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Karnataka Class 12 Commerce Accountancy Need for Maintaining of Accounts by Non Profit Organisation

Karnataka Class 12 Commerce Accountancy Need for Maintaining of Accounts by Non Profit Organisation

Karnataka Class 12 Commerce Accountancy Need for Maintaining of Accounts by Non Profit Organisation

Karnataka Class 12 Commerce Accountancy Need for Maintaining of Accounts by Non Profit Organisation : Accountancy refers to a systematic knowledge of accounting. It explains “why to do” and “how to do” of various aspects of accounting. It tells us why and how to prepare the books of accounts and how to summarize the accounting information and communicate it to the interested parties.

Accounting refers to the actual process of preparing and presenting the accounts. In other words, it is the art of putting the academic knowledge of accountancy into practice. Book-keeping is a part of accounting and is concerned with record keeping or maintenance of books of accounts. It is often routine and clerical in nature.

Karnataka Class 12 Commerce Accountancy Need for Maintaining of Accounts by Non Profit Organisation

Relationship between Accountancy, Accounting and Book-keeping

Book-keeping provides the basis for accounting and it is complementary to accounting process. Accounting begins where book-keeping ends. Accountancy includes accounting and book-keeping. The terms Accounting and Accountancy are used synonymously.  

Karnataka Class 12 Commerce Accountancy Need for Maintaining of Accounts by Non Profit Organisation

Distinction between Book-keeping and Accounting

In general the following are the differences between book-keeping and accounting.

Sl.No.Basis of DistinctionBook-keeping Accounting
 1.Scope Recording and maintenance of books of accounts.It is not only recording and maintenance of books of accounts but also includes analysis, interpreting and communicating the information.
 2.Stage Primary stage. Secondary stage
 3.Objective To maintain systematic records of business transactions. To ascertain the net result of the business operation.
 4.NatureOften routine and clerical in nature.  Analytical and executive in nature.
 5.ResponsibilityA book-keeper is responsible for recording business transactions. An accountant is also responsible for the work of a book-keeper.
 6.SupervisionThe book-keeper does not supervise and check the work of an Accountant.  An accountant supervises and checks the work of the book-keeper.
 7.Staff involvedWork is done by the junior staff of the organisation.Senior staff performs the accounting work.

Karnataka Class 12 Commerce Accountancy Need for Maintaining of Accounts by Non Profit Organisation

 Users of Accounting Information

The basic objective of accounting is to provide information which is useful for persons and groups inside and outside the organisation.

I. Internal users: Internal users are those individuals or groups who are within the organisation like owners, management, employees and trade unions.

II. External users: External users are those individuals or groups who are outside the organisation like creditors, investors, banks and other lending institutions, present and potential investors, Government, tax authorities, regulatory agencies and researchers. 

The users and their need for information are as follows:

Sl no.InternalUsers Need for Information
i. OwnersTo know the profitability and financial soundness of the business.
ii.ManagementTo take prompt decisions to manage the business efficiently.
iii.Employees and Trade unionsTo form judgement about the earning capacity of the business since their remuneration and bonus depend on it.

 

Sl no.ExternalUsers Need for Information
i. Creditors, banks and other lending institutions To determine whether the principal and the interest thereof will be paid in when due.
ii.Present investors To know the position, progress and prosperity of the business in order to ensure the safety of their investment.
iii.Potential investorsTo decide whether to invest in the business or not.
iv.Government and Tax authorities To know the earnings in order to assess the tax liabilities of the business.
v.Regulatory agencies To evaluate the business operation under the regulatory legislation.
vi.ResearchersTo use in their research work.

Karnataka Class 12 Commerce Accountancy Need for Maintaining of Accounts by Non Profit Organisation

Branches of Accounting

Increased scale of business operations has made the management function more complex. This has given raise to specialised branches in accounting. The main branches of accounting are Financial Accounting, Cost Accounting and Management Accounting. 1. Financial Accounting : It is concerned with recording of business transactions in the books of accounts in such a way that operating result of a particular period and financial position on a particular date can be known.

2. Cost Accounting : It relates to collection, classification and ascertainment of the cost of production or job undertaken by the firm.

3. Management Accounting :  It relates to the use of accounting data collected with the help of financial accounting and cost accounting for the purpose of policy formulation, planning, control and decision making by the management. 

Karnataka Class 12 Commerce Accountancy Need for Maintaining of Accounts by Non Profit Organisation

Recording of business transactions has been in vogue in all countries of the world. In India, maintenance of accounts was practised not in such a developed form as we have today. Kautilya’s famous Arthasastra not only relates to Politics and Economics, but also explains the art of account keeping in a separate chapter.

Written in 4th century BC, the book gives details about account keeping, methods of supervising and checking of accounts and also about the distinction between capital and revenue, income and expenses etc. Double entry system was introduced to the business world by an Italian merchant named Lucas Pacioli in 1494 A.D.

Though the system of recording business transactions in a systematic manner has originated in Italy, it was perfected in England and other European countries during the 18th century only i.e., after the Industrial Revolution. Many countries have adopted this system today.

There are certain organisations which are set up for providing service to its members and the public in general. Such organisations include clubs, charitable institutions, schools, religious organisations, trade unions, welfare societies and societies for the promotion of art and culture. These organisations have service as the main objective and not the profit as is the case of organisations in
business. Normally, these organisations do not undertake any business activity, and are managed by trustees who are fully accountable to their members and the society for the utilization of the funds raised for meeting the objectives of the organisation.

Hence, they also have to maintain proper accounts and prepare the financial statement which take the form of Receipt and Payment
Account; Income and Expenditure Account; and Balance Sheet. at the end of for every accounting period (normally a financial year).

‘Not-for-Profit’ Organisations prepare Balance Sheet for ascertaining the financial position of the organisation. The preparation of their Balance Sheet is on the same pattern as that of the business entities. It shows assets and liabilities as at the end of the year. Assets are shown on the right hand side and the liabilities on the left hand side.  

However, there will be a Capital Fund or General Fund in place of the Capital and the surplus or deficit as per Income and Expenditure Account which is either added to/deducted from the capital fund, as the case may be. It is also a common practice to add some of the capitalised items like legacies, entrance fees and life membership fees directly in the capital fund.

Besides the Capital or General Fund, there may be other funds created for specific purposes or to meet the requirements of the contributors/donors such as building fund, sports fund, etc. Such funds are shown separately in the liabilities side of the balance sheet.

Some times it becomes necessary to prepare Balance Sheet as at the beginning of the year in order to find out the opening balance of the capital/general fund.

Karnataka Class 12 Commerce Accountancy Need for Maintaining of Accounts by Non Profit Organisation

Preparation of Balance Sheet
The following procedure is adopted to prepare the Balance Sheet:
1. Take the Capital/General Fund as per the opening balance sheet and add surplus from the Income and Expenditure Account. Further, add entrance fees, legacies, life membership fees, etc. received during the year.
2. Take all the fixed assets (not sold/discarded/or destroyed during the year) with additions (from the Receipts and Payments account) after charging depreciation (as per Income and Expenditure account) and show them on the assets side.
3. Compare items on the receipts side of the Receipts and Payments Account with income side of the Income and Expenditure Account. This is to ascertain the amounts of:

(a) subscriptions due but not yet received:

(b) incomes received in advance;

(c) sale of fixed assets made during the year;

(d) items to be capitalised (i.e. taken directly to the Balance Sheet) e.g. legacies, interest on specific fund investment and so on.

4. Similarly compare, items on the payments side of the Receipt and Payment Account with expenditure side of the Income and
Expenditure Account.

This is to ascertain the amounts if:

(a) outstanding expenses;

(b) prepaid expenses;

(c) purchase of a fixed asset during the year;

(d) depreciation on fixed assets;

(e) stock of consumable items like stationery in hand;

(f) Closing balance of cash in hand and cash at bank as, and so on.

A proforma Balance Sheet is given for the proper understanding of preparing the balance sheet.

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