Meaning and Objectives of Accounting Class 11 Notes

Accounting refers to collecting, summarising, analyzing, and reporting the information of a business in monetary terms. Here are the meaning and objectives of accounting class 11 notes.

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Characteristics of Accounting

Accounting is an art as well as a science.
Recording of financial transactions only
Recording in terms of money
Classifying
Summarising
Interpretation of the results
Communicating

Objectives of Accounting

To keep a systematic record of business transactions
To calculate profit or loss
To know the exact reasons leading to net profit
To ascertain the financial position of the business
To ascertain the progress of the business from year to year
To prevent errors and fraud
To provide information to various parties

Functions of Accounting

Maintaining complete and systematic records
Communicating the financial results to various parties
Protecting the assets of the business
Providing assistance to management
Trusteeship
Compliance with legal needs
Fixing responsibility

Book Keeping

Bookkeeping is the art of recording business dealings in a set of books.

Accountancy

It refers to a systematic knowledge of accounting concerned with the principles and techniques which are applied in accounting.

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Differences between Book Keeping and Accounting

Basis	Book Keeping	Accounting
Scope	Bookkeeping includes: a) Identifying the transactions of a financial nature. b) Measures in terms of money.	Accounting in addition to bookkeeping includes: a) Summarising the classified transactions b) Analysing and interpretations
Stage	Bookkeeping is a primary stage.	It is the secondary stage. Accounting starts where bookkeeping ends.
Objective	The main objective is to maintain systematic records of transactions of a financial nature.	Its main objective is to ascertain the net results and financial position of the business.
Nature of Job	The bookkeeping is routine and clerical in nature.	The accounting function is analytical in nature.
Who Performs	It is performed by the junior staff.	It is performed by the senior staff.

Book Keeping Vs Accounting

Difference between Accounting and Accountancy

Basis	Accounting	Accountancy
Meaning	It is concerned with recording, classifying, and summarising transactions.	It is a body of knowledge prescribing certain rules or principles to the observed while recording, classifying, and summarising of transactions.
Scope	It is narrow in scope. Accounting starts where bookkeeping ends.	It is much wider in scope and includes bookkeeping as well as accounting.
Relation	It depends on bookkeeping.	It depends on both bookkeeping and accounting.
Function	Its main function is to ascertain the net results and financial position of the business.	It includes the decision-making function. Also, on the basis of information provided by bookkeeping and accounting.

Accounting Vs Accountancy

Types/Sub Fields of Accounting

1) Financial Accounting

The main purpose of this accounting is to record the business transaction systematically to ascertain the profit or loss of the accounting period by preparing a profit or loss A/c and to present the financial position of the business by preparing a balance sheet.

2) Cost Accounting

The main purpose is to ascertain the total cost and per unit cost of goods produced by a business and help the management in exercising control over cost.

3) Management Accounting

Management accounting presents things in such a way to assist management planning. The management uses various techniques and helps in decision-making.

4) Tax Accounting

The branch of accounting which is used for tax purposes is called tax accounting.

5) Social Responsibility Accounting

It is the process of identifying, measuring, and communicating the contribution of a business to the society.

Accounting as a Source of Information

Accounting is often regarded as the language of the business. Accounting provides useful information to all these interested parties.

Financial Statements with Adjustments Class 11 Notes

Users of Accounting Information and Their Needs

These may be classified into two groups:
a) Internal Users
b) External Users

Internal Users

Internal users are those persons who have a direct interest in the business enterprise such as owners and management.

Owners: Owners contribute capital to the business and as such want to know about the profitability and financial soundness of the business.
Management: Management needs accounting information for the efficient and smooth running of the business enterprise. Management has direct access to these unpublished reports which contain valuable information not available to external users.

External Users

Individuals who have a present or future interest in the business enterprise but are not part of the management are called external users.

Some of the external users are:

Potential Investors: They need information to judge how safe the investment will be.
Short-Term Creditors: They want information about the creditworthiness of the business enterprise.
Employees: Employees need information about the profit of a business.

Advantages of Accounting

1) Helpful in the Management of Business

Management needs a lot of information for the efficient running of the business. All such information is provided by the accounting:

Helps in planning
Helps in decision-making
Helps in controlling

2) Provides Complete and Systematic Record

Accounting reports the net result of business activities of an accounting period. Accounting keeps a prompt and systematic record of all transactions and summarizes them.

3) Information regarding Profit or Loss

The profit & loss A/c prepared at the end of each accounting period discloses the net profit earned or loss suffered during that period.

4) Information regarding Financial Position

Accounting reports the financial position of the business by preparing a balance sheet at the end of each accounting period.

5) Helpful in the Prevention & Detection of Errors and Fraud

Accounting helps a business in preventing any error by keeping a record of each transaction happening in the business.

Limitations of Accounting

1) Influenced by personal judgments

Accounting is as yet an exact science and an accountant has to exercise his/her judgments in respect of various items.

2) Based on accounting concepts and conventions

Accounts are prepared based on several accounting concepts and conventions. Hence, the profitability and the financial position disclosed by it may not be realistic.

3) Incomplete information

Accounting statements provide only incomplete information because the actual profit or loss of a business can be known only when the business is closed down.

4) Unsuitable for forecasting

Financial accounts are only a record of past events. As such they can not be used for forecasting.

5) 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.

6) Based on historical costs

Accounts are prepared based on the historical cost and such that the figures given in financial statements do not show the effect of change in price level.

Qualitative Characteristics of Accounting Information

1) Reliability

Accounting information must be reliable. Reliability implies that the information must be factual and verifiable. The accounting information is said to have verifiability if such information can be verified from source documents such as cash memos.

2) Relevance

Accounting information depicted by financial statements must be relevant to the objectives of the enterprise. Unnecessary information must not be necessary or not be included in financial statements.

To be relevant, information must be capable of making a difference in decisions, it must help the management, and investors in making decisions.

3) Understandability

Accounting information should be prevented in such a way that it should be simple and logical so that they are understood easily by their users.

A person who does not have any knowledge of accounting technology should also be able to understand them without much difficulty.

4) Comparability

Comparability is a very useful quality of the accounting information. The financial statement should contain the figure for the previous year along with the figure for the current year so that the current performance can be compared with past performance.

Similarly, the financial statement should be prepared in such a way that the profitability and financial position of the concern may be compared with the other concern of a similar type.

5) Faithful Presentation

Financial statements are required to show a true and fair view of the profitability, financial position, and cash flows of an enterprise. Accounting information should also have the characteristic of completeness.

Role of Accounting

Role of language: Accounting is viewed as a language of business because it prepares reports and statements that communicate information.
Role of determining the net profit: It is also regarded as a means of determining the true profit or loss of a business enterprise.
Role of historical record: Accounting is viewed as chronological records of all financial transactions in the books of accounts.
Role of determining the financial position: It is also regarded as a means of showing the financial position of the business by preparation of the balance sheet.
Role of information system: Accounting is now regarded as an information system because it is capable of providing the kind of information that managers and parties require for making decisions.
Role of service providers: Accounting is regarded as a service activity because it provides quantitative financial information which is helpful to the users in different ways.