RBSE Solutions for Class 11 Accountancy Chapter 1 Introduction to Accounting

Rajasthan Board RBSE Solutions for Class 11 Accountancy Chapter 1 Introduction to Accounting Textbook Exercise Questions and Answers.

RBSE Class 11 Accountancy Solutions Chapter 1 Introduction to Accounting

RBSE Class 11 Accountancy Introduction to Accounting Textbook Questions and Answers 

Test Your Understanding I.

Complete the following sentences with appropriate words:
(a) Information in financial reports is based on ............... transactions.
(b) Internal users arc the ............... of the business entity.
(c) A ............... would most likely use an entities financial report to determine whether or not the business entity is eligible for a loan.
(d) The Internet has assisted in decreasing the ............... in issuing financial reports to users.
(e) ............... users are groups outside the business entity, who uses the information to make decisions about the business entity.
(f) Information is said to be relevant if it is .......... 
(g) The process of accounting starts with ............... and ends with ............... 
(h) Accounting measures the business transactions in terms of ............... units.
(i) Identified and measured economic events should be recorded in ............... order.
Answers: 
(a) Economic 
(b) Management/Employees 
(c) Creditor
(d) Time-gap 
(e) External 
(f) Free from bias 
(g) Identifying the transactions, communicating information 
(h) Monetary 
(i) Chronological.

 

Test Your Understanding II.

You are a senior accountant of Ramona Enterprises Limited. What three steps would you take to make your company’s financial statements understandable and decision useful?
1. ....................
2. ....................
3. ....................
[Hint : Refer to qualitative characteristics of accounting information]
Answers: 
1. Reliability, i.e., Verifiable, Faithful, Neutral, 
2. Relevance, i.e., Available on time. 
3. Understandability i.e., Comparable

Test Your Understanding III.

Which stakeholder group... Would be most interested in    
.................... (a) the VAT and other tax liabilities of the firm.
.................... (b) the potential for pay awards and bonus deals.
.................... (c) the ethical or environmental activities of the firm.
.................... (d) whether the firm has a long-term future.
.................... (e) profitability and share performance.
.................... (f) the ability of the firm to carry on providing a service or producing a product.
Answers: 
(a) Government and other regulators 
(b) Management 
(c) Social responsibility groups 
(d) Lenders 
(e) Suppliers and Creditors 
(f) Customers.

Test Your Understanding IV. 

Tick the Correct Answer

Question 1.
Which of the following is not a business transaction?    
(a) Bought furniture of ₹ 10,000 for business    
(b) Paid for salaries of employees ₹ 5,000
(c) Paid sons fees from her personal bank account ₹ 20,000
(d) Paid sons fees from the business ₹ 2,000.    
Answer:
(a) Bought furniture of ₹ 10,000 for business    

Question 2. 
Deepti wants to buy a building for her business today. Which of the following is the relevant data for his decision?
(a) Similar business acquired the required building in 2000 for ₹ 10,00,000
(b) Building cost details of 2003
(c) Building cost details of 1998
(d) Similar building cost in August, 2005 ₹ 25,00,000
Answer:
(a) Similar business acquired the required building in 2000 for ₹ 10,00,000

Question 3. 
Which is the last step of accounting as a process of information?
(a) Recording of data in the books of accounts
(b) Preparation of summaries in the form of financial statements
(c) Communication of information
(d) Analysis and interpretation of information.
Answer:
(c) Communication of information

Question 4.
Which qualitative characteristics of accounting information is reflected when accounting information is clearly presented?
(a) Understandability 
(b) Relevance
(c) Comparability 
(d) Reliability.
Answer:
(a) Understandability 

Question 5. 
Use of common unit of measurement and common format of reporting promotes:
(a) Comparability 
(b) Understandability
(c) Relevance 
(d) Reliability 
Answers: 
(a) Comparability 

Test Your Understanding V.

Mr. Sunrise started a business for buying and selling of stationery with ₹ 5,00,000 as an initial investment. Of which he paid ₹ 1,00,000 for furniture, ₹ 2,00,000 for buying stationery items. He employed a sales person and clerk. At the end of the month he paid ₹ 5,000 as their salaries. Out of the stationery bought he sold some stationery for ₹ 1,50,000 for cash and some other stationery for ₹ 1,00,000 on credit basis to Mr. Ravi. Subsequently, he bought stationery items of ₹ 1,50,000 from Mr. Reace. In the first week of next month there was a fire accident and he lost ₹ 30,000 worth of stationery. A part of the machinery, which cost ₹ 40,000, was sold for ₹ 45,000.

From the above, answer the following:
1. What is the amount of capital with which Mr. Sunrise started business?
2. What are the fixed assets he bought?
3. What is the value of the goods purchased?
4. Who is the creditor and state the amount payable to him?
5. What are the expenses?
6. What is the gain he earned?
7. What is the loss he incurred?
8. Who is the debtor? What is the amount receivable from him?
9. What is the total amount of expenses and losses incurred?
10. Determine if the following are assets, liabilities, revenues, expenses or none of these: sales, debtors, creditors, salary to manager, discount to debtors, drawings by the owner.
Answers: 
1. ₹ 5,00,000 
2. ₹ 1,00,000 
3. ₹ 2,00,000 
4. Mr. Reace, ₹ 1,50,000 
5. ₹ 5,000 
6. ₹ 5,000 
7. ₹ 30,000 
8. Mr. Ravi, ₹1,00,000 
9. ₹ 35,000 
10. Assets: debtors; Liabilities: creditors; None of these: drawings; Revenues: sales, expenses; discount, salary.

Short Answer Type Questions

Question 1.
Define Accounting.    
Answer: 
Accounting is the science concerned with the principles of maintaining accounts and designing the systems of recording, classifying, summarizing and interpreting the financial data for the end users.    

Question 2. 
State what is the end product of Financial Accounting?    
Answer: 
The end product of financial accounting are:
1. Profit or Loss Account: Accounting helps in ascertaining the net profit earned or loss suffered on account of carrying the business. This information is available from the profit and loss statement. Profit is calculated by deducting expenses from the revenues. Profit is a measure of the performance of the business.

2. Balance Sheet: A Balance Sheet depicts the financial position of a business. The Balance Sheet is a statement of assets and liabilities of the business on a particular date. Balance Sheet serves as barometer for ascertaining the    financial position of the business.    

Question 3.
Enumerate main objectives of Accounting?    
Answer: 
Objectives of Accounting:    
(a) To Keep Systematic Records: Accounting is done to keep a systematic record of financial transactions. Firstly record, then pay; if there is an error, trace it from the records. In the absence of accounting there would have been too much burden on human memory. Businessman cannot remember all the transactions what he might have observed during the daily operations.

(b) To Ascertain Profit or Loss: Accounting helps in ascertaining the net profit earned or loss suffered on account of carrying the business. This information is available from the profit and loss statement. Profit is calculated by deducting expenses from the revenues. Profit is a measure of performance of the business.    

(c) To Ascertain the Financial Position of the Business: This objective is served by the Balance Sheet. A Balance Sheet depicts the financial position of a business. The Balance Sheet is a statement of assets and liabilities of the business on a particular date. Balance Sheet serves as a barometer to ascertaining the financial position of the business.    

Question 4. 
Who are the users of accounting information?    
Answer: 
There are two types of users, internal and external. Some of such users are as follows:    

Internal Users
(1) Proprietor/Owner/Partner(s)/Shareholders: The person who invests his money as money’s worth and bears the risk in the business.
(2) Directors/Board of Directors: These persons compare, analyse the accounting information, make forecast, and compare its financial results with the result of industry.    

External users    
(1) Creditors: The users may be short term creditors or long term creditors. They require accounting information for solvency of the firm.
(2) Government: Government make policies and prepare plans and formulate corporate law regarding Taxation, Labour etc. which is based accounting information based on financial statements.    

Question 5. 
State the nature of accounting information required by long-term lenders.
Answer: 
In modem times, there are only two main long-term lenders which play an important role in economy. i.e., 
1. Banks.
2. Financial institutions.

1. Banks: The institution which accept deposits from the people and give loans to public who are in need. Before providing any loan amount to public, a bank wants to know that whether the person or businessman has the capacity to repay the loan. This information can only be collected by accounting. All financial statements help in assessing the repayment ability of a businessmen.

2. Financial Institutions: Financial institutions also provide loans to the businessman. Accounting keeps a systematic record of financial transactions along with the preparation and presentation of financial reports in order to measure the organisational success and financial soundness of the business. 

Question 6.
Who are the external users of information?
Answer:  
External users    
(1) Creditors: The users may be short term creditors or long term creditors. They require accounting information for solvency of the firm.
(2) Government: Government make policies and prepare plans and formulate corporate law regarding Taxation, Labour etc. which is based accounting information based on financial statements. 

Question 7.
Enumerate informational needs of management.
Answer: 
Following are informational needs of management:
1. Information about profitability and financial soundness of the business.    
2. Information that helps the management in planning, decision-making and controlling the business.
3. Information related to efficient running of the business such as increase or decrease in sales, speed of increase in the cost of production, etc.
4. Information related to the future course of action in order to achieve targets decided by the management.

Question 8.
Give any three examples of Revenues.
Answer:
Revenues. An amount added to the capital as a result of operation is called “Revenue”. It is an increase in the value of assets and leads to an increase in the capital of the proprietor or owner’s equity.

Some Examples of Revenue are:
1. Sales of products, merchandise and services    
2. Earning from interest
3. Dividend received    
4. Rent received

Question 9.
Distinguish between
(a) Debtors and Creditors; 
(b) Profit and Gain.
Answer:
(a) Debtors and Creditors: Debtors are those persons to whom a firm sells goods on the credit basis and in return, the firm entitles to receive such amount. Creditors are those persons from whom goods are bought on credit basis and the firm buying the goods is responsible to make payment for the goods bought.

(b) Profit and Gain: Any income earned by business from any operating activity is called profit, example gross profit and net profit. Gain is also part of profit which is non-recurring in nature. Example: Gain from sale of fixed asset. 

Question 10. 
‘Accounting information should be comparable’. Do you agree with this statement? Give two reasons.
Answer:
Yes, we agree that accounting information should be comparable. Comparability means comparison of financial statements of an enterprise for identification of financial position and performance. Through comparability different users can evaluate their financial position and performance and can take important steps for their enterprises.

Accounting information should be comparable due to following reasons:
1. If accounting information will be comparable it will be easy for a business to ascertain the financial soundness of the business in comparison to the other business.
2. Comparison helps the business to ascertain future profitability with reference to the previous year profitability. 

Question 11.
If the accounting information is not clearly presented, which of the qualitative characteristic of the accounting information is violated?
Answer:
If accounting information is not clearly presented, qualitative characteristics of reliability and relevance of accounting information is violated. It enhance the understandability and usefulness. Hence, characteristics of Reliability and Relevance should be properly maintained in order to get productive accounting information.

Question 12.
“The role of accounting has changed over the period of time”. Do you agree? Explain.
Answer:
In modem world, accounting plays very important role in education, training, analytical mind and experience of society. Now-a-days with the help of accounting, every decision is taken like in taxation, costing, management accounting company legislation and procedures. All books are maintained in a systematic manner through accounting.

Role of accounting in the modem world depends upon the users and it will be clear with the help of following:

1. To the Owners: Owners want to know about the profitability and financial soundness of the business. They also want to know how the profits are increasing or decreasing and to know the reasons there of.

2. To the Management: Management needs a lot of other information for the efficient running of the business such as increase or decrease in sales, speed of increase in the cost of production, etc.

3. To the Creditors: Creditors are the persons who have sold the goods to the business on credit. They need accounting information to determine whether the amount owing to them will be paid when due.

4. To the Investors: On the basis of such information they judge the safety for their investment in the business and decide whether they should buy, hold or sell the shares.

Question 13. 
Giving examples, explain each of the following accounting terms:
• Fixed assets 
• Revenue 
• Expenses 
• Short-term liability 
• Capital
Answer: 
(1) Fixed Assets: Fixed assets are those assets which help in manufacturing goods and to provide services. These assets are not meant for resale in normal course of business. Fixed assets are of two types:

(i) Tangible Fixed Assets: These the assets which can be seen and touched like plant and machinery, land and building and furniture.

(ii) Intangible Fixed Assets: These are the assets which can’t be touched and seen like goodwill, patent, trademarks, copyrights etc.

(2) Revenue: It is the monetary value of goods and services sold to the customers during a period of time. It results from sale of goods and services like interest, commission and dividend, etc.

(3) Expenses: It is the money spent in conducting business activities. It is the expenditure in return for which some benefit i.e., service is received e.g., expense of salary for clerks’ service; carriage expense for transporter’s service, expense of rent for landlords giving benefit or service of accommodation, etc.

(4) Short-term Liability: It is the amount due to outsiders i.e., to all other except owner e.g., trade creditors, bank overdraft etc. It is the liability which falls due for payment within a Short Period i.e., not more than 12 months.

(5) Capital: The amount invested by proprietor in the business is called capital. It is also termed as net worth. It is always be equal to asset minus creditor’s equity.

Question 14. 
Define revenues and expenses?
Answer:
Revenue. It is the gross money receipts which increases owner’s equity (capital) on one hand and also the assets (cash or account receivables) on the other hand, e.g., when goods costing ₹ 10,000 are sold for ₹ 15,000 cash, the receipt of ₹ 15,000 is Revenue but the next increase in assets, ₹ 5,000, is the Income. Sales of products, merchandise and services; and earning from interest, dividends, rents and wages, salaries, commission etc. are revenues.

Expenses. It is the money spent in conducting business activities. It is the expenditure in return for which some benefit, i.e., service is received, e.g., expense of salary for clerks’ service; carriage expenses for transporter’s service; expenses of rent for landlord’s giving benefit or service of accommodation, etc.

Question 15. 
What is the primary reason for the business students and others to familiarise themselves with the accounting discipline?
Answer: 
Business activities or non-business activities used by students, schools, colleges, hospitals etc. are involved in economic events. Economic event is known as a happening of consequence to a business organisation which consists of transactions and which are measurable in monetary terms. So, monetary measurement is the primary reason for business students to familiarise themselves with the accounting discipline.

Long Answer Type Questions.

Question 1.
What is accounting? Define its objectives.
Answer: 
Accounting is the science concerned with the principles of maintaining accounts and designing the systems of recording, classifying, summarizing and interpreting the financial data for the end users.    

Objectives of Accounting:    
(a) To Keep Systematic Records: Accounting is done to keep a systematic record of financial transactions. Firstly record, then pay; if there is an error, trace it from the records. In the absence of accounting there would have been too much burden on human memory. Businessman cannot remember all the transactions what he might have observed during the daily operations.

(b) To Ascertain Profit or Loss: Accounting helps in ascertaining the net profit earned or loss suffered on account of carrying the business. This information is available from the profit and loss statement. Profit is calculated by deducting expenses from the revenues. Profit is a measure of performance of the business.    

(c) To Ascertain the Financial Position of the Business: This objective is served by the Balance Sheet. A Balance Sheet depicts the financial position of a business. The Balance Sheet is a statement of assets and liabilities of the business on a particular date. Balance Sheet serves as a barometer to ascertaining the financial position of the business.   

Question 2. 
Explain the factors which necessitated systematic accounting.
Answer: 
Factors that necessitated systematic accounting:
(a) Recording of Transactions of Financial Character: In accounting, only the transactions of financial nature are recorded. Events or transactions of non-monetary nature (which cannot be measured in money terms) are not recorded in accounting books. However, now-a-days some important events of non-financial nature find place in accounting as a foot note.

(b) Recording in Monetary Terms: Transactions which can be measured in monetary terms are recorded in financial books. Events, which cannot be measured in money terms are not recorded in the accounting books e.g. efficiency or inefficiency of the management is not recorded in accounting books because it cannot be measured in money terms.

(c) Art of Recording: Without recording the transactions, accounting is not possible because recording of business transactions in a systematic manner help in ascertaining the financial position of business. This recording starts from Journal to Final Accounts in a systematic manner.

(d) Art of Classifying: Classification also plays an important role because classification is a grouping of transaction. This is possible by opening a particular accounts through “ledger”. Ledger A/c’s are opened by passing Journal entries.

(e) Art of Summarising: Summarising means present the data in a systematic manner which is understandable and useful for management.

(f) Helps in Analysis and Interpretation of Results: Through analysis and interpretation, management can judge the performance of business operations and preparation of future plans:

Question 3.
Describe the informational needs of external users.
Answer:
Information need of accounting for external users will be cleared with the help of following:

1. To the Creditors: Creditors are the persons who sell the goods to the business on credit. They need accounting information to determine whether the amount owing to them will be paid when due. They can ascertain it by a study of the Balance Sheet.

2. To the Investors: Investors need accounting information about the profitability and financial position of the business. On the basis of such information they judge the safety for their investment in the business and decide whether they should buy, hold or sell the shares.

3. To the Government: The government is interested in the financial statements of a business on account of assessment of income tax, goods and services tax, excise duty, etc.

4. To the Employees: Employees need information about the profits of a business to assess the ability of the business to pay higher wages and bonus.

5. To the Banks: Before providing a loan to a business, banks want to judge the profit earning capacity and the financial soundness of the business. Such information is only provided by the accounting.

Question 4.
What do you mean by an asset and what are different types of assets?
Answer:
Assets: Assets are valuable resources owned by business which are measurable in money terms. These are economic resources owned by proprietors for benefit in future.

Current assets: These are the assets which are held by the business with the purpose of converting them into cash within one year. For example: goods are purchased with the purpose to resell and earn profit, prepaid expenses, cash,stock, debtors etc. 

Non-Current Assets: The assets held by business not to resell for earning capacity. These are held for long term point of view.  
For Example: Long term loan and advances to outsiders, fixed assets. 

Fixed Asset Further Classified into-
(i) Tangible Assets: These are the assets which can be touched and seen and has physical existence. 
Example: Land and fluilding, Machinery etc.

(ii) lntingible Assets: These are the assets which cannot be touched and seen and don’t have physical existence.
Example: Goodwill, Trademark, Patents etc.

(iii) Fictitious Assets: Fictitious assets are those which are neither tangible nor intangible. They are losses not written off in the year in which these are incurred.
For Example: Deferred Revenue Expenditure, expenditure incurred on training of employees etc.

Question 5.
Explain the meaning of gain and profit. Distinguish between these two terms. 
Answer:
Profit is the excess of income over expenditure. The profit increase the investment of the owners. Example: Goods costing ₹ 2,00,000 are sold for ₹ 2,50,000. The sale amount of ₹ 2,50,000 cost of goods purchased is expenses and surplus amount ₹ 50,000 is the profit.

Gain is the profit that arises from events or transactions which are incidental to business such as sale of fixed assets, winning a court case, appreciation in the value of an asset.

Example: A building costing for ₹ 6,00,000 and sold for ₹ 8,00,000, here ₹ 2,00,000 is the gain on building.
The only difference between gain and profit is that, profit is the excess of revenue over expenditure. But gain is appreciation in the value of asset.

Question 6.
Explain the qualitative characteristics of accounting information.
Answer:
(i) Understandability: Main qualitative essential of accounting information in financial statement must be understandable by users. Understandability means decision makers must Interpret accounting information in the same sense as it is prepared & conveyed to them.

(ii) Comparability: Comparability means users can be able to compare the financial reports over different time period. To be comparable. accounting reports must belong to a common period and use common unit of measurement and format of reporting for the comparison.

(iii) Reliability: Reliability means the users must be able to depend on the information. Reliability is to be measured by the degree of correspondence between what the information conveys about the transactions or events that have occurred and displayed.

(iv) Reliability: Relevance means information must be available according to time predictions and feedback must be possible.

Question 7.
Describe the role of accounting in the modem world.
Answer:
Role of accounting in the modem world depends upon the users and it will be clear with the help of the following:

1. To the Owners: Owners want to know about the profitability and financial soundness of the business. They also want to know whether the profits are increasing or decreasing, reasons there of, the value of fixed assets and floating assets of the business etc. All such information is provided by accounting.

2. To the Management: In addition to the information about the profitability and financial soundness of the business, management needs a lot of other information for the efficient running of the business such as increase or decrease in sales, speed of increase in the cost of production, etc. All such information are provided by the accounting which helps the management in planning, decision making and controlling the business.

3. To the Creditors: Creditors are the persons who sell the goods to the business on credit. They need accounting information to determine whether the amount owing to them will be paid when due. They can ascertain it by studying the Balance Sheet.

4. To the Investors: Investors need accounting information about the profitability and financial position of the business. On the basis of such information they judge the safety for their investment in the business and decide whether they should buy, hold or sell the shares. 

5. To the Government: The government is interested in the financial statements of a business on account of assessment of income tax, goods and services tax, excise duty etc.

6. To the Employees: Employees need information about the profits of a business to assess the ability of the business to pay higher wages and bonus.

7. To the Banks: Before providing a loan to a business, banks want to judge the profit earning capacity and the financial soundness of the business. Such information is provided by the accounting alone.