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 for Beginners
1. What is the accounting cycle and what are its essential steps for a beginner?
The accounting cycle is the systematic process of identifying, recording, and processing the financial transactions of a company during a specific period. For beginners, understanding this cycle is the first step in learning accounting procedures. The essential steps include:
- Identifying Transactions: Recognising an economic event that must be recorded, such as a sale or a purchase.
- Journalising: Recording these transactions in a Journal, which is the book of original entry.
- Posting to Ledger: Transferring the journal entries to individual accounts in the General Ledger.
- Preparing a Trial Balance: Listing all ledger account balances to check if the total debits equal the total credits, ensuring arithmetical accuracy.
- Preparing Financial Statements: Using the balanced accounts to create the Income Statement and Balance Sheet.
2. What are the five main types of accounts in accounting and what do they represent?
In accounting, all transactions are classified into five fundamental types of accounts. These are:
- Assets: Resources owned by the business that have future economic value (e.g., cash, buildings, inventory).
- Liabilities: Obligations or debts owed by the business to others (e.g., loans, accounts payable).
- Equity: The owner's stake in the company; it is the residual interest in the assets after deducting liabilities (e.g., capital, retained earnings).
- Revenue (or Income): The earnings generated from the business's primary operations, such as sales of goods or services.
- Expenses: The costs incurred in the process of generating revenue (e.g., salaries, rent, utilities).
3. What are the 'Golden Rules' of Debit and Credit in accounting?
The golden rules of accounting, based on the type of account, are fundamental to the double-entry system. They guide how to debit or credit an account:
- For Real Accounts (Assets): Debit what comes in, Credit what goes out.
- For Personal Accounts (Liabilities, Equity, or individuals): Debit the receiver, Credit the giver.
- For Nominal Accounts (Revenues and Expenses): Debit all expenses and losses, Credit all incomes and gains.
Following these rules ensures that for every transaction, the total debits always equal the total credits.
4. How does the double-entry system work for a simple transaction like purchasing furniture for cash worth ₹10,000?
The double-entry system means every transaction affects at least two accounts. For the purchase of furniture for ₹10,000 cash:
- First Effect: The business acquires an asset, 'Furniture'. Since furniture is a real account and is coming into the business, the Furniture A/c is debited by ₹10,000.
- Second Effect: The business pays with another asset, 'Cash'. Since cash is a real account and is going out of the business, the Cash A/c is credited by ₹10,000.
This single transaction results in a debit entry and a credit entry of equal value, keeping the accounting equation (Assets = Liabilities + Equity) balanced.
5. What is the main difference between a Journal and a Ledger?
The Journal and the Ledger are two of the most important books in the accounting process, but they serve different purposes. The key difference is that a Journal is the book of original entry where transactions are recorded chronologically as they occur. In contrast, a Ledger is the principal book where transactions are posted from the journal and classified into their respective individual accounts (e.g., Cash A/c, Sales A/c, Rent A/c). In short, the journal records the 'date-wise' details of a transaction, while the ledger provides a complete 'account-wise' summary.
6. Why is preparing a Trial Balance a crucial step before creating final financial statements?
Preparing a Trial Balance is a critical checkpoint in the accounting cycle. Its primary purpose is to verify the arithmetical accuracy of the posting process from the journal to the ledger. By listing all account balances, it confirms that the total of all debit balances equals the total of all credit balances. If the totals do not match, it signals an error that must be located and rectified before preparing the final Income Statement and Balance Sheet, thus ensuring the reliability of these financial reports.
7. For a small retail shop, what is the most basic accounting procedure they must follow?
For a small retail shop, the most fundamental and non-negotiable accounting procedure is the diligent recording of all daily transactions. This starts with identifying every sale, purchase, payment, and receipt. At a minimum, the shop owner should maintain a cash book to record all cash inflows and outflows and a journal to record credit sales and purchases. This simple act of recording forms the basis for tracking profitability, managing cash flow, and fulfilling tax obligations, even if a full ledger system isn't immediately implemented.
