Government of Karnataka

Accountancy
Financial Accountin,g
Part I
Textbook for Class XI

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NATIONAL COUNCIL OF EDUCATIONAL RESEARCH ANO TRAINING
 THE CONSTITUTION OF
INDIA
PREAMBLE
PEOPLE OF INDIA, having
solemnly resolved to constitute India into a
1
[SOVEREIGN SOCIALIST SECULAR
DEMOCRATIC REPUBLIC] and to secure
to all its citizens :
JUSTICE, social, economic and
political;
LIBERTY of thought, expression, belief,
faith and worship;
EQUALITY of status and of opportunity;
and to promote among them all
FRATERNITY assuring the dignity of
2
the individual and the [unity and
integrity of the Nation];
IN OUR CONSTITUENT ASSEMBLY
this twenty-sixth day of November, 1949 do
HEREBY ADOPT, ENACT AND GIVE TO
OURSELVES THIS CONSTITUTION.
1. Subs. by the Constitution (Forty-second Amendment) Act, 1976, Sec.2,
for "Sovereign Democratic Republic" (w.e.f. 3.1.1977)
2. Subs. by the Constitution (Forty-second Amendment) Act, 1976, Sec.2,
for "Unity of the Nation" (w.e.f. 3.1.1977)
 FOREWORD

The • a romd Cu r cul um Fram work (, CFl. 2005, coinm � ds lha

hUdrcn'_ llf . at school musl be linked to U1 - r- Hfo oulsid- h school. Th .
prin, l11k marks a dcpa ui;e ro11 lh • k.ga y of bookish learn.in •• wbl • h
conUnu s Lo shape our system and u cs a gap b Lwe n lhe sc ool. ome
n • cornmunll.y. The Jabi and L ·_Lboo . d veloped on the basis of NCF
ignify .:lfl at n t o mpl 1 nt. hi bas·c ldca. They al o aU! mp to
disr:ourag . rub. learning a.ml Lh m� nLetta.U( • o!f ha1-p bou.ndarles b Lwce:n
cliff.". - nl subj • ·t ar • s. w� hop Lhi.:s • me.it. ures wlU take us si i11flcan:Uy
fm-Lher in the d re ·lion of a chih:1-c:en re yslem or cducaUon ouLHned 1n
lh aUon�l Po I .y n E h. cat o. ( 986).
The success of this effort depends on the steps tha school principals,
and teachers will take to encourage children to nifliect on their own
learning and to pursue imaginative activities and qut::stions. We mus .
recognise that, given space, time and freedom, child en gen ra .c new
knowledge by engaging with the information passed on to. them by adut .
Treating the prescribed textbook as the sole basis of exruntnatlon 1s one
of the key reasons why other resources and sites of learning are ignored.
Inculcating creativity and initiative is possible if we perceive and treat
children as participants in learning, not as receivers of a fixed body of
knowledge.
These aims imply considerable change in school routines and mode
of functioning. Flexibility in the daily time-table is as necessary as rigour
in implementing the annual calendar so that the required number of
teaching days are actually devoted to teaching. The methods used for
teaching and evaluation will also determine how effective this textbook
proves for making children's life at school a happy experience, rather
than a source of stress or boredom. Syllabus designers have tried to
address the problem of curricular burden by restructuring and
reorienting knowledge at different stages with greater consideration for
child psychology and the time available for teaching. The textbook
attempts to enhance this endeavour by giving higher priority and space
to opportunities for contemplation and wondering, discussion in small
groups, and activities requiring hands-on experience.
The National Council of Educational Research and Training (NCERT)
appreciates the hard work done by the text ook development committee
 iv
responsible for this book. We wish to thank the Chairperson of the
advisory group in Social Sciences Professor Hari Vasudevan and the Chief
Advisor for this book, Professor R.K. Grover, (Retd.) Director, School of
Management Studies (IGNOU). New Delhi for guiding the work of this
committee. Several teachers contributed to the development of this
textbook; we are grateful to their principals for making this possible. We
are indebted to the institutions and organisations which have generously
permitted us to draw upon their resources, material and personnel. We
are especially grateful to the members of the National Monitoring
Committee, appointed by the Department of Secondary and Higher
Education, Ministry of Human Resource Development under the
Chairpersonship of Professor Mrinal Miri and Professor G.P. Deshpande,
for their valuable time and contribution. As an organisation committed
to the systemic reform and continuous improvement in the quality of its
products, NCERTwelcomes comments and suggestions which will enable
us to undertake further revision and refinement.

Director
New Delhi National Council of Educational
20 December 2005 Research and Training
 TEXTBOOK DEVELOPMENT COMMITTEE

CHAIRPERSON, AnVlSORY COMMITTEE FOR TEXTBOOKS IN SOCIAL SCIENCES AT

UPPER PRlMARY LEVEL

Hari Vasudevan, Professor, Department ofHisto:ry, University of Calcutta,

Kolkata
CHIEF AnVlSOR

R. K. Grover, Professor, (Retd.}, School of Management Studies, IGNOU,

New Delhi.
MEMBERS

AK. Bansal, Reader, PGDAV College, Nehru Nagar, New Delhi.

Amit Singhal, Lecturer, Ramjas College, Delhi University, Delhi.
Ashwini Kumar Kala, PGT Commerce, Hiralal Jain Senior Secondary
School, Sadar Bazar, Delhi.
D.K Vaid, Professor, Department of Education in Social Sciences and
Humanities, NCERT, New Delhi.
Deepak Sehgal, Reader, Deen Dayal Upadhaya College, Delhi University,
Delhi.
H.V. Jhamb, Reader, Khalsa College, Delhi University, Delhi.
Ishwar Chand, PGT Commerce, Government Sarvodaya Bal Vidyalaya,
West Patel Nagar, New Delhi.
K. Sambasiva Rao, Professor, Department of Commerce, Andhra
University, Visakhapatnam.
M. Srinivas. Professor, Department of Commerce, College for Women,
Osmania University, Hyderabad.
P.K. Gupta, Reader, Department of Management Studies, Jamia Millia
Islamia, New Delhi.
Rajesh Bansal, PGT Commerce, Rohtagi AV. Senior Secondary School,
Nai Sarak, Delhi.
S.K. Sharma, Reader, Khalsa College, Delhi University, Delhi.
 vJ

S.S. Sehrawat. AssL,:_;tant Commissioner, Kendriya Vidyalaya Sangathan,

Chandlgarh.
�v1b1. Sha11�;.111, PGTCommercc, Cyan Bharali School, Saket, New Delhi.
Shiv Jun eja. PGT Commerce, Nirankari Boys Senior Secondary SchooL
Paharganj, Delhi.
Sush1l Kumar, POT Commerce, Government Sarvodaya Bal Vldyalaya,
l<atlash Puri. Delh1.
Va11lt<1 rrlµallu, Lec:lurer; Dcparlrocnt of Curnrncrcc, DclhJ School of
Economics, Delhi UniveT1Sily. Delhi.

MEMDBR-COORDLNATOR
Shipra Vaidya. Professor. Department of Education ln Social Sciences
NCERT. New DclhJ.
 ACKNOWLEDGEMENTS

The N a t i onal C o u n c i l of E d u c a t i o n a l Re s e arch a n d Trai n i n g

acknowledges the valuable contributions o f the Textbook Development
Committee which took considerable pains in the development and review
of manuscript as well .
Special thanks are due to Head, Department of Education in Social
Sciences, NCERT for constant support , during the d evelopment of
this book. We also acknowledge the contribution of all teachers of
commerce who developed the extra learning material for QR codes in the
textbook.
Th e Council acknowledges the Contribu tion of Sanj eev Kumar,
Wee Principal, Government Boys Senior Secondary School , Mata Sundari
Road for reviewing and updating this textbook.
The Contribution of AFC- Office, administration of DESS, Publication
Department and Secretariat of NCERT in bringing out this book are also
duly acknowledged .
 Constitution of India
Part IV A (Article 51 A)

Fundamental Duties
It shall be the duty of every citizen of India —
(a) to abide by the Constitution and respect its ideals and institutions, the
National Flag and the National Anthem;
(b) to cherish and follow the noble ideals which inspired our national struggle
for freedom;
(c) to uphold and protect the sovereignty, unity and integrity of India;
(d) to defend the country and render national service when called upon to
do so;
(e) to promote harmony and the spirit of common brotherhood amongst all
the people of India transcending religious, linguistic and regional or
sectional diversities; to renounce practices derogatory to the dignity of
women;
(f) to value and preserve the rich heritage of our composite culture;
(g) to protect and improve the natural environment including forests, lakes,
rivers, wildlife and to have compassion for living creatures;
(h) to develop the scientific temper, humanism and the spirit of inquiry and
reform;
(i) to safeguard public property and to abjure violence;
(j) to strive towards excellence in all spheres of individual and collective
activity so that the nation constantly rises to higher levels of endeavour
and achievement;
*(k) who is a parent or guardian, to provide opportunities for education to
his child or, as the case may be, ward between the age of six and
fourteen years.

Note: The Article 51A containing Fundamental Duties was inserted by the Constitution
(42nd Amendment) Act, 1976 (with effect from 3 January 1977).
*(k) was inserted by the Constitution (86th Amendment) Act, 2002 (with effect from
1 April 2010).
 CONTENTS

FOREWORD iii
Chapter 1 Introduction to Accounting 1
1.1 Meaning of Accounting 2
1 .2 Accounting as a Source of Information 6
1 .3 Objectives of Accounting 10
1 .4 Role of Accounting 13
1 .5 Basic Terms in Accounting 14
Chapter 2 Theory Base of Accounting 23
2. 1 Generally Accepted Accounting Principles (GAAP) 24
2.2 Basic Accounting Concepts 25
2.3 Systems of Accounting 33
2.4 Basis of Accounting 34
2.5 Accounting Standards 35
Chapter 3 Recording Transactions - I 46
3. 1 Business Transactions and Source Document 46
3.2 Accounting Equation 50
3.3 Using Debit and Credit 52
3.4 Books of Original Entry 60
3. 5 The Ledger 72
3.6 Posting from Journal 75
Chapter 4 Recording Transactions - II 99
4. 1 Cash Book 100
4.2 Purchases (Journal) Book 125
4.3 Purchases Return (Journal) Book 127
4.4 Sales (Journal) Book 129
4. 5 Sales Return (Journal) Book 131
4.6 Journal Proper 139
4. 7 Balancing the Accounts 141
Chapter 5 Bank Reconciliation Statement 1 60
5. 1 Need for Reconciliation 161
5.2 Preparation of Bank Reconciliation Statement 166
 X

Chapter 6 Trial Balance and Rectification of Errors 1 80

6. 1 Meaning of Trial Balance 1 80
6.2 Objectives of Preparing the Trial Balance 181
6.3 Preparation of Trial Balance 1 84
6.4 Significance of Agreement of Trial Balance 189
6.5 Search ing of Errors 191
6.6 Rectification of Errors 192
Chapter 7 Depreciation, Provisions and Reserves 226
7. 1 Depreciation 226
7.2 Depreciation and other Similar Terms 230
7.3 Causes of Depreciation 230
7.4 Need for Depreciation 231
7.5 Factors Affecting the Amount of Depreciation 232
7.6 Methods of Calculating Depreciation Amount 234
7.7 Straight Line Method and Written Down Method: 238
A Comparative Analysis
7.8 Methods of Recording Depreciation 240
7.9 Disposal of Asset 249
7. 10 Effect of any Addition or Extension to the 259
Existing Asset
7. 1 1 Provisions 262
7. 1 2 Reserves 264
7. 13 Secret Reserve 268
Chapter 8 Bill of Exchange 277
8. 1 Meaning of Bill of Exchange 278
8.2 Promissory Note 280
8.3 Advantages of Bill of Exchange 28 1
8.4 Maturity of Bill 282
8.5 Discounting of Bill 282
8.6 Endorsement of Bill 282
8.7 Accounting Treatment 283
8.8 Dishonour of a Bill 290
8.9 Renewal of the Bill 296
8. 1 0 Retiring of the Bill 298