Class 12th CBSE Accountancy Concepts Quiz

Class 12th CBSE Accountancy

Accounting is essentially the process of recording, classifying, summarizing, analyzing, interpreting, communicating and reporting economic information to enable informed decision making by individuals within and outside the organization. In the context of Class 12 CBSE Accountancy, students focus on various aspects of accounting such as preparation of financial statements, understanding partnership accounts, dealing with accounting for not-for-profit organizations, studying company accounts, and learning how to prepare cash flow statements. These concepts help students understand the principles and techniques used in preparing financial reports, analyzing business transactions, and presenting them in ways that aid management decision making and assist external users in assessing a firm's performance and financial position.

Financial Statements

Financial statements play a crucial role in accounting because they serve as the chief record of past transactions between the enterprise and its creditors, owners and other parties during a specific period of time. They present a comprehensive picture of a company's profitability, liquidity, solvency, and efficiency in managing resources over a given period. Key types of financial statements include income statements, balance sheets, and cash flow statements.

The income statement, also known as the profit & loss statement, shows revenues earned, expenses paid out, net earnings or losses, retained earnings, dividends declared, taxes, deferred credits, etc., and thereby reflects the operating results of a business during a certain period. It provides readers with a clear indication of whether the company has made money or suffered losses during that interval.

The balance sheet consists of assets, liabilities, and owner's equity, and presents a snapshot of what the entity owns, owes, and controls at a particular point in time. This helps determine if it can pay all of its current obligations as they arise. Assets represent things owned by a business like inventory, property plant & equipment, receivables, investment securities, and prepaid items while liability represents debts owed by the business including notes payable, accrued expenses, sales tax, interest, wages payable, accounts payable, capital lease, bonds payable, and deferred revenue. Equity is the owners claim against assets after paying off all the liabilities.

A cash flow statement depicts all sources from which cash inflows occur, all uses to which cash outflows go during a specified period and the resulting increase or decrease in cash balances held in a bank during this period. Cash inflow includes payments received from customers, borrowings, investments, grants, donations, sale of property, plant & equipment, reduction in debtor days outstanding, and so on. On the other hand, cash outflow includes payment of salaries, rents, insurance premiums, government levies, and so forth.

Partnership Accounts

In a partnership setup, each partner contributes to the capital of the firm and bears risks jointly. A partnership firm's books of accounts have a separate set of records different from those maintained by a proprietorship concern or a corporation. Preparation of these records involves maintaining adequate books of accounts, issuing invoices, keeping proper vouchers, carrying on internal audits regularly, submitting returns to appropriate authorities, and accurate disclosure of profits. However, unlike a corporate form of ownership where shares are issued, in a general partnership there aren't any capital stock certificates, hence there isn't any concept called 'assets'. All that mainly matters is the total amount contributed by partners towards forming the firm.

Not-For-Profit Organizations

These entities do not exist primarily for generating profits; instead, their mission lies in achieving non-commercial objectives. Such entities raise funds through donations, which forms their primary source of revenue. Their organizational structure differs significantly from commercial enterprises. Notably, when an entity is formed for charitable purposes, rules regarding maintenance of books of accounts differ greatly. For instance, there must always be clarity on who benefits from the activities and services rendered. Also, fundraising methods employed must conform to certain norms established under the Income Tax Act.

Company Accounts

Companies operate under different legal structures, governed by specific laws and regulations. Companies limited by shares are distinct from companies limited by guarantee. Each type of company has specific characteristics, and therefore, special features need consideration while drawing up accounts. While calculating shareholder loans and preferences vary according to legal stipulations, even the computation of reserves may necessitate more attention compared to sole traders.

Cash Flow Statement

Preparing a cash flow statement involves three steps: direct method, indirect method, and reconciliation of opening and closing balances. Under the Direct Method, cash inflows and outflows are allocated based on actual cash movements in the period under review. Indirect Method begins with computing the difference between Net Profit/Loss reported in the Income Statement and Opening Balance Sheet/Net Worth computation. Reconciliation of Opening and Closing Balances ensures consistency among starting and ending positions of cash flows.

Understanding these key elements of accounting in Class 12th CBSE syllabus provides a strong foundation for future careers involving finance, economics, law, banking, administration of religious institutions, and many others.