NCERT | CLASS 11 ACCOUNTANCY | IMPORTANT QUESTIONS

Question 1: Distinguish between debtors and creditors; Profit and Gain.

ANSWER: The difference between Debtors and Creditors is given below.

Basis of difference	Debtors	Creditors
Meaning	Persons or organizations that are liable to pay money to a firm are called debtors.	Persons or organizations to whom the firm is liable to pay money are called creditors.
Nature	They have a debit balance to the firm.	They have a credit balance to the firm.
Payment	Payments are received from them.	Payments are made to them.
Shown	They are shown as assets in the Balance sheet under Current Assets.	They are shown as liabilities in the Balance Sheet under Current Liabilities.

The difference between Profit and Gain is given below.

• Gain− Gain is incidental to the business. They arise from irregular activities or non-recurring transactions; for example, profit on sale of fixed assets, appreciation in value of asset, profit on sale of investment, etc.
• Profit− This refers to the excess of revenue over the expense. It is normally categorised into gross profit or net profit. Net profit is added to the capital of the owner, which increases the owner’s capital. For example, goods sold above its cost

Question 2: What is accounting? Define its objectives.

ANSWER:

Accounting is a process of identifying the events of financial nature, recording them in the journal, classifying in their respective accounts and summarising them in profit and loss account and balance sheet and communicating results to users of such information, viz. owner, government, creditor, investors, etc.

According to the American Institute of Certified Accountants, 1941, “Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions, and events that are, in part at least, of financial character and interpreting the results thereof.”

In 1970, the American Institute of Certified Public Accountants changed the definition and stated, “The function of accounting is to provide quantitative information, primarily financial in nature, about economic entities, that is intended to be useful in making economic decisions.”

Objectives of Accounting:

1. Recording business transactions systematically− It is necessary to maintain systematic records of every business transaction, as it is beyond human capacities to remember such large number of transactions. Skipping the record of any one of the transactions may lead to erroneous and faulty results.
2. Determining profit earned or loss incurred− In order to determine the net result at the end of an accounting period, we need to calculate profit or loss. For this purpose trading and profit and loss account are prepared. It gives information regarding how much of goods have been purchased and sold, expenses incurred and amount earned during a year.
3. Ascertaining financial position of the firm− Ascertaining profit earned or loss incurred is not enough; proprietor also interested in knowing the financial position of his/her firm, i.e. the value of the assets, amount of liabilities owed, net increase or decrease in his/her capital. This purpose is served by preparing the balance sheet that facilitates in ascertaining the true financial position of the business.
4. Assisting management− Systematic accounting helps the management in effective decision making, efficient control on cash management policies, preparing budget and forecasting, etc.
5. Assessing the progress of the business− Accounting helps in assessing the progress of business from year to year, as accounting facilitates the comparison both inter-firm as well as intra-firm.
6. Detecting and preventing frauds and errors− It is necessary to detect and prevent fraud and errors, mismanagement and wastage of the finance. Systematic recording helps in the easy detection and rectification of frauds, errors and inefficiencies, if any.
7. Communicating accounting information to various users− The important step in the accounting process is to communicate financial and accounting information to various users including both internal and external users like owners, management, government, labour, tax authorities, etc. This assists the users to understand and interpret the accounting data in a meaningful and appropriate manner without any ambiguity.

Question 3: What do you mean by an asset and what are different types of assets?

ANSWER:

Any valuable thing that has monetary value, which is owned by a business, is its asset. In other words, assets are the monetary values of the properties or the legal rights that are owned by the business organizations.

Fixed Assets− These are those assets that are held for the long term and increase the profit earning capacity and productive capacity of the business. These assets are not meant for sale, for example, land, building machinery, etc.

Current Assets− Assets that can be easily converted into cash or cash equivalents are termed as current assets. These are required to run day-to-day business activities; for example, cash, debtors, stock, etc.

Tangible Assets− Assets that have a physical existence, i.e., which can be seen and touched, are tangible assets; for example, car, furniture, building, etc.

Intangible Assets− Assets that cannot be seen or touched, i.e. those assets that do not have a physical existence, are intangible assets; for example, goodwill, patents, trademark, etc.

Liquid Assets− Assets that are kept either in cash or cash equivalents are regarded as liquid assets. These can be converted into cash in a very short period of time; for example, cash, bank, bills receivable, etc.

Fictitious Assets− These are the heavy revenue expenditures, the benefit of whose can be derived in more than one year. They represent loss or expense that is written off over a period of time, for example, if advertisement expenditure is Rs 1,00,000 for 5 years, then each year Rs 2,00,000 will be written off.

Question 4: Describe the role of accounting in the modern world.

Answer:

The role of accounting has been changing over the period of time. In the modern world, the role of accounting is not only limited to record financial transactions but also to provide a basic framework for various decision making, providing relevant information to various users, and assists in both short-run and long-run planning. The role of accounting in the modern world are given below.

→ Assisting management- Management uses accounting information for short-term and long-term planning of business activities, to predict the future conditions, prepare budgets, and various control measures.

→ Comparative study- In the modern world, accounting information helps us to know the performance of the business by comparing the current year’s profit with that of the previous years and also with other firms in the same industry.

→ Substitute of memory- In the modern world, every business incurs a large number of transactions and it is beyond human capability to memorize each and every transaction. Hence, it is very necessary to record transactions in the books of accounts.

→ Information to end-user- Accounting plays an important role in recording, summarising, and providing relevant and reliable information to its users, in form of financial data that helps in decision making.

Question 5: Explain the qualitative characteristics of accounting information.

Answer:

The qualitative characteristics of accounting information are:

→ Reliability: Accounting information must be reliable so that business owners can be reasonably assured that accounting information presents an accurate picture of the company. All accounting information is verifiable and can be verified from the source document (voucher), via cash memos, bills, etc. Hence, the available information should be free from any errors and unbiased.

→ Relevance: It means that essential and appropriate information should be easily and timely available and any irrelevant information should be avoided. The users of accounting information need relevant information for decision making, planning, and predicting future conditions.

→ Understandability: Accounting information should be presented in such a way that every user is able to interpret the information without any difficulty in a meaningful and appropriate manner.

→ Comparability: It allows business owners to compare accounting information of a current year with that of the previous years. Comparability enables intra-firm and inter-firm comparisons. This assists in assessing the outcomes of various policies and programs adopted in different time horizons by the same or different businesses. Further, it helps to ascertain the growth and progress of the business over time and in comparison to other businesses.

Question 6: Accounting information refers to financial statements. The information provided by these statements can be categorized into various types. Briefly describe them.

Answer:

1. Types of Accounting Information Accounting information refers to the information provided in financial statements of the business, generated through the process of book keeping and summarising. By using the accounting information, the users are in a position to take the correct decision. The financial statements so generated are the income statement i.e., profit and loss account and the position statement i.e., balance sheet and a Cash Flow Statement. The information made available by these statements can be categorised into the following categories:
   1. Information Related to Profit or Loss during the year: Information about the profit earned or loss incurred by the business during an accounting period is made available through the income statement of the business  i.e., the profit and loss account. Trading account provides information about gross profit or gross loss whereas the profit and loss account provides information about the net profit or net loss during the year. It also gives details of all the expenses and incomes during the year.
   2. Information Related to Financial Position of the business : Information about the financial position of the enterprise is determined through its position statement i.e., the balance sheet.
      It provides information about the assets and liabilities of a business on a particular date. The difference between the two is represented by capital i.e., amount due to owners. In the case of not-for-profit organisation, difference between assets and liabilities is termed as general fund.
   3. Information about Cash Flow during the year : Cash flow statement is a statement that shows inflow and outflow of cash during a specific period. It helps in making various decisions such as payment of liabilities, payment of dividend and expansion of business, etc., as all these are based on availability of cash. It gives a clear picture of the liquidity of the business.

Question 7:

Giving examples, explain each of the following accounting terms:

• Fixed assets
• Revenue
• Expenses
• Short-term liability
• Capital

ANSWER:

• Fixed assets− These are held for long term and increase the profit earning capacity of the business, over various accounting periods. These assets are not meant for sale; for example, land, building, machinery, etc.
• Revenue− It refers to the amount received from day to day activities of business, viz. amount received from sales of goods and services to customers; rent received, commission received, dividend, royalty, interest received, etc. are items of revenue that are added to the capital.
• Capital− It refers to the amount invested by the owner of a firm. It may be in form of cash or asset. It is an obligation of the business towards the owner of the firm, since business is treated separate or distinct from the owner.

Capital = Assets − Liabilities.

• Expenses− Expenses are those costs that are incurred to maintain the profitability of business, likerent, wages, depreciation, interest, salaries, etc. These help in the production, business operations and generating revenues.
• Short term liabilities− Those liabilities that are incurred with an intention to be paid or are payable within a year; for example, bank overdraft creditors, bills payable, outstanding wages, short-term loans, etc.

Question 8: Describe the informational needs of external users.

Answer:

The various external users and their needs are:

• Investors and potential investors: information on the risks and return on investment;

• Unions and employee groups: information on the stability, profitability, and distribution of wealth within the business;

• Lenders and financial institutions: information on the creditworthiness of the company and its ability to repay loans and pay interest;

• Suppliers and creditors-information on whether amounts owed will be repaid when due, and on the continued existence of the business;

• Customers-information on the continued existence of the business and thus the probability of a continued supply of products, parts, and after-sales service;

• Government and other regulators- information on the allocation of resources and the compliance to regulations;

• Social responsibility groups, such as environmental groups-information on the impact on the environment and its protection;

• Competitors: information on the relative strengths and weaknesses of their competition and for comparative and benchmarking purposes.

Question 9: Distinguish between financial accounting, cost accounting, and management accounting.

Answer:

Basis	Financial Accounting	Cost Accounting	Management Accounting
Meaning	Financial accounting is a specialized branch of accounting that keeps track of a company’s financial transactions. Using standardized guidelines, the transactions are recorded, summarized, and presented in a financial report or financial statements such as an income statement or a balance sheet.	Cost accounting is an accounting method that aims to capture a company’s costs of production by assessing the input costs of each step of production as well as fixed costs, such as the depreciation of capital equipment. Cost accounting will first measure and record these costs individually, then compare input results to output or actual results to aid company management in measuring financial performance.	Management accounting also called managerial accounting or cost accounting is the process of analyzing business costs and operations to prepare an internal financial report, records, and account to aid managers’ decision-making process in achieving business goals. In other words, it is the act of making sense of financial and costing data and translating that data into useful information for management and officers within an organization.
Objects	Record transaction and determine financial position & profit or loss	Ascertainment, allocation, accumulation, and accounting for the cost	To assist the management in decision making & policy formulation
Nature	Concerned with historical data	concerned with both past and present recorded( historical in nature)	Deals with a projection of data for the future( futuristic in nature)
Principle followed	Governed by GAAP	certain principles followed for recording cost	No set principles are followed in it
Data Used	Qualitative aspects are not recorded	Only quantitative aspects are recorded	Uses both qualitative and quantitative concepts

Question 10: What are the functions or steps of the accounting process? 

Answer:

 Following attributes or major steps that can be drawn from the definition of Accounting:

① Identifying and Measurement
② Recording
③ Classifying
④ Summarizing
⑤ Analysis, Interpretation, and Communication

(1) Identifying financial transactions and events

Accounting records only those transactions and events which are of financial nature. So, first of all, such transactions and events are identified.

The first step in accounting is to determine what to record, i.e., to identify the financial events which are to be recorded in the books of accounts. It involves observing all business activities and selecting those events or transactions which can be considered as financial transactions.

(2) Measuring the transactions

Accounting measures the transactions and events in terms of money which are considered as a common unit.

In Accounting, we record only those transactions which can be measured in terms of money or which are of financial nature. If a transaction or event cannot be measured in monetary terms, it is not considered for recording in financial accounts.

There are few events directly or indirectly make an effect on the working of a business firm but cannot be recorded in the books of accounts because they cannot be measured in terms of money.
For example, the appointment of a new managing director, signing of contracts, strikes, death of an employee etc is not shown in the books of accounts.

(3) Recording of transactions

Accounting involves recording the financial transactions of inappropriate books of accounts such as journals or Subsidiary Books.

A transaction will be recorded in the books of accounts only if it is considered an economic event and can be measured in terms of money. Once the economic events are identified and measured in financial terms, these are recorded in books of account in monetary terms and in chronological order. The recording should be done in a systematic manner so that the information can be made available when required.

(4) Classifying the transactions

Transactions recorded in the books of original entry – Journal or Subsidiary books are classified and grouped according to nature and posted in separate accounts known as ‘Ledger Accounts’.

Once the financial transactions are recorded in journal or subsidiary books, all the financial transactions are classified by grouping the transactions of one nature at one place in a separate account. This is known as the preparation of Ledger.

(5) Summarising the transactions

It involves presenting the classified data in a manner and in the form of statements, which are understandable by the users.

It includes Trial balance, Trading Account, Profit and Loss Account, and Balance Sheet.

It is concerned with the presentation of data and it begins with a balance of ledger accounts and the preparation of trial balance with the help of such balances. A trial balance is required to prepare the financial statements i.e. Trading Account, Profit & Loss Account, and Balance Sheet.

(6) Analysing and interpreting financial data

Results of the business are analyzed and interpreted so that users of financial statements can make a meaningful and sound judgment.

The main purpose of accounting is to communicate the financial information to the users who analyze them as per their individual requirements.

(7) Communicating the financial data or reports to the users

Communicating the financial data to the users on time is the final step of Accounting so that they can make appropriate decisions. Providing financial information to its users is a regular process.