. It is the process of recording transactions in the books of accounts. Accounting is part of Accountancy. Accounting is the process of reording, classifying, analysing and interpreting of financial data. Accountancy is the systematic knowledge of accounting process and contains the standards, principles, policies and procedures to be followed in accounting. Accountancy Accounting Book-keeping 2.4 Accounting Principles Accounting principles are the basic norms and assumptions developed and established as the basis for accounting system. These principles are adopted by the accountants universally. These accounting principles provide uniformity and consistency in the accounting methods and process. Such accounting principles are known as Generally Accepted Accounting Principles (GAAP). 17 Accountancy Unit-02.indd 17 12/12/2021 6:13:01 PM  Accounting principles provide the basic framework within which the accounting records and accounting reports are to be prepared. Accounting standards have been issued by national and international regulatory authorities to ensure uniformity of accounting procedure and accounting results. These accounting standards and GAAPs provide the theoretical base of accounting. Accounting principles may be accounting concepts or accounting conventions. Accounting concepts are the basic assumptions whereas conventions are the guidelines based upon practice or usage. Accounting concepts are the basic assumptions or conditions upon which accounting has been laid. Accounting concepts are the results of broad consensus. The word concept means a notion or abstraction which is generally accepted. Accounting concepts provide unifying structure to the accounting process and accounting reports. The word convention refers to traditions or usage. The accounting conventions are the usage or practices which are followed as a guide to the preparation of accounting statements. The utility of these accounting conventions have been recognised by regulatory authorities of accountancy in making financial statements more realistic, reliable, and useful to all concerned parties. The important accounting concepts and conventions are discussed below: (i) Business entity concept This concept implies that a business unit is separate and distinct from the owner or owners, that is, the persons who supply capital to it. Based on this concept, accounts are prepared from the point of view of the business and not from the owner’s point of view. Hence, the business is liable to the owner for the capital contributed by him/her. According to this concept, only business transactions are recorded in the books of accounts. Personal transactions of the owners are not recorded. But, their transactions with the business such as capital contributed to the business or cash withdrawn from the business for the personal use will be recorded in the books of accounts. It implies that the business itself owns assets and owes liabilities. (ii) Money measurement concept This concept implies that only those transactions, which can be expressed in terms of money, are recorded in the accounts. Since, money serves as the medium of exchange transactions expressed in money are recorded and the ruling currency of a country is the measuring unit for accounting. Transactions which do not involve money will not be recorded in the books of accounts. For example, working conditions in the work place, strike by employees, efficiency of the management, etc. will not be recorded in the books, as they cannot be expressed in terms of money. It helps in understanding of the state of affairs of the business as money serves as a common measure by means of which heterogeneous facts about the business are recorded. For example, 18 Accountancy Unit-02.indd 18 12/12/2021 6:13:01 PM  if a business has 5 computers, 2 tables and 3 chairs, the assets cannot be added to give useful information, unless, they are expressed in monetary terms ` 1,00,000 for computers, ` 10,000 for tables and ` 1,500 for chairs. (iii) Going concern concept It is the basic assumption that business is a going concern and will continue its operations for a foreseeable future. Going concern concept influences accounting practices in relation to valuation of assets and liabilities, depreciation of the fixed assets, treatment of outstanding and prepaid expenses and accrued and unearned revenues. For example, assets are generally valued at historical cost. Any increase or decrease in the value of assets in the short period is ignored. (iv) Cost concept An asset is recorded in the books on the basis of the historical cost, that is, the acquisition cost. Cost of acquisition will be the base for all further accounting. It does not mean that the asset will always be shown at cost. It is recorded at cost at the time of its purchase, but is systematically reduced in its book value by charging depreciation. The cost concept has the following limitations: a) In an inflationary situation, when prices of commodities increase, valuing the assets at historical cost may not represent the true position of the business. b) The results of business units established at different dates are not comparable if assets are recorded on historical basis. c) Assets which do not have acquisition cost such as human resources are not recognised under this concept. (v) Dual aspect concept According to this concept, every transaction or event has two aspects, i.e., dual effect. For example, when Arun starts a business with cash ` 5,00,000, on the one hand, the business gets cash of ` 5,00,000 and on the other hand, a liability arises, that is, the business has to pay Arun a sum of ` 5,00,000. This is the concept which recognises the fact that for every debit, there is a corresponding and equal credit. This is the basis of the entire system of double entry book-keeping. From this concept arises the basic accounting equation, that is, Capital + Liabilities = Assets (vi) Periodicity concept This concept deals with preparing accounts for a particular period. As the proprietors, investors, creditors, employees and the government are interested in knowing the performance of the business unit periodically, it becomes necessary to select a particular period, normally one year for measuring performance. Hence, financial statements are prepared after every accounting period and not at the end of its life. 19 Accountancy Unit-02.indd 19 12/12/2021 6:13:02 PM  This concept helps the business in distribution of income to the owners and comparing and evaluating performance of different periods. (vii) Matching concept According to this concept, revenues during an accounting period are matched with expenses incurred during that period to earn the revenue during that period. This concept is based on accrual concept and periodicity concept. Periodicity concept fixes the time frame for measuring performance and determining financial status. All expenses paid during the period are not considered, but only the expenses related to the accounting period are considered. On the basis of this concept, adjustments are made for outstanding and prepaid expenses and accrued and unearned revenues. Also due provisions are made for depreciation of the fixed assets, bad debt, etc., relating to the accounting period. Thus, it matches the revenues earned during an accounting period with the expenses incurred during that period to earn the revenues before sharing any profit or loss. (viii) Realisation concept According to realisation concept, any change in value of an asset is to be recorded only when the business realises it. When assets are recorded at historical value, any change in value is to be accounted only when it realises. (ix) Objective evidence concept Objective evidence concept requires that all accounting transactions recorded should be based on objective evidence. The objective evidence includes documentary evidence like cash receipts, invoices, etc. It ensures authenticity, accuracy and reliability of transactions entered in the books of accounts. (x) Accrual concept According to accrual concept, the effects of the transactions are recognised on mercantile basis, i.e., when they occur and not when cash is paid or received. Revenue is recognised when it is earned and expenses are recognised when they are incurred. All expenses and revenues related to the accounting period are to be considered irrespective of the fact that whether revenues are received in cash or not and whether expenses are paid in cash or not. For example, i) Credit sale is recognised as sale though the amount has not been received immediately. ii) Rent for the month of March-2018 has not been paid and if the accounting period is 1.4.2017 to 31.3.2018, it will still be recorded as an expense for the accounting year 2017-2018 because it had become due. (xi) Convention of consistency The consistency convention implies that the accounting policies must be followed consistently from one accounting period to another. The results of different years will be comparable only when same accounting policies are followed from year to year. For example, if a firm follows the straight line method of charging depreciation since its purchase or construction, the method should be followed without any change. However, it does not mean that changes are not possible. 20 Accountancy Unit-02.indd 20 12/12/2021 6:13:02 PM  Owner and business are two different Business entity entities Only monetary transactions are recorded Money measurement Business will continue for a foreseeable future Going concern A Assets are recorded at cost price C Cost C Every transaction has two aspects – debit O Dual aspect aspect and credit aspect U N Accounts are closed at the end of Periodicity accounting period. It is generally one year T I Expenses relating to a particular period are N Matching to be matched with revenues relating to that G period. Revenue should be recorded only when it is Realisation realised. p R Every transaction must have a supporting Objective evidence I evidence N C Transaction is recorded when it is entered Accrual I into and not when settlement takes place. P L Accounting rules and practices should be E Consistency continuously observed S Accounts must disclose full and fair Full disclosure information Relatively important and significant monetary items are to be recorded and Materiality disclosed in the financial statements While recording transactions, only the Conservatism prospective losses and not the prospective incomes should be considered 21 Accountancy Unit-02.indd 21 12/12/2021 6:13:02 PM  Change in accounting policy can be incorporated in the following circumstances: (a) To comply with the provisions of law (b) To comply with accounting standards issued and (c) To reflect true and fair view of state of affairs of the business. (xii) Convention of full disclosure It implies that the accounts must be prepared honestly and all material information should be disclosed in the accounting statement. This is important because the management is different from the owners in most of the organisations. The disclosure should be full, fair and adequate so that the users of the financial statements can make correct assessment about the financial position and performance of the business unit. (xiii) Convention of materiality According to this convention, financial statements should disclose all material items which might influence the decisions of the users of financial statements. Hence, any item which is not significant and is not relevant to the users need not be disclosed in the financial statements. This principle is basically an exception to the full disclosure principle. The term materiality is subjective in nature. Materiality depends on the amount involved in the transaction, size of the business, nature of information, requirements of the person making decision, etc. An item material to one person may be immaterial to another person. (xiv) Convention of conservatism or prudence It is a policy of caution or playing safe. While recording the business transactions one has to anticipate no income but provide for all possible losses. For example, the closing stock in the factory is valued at ` 35,000 at cost price and ` 25,000 at its realisable price. But while recording in the books the value of ` 25,000 will be considered being the lower of the two. According to realisation concept, any increase in value is not to be accounted unless it has materialised. The conservatism convention puts further restriction on it. Any unrealised gain is not to be anticipated but provision can be made against all possible losses. Going concern concept, Convention of consistency and Accrual concept are considered as fundamental accounting assumptions. 2.5 Accounting Standards (AS) Student activity Think: In your school, there are some basic rules to be followed by every student. What are they? What will happen if there is no such rule? Accounting Standards provide the framework and norms to be followed in accounting so that the financial statements of different enterprises become comparable. It is necessary to standardise the accounting principles to ensure consistency, comparability, adequacy and reliability of financial reporting. 22 Accountancy Unit-02.indd 22 12/12/2021 6:13:02 PM  In the words of Kohler, “Accounting standards are codes of conduct imposed by customs, law or professional bodies for the benefit of public accountants and accountants generally” Thus, Accounting Standards are written policy documents issued by the expert accounting body or by government or other regulatory body covering the aspects of recognition, measurement, treatment, presentation and disclosure of accounting transactions and events in the financial statements. 2.5.1 Need for accounting standards The need for accounting standards is as follows: (i) To promote better understanding of financial statements (ii) To help accountants to follow uniform procedures and practices (iii) To facilitate meaningful comparison of financial statements of two or more entities. (iv) To enhance reliability of financial statements (v) To meet the legal requirements effectively 2.6 International Financial Reporting Standards (IFRS) International Financial Reporting Standards (IFRS) are issued by the International Accounting Standard Board (IASB). IFRS is a set of International Accounting Standards stating how particular types of transactions and other events should be reported in financial statements. IFRS are issued to develop Accounting Standards that would be acceptable worldwide and to improve financial reporting internationally. 2.7 Accounting Standards in India In India, Standards of Accounting is issued by the Institute of Chartered Accountants of India (ICAI). The Council of the Institute of Chartered Accountants of India constituted Accounting Standards Board (ASB) on 21st April, 1977 recognising the need for Accounting Standards in India. ASB formulates Accounting Standards so that such standards may be established by the Council of the Institute in India. The ASB will consider the applicable law, custom, usage, business environment and the International Accounting Standards while framing Accounting Standards (AS) in India. Due to globalisation, the accounts prepared in India must be compatible with accounts prepared in other countries. This has resulted in the existing AS being converged with the IFRS. This convergence has resulted in what is known as Ind AS. Ind AS are basically the International Accounting Standards which have been modified in accordance with Indian accounting practices, customs and traditions. Presently, all big companies have to follow Ind AS rules, but smaller business units are allowed to continue using AS. In future, it is expected that all business entities in India will migrate to Ind AS. Student activity Visit icai.org. Refer under Resources, Accounting Standards and Ind AS. 23 Accountancy Unit-02.indd 23 12/12/2021 6:13:02 PM  Points to remember There are established accounting principles available which are to be applied in the preparation of accounting records and financial statements. The Accounting Standards are designed t