Introduction to Accounting Class 11: Notes, Basic Terms and Solved Questions

What Introduction to Accounting is about

Weightage: This chapter is part of Unit 1, Theoretical Framework (Part A: Financial Accounting-I), which carries 12 of the 80 theory marks in the school annual exam together with Theory Base of Accounting.Source: CBSE Accountancy (055) syllabus 2026-27, Class XI course structure, Unit 1 Theoretical Framework

Key concepts

Meaning of accounting and the accounting process

NCERT section 1.1

Accounting is the process of identifying money events (transactions) of a business, measuring them in money, recording them in a systematic way, classifying and summarising them, and communicating the results to people who need them for decisions.

Each word matters:

• Economic events: only events that can be expressed in money are recorded. A manager's resignation is important but has no money value at that moment, so it is not recorded.
• Identification: deciding which events are business transactions of *this* entity.
• Measurement: putting a money value on them, in rupees.
• Recording: entering them in the books in date order (the journal), then sorting them into accounts (the ledger).
• Communication: reports such as the Trading and Profit and Loss Account and the Balance Sheet, given to users in time.

Book-keeping is only the recording part (journal and ledger). Accounting is wider: it also summarises, analyses and interprets.

Worked example

Which of these will be recorded in the books of Meher Traders? (i) Goods worth ₹25,000 sold on credit; (ii) the owner's son gets admission to a college; (iii) a skilled sales manager joins the firm; (iv) salary of ₹18,000 paid to the sales manager.

Try it first, then show the solutionSolution

1. Ask: is it a business event of this entity, and can it be measured in money?
2. (i) yes: a credit sale of ₹25,000; (ii) no: a personal event of the owner's family; (iii) no: joining has no money value yet; (iv) yes: an expense of ₹18,000

Answer: (i) and (iv) are recorded; (ii) and (iii) are not.

Accounting as a source of information; types of accounting information and branches

NCERT section 1.2

Accounting is an information system: inputs are transactions, processing is recording, classifying and summarising, and outputs are reports for users. The accountant must make sure the output is relevant, adequate and reliable.

Types of accounting information (by what it is about):

• information about profit or loss (from the Profit and Loss Account),
• information about the financial position, that is assets, liabilities and capital (from the Balance Sheet),
• information about cash flows and other management data (cost of a product, budgets, forecasts).

Because different users need different information, three branches grew out of accounting:

Branch	Purpose	Looks at
Financial accounting	Record transactions, find profit or loss, show the financial position	Past period; all stakeholders
Cost accounting	Find the cost of each product or service, help fix prices and control costs	Costs, mainly for management
Management accounting	Give managers information for planning, control and decisions	Past and future; internal users only

Newer areas such as human resource accounting and social accounting have also grown.

Worked example

A factory owner wants to know the cost of making one cricket bat so that he can fix its selling price. Which branch of accounting will help him?

Try it first, then show the solutionSolution

1. The question is about the cost of a product and price fixing
2. That is the purpose of cost accounting

Answer: Cost accounting.

Users of accounting information and their needs

NCERT section 1.1 and 1.3

Users are of two kinds.

Internal users work inside the business: owners who run it, managers at every level, and employees in decision roles. They need detailed, timely information on costs, sales, profit by product and cash, for planning, controlling and decision-making.

External users are outside and depend on the published statements:

User	What they want to know
Investors and potential investors	Risk and return; is the business profitable and safe?
Lenders and banks	Can it repay the loan and pay interest on time?
Suppliers and creditors	Will they be paid on time; will the firm survive?
Customers	Will supply, spare parts and after-sales service continue?
Employees and unions	Is the business stable and profitable enough for wages, bonus and job security?
Government and regulators	Taxes due, compliance with laws, use of resources
Social and environmental groups	Effect of the business on society and the environment
Competitors	Relative strength, for comparison and benchmarking

Employees are internal users when they take decisions inside the firm; employee unions asking about bonus are external users.

Worked example

Which user group would be most interested in (a) whether the firm can pay interest on a 5-year loan; (b) the tax liability of the firm?

Try it first, then show the solutionSolution

1. (a) Interest and repayment worry lenders and financial institutions
2. (b) Tax liability concerns the government and tax authorities

Answer: (a) Lenders and financial institutions; (b) the government and tax authorities.

Qualitative characteristics of accounting information

NCERT section 1.2.1

These are the qualities that make accounting information useful for decisions. There are four.

1. Reliability: users can depend on it. It is free from error and bias, verifiable (another person using the same method gets the same figure), faithful (it shows what actually happened) and neutral (not tilted to suit one group).
2. Relevance: it can change a decision. It is timely (available before the decision is taken), helps in prediction of future results, and gives feedback that confirms or corrects past expectations.
3. Understandability: the user reads it in the same sense in which the accountant meant it. Clear headings, proper grouping and plain language help.
4. Comparability: users can compare the figures of one period with another and of one firm with another. This needs the same period length, the same unit of money and the same methods and formats each year.

A useful memory line: reliable and relevant information, presented understandably and comparably.

Worked example

A firm values its closing stock at cost in one year and at market price in the next, without saying so. Which qualitative characteristic is hurt most?

Try it first, then show the solutionSolution

1. The two years now use different methods
2. Users cannot compare profit of the two years fairly

Answer: Comparability (and, because the change is hidden, reliability too).

Objectives, advantages and limitations of accounting

NCERT section 1.3

Objectives (why accounting is done):
1. Maintain a systematic record of all business transactions, since no one can remember them.
2. Find the profit or loss of a period: profit = revenue − expenses.
3. Show the financial position (assets and liabilities) at the end of the period through the Balance Sheet.
4. Provide information to users in reports, statements and charts.

Advantages: complete and permanent records; profit and position known; helps management plan and control; comparison between years and firms; accepted as evidence in courts and by tax authorities; helps in raising loans; helps value a business when it is sold.

Limitations (do not ignore these in long answers):

• It records only money-measurable events; skill of staff, quality of management or a strike threat are left out.
• It is historical: figures are at past cost and ignore price changes (inflation).
• It contains estimates and personal judgement (depreciation, doubtful debts), so it is not always exact.
• Different methods for the same item (stock, depreciation) can give different profits.
• It can be manipulated (window dressing) to show a better picture.

Worked example

A building bought for ₹20,00,000 in 2010 is still shown at that cost though its market value is now ₹85,00,000. Which limitation of accounting does this show?

Try it first, then show the solutionSolution

1. Assets are recorded at historical cost
2. Price changes after purchase are not recorded

Answer: Accounting is based on historical cost and ignores changes in price level.

Role of accounting in business

NCERT section 1.4

Accounting is a means to an end, not the end itself. Its roles:

• Language of business: owners, managers and outsiders talk about a business in terms of sales, profit, assets and debts, all of which come from accounting.
• Historical record: a dated, permanent record of what happened, useful as evidence.
• Current economic reality: the Balance Sheet shows what the business owns and owes now.
• Information system: it collects data, processes it and sends useful information to many users.
• Service to users: it supports decisions of investors, lenders, managers and the government.

Over time the role has grown from simple book-keeping to decision support: budgets, cost control, tax planning and performance measurement all depend on accounting data.

Worked example

Why is accounting called the "language of business"? Answer in two points.

Try it first, then show the solutionSolution

1. Results of a business are communicated in accounting terms such as profit, sales, assets and liabilities
2. Users inside and outside the business understand and act on these terms

Answer: Because it is the common medium through which the results and position of a business are communicated to everyone who deals with it.

Basic terms I: entity, transaction, capital, drawings, assets and liabilities

NCERT section 1.5

• Entity (business entity): a business with its own identity, separate from its owner, for which the books are kept.
• Business transaction: an event involving money or money's worth between two or more parties, such as buying goods or paying rent. It is a cash transaction if paid at once and a credit transaction if payment is postponed.
• Capital: the amount (cash or assets) the owner invests in the business. For the business it is a claim of the owner, so it appears on the liabilities side of the Balance Sheet. Profit increases it; drawings and loss reduce it.
• Drawings: cash or goods taken out by the owner for personal use. Drawings reduce capital.
• Assets: resources owned by the business that have money value and give future benefit.
• Non-current assets: held for long-term use, not for resale (land, building, machinery, furniture, long-term investments, goodwill, patents).
• Current assets: cash or items expected to turn into cash or be used up within 12 months or the operating cycle (stock, debtors, bills receivable, cash, prepaid expenses).
• Liabilities: amounts the business owes to outsiders.
• Non-current liabilities: payable after 12 months (long-term loans, debentures).
• Current liabilities: payable within 12 months (creditors, bills payable, outstanding expenses, short-term loans).

Worked example

Find the capital of a business that has cash ₹60,000, stock ₹90,000, debtors ₹40,000, furniture ₹50,000, machinery ₹1,60,000, creditors ₹70,000 and a 4-year bank loan ₹1,00,000.

Try it first, then show the solutionSolution

1. Total assets = 60,000 + 90,000 + 40,000 + 50,000 + 1,60,000 = ₹4,00,000
2. Total outside liabilities = 70,000 + 1,00,000 = ₹1,70,000
3. Capital = Assets − Liabilities = 4,00,000 − 1,70,000 = ₹2,30,000

Answer: Capital = ₹2,30,000

Basic terms II: expenditure, expense, revenue, income, profit, gain and loss

NCERT section 1.5

• Expenditure: spending money (or taking on a liability) for some benefit. If the benefit lasts more than a year it is capital expenditure and becomes an asset (buying machinery, cost of installing it). If the benefit is used up within the year it is revenue expenditure and is an expense (wages, rent, repairs).
• Expense: the cost used up in earning revenue in a period: rent, salaries, depreciation, electricity.
• Revenue: amounts earned from the normal activities of the business: sales, and also commission, interest, rent or dividend received where these arise regularly.
• Income: the increase in the owner's wealth over a period; revenue minus expenses gives net income (profit). In everyday use, revenue is also called income.
• Profit: excess of revenue over related expenses of a period. It increases capital.
• Gain: a profit from an event incidental to the business, often irregular: selling an old machine above book value, winning a lawsuit.
• Loss: excess of expenses over revenue; also money or goods lost with no benefit in return (theft, fire, loss on sale of an asset).

Profit is from the main trading activity and recurs; gain is from side events and is occasional.

Worked example

A machine costing ₹30,000 is sold for ₹36,000. Is the ₹6,000 a profit or a gain? Why?

Try it first, then show the solutionSolution

1. Excess over cost = 36,000 − 30,000 = ₹6,000
2. Selling a machine is not the main business; it is incidental

Answer: ₹6,000 is a gain, because it arises from an incidental, non-trading event.

Basic terms III: purchases, sales, goods, stock, debtors, creditors, voucher and discount

NCERT section 1.5

• Goods: the items a business buys to sell (or makes and sells). Chairs are goods for a furniture dealer but an asset (furniture) for a bank.
• Purchases: goods bought for resale (or raw material for production), in cash or on credit. Buying a computer for office use is not a purchase in this sense; it is an asset.
• Sales: revenue from goods sold or services given, in cash or on credit. Sale of an old asset is not sales.
• Stock (inventory): goods lying unsold. Opening stock at the start of the period, closing stock at the end. In a factory, stock includes raw material, work-in-progress and finished goods.
• Debtors: people who owe the business money because they bought goods or services on credit. They are current assets.
• Creditors: people the business owes money to because it bought goods or services from them on credit. They are current liabilities.
• Voucher: the written proof of a transaction: cash memo, invoice, receipt, pay slip, debit or credit note.
• Trade discount: a reduction from the list (catalogue) price at the time of sale, given to a trader or for bulk buying. It is not recorded in the books; the sale is recorded at the net amount.
• Cash discount: a reduction allowed to a debtor for paying early or on time. It is recorded: as an expense (discount allowed) by the seller and an income (discount received) by the buyer.

Worked example

Goods with a list price of ₹50,000 are sold on credit at 10% trade discount and 2% cash discount if paid within 10 days. The buyer pays in 7 days. Find the invoice amount and the cash received.

Try it first, then show the solutionSolution

1. Trade discount = 10% of 50,000 = ₹5,000; invoice (sale recorded) = ₹45,000
2. Cash discount = 2% of 45,000 = ₹900 (on the invoice amount, not the list price)
3. Cash received = 45,000 − 900 = ₹44,100

Answer: Invoice ₹45,000; cash received ₹44,100 (cash discount ₹900 is recorded, trade discount is not).

Introduction to Accounting in real life

Each concept, met in an everyday situation. Read the situation, answer the question in your own words, then compare with the model answer. The one-line hook is what to remember.

Topics in this chapter

• Basic Accounting Terms: Assets, Liabilities, Capital, Drawings, Expenses and Income
• Users of Accounting Information and Their Needs

Introduction to Accounting: key facts

Profit or loss of a period

Profit = Revenue − Expenses (a negative result is a loss)

Revenue ₹6,00,000 and expenses ₹5,40,000 give profit ₹60,000.

Capital (owner's equity)

Capital = Total assets − Outside liabilities

This is the accounting equation, Assets = Liabilities + Capital, rearranged; it is studied fully in Chapter 3.

Closing capital

Closing capital = Opening capital + Additional capital + Profit − Drawings (− Loss)

Drawings always reduce capital; they are never an expense.

Trade discount

Invoice price = List price − Trade discount

Trade discount is not entered in the books.

Cash discount

Cash discount = Rate × Invoice amount (after trade discount)

Recorded as discount allowed (seller) or discount received (buyer).

Gain or loss on sale of an asset

Gain = Sale price − Book value (if negative, it is a loss)

Incidental, so it is a gain, not trading profit.

How the school exam asks Introduction to Accounting

The question patterns to expect, and the method that works for each.

Tricks to remember Introduction to Accounting

Short memory aids. Say each one aloud once, then use it on a question the same day.

• I-M-R-C for the meaning

  Identify, Measure, Record, Communicate: "I Must Record Carefully".

  Use it when: Defining accounting in one sentence.

• RRUC for qualitative characteristics

  "Real Rupees Unlock Credit": Reliability, Relevance, Understandability, Comparability.

  Use it when: Listing the four characteristics.

• Profit vs gain

  Profit is from the Product you deal in; Gain is from a Garage sale of old assets.

  Use it when: Profit or gain classification.

• Trade discount stays outside

  Trade discount stays at the Trader's counter; Cash discount Comes into the books.

  Use it when: Deciding which discount is recorded.

Introduction to Accounting: exam-level solved questions

Ordered from exam level to HOTS. Cover the solution, write your own, then compare step by step.

Case-study practice (Section E style)

Read the situation, then answer every part. In a school exam set on the board pattern this is a 4-mark question split into 1 + 1 + 2 marks.

Where the marks are

How a typical answer is split into step marks. Show every step: a right final answer alone rarely earns full marks.

Where students lose marks in Introduction to Accounting

The slips examiners see most often, and what to write instead.

• ✗Mistake: Treating drawings as an expense

  Money goes out of the business, so it feels like an expense.

  Wrong working

  Net profit = Revenue − Expenses − Drawings

  Right working

  Net profit = Revenue − Expenses; Closing capital = Opening capital + Profit − Drawings

  ✓Do this: Drawings are a withdrawal by the owner; they reduce capital, never profit.

  Usually costs: 1-2 marks in a capital calculation.

• ✗Mistake: Calculating cash discount on the list price

  Both discounts are given as percentages of "the price".

  Wrong working

  Cash discount = 2% of ₹50,000 (list price) = ₹1,000

  Right working

  Cash discount = 2% of ₹45,000 (after 10% trade discount) = ₹900

  ✓Do this: Take trade discount first; cash discount is on the amount actually due.

  Usually costs: 1 mark.

• ✗Mistake: Calling every computer or table "goods" or "purchases"

  The word purchase is used for any buying in daily life.

  Wrong working

  A grocer buys a computer for ₹45,000: Purchases ₹45,000

  Right working

  Computer ₹45,000 is a non-current asset; only items bought for resale are purchases

  ✓Do this: Ask whether the item is bought to sell (goods) or to use (asset).

  Usually costs: 1 mark per item in classification questions.

• ✗Mistake: Mixing up profit and gain

  Both increase capital.

  ✓Do this: Profit comes from the main, regular activity; gain comes from an incidental event such as selling an old asset.

  Usually costs: 1 mark in a 3-mark distinction.

• ✗Mistake: Listing qualitative characteristics without explaining them

  Students write only the four names.

  ✓Do this: For each characteristic, give its meaning and one part (e.g. timeliness for relevance) or an example.

  Usually costs: Up to half the marks of a 4- or 6-mark answer.

• ✗Mistake: Calling employees' unions internal users

  Employees can be internal users.

  ✓Do this: Managers and employees who take decisions inside the firm are internal; unions and employee groups looking at pay and stability are listed with external users.

  Usually costs: 1 mark in an MCQ.

NCERT exercise guide: Introduction to Accounting

What each exercise in the NCERT chapter tests, how to approach it, and a question of the same kind solved step by step. Questions here are written in our own words.

Practice questions on Introduction to Accounting

Write each answer on paper first. Open the hint only if you are stuck, and the answer only when you have finished.

1. Q1 · 1 mark · MCQExam level

   Accounting records only those events that:
   (a) are important to the owner
   (b) can be measured in money
   (c) happen in cash
   (d) are approved by the manager

   Hint

   Think of the word "economic" in the definition.

   Answer

   (b) can be measured in money

2. Q2 · 1 mark · MCQExam level

   Which of the following is an internal user of accounting information?
   (a) Banker
   (b) Tax authority
   (c) Production manager
   (d) Supplier

   Hint

   Who works inside the business?

   Answer

   (c) Production manager

3. Q3 · 1 mark · Very short answerExam level

   Fill in the blank: Goods taken by the owner for personal use are called ________.

   Hint

   They reduce capital.

   Answer

   Drawings

4. Q4 · 3 marks · Short answerExam level

   Distinguish between debtors and creditors on two bases.

   Hint

   Who owes whom, and where it is shown.

   Answer

   Meaning: debtors owe the business for credit sales; creditors are owed by the business for credit purchases. Balance Sheet: debtors are current assets; creditors are current liabilities. Origin: debtors arise from credit sales; creditors from credit purchases.

5. Q5 · 3 marks · Short answerHarder exam level

   Suppose a trader's assets are ₹7,40,000 and his capital is ₹5,10,000. Find his outside liabilities. If he now pays a creditor ₹30,000 in cash, what are the new assets, liabilities and capital?

   Hint

   Liabilities = Assets − Capital; payment reduces both sides.

   Answer

   Liabilities = 7,40,000 − 5,10,000 = ₹2,30,000. After payment: assets ₹7,10,000, liabilities ₹2,00,000, capital unchanged at ₹5,10,000.

6. Q6 · 3 marks · Short answerHarder exam level

   Suppose goods of list price ₹1,20,000 are sold at 10% trade discount, and the customer later gets 2% cash discount for early payment. Find (a) the amount recorded as sales, (b) the cash received, (c) the discount recorded by the seller.

   Hint

   Cash discount is on the amount after trade discount.

   Answer

   (a) Sales ₹1,08,000; (b) cash ₹1,05,840 (1,08,000 − 2,160); (c) discount allowed ₹2,160.

7. Q7 · 4 marks · Long answerHarder exam level

   Explain any four limitations of accounting.

   Hint

   Money measurement, history, estimates, methods.

   Answer

   (1) Only money-measurable facts are recorded, so quality of staff or management is ignored. (2) It is based on historical cost and ignores price-level changes. (3) It uses estimates such as depreciation, so results are not exact. (4) Different permitted methods (e.g. of stock or depreciation) give different profits; figures can also be window-dressed.

8. Q8 · 4 marks · Short answerHarder exam level

   State whether each is profit, gain or loss, with a reason: (i) excess of sales over cost of goods sold; (ii) compensation of ₹40,000 won in a court case; (iii) machinery of book value ₹60,000 sold for ₹52,000; (iv) appreciation in the market value of land when it is sold.

   Hint

   Main activity or incidental?

   Answer

   (i) Profit: from the main trading activity. (ii) Gain: incidental event. (iii) Loss of ₹8,000 on sale of an asset. (iv) Gain: incidental, from sale of a fixed asset.

9. Q9 · 6 marks · Long answerHarder exam level

   Explain the four qualitative characteristics of accounting information with one example each.

   Hint

   R, R, U, C.

   Answer

   Reliability: free from error and bias, verifiable (e.g. sales backed by invoices). Relevance: timely and helps prediction and feedback (e.g. monthly sales report before the pricing meeting). Understandability: readable in the sense meant (e.g. clear headings and grouping). Comparability: same methods and period so years and firms can be compared (e.g. stock valued by the same method each year).

10. Q10 · 3 marks · Short answerHarder exam level

    Suppose Asha's capital on 31st March 2026 is ₹4,60,000. During the year she withdrew ₹8,000 a month and introduced ₹40,000 more capital; the profit for the year was ₹1,10,000. Find her capital on 1st April 2025.

    Hint

    Work backwards from the closing capital.

    Answer

    Drawings = 8,000 × 12 = ₹96,000. Opening = 4,60,000 + 96,000 − 40,000 − 1,10,000 = ₹4,06,000.

11. Q11 · 4 marks · Long answerHarder exam level

    Describe the information needs of any four external users of accounting information.

    Hint

    For each user: what decision do they take?

    Answer

    Investors: profitability and risk to decide whether to invest. Lenders: ability to pay interest and repay. Suppliers: whether dues will be paid on time and the firm will survive. Government: tax payable and compliance with laws. (Also customers, employees and unions, social groups, competitors.)

12. Q12 · 6 marks · Long answerHOTS / competency

    Suppose a shoe shop owner says, "My accounts show a big profit, so my business must be well run." Using the limitations and qualitative characteristics of accounting, give three reasons why this conclusion may be wrong.

    Hint

    What does profit not tell you?

    Answer

    (1) Accounting ignores non-money facts such as customer complaints or poor staff morale that may hurt future profit. (2) Profit depends on estimates and chosen methods (stock valuation, depreciation); a change of method can raise profit without better management. (3) Historical cost may understate the real value of assets used, so return on them looks better than it is. Also, profit alone is not comparable unless set against earlier years and similar shops.

Test your recall

Answer in your head or on paper first, then open the card. Pulling an answer out of memory makes it stick far better than re-reading.

1. 1.Define accounting in one line.Show answer

   Identifying, measuring, recording and communicating the financial information of a business to users.

2. 2.Name the three branches of accounting.Show answer

   Financial, cost and management accounting.

3. 3.Name the four qualitative characteristics.Show answer

   Reliability, relevance, understandability and comparability.

4. 4.Is capital a liability for the business?Show answer

   Yes, it is the owner's claim and is shown on the liabilities side of the Balance Sheet.

5. 5.Which discount is not recorded in the books?Show answer

   Trade discount.

6. 6.Give two examples of current liabilities.Show answer

   Creditors and bills payable (also outstanding expenses, bank overdraft).

7. 7.What is a voucher?Show answer

   Written evidence of a transaction, such as a cash memo, invoice or receipt.

8. 8.Give one limitation of accounting.Show answer

   It records only money-measurable events (also: historical cost, estimates).

9. 9.Who are external users? Name four.Show answer

   Investors, lenders, suppliers, customers (also government, unions, competitors).

Quick revision checklist

The night before the exam: can you do each of these without looking?

• ☐Can you define accounting using identify, measure, record and communicate?
• ☐Can you say how book-keeping differs from accounting?
• ☐Can you name the needs of investors, lenders, suppliers, customers and government?
• ☐Can you explain the four qualitative characteristics with an example each?
• ☐Can you list four objectives and four limitations of accounting?
• ☐Can you classify an item as current or non-current asset or liability?
• ☐Can you separate capital and revenue expenditure with reasons?
• ☐Can you tell profit from gain, and expense from drawings?
• ☐Can you compute trade and cash discount in the right order?
• ☐Can you find closing capital from opening capital, profit and drawings?

Introduction to Accounting: frequently asked questions