Plus One Accountancy Notes Chapter 1 Introduction to Accounting_Capsule Notes

CHAPTER 1: INTRODUCTION TO ACCOUNTING – MICRO NOTES
MEANING & DEFINITION
Accounting: Financial diary for businesses – records money activities, tracks profit/loss, aids decisions.
AICPA (1941): Art of recording, classifying & summarising financial transactions & interpreting results.
AAA (1966): Process of identifying, measuring & communicating economic information for informed decisions.
History: Luca Pacioli (1494, Venice) wrote first book on double entry – used Debit (debito) & Credit (credito).
ACCOUNTING AS INFORMATION SYSTEM (8 STEPS)
Identification → Measurement → Recording → Classification → Summarising → Analysis → Interpretation → Communication
Correct Sequence (Exam Q): Identifying, Recording, Classifying, Summarising.
OBJECTIVES OF ACCOUNTING
Record keeping (systematic), Profit/Loss calculation, Financial position (Balance Sheet), Information for users, Legal compliance (tax), Management help (decisions).
USERS OF ACCOUNTING INFORMATION
Internal: Managers, Employees, Owners.
External: Investors, Creditors/Banks, Government, Customers, Researchers, Suppliers, Competitors.
QUALITATIVE CHARACTERISTICS
Reliability: Free from error/bias, verifiable, faithful.
Relevance: Useful for decisions, timely, predictive.
Understandability: Clear presentation, easy to interpret.
Comparability: Can compare over time & between firms.
BRANCHES OF ACCOUNTING
Financial Accounting: Records transactions, prepares P&L & Balance Sheet for outsiders.
Cost Accounting: Ascertains & controls product cost (cost sheet).
Management Accounting: Provides info for managerial decisions (budgets, forecasts).
BASIC ACCOUNTING TERMS
Entity: Business unit with individual existence (ITC Ltd).
Transaction: Event involving value (purchase, sale).
Assets: Economic resources – Non-Current (Land, Machinery, Goodwill) & Current (Stock, Debtors, Cash).
Liabilities: Debts – Non-Current (long-term loans) & Current (Creditors, Bills Payable).
Capital: Amount invested by owner (claim on assets).
Drawings: Withdrawal of money/goods by owner for personal use.
Sales: Revenues from goods sold (cash/credit).
Purchases: Goods procured (cash/credit).
Stock (Inventory): Goods unsold at period end (Closing Stock) or at start (Opening Stock).
Debtors: Persons who owe money for credit purchases.
Creditors: Persons to whom money is owed for credit purchases.
Revenue: Amount earned from sales, commission, interest, rent received.
Expenses: Costs to earn revenue (salary, rent, wages, depreciation).
Profit: Excess of revenue over expenses.
Loss: Excess of expenses over revenue.
Gain: Profit from incidental transactions (sale of fixed asset).
Discount: Trade (deduction from list price, not recorded) vs Cash (deduction for prompt payment, recorded).
Voucher: Documentary evidence (Cash memo, Invoice).
Goods: Products business deals in (for furniture dealer, chairs are goods).
Goodwill: Intangible asset for reputation & earning power.
IMPORTANT EXAM QUESTIONS
1. Describe any three objectives of accounting (3 marks).
2. Classify users into internal/external (CEO, Customers, Finance Officer, Plant Manager, Labour Unions, Banks).
3. State the qualitative characteristics of accounting (4 pillars).
4. Explain any three branches of accounting.
5. Define: Capital, Drawings, Debtor, Creditor, Goodwill, Amortization.
6. Correct sequence of accounting process? (Identifying, Recording, Classifying, Summarising).
7. Cash or assets invested by owner? (Capital).
8. Decrease in value of intangible asset? (Amortization).