Textbook for CBSE Class XI T.S. GREWAL’S ely a aT Ce FINANCIAL ACCOUNTING Hiaheaas fl Seas oe sheet iatnd or] Se pst pean bicothee eso ee awegiine nn iene Br Se, Culshan, Br 6 pag ne sa scially thankful to Dr. julshan, Dr. $2 : ‘nis oglton, We are especially nS Gulshan Dr ould hs fo Sea neSPearineroa Shanogd Baga singh Catepe (UNWersy OOoMy, Rx ceran SSE Oe tn a \ardwa}, Ms. Jaya Khurana, 4 Bhasin, Me Arvind Bhalla, ese Khurana Mi 2c Tape in m Sunder, Ms. Reena Mehta, Mr. 8.K. Lamba, BN P EELERAD Este uae eH Ae gi gh A lr Sieh atin Me Mukes go 2° Aaa tao, Mr, Vinod Vil, ME, Sauah ABRL MS Sharma, i yNaagar, Mis. Seer fare. Vasumali Viswanathan, Mr i asa Mr Mungo aa rn. Wjay Shalon, Me. Maniena Sharma, Me, Si. Somaya, Mer ora Vial ‘nc Kumar, Mr. Rajeev Mediratta, Ms. Dinest da, pelts , (ears tere Me an aa eatja, Mir Surinder Khanna, Mr. Harsh Khanna, Vache, Mr JN. Mata, Mr An et naar Mr Gaurav Palo, Ms Nimala Singhal Ms, Vaneota Gupta M8 eT Me Coa Sunder Mr. M Raina, Mc Hemant Deshpande, Mr: Prabnakar Rao Mr. Abbas Al Ms.Neha Jastih yeh Tuvan, Mr Vie) Manta, Mr, Pramod (aimia, Mr Liyaaust All Khan, Mr. Vishal Bhatia, Or. Saakshi Kodwani (Indore); Mr. Harsh Kalra, vf Ir. Re (Ganaur) Mr. Amereest Mr Vienal Bate sta (Sonepat), Mr, Arvind Kumar, Mr, Abhimanye Verma (Ganaur): Mr. Amer eaitttac ane Mat, Ms. Shewta Nagpal, Mr Varun Anoja (Panipat) ME Deepak Culver, (Reva. Mc Arpt Agarwal, Dr Shun Tapa (eae tin ymera, Me. Shikha Sharma, Ms. Deepti Joseph, Bhasin (Hisar), Dr. Rajendra Jasuja, Sr pum venuaer a wosenh His, Sakshi Pandl, Mr Prashant Pathak, Mr. Ashish Choudhary, Mr. Pradumen Sigh (etoea) Me. Sau G, Tomas, Meche ce iahaigh, Mr Gunes! Sharma, Ms. Ragin Pandey. Mr. Bhrendra Mo eA Tenaen ‘ate| Singh, ndra Rana, Mr. Mukesh Babu Verma, Chauhan, Mr Amit inder, Mr. Luv Agarwal, Mr. Balte] Singh, Mr. Loken ; abu Vern fir Gaurav Shivhare Mr Art Gupta, Mr. Sanjay Mangal, Mc. Aditya Dit. Mr Piyush Ja (Agra Mr Garay Aaa tn anc OU a Mat Pst Ray Sera, © © Ss ‘Me Gauhar Nayab, Mr. Himanshu Saxena, Mr. % 5 nt, Mr Uait Maheshwari (Hathras); Me. RN. Nishra Tuna Mr. Saurabh Varshney. Mr Himanshu Varshney, Mr Parvez Alam, Mr. Vineet Arora, Mr. Manish Qwatra, Mr. Younus Khan, Mr. Rajesh ( a (Aligarh) Ms. Reena Dwivedi, Ms. Ritu Bhargawa, Ms. Vandana Gaur, Mr. Ravindra Pratap Singh, Mr. Manish Kumar Klan, Lucknow, Mr. Vineet Chopra (varanasi): Mr, Avind Gupta, Ms. Deepika Dhara (Karna) Mr. ML Sharma, Mr Ranjeet Singh Ms, AnuBsh Mr. S.C Jat Mr, Ravi Kran, Mr.P.C. Gangwal Mr B.L_ Son, Mr Ajay Kumar Sharma, Ms. Ragin Nair, Mr. Vijay K. Aggarwal, Mr. §.D. Sharma, Mr. Gaurav Takkar, Ms. Ashee Stivatsav (Vice-Principal), Dr Abishek Jain, Dr. Shikha Jaiman, Mr. Gaurav Bansal (Jaipur), Mr. Mano] Kumar Gupta, Mr-V.K Dave, Mr Rajkumar Sambhawani, Mr. Rajender Dhanwal, Mr.G.R. Daga, Mr. Sandeep Mehta, Mr. Paras ‘Mehta, Mr Ranjt Singh, Mr. Dananjay Chouhan, Mr. RK. Joshi, Mr. Deepak Lalvani, Dr. Sony Diwani (Jodhpur) IM Saniay Stimal, CA, Rahul Badala, CA. Rahul Dembia, Mr. Chetan Prakash Kumawat, Mr. Prashant Narayan, ‘A. Romi Jain. Or. Shailendra Soman Mr Hitesh Nasa, Mc Chirag, Mr. Gopal eran. Rajat Kandelval (Udaipur); Mr. Sumit Goyal (MACE) (Ajmer); Mr. Ganesh K. Shroff (Kotputli), Mr. R.K. Jindal (Hanumangarh), Sanjeev Ga, Ms. Manly Agganval (Sri Ganganaga) Mr, Surendra Kumar Daya (Mera) Ms, Gushien Kaur (Khanna, Ludhiana); Ms, Vanita Arora (Chandigarh); Ms. Gulshan Kaur (Panchkula); Mr. Subhasish Mazumder, Mr. D.N. Banerjee, Ms. Mala Ghosh, Ms. Sonali Bhattacharya, Mr. Bappa Nag, Mr. Surjendu Bikash Datta Ray, Mr. Avijit Sarkar (Kolkata); Dr, Pankaj ena (ene ‘Mr. M.Y.K. Mangla, Dr. Amrit Kumar, Mr. Prakashveer, Mr. Gutam Kumar, Mr. Ranjeet Kumar Takur (Ranchi); Mr. Sourabh Sardana, Mr. Khalid Khan, Mr. Harish Bhardwaj, Mr. Vipin Bali, Ms. Archana Malik, Ms. Komal Hotchandani, Ms, Nisha Sharma, Mr. Virin Miglani, Ms. Rekha Panvrar, Ms. Kavita Suni, Mr. Sudhir Sapra, Mr. Rajesh Kumar, Ms Jyotsna Davar, Mr. Vinay Setia, Ms. Vasumati Viswanathan, Mr. C.M. Jain (Delhi). Mr. Sonik Grover, Hemant Ct I Ojna (Surat); Mr. Hussain Kagalwala (Vadoadra); Mr. Amardeep Singh Anand, Mr. Anil Kumar Jangir, Mr. B.V.K. Reddy, Mr. Deepak Chandrayan, Ms. Harmeel Kaur Nandra, Mrs, Raminder Kaur Mr. Asif Khan (Chhattisgarh); Mr. Amit Shirpurkar, Mr. Vijay Panicker, Mr. Awinash Pandey. Mr. S. Hussain Haidr, Mr. Sandeep A. Vyas (Rai Mr, Rake Debnath (Raga); Me Prince Kumar Satu Mr. Vikash Agrawal (Bilaspur), Mrs, Jayanti Pillal pagdalpun Mr. Mahendra Meher (Korba); Mr. Surendra Kumar Sharma, (Nagpur); Mr. Harish Kumar, Mr. Gulshan Hans (Faridabad); Mr. Navneet Kumar (Greater Faridabad); Mr. Ashutosh Panigrahi (Bhubaneswar): Mr. C.D. Abraham, Mr. Devidayal S. (Emakulam), Mr. Ganesh Upadyaya, Ms. Mansi Werman, Ms, Sushma Bhaduria, Mr. Om Kumar Shulkla, Ms. Minakshi yer (Gwalior), Mr. Mubarik Khan (Sardarpura): Mr. Abhishek Jain (Burhanpur) Dr. Ravi Jain (Bhind); Or. Sunil Samadhiya, Mr. Vikul Jain (Shivpuri); Mr. Nirmal Kumar Jain (Guna); Dr. Atul Hans, Mr. Sachin ‘Sharma (Jammu); Ms. Harshana Bindra (Dehradun) Mr. Rajiv Adis, Ms. Deepali Ambekar, Ms. Bhawna, Ms. Shobha Gupta, Mr. Paulson Thomas (Dubai); Ms. Jenny Mathews, Ms. Rekha Vij, Ms. Vimmi Hanspal (Abu Dhabi) Mr H.8. Bagga, Mr. Alexander Gee Varghese (Oman), CA, Gaurav Batreon Vern warchiney, CA. Navin Soni, CA. Harsimran Grewal Dhillon and CA, Puneet Grewal (M.Sc. Forensic Accounting, UK There are many others we are indebted to and we trust they will forgive us for our inability to enlist them. We invite you to mail your queries and suggestions to the authors at cagsgrewal@gmail.com or to the publishers at scs@sultanchandebooks.comCHAPTER i MEANING AND DEFINITIONS OF ACCOUNTING _ Accounting a systematic process of identifying, measuring, recording, classifying, summarising, interpreting and communicating financial information to the users. It | gives information on: (@ the resources available; | Gd how the available resources have been employed; and (iii) the results achieved by their use. It shows the profit earned or loss incurred during the accounting period, value and _ nature of assets, liabilities and owners’ equity, i.e., capital. accounting is a medium of communication, it is called the language of business. unting is the art of recording, classifying and summarising in a significant manner in terms of money; transactions and events which are, in part at least, of a financial character, and interpreting the results thereof.” | q —American Institute of Certified Public Accountants ‘Accounting is the science of recording and classifying business transactions and vents, primarily of a financial character, and the art of making significant summaries, inalysis and interpretations of those transactions and events and communicating the sults to persons who must make decisions or form judgment.” —Smith and Ashburne unting is the process of identifying, measuring and communicating economic mation to permit informed judgments and decisions by users of the information.” —American Accounting Associationstm 1 the capitalCHAPTER LEARNING OBJECTIVES “This Chapter would enable you to understand: 3 Meaning and Nature of Accounting Principles Features of Accounting Principles 5 Necessity of Accounting Principles G Fundamental Accounting Assumptions or Concepts: > Going Concern > Consistency » Accrual Accounting Principles: | > Accounting Entity > MoneyMeasurement’ > Accounting Period > Full Disclosure > Materiality » Prudence or Conservatism | > costoristorcalcost > Matching > Dual Aspect or Duality Pain ectring rics ne presctean fais atin been id |» Revenue Recognition (Realisation) > Verifiable Objective G1 Accounting Standards Meaning of Accounting Standards Nature of Accounting Standards © Concept of Accounting Standards |G objectives and Utility of Accounting Standards “International Financial Reporting Standards IFS) and Indian Accounting Standards (ind-AS) Accounting principles, concepts and conventions commonly known as General: {Accepted Accounting Principles or GAAPs are the basic rules that define the Parameters and constraints within which accounting operates. These principles are the theory base of accounting, on the basis of which financial statements are prepared. In other words, they are the guidelines for preparing the financial statements. ‘The Institute of Chartered Accountants of India (ICAI has issued Accounting Standards to standardise the accounting practices adopted to prepare financial statements. Initially the accounting standards were recommendatory but were gradually made mandatory. Presently, the accounting standards issued by ICAI are applicable on non- corporate enterprises (firm). The accounting standards notified under the Companies Act, 2013 are applicable and mandatory on companies. a smalland hbetween Accrual Basis of Accounting and Cash Basis of Accounting The most significant function of accounting is to determine profit earned or loss incurred by a business during an accounting period. Profit earned or loss incurred by the business can be determined either by 1. Cash Basis of Accounting or 2. Accrual or Mercantile Basis of Accounting. 1. Cash Basis of Accounting Cash basis of accounting is a system in which transactions are recorded when cash is transacted, whether received or paid. It means, revenue is recognised on receipt ofcash. Likewise, expenses are recorded as incurred when they have been paid. The difference between the total incomes and total expenses represents Profit or Loss of a business for the accounting period. Thus, when Cash Basis of Accounting is followed, outstanding and prepaid expenses and income received in advance or accrued incomes are not considered. Receipts and Payments Account prepared in case of Not-for-Profit Organisations, such as charitable institutions, clubs and schools, is an example of accounting on cash basis. tstanding Expenses are those expenses which have become due during the accounting riod but which have not yet been paid. d Expenses are those expenses which have been paid in advance. Income is an income which has been earned during the accounting period but et become due and, therefore, has not been received, din Advance is an income which has been received before it has been , goods to be sold or services to be rendered in future. Advantages: Advantages of Cash Basis of Accounting are: (0) It is.a simple basis of accounting as adjustments for outstanding expenses, prepaid expenses, accrued income and income received in advance is not made. (ii) This approach is more objective as very few estimates and judgments are required. (ii) This basis of accounting is suitable for those enterprises where most of the transactions are on cash basis.MEANING OF AN ACC! ITING EQUATION An Accounting Equation is a mathematical expression which shows that the assets and liabilities of a firm are equal. An Accounting Equation is based on the Dual Aspect Concept of accounting meaning, every transaction has dual aspect or two aspects— debit and credit. It holds that for every debit there is a credit of equal amount and vice versa. It means, total claims (those of outsiders and of the proprietors) will always be equal to the total assets of the firm. ‘The claims, also known as equities, are of two types: 1. Owner's equity or capital and 2, Liabilities or amounts due to outsiders (i.e., Outsiders’ Equity). We can express it mathematically as follows: “Assets = Equities (Total Claims) Or Assets = Liabilities + Capital Or Liabilities = Assets — Capital © Or Capital = Assets — Liabilities The above relationship is known as the Accounting Equation or the Balance Sheet Equation. An Accounting Equation always holds true with every change that occurs due to a transaction entered into. It is because of the reason that it is based on the Dual Aspect Concept of accounting. Effect of Transactions on Accounting Equation A transaction may affect either both sides of the equation by the same amount or one side of the equation only, by both increasing or decreasing it by equal amounts. Transactions from the Accounting Equation viewpoint, can be divided into two, ie, 1, Transactions Affecting Two Items and. 2. Transactions Affecting More Than Two Items. Let us discuss them in detail 1. Transactions Affecting Two Items: As the title suggests, these are those transactions that affect two items of the accounting equation or Balance Sheet,No. 6:10)