Exercise Solutions Available
Step-by-step answers for all textbook questions in this chapter
How to Use This Solutions Page
This page provides complete NCERT solutions for CBSE Class 11 Accountancy Chapter 1 — Introduction to Accounting. Follow these steps for best results:
1. Read the NCERT textbook chapter first. 2. Attempt every question on your own before reading the solution. 3. Compare your answer with the solution given here. 4. If your answer is incomplete or wrong, note the keywords you missed. 5. Re-attempt the question after one day without looking at the solution.
For definition questions, the NCERT definition is given first, followed by an elaboration with examples. For distinction questions, a table format is used — this is what CBSE examiners prefer.
Key Concepts Recap
Before solving the exercise, revise these key points from the chapter:
- Accounting is the process of identifying, measuring, recording, classifying, summarising, analysing, interpreting, and communicating financial information to users for decision-making.
- Five objectives: Maintain systematic records, ascertain profit/loss, ascertain financial position, provide information to users, comply with legal requirements.
- Internal users: Owners, management, employees. External users: Investors, creditors, government, consumers, research scholars.
- Key terms: Transaction, Capital, Drawings, Assets, Liabilities, Revenue, Expense, Debtors, Creditors, Stock, Voucher, Discount (Trade and Cash), Solvent, Insolvent.
- Bookkeeping is only the recording part. Accounting is broader — includes classifying, summarising, analysing, interpreting, and communicating.
Intext Questions
Intext Question 1 (Page 1)
Q: Define accounting.
Accounting is the process of identifying, measuring, recording, classifying, summarising, analysing, interpreting, and communicating financial information to the users for decision-making.
This definition highlights that accounting is not merely record-keeping. It is a comprehensive process that starts with identifying a transaction and ends with communicating the results to stakeholders. For example, when a business sells goods worth Rs 10,000 on credit, accounting identifies this as a transaction, measures it at Rs 10,000, records it in the journal, classifies it under "Sales" and "Debtors," summarises it in the financial statements, analyses its impact on profit, interprets what it means for the business, and communicates this information to owners, creditors, and other users.
Intext Question 2
Q: Distinguish between bookkeeping and accounting.
| Basis | Bookkeeping | Accounting |
|---|---|---|
| Meaning | Recording of financial transactions only | Recording plus classifying, summarising, analysing, interpreting, and communicating |
| Scope | Narrow | Broad |
| Objective | To maintain systematic records of transactions | To ascertain profit/loss, financial position, and communicate information to users |
| Nature | Routine and clerical | Analytical and interpretive |
| Sub-fields | No sub-fields | Financial accounting, management accounting, cost accounting, tax accounting |
| Skill required | Basic arithmetic and recording skills | Analytical, interpretive, and decision-making skills |
| Who performs | Bookkeeper | Accountant (often a Chartered Accountant) |
| Relationship | It is the foundation of accounting | It begins where bookkeeping ends |
Intext Question 3
Q: State any two objectives of accounting.
1. To maintain systematic records: Accounting provides a reliable and organised record of all financial transactions, which can be retrieved when needed and also serves as legal evidence.
2. To ascertain the results of operations (profit or loss): By preparing the Trading Account and Profit & Loss Account at the end of the accounting period, accounting helps determine whether the business has earned a profit or incurred a loss.
Intext Question 4
Q: List the internal users of accounting information.
The internal users of accounting information are:
1. Owners / Proprietors: To assess profitability and decide on continuation, expansion, or closure. 2. Management: To plan, control costs, evaluate performance, and take corrective action. 3. Employees: To assess job security and demand fair wages and bonuses.
Intext Question 5
Q: List the external users of accounting information.
The external users of accounting information are:
1. Investors / Potential Investors: To evaluate profitability and growth prospects before investing. 2. Creditors / Suppliers: To assess the ability of the business to pay debts on time. 3. Banks / Financial Institutions: To evaluate creditworthiness before granting loans. 4. Government / Tax Authorities: To determine tax liability and ensure regulatory compliance. 5. Consumers: To check whether the business is earning excessive profits. 6. Research Scholars: To study financial trends and industry performance.
Chapter-End Exercise Questions
Exercise Question 1
Q: Define accounting. Give its main objectives.
Definition: Accounting is the process of identifying, measuring, recording, classifying, summarising, analysing, interpreting, and communicating financial information to the users for decision-making.
Main Objectives of Accounting:
1. To maintain systematic records: Human memory is limited. Accounting provides an organised record of all financial transactions so that information can be retrieved whenever needed. This record also serves as legal evidence in disputes.
2. To ascertain the results of operations (profit or loss): By preparing the Trading Account and Profit & Loss Account, accounting determines whether the business has earned a profit or incurred a loss during the accounting period. Revenue is matched against expenses to arrive at this result.
3. To ascertain the financial position: The Balance Sheet shows what the business owns (assets) and what it owes (liabilities) on a specific date. This helps users understand whether the business is financially sound.
4. To provide information to users for decision-making: Accounting communicates financial information to various users — owners, investors, creditors, government, employees — who use it to make economic decisions.
5. To comply with legal requirements: Various laws (Companies Act, Income Tax Act, GST laws) require businesses to maintain proper books of accounts. Accounting helps fulfil these legal obligations.
Exercise Question 2
Q: Explain the following accounting terms with examples:
(a) Transaction
Example: Purchasing goods for Rs 5,000 cash is a transaction. A change in the managing director is not a transaction because it cannot be measured in money.
(b) Capital
Example: If Mr Ram starts a business by investing Rs 2,00,000 in cash and Rs 50,000 in goods, his capital is Rs 2,50,000.
(c) Drawings
Example: If the owner takes home Rs 5,000 cash from the business for personal expenses, or withdraws goods worth Rs 2,000 for personal use, these are drawings.
(d) Liabilities
Example: If the business has taken a bank loan of Rs 1,00,000 and owes Rs 30,000 to creditors, both are liabilities.
(e) Assets
Example: Cash Rs 50,000, Stock Rs 30,000, Machinery Rs 2,00,000 — all are assets.
(f) Revenue
Example: If a firm sells goods worth Rs 1,00,000, this Rs 1,00,000 is its revenue.
(g) Expense
Example: Rent paid Rs 10,000, Salary paid Rs 20,000 — both are expenses.
(h) Income
Example: If revenue is Rs 1,00,000 and expenses are Rs 70,000, income (profit) = Rs 30,000.
(i) Debtors
Example: If Suresh buys goods worth Rs 15,000 on credit, Suresh is a debtor of the business.
(j) Creditors
Example: If the business buys goods worth Rs 20,000 on credit from Mohan, Mohan is a creditor of the business.
Exercise Question 3
Q: Distinguish between:
(a) Debtors and Creditors
| Basis | Debtors | Creditors |
|---|---|---|
| Meaning | Persons who owe money to the business | Persons to whom the business owes money |
| Nature | Current asset | Current liability |
| Arises from | Credit sales | Credit purchases |
| Also called | Accounts receivable / Trade receivables | Accounts payable / Trade payables |
| Position in Balance Sheet | Shown on the assets side | Shown on the liabilities side |
| Rule | "Debit the receiver" — debtor's account is debited at the time of sale | "Credit the giver" — creditor's account is credited at the time of purchase |
(b) Revenue and Expense
| Basis | Revenue | Expense |
|---|---|---|
| Meaning | Amount earned from normal business activities | Amount spent or cost incurred to earn revenue |
| Effect on capital | Increases owner's capital | Decreases owner's capital |
| Recorded on | Credit side of P&L Account | Debit side of P&L Account |
| Examples | Sales, fees received, commission earned | Rent, salary, wages, electricity |
(c) Trade discount and Cash discount
| Basis | Trade Discount | Cash Discount |
|---|---|---|
| When given | At the time of sale/purchase | At the time of payment |
| Purpose | To encourage bulk purchases | To encourage prompt payment |
| Recording | Not recorded in the books; deducted from list price | Recorded in the books — Discount Allowed A/c (debit), Discount Received A/c (credit) |
| Type | Reduction in price | Expense (for seller) / Income (for buyer) |
| Calculation | On list price | On net amount (after trade discount) |
Exercise Question 4
Q: Explain the role of accounting in business.
Accounting plays a vital role in business in the following ways:
1. Measures profit or loss: By preparing the Trading Account and Profit & Loss Account, accounting tells the business whether it is earning a profit or incurring a loss. This is the primary reason businesses maintain accounts.
2. Shows financial position: The Balance Sheet reveals what the business owns (assets) and what it owes (liabilities). This helps owners understand whether the business is financially sound.
3. Facilitates planning and budgeting: Accounting data from past periods helps management plan future activities, set budgets, and forecast revenues and expenses.
4. Enables cost control: By comparing actual expenses with budgeted amounts, accounting helps identify areas where costs can be reduced.
5. Builds stakeholder confidence: Reliable financial statements increase the confidence of investors, creditors, and banks, making it easier to raise funds.
6. Ensures legal compliance: Accounting helps businesses comply with the Companies Act, Income Tax Act, GST laws, and other statutory requirements.
7. Supports decision-making: Accounting information helps owners and managers make informed decisions about pricing, expansion, investment, and financing.
Exercise Question 5
Q: State the limitations of accounting.
The main limitations of accounting are:
1. Ignores qualitative factors: Accounting records only monetary transactions. It does not capture qualitative aspects like employee morale, management quality, brand reputation, or customer satisfaction, which are equally important for business success.
2. Historical in nature: Accounting records past transactions. It tells what has already happened, not what will happen. Financial statements are not predictive tools.
3. Based on estimates: Several items (depreciation rate, provision for doubtful debts, stock valuation) are based on estimates. Different estimates lead to different profit figures, reducing reliability.
4. Window dressing: Management may manipulate accounts to present a better picture — inflating sales, hiding expenses, overvaluing assets. This misleads users.
5. Does not reflect current market values: Assets are recorded at historical cost minus depreciation. Market values may be significantly different, so the Balance Sheet does not show the true current worth of the business.
6. Inadequate for non-financial performance: Modern businesses need to measure environmental, social, and governance (ESG) performance, which accounting does not capture.
Exercise Question 6
Q: Who are the users of accounting information? Classify them into internal and external users.
Users of accounting information are all those persons or groups who need financial data to make decisions. They are classified as follows:
Internal Users:
1. Owners / Proprietors: To assess profitability, evaluate return on investment, and decide on continuation or expansion. 2. Management: To plan, control costs, evaluate departmental performance, and take corrective action. 3. Employees: To assess job security, demand fair wages and bonuses, and evaluate the financial health of the employer.
External Users:
1. Investors / Potential Investors: To evaluate profitability and growth prospects before investing or divesting. 2. Creditors / Suppliers: To assess the ability of the business to pay its debts on time. 3. Banks / Financial Institutions: To evaluate creditworthiness and repayment capacity before granting loans. 4. Government / Tax Authorities: To determine tax liability and ensure compliance with laws. 5. Consumers / Customers: To check for excessive profiteering, especially in regulated industries. 6. Research Scholars: To study financial trends, industry patterns, and economic data.
Exercise Question 7
Q: Explain the branches of accounting.
The four main branches of accounting are:
1. Financial Accounting: Concerned with recording transactions and preparing financial statements (Trading A/c, P&L A/c, Balance Sheet) for external users. It follows GAAP and statutory formats. It is historical in nature.
2. Management Accounting: Provides financial information to internal users (managers). It includes budgeting, forecasting, cost-volume-profit analysis, and variance analysis. It is future-oriented and flexible. There are no statutory formats.
3. Cost Accounting: Concerned with ascertaining the cost of products, services, or activities. It helps in cost control, cost reduction, and pricing decisions. Techniques include job costing, process costing, and standard costing.
4. Tax Accounting: Deals with the computation of taxable income and tax liability under the Income Tax Act, GST laws, and other statutes. It ensures compliance and helps in tax planning.
Exercise Question 8
Q: Distinguish between solvent and insolvent.
| Basis | Solvent | Insolvent |
|---|---|---|
| Meaning | Assets are sufficient to pay all liabilities in full | Assets are not sufficient to pay all liabilities in full |
| Financial position | Financially sound | Financially distressed |
| Ability to pay | Can meet all obligations | Cannot meet obligations |
| Court declaration | No court declaration needed | A court may declare the person or business as bankrupt |
| Example | Assets = Rs 10,00,000, Liabilities = Rs 5,00,000 — solvent | Assets = Rs 3,00,000, Liabilities = Rs 5,00,000 — insolvent |
Exercise Question 9
Q: What is meant by window dressing in accounting? Why is it considered a limitation?
Window dressing refers to the manipulation of accounts by management to present a better financial picture than the actual reality. It may involve inflating sales figures, hiding or deferring expenses, overvaluing assets, undervaluing liabilities, or showing fictitious transactions.
It is considered a limitation because:
- It misleads users (investors, creditors, government) who rely on financial statements for decision-making.
- It defeats the very purpose of accounting — providing true and fair information.
- It can lead to wrong decisions — investors may invest in a weak company, creditors may extend credit to a business that cannot repay.
- It is unethical and, in many cases, illegal (fraud).
Exercise Question 10
Q: Explain the term "voucher" in accounting.
A voucher is a written document that provides evidence of a business transaction and authorises its recording in the books of accounts. It is prepared on the basis of source documents (invoices, receipts, cheques, etc.).
A voucher typically contains: voucher number, date, accounts to be debited and credited, amount in figures and words, narration, and the signature of the person preparing and authorising it.
Types of vouchers include: debit voucher (for cash payments), credit voucher (for cash receipts), transfer/journal voucher (for non-cash transactions), and compound voucher (for transactions with multiple debits or credits).
Related Guides:
- [Chapter 1 Guide — Introduction to Accounting](/school/cbse/class/11/accountancy/cbse-introduction-to-accounting)
- [All Class 11 Accountancy Solutions](/school/cbse/class/11/accountancy/solutions)
- [Class 11 Accountancy Subject Guide](/school/cbse/class/11/accountancy)