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
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
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
Current ratio or working capital ratio
Liquid ratio or quick ratio or acid test ratio
Solvency Ratios
Debt equity ratio
Total assets to debt ratio
Proprietary ratio
Interest coverage ratio
Activity Ratio
Inventory turnover ratio
Debtors turnover ratio
Creditors turnover ratio
Working capital turnover ratio
Profitability Ratios
Gross Profit ratio
Operating ratio
Operating profit ratio
Net profit ratio
Return on investments