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Basic Accounting Procedures

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Last updated date: 20th Apr 2024
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Introduction to Accounting and Its Basic Procedures

There are various forms of organisations and they have their own methodology for the preparation and presentation of accounts. In Class 12 Accountancy, the basics consists of accounting for not-for-profit organisations, accounting for partnership firms and accounting for companies.


Accounting for a partnership includes the fundamentals of accounting, valuation of goodwill, reconstitution of partnership firm and dissolution of the partnership. Accounting for companies includes the issue of shares and debentures and the redemption of debentures. The theory of Accounts Class 12 is discussed below (fundamentals of accountancy notes).


Accounting for Not for Profit Organisations

These organisations work with the intention of not earning profits throughout their life and are dedicated to service to society and its members. It is a separate legal entity, i.e members are different from the organisation. They are organised as charitable trusts or societies in general and are managed by the executive elected by the organisation's members. The main sources of income for not-for-profit organisations are subscriptions for their members, donations, legacies and grants for a particular purpose. The sources of various funds are credited to the capital fund or the general fund.


The final accounts of not-for-profit organisations are as follows:

  • Receipts and Payment Accounts:

Recording of cash receipts and cash payments take place here irrespective of their nature (capital or revenue). It is the real account, also called a summary of cash books.

  • Income and Expenditure Accounts:

It is the summary of income and expenditure performed during an accounting year. It is a nominal account and similar to a profit and loss account.

  • Balance Sheet:

In order to ascertain the financial position of the organisation at a particular date, the balance sheet is prepared. The pattern for the balance sheet remains the same as that of the business entities.


Sources of Fund in not-for-profit Organisations


Sources of Fund in not-for-Profit Organisations


Accounting for Partnership Firms

As per the provisions of Section number 4 of the Indian Partnership Act 1932, partnership is the relationship between two or more persons who have agreed to share the profits of the business carried on by all or any of them acting for all.

The person who has entered into a partnership with one another are called partners, and partners are collectively known as the firm. The name under which the business is carried on is called a firm name. The document containing written rules and regulations regarding the partnership is called a partnership deed.


Prerequisite Details of Partnership Firm

  • Name and address of all the partners

  • Name and address of the firm

  • Principal place of business

  • Nature of Business

  • Date of commencement of Partnership

  • Capital contributed by each Partner

  • Profit and loss sharing Ratio

Partnership


Partnership


Accounting for Companies

As per the provisions of Section number 2(20) of the Companies Act 2013, “Company means a company as incorporated under this act or any previous company law”. A company is an artificial person which comes into existence by law and has a separate legal entity. The companies can be classified into three types depending upon their incorporation, liability and transferability of shares. As per the provisions of Section number 2(84) of the Companies Act 2013, “Share means a share in the share capital of the company and includes stock.” There are two classes of shares namely preference share capital and equity share capital.


The word debenture comes from the Latin word Debere which means to owe. As per the provisions of Section number 2(30) of the Companies Act 2013, “Debenture includes debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not.”


Summary

Accounts formation and analysis are the most crucial part of the organisation. It is required in all forms of organisation, whether profit oriented or not. There are three types of organisations discussed in Class 12 Accounts. The first is the not-for-profit organisation which recommends the preparation of final accounts along with their adjustments. The second part deals with the preparation of Partnership accounts with fundamentals of accounts and their adjustments, and reconstitution along with its dissolution. The third part deals with the issue of shares and debentures along with their redemption and also the analysis of financial statements prepared by the management.

FAQs on Basic Accounting Procedures

1. Enlist the classification of various items of the balance sheet under their main head and subhead.

Sno

Items

Head 

Subhead

1.

Debentures

Non-current Liabilities

Long-term borrowings

2.

Securities Premium Reserve

Shareholders fund

Reserves and surplus

3.

Bills Payable

Current liabilities

Trade payables

4.

Calls in arrear

Shareholders fund

Subscribed capital

5.

Interest accrued but not due on debentures

Current liabilities

Other current liabilities

6.

Bills receivable

Current assets

Trade receivables

7.

Deferred tax assets

Non-current assets 

Deferred tax assets

8.

Livestock 

Non-current assets 

Fixed assets

9.

Prepaid rent

Current assets

Other current assets

2. What are the Qualitative Characteristics of Accounting Information?

Qualitative characteristics can be defined as the attributes that help in accounting information. These attributes improve the usefulness and understandability of:

  • Reliability: It implies that the information must not contain any material error. Personal bias should also be absent.

  • Relevance: The accounting of information should also be relevant to the requirements of the decision-making of the organization and its members.

  • Understandability: It states that all information should be disclosed in financial statements. This should be done in a manner that is easy to understand.

  • Comparability: Over time, both inter-firm and intra-firm comparisons should be possible.

2. Explain the types of financial statement analysis.

There are four viewpoints for financial statement analysis. The first is on the basis of users i.e external analysis (outside the organisation) and internal analysis (within the organisation). The second is on the basis of objectivity i.e short-term analysis and long-term analysis. The third is on the basis of the viewpoint of time span i.e horizontal analysis and vertical analysis. The fourth on the basis of the viewpoint of the firm i.e Intra firm analysis and inter-firm analysis.

4. Enlist the classification or types of ratios.

Liquidity Ratio

  1. Current ratio or working capital ratio

  2. Liquid ratio or quick ratio or acid test ratio

Solvency Ratios

  1. Debt equity ratio 

  2. Total assets to debt ratio

  3. Proprietary ratio

  4. Interest coverage ratio

Activity Ratio

  1. Inventory turnover ratio

  2. Debtors turnover ratio

  3. Creditors turnover ratio

  4. Working capital turnover ratio

Profitability Ratios

  1. Gross Profit ratio

  2. Operating ratio

  3. Operating profit ratio

  4. Net profit ratio

  5. Return on investments