See http://chris.gunawardena.id.au/software-development/arduino-clock/

arduino_clock_accuracy_test.cpp

void setup() {  
  // initialize serial communication at 9600 bits per second:
  Serial.begin(9600);
}

//set current time
int hours = 12;
int minutes = 31;
int seconds = 0;

// the loop routine runs over and over again forever:
void loop() {
  //increment by seconds and cascade down
  seconds = seconds + 1;
  minutes = minutes + (seconds/60);
  hours = hours + (minutes/60);
  
  //reset when over 60, 12 etc
  seconds = seconds % 60;
  minutes = minutes % 60;
  hours = hours % 12;

  //print the time
  Serial.print(hours);
  Serial.print(":");
  Serial.print(minutes);
  Serial.print(":");
  Serial.print(seconds);
  Serial.println("");
  
  //wait 1 second
  delay(1000);
}