Introduction to Accounting: ISC Class 11 Accounts Notes and Terms

What Introduction to Accounting is about

Weightage: Introduction to Accounting belongs to the unit Introduction to Accounting, which CISCE weights at 2 of the 80 marks in the ISC Class XI Accountancy Paper I (Theory). Class XI is examined by the school, so your school sets the paper within this weightage.Source: CISCE ISC Accountancy syllabus, examination year 2028, Class XI unit weightage

Key concepts

Brief history and meaning of accounting

Record keeping is as old as trade. Traders in ancient Mesopotamia kept clay-tablet records; in India, Kautilya's Arthashastra describes how royal accounts and revenue should be kept; and Indian merchants have long kept bahi-khata books in a double-sided form.

The modern double entry system was first described in print by the Italian mathematician Luca Pacioli in 1494, in *Summa de Arithmetica*. With the Industrial Revolution, joint stock companies and income tax, accounting grew into a profession with standards and audits; today most records are kept on computers.

Accounting is the process of:

1. Identifying transactions that are financial in nature;
2. Measuring them in money;
3. Recording them in the books (journal and subsidiary books);
4. Classifying them into accounts (ledger);
5. Summarising them (trial balance and final accounts);
6. Analysing and interpreting the results; and
7. Communicating them to users.

The well-known AICPA definition (1941) says the same in short: accounting is the art of recording, classifying and summarising money transactions of a financial character in a meaningful way, and interpreting the results. Quote its key words (art, recording, classifying, summarising, interpreting) when asked for a definition.

Worked example

Suppose a student writes: "Accounting means writing transactions in a book." Explain why this is incomplete and list the steps it leaves out. [2 marks]

Try it first, then show the solutionSolution

1. Writing transactions in a book is only the recording step, which is book-keeping.
2. Accounting also identifies financial transactions, measures them in money, classifies them in the ledger, summarises them in a trial balance and final accounts, analyses and interprets them, and communicates the results to users.

Answer: Incomplete: recording is only one step. It leaves out identifying, measuring, classifying, summarising, analysing and interpreting, and communicating.

Event, transaction, voucher, capital and drawings

• Event: any happening that results from a transaction or causes a change, for example a rise in the market price of stock. Not every event is recorded.
• Transaction: an exchange of goods, services or money between two parties that can be measured in money and changes the financial position. Transactions may be cash (paid at once) or credit (paid later). Every transaction is an event, but not every event is a transaction.
• Voucher: the written documentary evidence of a transaction: a cash memo, invoice, receipt, pay-in slip or debit note. Entries are made only on the basis of vouchers, which also help the auditor.
• Capital: the money or assets the owner brings into the business. For the business it is a liability to the owner (an internal liability). Capital = Assets − Outside liabilities.
• Drawings: cash or goods taken out of the business by the owner for personal use. Drawings reduce capital; they are never an expense.

Worked example

Suppose Mira, owner of Mira Stationers, (a) signs a contract to buy a printer next month, (b) buys stationery on credit for ₹18,000, (c) takes ₹4,000 from the till to pay her son's school fees. Which are transactions, and how is (c) treated? [2 marks]

Try it first, then show the solutionSolution

1. (a) Signing a contract is an event; no goods or money change hands yet, so it is not recorded.
2. (b) Credit purchase: goods are received and a liability arises, measurable in money, so it is a transaction.
3. (c) Cash leaves the business for a personal purpose: a transaction recorded as drawings, which reduces Mira's capital.

Answer: (b) and (c) are transactions; (a) is only an event. (c) is drawings of ₹4,000, deducted from capital, not an expense.

Assets: tangible, intangible, fixed, current, liquid, wasting and fictitious

Assets are resources owned or controlled by the business that will give future economic benefit.

Type	Meaning	Examples
Tangible	Have physical form; can be seen and touched	Land, building, machinery, furniture, stock
Intangible	No physical form but have value	Goodwill, patents, trademarks, copyrights, software licences
Fixed (non-current)	Held for long-term use in the business, not for sale	Building, plant, vehicles
Current	Held for a short time; turned into cash within a year	Cash, bank, debtors, bills receivable, stock, prepaid expenses
Liquid	Cash or convertible into cash almost at once	Cash, bank, debtors, bills receivable, marketable securities
Wasting	Value is used up as the asset is exploited	Mines, quarries, oil wells, timber tracts
Fictitious	Not real assets: expenses or losses not yet written off	Preliminary expenses, debit balance of profit and loss, heavy advertisement written off over years

Liquid assets = Current assets − Stock − Prepaid expenses. Stock is excluded because it must first be sold; prepaid expenses can never be turned into cash.

Worked example

Suppose a business has cash ₹25,000, bank ₹60,000, debtors ₹90,000, bills receivable ₹15,000, stock ₹1,40,000 and prepaid insurance ₹6,000. Find its current assets and liquid assets. [2 marks]

Try it first, then show the solutionSolution

1. Current assets = 25,000 + 60,000 + 90,000 + 15,000 + 1,40,000 + 6,000 = ₹3,36,000.
2. Liquid assets = Current assets − Stock − Prepaid expenses = 3,36,000 − 1,40,000 − 6,000 = ₹1,90,000.

Answer: Current assets ₹3,36,000; liquid assets ₹1,90,000.

Liabilities: internal and external; current, long-term and contingent

Liabilities are the amounts the business owes.

• Internal liability: owed to the owner: capital and the owner's share of profits (reserves).
• External (outside) liabilities: owed to outsiders. They are:
• Current: payable within one year: creditors, bills payable, bank overdraft, outstanding expenses.
• Long-term (non-current): payable after more than one year: a 5-year bank loan, debentures.
• Contingent liability: a possible liability that depends on a future event that may or may not happen: a guarantee given for another person's loan, a bill discounted with the bank that may be dishonoured, a claim being contested in court. It is not added to liabilities; it is shown as a footnote to the balance sheet.

Trade creditors are suppliers to whom money is owed for goods bought on credit; trade debtors are customers who owe money for goods sold on credit. Creditors are a current liability; debtors are a current asset.

Worked example

Suppose a business has: capital ₹5,00,000; creditors ₹80,000; a bank loan repayable in 5 years ₹3,00,000; outstanding wages ₹12,000; and it has guaranteed a supplier's bank loan of ₹1,00,000. Classify each and find total external liabilities. [3 marks]

Try it first, then show the solutionSolution

1. Capital: internal liability. Creditors and outstanding wages: current external liabilities. Bank loan: long-term external liability.
2. The guarantee is a contingent liability: it will arise only if the supplier defaults, so it is shown as a footnote and not added.
3. External liabilities = 80,000 + 3,00,000 + 12,000 = ₹3,92,000.

Answer: External liabilities ₹3,92,000 (current ₹92,000; long-term ₹3,00,000); capital ₹5,00,000 is internal; the ₹1,00,000 guarantee is contingent (footnote only).

Purchases, sales, goods and stock

• Goods: the items the business buys to resell or uses in making products for sale. A furniture dealer's goods are tables; a stationer's are pens. A table bought by a stationer for its office is an asset (furniture), not goods.
• Purchases: goods bought for resale or for production, in cash or on credit. Buying an asset for use (a computer for the office) is not a purchase in this sense.
• Sales: goods sold in the ordinary course of business, in cash or on credit. Selling an old machine is not sales; it is sale of an asset.
• Purchases return (return outward) and sales return (return inward) reduce purchases and sales.
• Stock (inventory): goods lying unsold on a date. In a manufacturing firm stock is of three kinds:
• Raw material: inputs not yet used (timber for a furniture maker);
• Work in progress: partly finished goods (chairs not yet polished);
• Finished goods: ready for sale.

Closing stock of one year becomes the opening stock of the next.

Worked example

Suppose a furniture maker holds timber ₹1,20,000, half-made chairs ₹45,000 and finished tables ₹2,10,000 on 31st March. It also bought an office computer for ₹55,000 during the year. Classify the stock, find total stock and say whether the computer is a purchase. [3 marks]

Try it first, then show the solutionSolution

1. Timber is raw material ₹1,20,000; half-made chairs are work in progress ₹45,000; finished tables are finished goods ₹2,10,000.
2. Total stock = 1,20,000 + 45,000 + 2,10,000 = ₹3,75,000.
3. The computer is bought for use, not for sale, so it is a fixed asset (computer account), not purchases.

Answer: Stock ₹3,75,000 (raw material ₹1,20,000; WIP ₹45,000; finished goods ₹2,10,000). The computer is a fixed asset, not a purchase of goods.

Revenue, income, expense, profit, gain and loss

• Revenue: amounts earned from the main activity of the business: sales of goods or fees for services. Rent received by a property company is its revenue.
• Income: a wider term: revenue plus other earnings such as interest and dividends received. Net income = Revenue − Expenses.
• Expense: cost incurred to earn revenue in the current period: rent, salaries, wages, carriage, depreciation.
• Expenditure: spending of money or creating a liability; if its benefit lasts beyond the year it is capital expenditure (an asset), otherwise revenue expenditure (an expense).
• Profit: excess of revenue over expenses of a period. Gross profit = Sales − Cost of goods sold; net profit = Gross profit + other incomes − indirect expenses.
• Gain: profit from an incidental or non-recurring event, such as selling a fixed asset above its book value.
• Loss: excess of expenses over revenue, or money lost without any benefit: stock destroyed by fire, theft by an employee.

Worked example

Suppose Tara Traders, a garment dealer, had sales ₹8,40,000, cost of goods sold ₹5,10,000, operating expenses ₹1,95,000 and sold an old delivery van for ₹15,000 more than its book value. Find gross profit and net profit, and classify the van item. [3 marks]

Try it first, then show the solutionSolution

1. Gross profit = Sales − Cost of goods sold = 8,40,000 − 5,10,000 = ₹3,30,000.
2. The van surplus is a gain: it comes from an incidental event, not from selling garments.
3. Net profit = 3,30,000 − 1,95,000 + 15,000 = ₹1,50,000.

Answer: Gross profit ₹3,30,000; net profit ₹1,50,000; the ₹15,000 is a gain (not revenue).

Book-keeping, accounting and accountancy; the accounting cycle

Basis	Book-keeping	Accounting	Accountancy
Scope	Recording and classifying transactions	Book-keeping plus summarising, analysing, interpreting and communicating	The whole body of knowledge (principles, rules, practice)
Stage	First stage	Begins where book-keeping ends	Covers both
Done by	Book-keeper (junior staff)	Accountant	Body of knowledge, not a person
Analysis	No analytical skill needed	Needs judgement and analysis	Theory behind both

The accounting cycle is the sequence repeated every accounting period:

1. Identify the transaction (with its voucher);
2. Record it in the journal or subsidiary books;
3. Post it to the ledger;
4. Prepare the trial balance;
5. Pass adjusting entries;
6. Prepare the final accounts (Trading and Profit and Loss Account, Balance Sheet);
7. Pass closing entries and carry balances forward to the next period.

Worked example

Suppose a trainee at Jaya Electricals has posted all journal entries to the ledger. Name, in order, the next three steps of the accounting cycle. [1 mark]

Try it first, then show the solutionSolution

1. After ledger posting comes the trial balance, then the adjusting entries, then the final accounts.

Answer: Trial balance → adjusting entries → final accounts (then closing entries).

Stakeholders and the specialised fields of accounting

Internal users run the business: owners (profit and safety of capital), management (planning, control, decisions) and employees (wages, bonus and job security).

External users: creditors and suppliers (can the firm pay?), banks and lenders (repayment and interest), investors (return and growth), government and tax authorities (tax, statistics, regulation), customers (continuity of supply), researchers and the public (employment, environment).

Specialised fields (brief):

• Financial accounting: records transactions and prepares the profit and loss account and balance sheet, mainly for external users, about the past period.
• Cost accounting: finds and controls the cost of each product, job or process, helping fix prices and cut waste.
• Management accounting: uses financial and cost data to help managers plan, decide and control (budgets, ratios, forecasts); it looks to the future and is for internal use.

Worked example

Suppose a bank is deciding whether to lend ₹20 lakh to Orbit Plastics, while Orbit's production head wants to know why the cost of each bucket rose. Which field of accounting serves each, and what will the bank look at? [2 marks]

Try it first, then show the solutionSolution

1. The bank is an external user: it relies on financial accounting, especially the balance sheet and profit record, to judge repayment capacity.
2. The production head needs cost accounting, which finds the cost of each bucket and the reason for the rise.

Answer: Bank: financial accounting (profitability and ability to repay). Production head: cost accounting (cost per unit and its components).

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

• Assets, Liabilities and Capital: Meaning and Classification
• Transactions, Revenue, Expenses, Profit and Loss

Introduction to Accounting: key facts

Capital

Capital = Total assets − Outside (external) liabilities

The accounting equation rearranged; studied fully in Chapter 3.

Closing capital

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

Drawings always reduce capital.

Liquid assets

Liquid assets = Current assets − Stock − Prepaid expenses

Gross profit

Gross profit = Net sales − Cost of goods sold

Net profit

Net profit = Gross profit + Other incomes and gains − Indirect expenses and losses

Total stock of a manufacturer

Stock = Raw material + Work in progress + Finished goods

Introduction to Accounting: diagrams to practise

Practise each one on paper: draw it from the checklist, then tick off every label.

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.

• Accounting steps: I Must Record, Classify, Summarise, Analyse, Communicate

  "I Must Really Count Sweets And Chocolates": Identify, Measure, Record, Classify, Summarise, Analyse/interpret, Communicate.

  Use it when: Meaning and functions of accounting.

• Liquid = Cash quickly

  Strip out the two current assets that cannot become cash quickly: Stock (must be sold first) and Prepaid (never comes back as cash).

  Use it when: Liquid assets calculation.

• WFF for wasting, fictitious, fixed

  Wasting is dug out (mines), Fictitious is written off (preliminary expenses), Fixed is used (machines).

  Use it when: Telling the three asset types apart.

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 A style)

Read the situation, then answer every part. In a school exam set on the board pattern this is a 7-mark question split into 2 + 2 + 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

  Drawings are a withdrawal of the owner's capital, not a cost of earning revenue; charging them to profit understates profit and double-counts the reduction in capital.

  Wrong working

  Net profit = Gross profit − Salaries − Drawings.

  Right working

  Net profit = Gross profit − Salaries; Closing capital = Opening capital + Net profit − Drawings.

  ✓Do this: Ask: did the business use it to earn revenue? If the owner enjoyed it, it is drawings.

  Usually costs: 1-2 marks and every figure after it.

• ✗Mistake: Including stock or prepaid expenses in liquid assets

  Stock must be sold before it becomes cash, and prepaid expenses never become cash.

  ✓Do this: Write the formula Liquid assets = Current assets − Stock − Prepaid expenses before substituting.

  Usually costs: 1 mark.

• ✗Mistake: Adding a contingent liability to total liabilities

  It may never have to be paid; it is disclosed by footnote only.

  ✓Do this: Look for 'guarantee', 'bills discounted', 'claim not acknowledged': these are contingent.

  Usually costs: 1 mark.

• ✗Mistake: Calling a gain 'revenue', or a loss 'expense'

  Revenue comes from the main activity and recurs; a gain is incidental. An expense brings benefit (revenue); a loss brings none.

  ✓Do this: Test with two questions: is it the main business? Did it help earn revenue?

  Usually costs: ½-1 mark per item in classification questions.

• ✗Mistake: Writing the same three points for book-keeping and accounting

  Answers that say 'accounting is wider' without naming the extra steps (summarising, analysing, interpreting, communicating) do not show the distinction.

  ✓Do this: Use a table with named bases and contrasting entries in each row.

  Usually costs: 1-2 marks of a 4-mark distinction.

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

   Who first described the double entry system in print, and in which year?
   (a) Kautilya, 300 BC
   (b) Luca Pacioli, 1494
   (c) Adam Smith, 1776
   (d) Pacioli, 1694

   Hint

   An Italian mathematician.

   Answer

   (b) Luca Pacioli, 1494.

2. Q2 · 1 mark · Very short answerExam level

   Give one example each of a wasting asset and a fictitious asset.

   Hint

   One is dug out, the other is written off.

   Answer

   Wasting: a coal mine (or quarry, oil well). Fictitious: preliminary expenses not yet written off (or debit balance of profit and loss).

3. Q3 · 2 marks · Short answerExam level

   What is a voucher? Give two examples.

   Hint

   Evidence.

   Answer

   A voucher is the written document that proves a transaction took place and is the basis of the entry, e.g. a cash memo and a supplier's invoice (also receipts, pay-in slips, debit notes).

4. Q4 · 2 marks · Short answerHarder exam level

   Suppose a business has total assets of ₹9,40,000. Creditors are ₹1,25,000, a 3-year loan is ₹2,00,000 and outstanding rent ₹15,000. It has also guaranteed a loan of ₹50,000. Find capital.

   Hint

   Leave out the contingent item.

   Answer

   Outside liabilities = 1,25,000 + 2,00,000 + 15,000 = ₹3,40,000; capital = 9,40,000 − 3,40,000 = ₹6,00,000. The ₹50,000 guarantee is contingent and is not deducted.

5. Q5 · 2 marks · Short answerHarder exam level

   Suppose current assets are ₹2,80,000, of which stock is ₹95,000 and prepaid expenses ₹7,000. A student finds liquid assets of ₹1,85,000. Find the error and correct it.

   Hint

   Which deduction is missing?

   Answer

   The student deducted only stock (2,80,000 − 95,000). Prepaid expenses must also be deducted: liquid assets = 2,80,000 − 95,000 − 7,000 = ₹1,78,000.

6. Q6 · 3 marks · Short answerHarder exam level

   Distinguish between financial accounting and management accounting on three bases.

   Hint

   Users, time, form.

   Answer

   Users: financial accounting serves mainly outsiders; management accounting serves managers. Time: financial looks at the past period; management looks to the future (budgets, forecasts). Form: financial follows set formats and standards and is often legally required; management reports have no fixed format and are optional.

7. Q7 · 2 marks · Short answerHarder exam level

   Suppose an electronics dealer's warehouse was flooded, destroying TVs costing ₹1,20,000; the insurer paid ₹80,000. How much is the loss, and why is it not an expense?

   Hint

   What benefit did the business get?

   Answer

   Loss = 1,20,000 − 80,000 = ₹40,000. It is a loss because the business received no benefit (no revenue) in return; an expense is incurred to earn revenue.

8. Q8 · 3 marks · Short answerHOTS / competency

   Suppose a business's capital was ₹3,50,000 at the start and ₹4,10,000 at the end of the year. The owner brought in ₹40,000 more and withdrew ₹48,000. Find the profit or loss for the year.

   Hint

   Rearrange the closing-capital formula.

   Answer

   Profit = Closing capital + Drawings − Additional capital − Opening capital = 4,10,000 + 48,000 − 40,000 − 3,50,000 = ₹68,000 profit.

9. Q9 · 3 marks · Short answerHOTS / competency

   The same new car can be recorded as purchases by one business and as a fixed asset by another, and can appear in a third record as closing stock. Name the businesses (or situations) and justify.

   Hint

   Goods depend on the trade.

   Answer

   A car dealer buys cars for resale: purchases (and unsold cars are its stock). A courier firm buys a car for delivery: fixed asset. The same car dealer's unsold car at year-end is its stock (finished goods). (Any trader in cars, any user of a car, and the dealer's closing stock are accepted.)

10. Q10 · 3 marks · Short answerHarder exam level

    Suppose a manufacturer's stock on 31st March is: raw cotton ₹2,40,000; yarn on the machines ₹85,000; finished shirts ₹3,15,000; packing boxes not yet used ₹20,000. Find raw material, work in progress, finished goods and total stock.

    Hint

    Packing material not yet used is a material.

    Answer

    Raw material = 2,40,000 + 20,000 = ₹2,60,000; work in progress ₹85,000; finished goods ₹3,15,000; total ₹6,60,000.

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.Liquid assets formula?Show answer

   Current assets − Stock − Prepaid expenses.

2. 2.Is capital an internal or external liability?Show answer

   Internal: it is owed to the owner.

3. 3.Where is a contingent liability shown?Show answer

   As a footnote to the balance sheet, not in the total.

4. 4.Three kinds of stock in a factory?Show answer

   Raw material, work in progress, finished goods.

5. 5.Who described double entry in 1494?Show answer

   Luca Pacioli.

6. 6.Do drawings reduce profit?Show answer

   No. They reduce capital.

7. 7.Which field of accounting looks to the future for managers?Show answer

   Management accounting.

Quick revision checklist

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

• ☐Accounting: identify, measure, record, classify, summarise, analyse and interpret, communicate.
• ☐Every transaction is an event; not every event is a transaction.
• ☐Capital = Assets − Outside liabilities; it is an internal liability.
• ☐Liquid assets = Current assets − Stock − Prepaid expenses.
• ☐Contingent liability: footnote only.
• ☐Drawings reduce capital, never profit.
• ☐Gain = incidental; loss = no benefit; expense = cost of earning revenue.
• ☐Financial (past, outsiders), cost (per unit cost), management (future, managers).

Introduction to Accounting: frequently asked questions