The role of accounting in the modern world are given below. Whereas debtor is also derived from the Latin word “debra,” which means “to owe,” and it is the party who must pay money to the first party (creditors). They come under the asset category in the balance sheet of the company. Also, the discount can be allowed to debtors by the person who extends the credit. In general terms, a debtor is one who is indebted to the entity, in the form of an individual or a firm, a government or a company, etc., who owes money for the products or services sold to him. For example, if A borrowed money from B and he is entitled to pay it back to B after a specific duration, then in this condition, A will be the debtor, and B will be a creditor.

NCERT Solutions Class 11 Accountancy Chapter 1 Introduction to Accounting

“The role of accounting has changed over the period of time.” Do you agree? The main purpose of accounting is to communicate the financial information to the users who analyze them as per their individual requirements. Accounting measures the transactions and events in terms of money which are considered as a common unit. Fixed Assets− These are those assets that are held for the long term and increase the profit earning capacity and productive capacity of the business. These assets are not meant for sale, for example, land, building machinery, etc.

Today the accounting information’s plays a vital role in a business enterprise. After Trading and Profit and Loss Account, Balance Sheet is prepared to show the financial position of the business. The techniques of recording, classifying and summarising the transactions have been explained in detail later in the book. All such informations are provided by the accounting which helps the management in planning, decision-making and controlling the business. Before allowing goods on credit to any person, first of all, the company checks his credibility, financial status and capacity to pay. Credit policy is made by the management of the company which takes decisions regarding credit period allowed to debtors as well as discount allowed to them for making early payments.

Secured and unsecured creditors are the two types of creditors. Secured creditors only give loans to debtors who can put up a specified asset as security. In the event of a debtor’s bankruptcy, a secured creditor can seize the debtor’s collateral to cover the debtor’s losses. A mortgage, which uses a piece of property as security, is the most well-known example of a secured loan. The relationship that a debtor and a creditor share complements the relationship that a customer and supplier share.

Since the external users (e.g., Banks, Creditors) do not have direct access to all the records of an enterprise, they have to rely on financial statements as the source of information. External users are basically interested in the solvency and profitability of an enterprise. Besides the function of book-keeping, accounting involves summarizing, analyzing, interpreting the financial statements and communicating the results to the users of these statements. Accounting is the language of business; it means that an enterprise communicates with the outside world, including the proprietors, through accounting statements.

Charlie Company is the creditor and Alpha Company is the debtor if Charlie Company sells items to Alpha Company on credit. The asset is a resource of value owned by a person or business that can be used to generate cash flows in future. The informational needs of external users are discussed below. It involves presenting the classified data in a manner and in the form of statements, which are understandable by the users. The information disclosure requirements are set after a public debate reflecting the views of cross-sections of the users.

Can a person be both a debtor and a creditor?

• So, first of all, such transactions and events are identified.
• Net profit increases owner’s capital and net loss decreases it.
• The recording should be done in a systematic manner so that the information can be made available when required.
• Short-term debtors’ payments are accounted for as short-term receivables in the company’s current assets.

Whenever the company purchases goods from another company or services are provided by a person and the amount is not yet paid. Then that individual or company is regarded as the creditor. It is concerned with the presentation of data and it begins with a balance of ledger accounts and the preparation of trial balance with the help of such balances. A trial balance is required to prepare the financial statements i.e. In Accounting, we record only those transactions which can be measured in terms of money or which are of financial nature. If a transaction or event cannot be measured in monetary terms, it is not considered for recording in financial accounts.

Liquid Assets− Assets that are kept either in cash or cash equivalents are regarded as liquid assets. These can be converted into cash in a very short period of time; for example, cash, bank, bills receivable, etc. Such a profit or loss statement is useful for all parties having stake in business like the management, lenders, investors, the proprietor or the partners or the shareholders, tax authorities and workers, etc. It is so because from its study, the management, can know whether the policies adopted by it were fruitful or not and can decide upon and possible, a change in the selling price or the advertising policy, etc. The relationship between a debtor and a creditor is critical to the extension of credit between parties, as well as the accompanying transfer of assets and liability settlement. When a creditor lends money versus extends credit, the creditor’s actions are somewhat different.

As a result, the company’s liquidity does not degrade, and the risk of default does not rise. Creditors are the current liabilities of the company, whose debt is to be paid within one year. They are called as current liabilities because they provide credit for a limited time and hence, they should be paid, shortly. Creditors allow a credit period, after which the company has to discharge its obligation. But, if the company fails to pay the debt within the stipulated time, then interest is charged for delayed payment.

• Accounting collects information to help management in this regard.
• Accounting measurement and treatment of any transaction depends, to a large extent, on the nature of the enterprise, conditions of the occurrence of transactions and the legal frame work.
• Gross profit or gross loss is the difference’ between the cost of goods sold and sales.
• It involves presenting the classified data in a manner and in the form of statements, which are understandable by the users.
• Debtors are an integral part of current liabilities and represent the aggregate amount which a customer owe to the business.

Topper’s Solved these Questions

The productive and confirmatory roles of information are interrelated. For example, information about the current level and structure of asset-holding has value to users when they endeavour to predict the ability of the enterprise to take advantage of opportunities and its ability to react to adverse situations. Revenue in accounting is the income of a recurring (regular) nature from any source. It includes the amount received from sale of goods, rent receipt, commission, dividend and interest received.

In other words, assets are the monetary values of the properties or the legal rights that are owned by the business organizations. The same information plays a confirmatoty role in respect of past prediction about, for example, the way in which the enterprise would be structured or the outcome of planned operations. Accounting collects information to help management in this regard. For instance, management would be able to know which department is overspending. Top level management requires information for planning, middle level management requires information for controlling the operations. They can be classified into – Financial Accounting, Managerial Accounting, Cost accounting, Internal accounting and Tax accounting.

NCERT CLASS 11 ACCOUNTANCY IMPORTANT QUESTIONS

Contents of the book even relied in current accounting world as the popular terms Debit (Dr.) and Credit (Cr.), while preparing accounts of a business enterprise. Debit comes from the Italian word Debito or debeo which means owed to the proprietor, credit comes from the Italian word Credito or credo which means trust or belief in the proprietor. Similar transactions relating to a particular account for a given period are brought together. For example, cash transactions like cash sales, cash purchases, cash expenses are put in one place in the Ledger under Cash Account. The sum owing to a debtor is repaid on a regular basis, with or without interest (debt almost always includes interest payments).

Then the former company will be debtor while the latter company is the creditor. They are the two parties to a particular transaction and hence there should not be any confusion regarding these two anymore. So, there is a fine line of differences between debtors and creditors which we have discussed in the article below, take a read. To determine the financial position of the business by preparing a balance sheet. Accounting records only those transactions and events which are of financial nature. So, first of all, such transactions and events are identified.

At the end of the month he paid Rs. 5,000 as their salaries. Out of the stationery bought he sold some stationery for Rs. 1,50,000 for cash and some other stationery for Rs. 1,00,000 on credit basis to Mr. Ravi. Subsequently, he bought stationery’ items of Rs. 1,50,000 from Mr. Peace. In the first week of next month there was a fire accident and he lost Rs. 30,000 worth of stationery. A part of the’machinery, which cost Rs. 40,000 was sold distinguish between debtors and creditors class 11 for Rs. 45,000.

Ans.Accounting requires the preparation of the 3 most important financial statements. They are – The Balance sheet, which is a summary of the financial position of a company including the assets, liabilities and capital. The Income Statement, which is a record of the revenues and expenditures; and The Cash Flow statement, which is the summary of the cash and cash equivalents flowing in and out of the business organisation. The first step in accounting is to determine what to record, i.e., to identify the financial events which are to be recorded in the books of accounts. It involves observing all business activities and selecting those events or transactions which can be considered as financial transactions.