This page contains the following topics

01. Accounting: as a Language of Business

02. Users of Accounting Information

03. Basic Accounting Principles

04. Expense/Assets & Incomes/Liabilities (their concepts)

05. Accounting Equation

06. Journal Entries

07. Some specific forms of Journal Entries

08. Ledger Posting & Trial Balance

09. Cash Book

10. Bank Reconciliation Statement (BRS)

11. Concept of Capital & Revenue

12. Accounting for Fixed Assets (Depreciation)

13. Financial Ratio Analysis

14. Cash Flow Statement

15. Fund Flow Statement

16. Financial Statements (Final Accounts/Work Sheets)

17. Theories Question answers

Accounting is a Language of Business

In our society, we find different languages spoken by people. It is a communication system between people. In other specific fields of science, sports etc there have been different languages used. That is also a communication system. Likewise, accounting is also a communication system or a language of business. It helps to communicate the information of business like profit and loss position, about assets and liability, expense and income data, status of funds and also so many other related information to its stakeholders. In absence of accounting system, this information about the business could not be compiled and provided to the concerned. Thus accounting provides relevant and reliable financial information to interested parties. It is a business information system

Accounting is a common language in the business world and provides financial information from one person to another of the business world. The information provided is useful while taking business and economic decision.

USERS OF ACCOUNTING INFORMATION

Accounting information is useful for the stakeholders while taking business and economic decision in business organizations. A person not having knowledge about English language is not able to take information through English language. In the same way, an individual not having sophisticated understanding of accounting is not able to understand it. Therefore it is also equally important that the users of the accounting information should also have a reasonable understanding of business and economic activities

Among the user of accounting information, the management itself is the main user. Other important users of accounting information are briefly described as below

(1) Investors

Investors are owner of company or creditors of company. Investors could be an individual or an institution like in Nepal Employee Provident Fund, Insurance Companies and also mutual funds. Accounting information enables the investors to identifying the most profitable investment opportunities, on the basis of which the inventors decide about BUY, RETAIN and SALE of investments. Investors are interested in the ability of the business organization to pay out Dividend to its investors or shareholders, which is the key to assess the management performances. Therefore accounting information is useful for both investors and potential inventors.

(2) Lenders

Lenders are an individual like debenture holders or are institution like banking and financial institutions. Lenders are interested about Safety of their loan and interest will be paid on due date. Banking institutions do credit evaluation on the basis of information derived from financial statements like Income Statements (PL Account), Balance Sheets, Cash Flow Statements, Financial Ratios and other financial indicators, provided by accounting system of the organization

(3) Suppliers and other Trade Creditors

Suppliers are interested about whether their Credit amount will be paid on due date or not and also the possibilities of growth in the business in future. Financial statements provide information to the suppliers about the financial strength, liquidity and trends of growth in future

(4) Customers

Customers are objective of business. They are the most important stakeholder for any business organization. All the Customers, among which mainly institutional customers use financial information. Customers decide about volume of business, long term relationship on the basis of the trust worthiness, honor of post sale services, guarantee and warranty promises and like others

(5) Management of the business

Management needs business information for planning, organizing, controlling and evaluating the business performances of the business. Management use accounting information for evaluation of potential investment projects. Management monitors the key accounting indicators to study about business affairs with competitors in global arena

(6) Security Analysts and Advisors

Today Equity and Bond analysts, stockbrokers, Tax Advisors, Investment Analysts, Credit Rating Agencies offer a wide array of business information services to the investors, potential investors and other researchers. They give advice to their clients and in Business TV programs about BUY, RETAIN and SALE of investments to the investors and potential investors. They gather Information the financial statements provided by accounting system

(7) Employees and Trade Unions

Employees are naturally interested in the financial performance of the organization which they are working for. Because the organization is the main source of their income. Potential employees also would like to look into the financial performance for ensuring a long term career in the organization. Also retired employees want to ensure their receivables like gratuity, pension etc. Such information comes from the accounting system. Not the least Trade Unions activists are also naturally interested as they are for the security of the interest of employees

(8) Government and Regulatory Agencies

Government and regulatory bodies are responsible for ensuring follow of government regulation and a fair business practices by an enterprise in the Taxation, Customs Duties, Excise Duties in the national and international business practices. In Nepal Ministry of Commerce and Industry, Ministry of Finance looks into the financial affairs of business enterprise. Also Nepal Stock Exchange (NEPSE) is responsible specially for regulate the investment affairs. The review of annual reports contributes to improvement in financial standards

(9) General Public

Prosperity of the local community depends on the success of the enterprises running in the society. Financial statements assist the Public by providing information about trends and recent developments in the prosperity of the enterprise. An individual and institution working for the broad interest if public have a general interest in the affairs of business enterprises. Such individual and groups are Social Worker, Political Parties, NGOs, Consumer forum, Newspaper, Television Channels, Environmental protection group etc. They use business information for their decisions in the public interest

BASIC ACCOUNTING PRINCIPLES

Accounting principles are also called Accounting concepts. The method of keeping Accounting is guided by principles developed mainly by accounting institutions and conventions from time to time. Following are some major accounting concepts

(1) Business Entity Concept

A business should be treated as a separate accounting as well as a legal entity, which is separate from its owner(s) and other firms of the same organization. This concept says that the personal financial affairs of the proprietor or other firms should not be clubbed in the business. It helps to prepare financial statements of the affairs of a particular enterprise and will help to produce a meaningful financial information about the business

(2) Going Concern Concept

A business firm is established with the assumption that it will continue till the indefinite long period of time. Therefore an enterprise acquires Fixed Assets and it also justifies an accounting system based on historical cost

(3) Money measurement Concept

Money is the only common denominator for all business enterprise. It makes possible to compare financial information between different enterprises of the organization or with other business organization. This concept says that all business transactions should be expressed or recorded in terms of money or money’s worth. The transaction which is not or cannot be measured in terms of money is not recorded in the accounting system

(4) Duel Aspects

Duel aspect is also known as accounting equation concept. It says that any transaction in the business has a double effect. It approves that Assets of a business is always equal to Capital + Liability. Either both sides increase or both sides decrease or zero effect in both sides. Therefore it is also known as Double Entry System and Accounting Equation Concept

(5) Accrual Concept

Under Accrual Concept, it says that all kinds of Paid and Unpaid or Payable expenses expense for the period, in the same way Received and Receivable both kinds of Incomes of the period are taken as Income for the period. Therefore the Accrual basis is also called Period basis, i.e. all kinds of Cash/Credit transactions related to a certain financial year are recorded in the books of account

Therefore under accrual concept, outstanding expenses, Receivable incomes are added and Prepaid expenses, Pre received incomes are subtracted while preparing Income Statement. It helps to determine the actual Income, Expenses, Profit and Loss, actual assets and liability position of the business enterprise

(6) Matching Concept

Matching Concept says that Expenses and Income should be recorded in the related accounting period. If Income are recorded in one period and expenses to generate that income is recorded in the other period then the accounting information about Profit and Loss would be unreal. Therefore accounting follows accrual concept, i.e. concept of Outstanding and Prepaid, Receivable and Pre received while recording information about Income and Expenses

(7) Accounting Period Concept

It says that performance of business is evaluated for a period of One Year. A business organization cannot wait for years and years to know about how success the business is for them. How much profit or loss has been there. It helps to the organization for evaluation of business performance and takes necessary corrective action is need be

(8) Historical Cost Concept

Historical Cost refers to the Cost that is at the time the item arose. The transaction of business is recorded on the basis of “the worth or value that is” at the time it takes place. Worth of a Fixed Assets increase and decrease from time to time, but accounting records do not change as per the increase or decrease in the value. Expense, Income, Assets and Liability are recorded in the books of account at the Price or worth it took place at the time when expense too place, when assets are acquired

(9) Realization Concept

This concept says that Income and Expenses are recorded in the books of account when it is realized. Sales are not recorded on the basis of Order Received or Purchase is not recorded on the basis of order placed. Similarly, Sales and Purchase are not recorded on the basis of Advance Cash Received for future Sales or Advance Cash paid for a future purchase. The similar behavior is there in case of Expenses and Income also. In other word, actual Sales, actual Purchase, actual income and actual expenses are recorded in the books. Cash does not matter, rather time period matters

EXPENSES & ASSETS, INCOMES & LIABILITIES

Payments generate (a) Expenses and (b) Assets or Properties. An individual or an organization makes payment in order to receive benefits. Some benefits are SHORT-TERM and some benefits are LONG-TERM in nature. Generally Period less than ONE year is called short-term and period more than ONE year is called long-term.

When SHORT-TERM benefits are received, such payments are for Expenses. For Example; Rent, Wages & Salaries, Allowances Expenses, Commission Expense, Interest Expenses, Stationeries, Freights, Travelling Expenses, Telephone Expenses, Electricity & Water Expenses, Repair & Maintenance Expenses, ETC.

When LONG-TERM benefits are received, such payments create Assets or Properties. For Examples; Land & Building, Plant & Machinery, Furniture & Fixtures, Motor Vehicles, Long-term Investments, Equipment, ETC. These assets are also called FIXED Assets

Fixed Assets are divided into mainly two parts. They are

(a) Tangible or Physical Fixed Assets: Tangible Fixed Assets are those which are physical in nature. These FA can be seen and touched, have a weight etc. For Example: Land & Building, Plant & Machinery, Furniture & Fixtures, Motor Vehicles, Long-term Investments, Equipment, ETC.

(b) Intangible Fixed Assets: Intangible Fixed Assets are those which are non-physical in nature. For Example; Goodwill, Copyright, Patents, ETC. These assets also give Long-term benefits, but they are not in physical form. They are in the form of Paper/Licenses/Authorities ETC.

Further, Some Assets are Fixed Assets and some Assets are Current Assets. How? Let us see. All Assets are CONVERTIBLE into CASH. Assets or Properties have Money Value. In other words, most of the assets can be sold or realized CASH. For Example, Building can be sold and converted into Cash. Machineries can be sold and converted into Cash. But, some assets are convertible into cash very fast or in SHORT period of time and some assets are convertible slow or in LONG period of time. On the basis of their nature of convertibility into cash, some assets are called FIXED ASSETTS and some assets are called CURRENT ASSETS. Assets are broadly divided into 3 major GROUPS

(1) Fixed Assets

Fixed-assets are generally convertible into cash slow or take a long period of time. For Example; Land & Building, Plant & Machinery, Furniture & Fixtures, Motor Vehicles, Long-term Investments, Equipment, ETC

(2) Current Assets:

Some assets are generally convertible into cash fast or within a short period of time. Such assets are called Current Assets. In other words, Current Assets are convertible into cash fast, in short period of time in general course off business. For Example

• Inventory or Stock: Inventories are the goods or things which are purchased by organization with the purpose to sell them to customers for making profits. Inventories are generally converted into cash fast or in a short period of time

• Accounts Receivables or Sundry Debtors: When organization sells goods or inventory on credit then, such transactions are seen in the accounts as Receivables. Such amount is called Accounts Receivable (AR) or Sundry Debtors (SD). Such amounts are generally collected or realized or converted into cash very soon or in the short period of time

• Bills Receivable: If Account Receivables are not realized in given credit period or sometime credit amount is very big, then organization generally prepares a legal document for financial security, such legal document is called Bills Receivables. Generally Bills Receivables has a term of 3 months, 6 months or maximum of 9 months

• Prepaid Expenses: Sometimes, organization make payment of expenses in Advance. For Example, Insurance Premium is an expense, which is paid by the organization in advance. Such expenses which are paid in advance is called Advance Expenses or Prepaid Expenses. It is Assets for the company. Such advance amount is settled faster, in the Short-period of time

(3) Fictitious Assets

Fictitious Assets are a Imaginary Assets. All kinds of Assets (Fixed Assets and Current Assets both can converted into cash. Fixed Assets are converted into cash in long period of time and Current Assets are converted into cash in short period of time. But Fictitious Assets such assets which are not converted into cash at all. It is categorized into assets because it gives long-term benefits to company like all other Fixed Assets. So Fictitious Assets are also called a kind of Fixed Assets. But it is not converted into cash, so these assets are imaginary assets only and is called Fictitious Assets. Following are example of Fictitious Assets.

• Preliminary Expenses: There are some expenses in the organization, which take place generally at the time of establishment of organization. For Example; Expenses for Registration of Company with Company registration department, Expenses of Registration of Company with Tax Department, Expenses of inauguration of Company Etc. Such expenses give long term benefits to the organization. Therefore such expenses are taken as Assets. But on the other hand, such assets rot convertible into cash or such assets cannot be sold. Therefore, it is Fictitious Assets or Imaginary Assets for the company.

• Discount on Issue of Share: Company issue shares to collect capital. Sometimes, public do not show interest to buy shares. In such a condition, company offer Discount. Such Discount at the time of issue off share is called Discount on Issue of Share. Such expenses give long term benefits to the organization. Therefore such expenses are taken as Assets. But on the other hand, such assets rot convertible into cash or such assets cannot be sold. Therefore, it is Fictitious Assets or Imaginary Assets for the company

• Underwriting Commission: Generally company appoints banks or financial institutions for management of Issue of new Shares. Such offer is called Initial Public Offering (IPO). Such banks or financial institutions manage all the activities for Issue of Shares and collection of fund for the company. For this kind of service, company gives some amount as commission. It is called Underwriting Commission. Such expenses give long term benefits to the organization. Therefore such expenses are taken as Assets. But on the other hand, such assets are not convertible into cash or such assets cannot be sold. Therefore, it is Fictitious Assets or Imaginary Assets for the company

Receipts generate (a) Income and (b) Liabilities. Some receipts are refundable. They are liabilities for company. For example; Loan received from bank. Loan received from bank is refundable. Therefore such receipts are Liabilities for company. But if company do cash sale and receive money from customers. Such receipts are not refundable. Such receipts are income for company

It is a common feature for Liabilities that all kinds of Liabilities are payable. Further Liabilities are broadly divided into 3 major groups. They are as follows

(1) Current Liabilities

Current Liabilities are those liabilities which are payable in SHORT period of time. So it is also called short-term liabilities. Following are some of the examples of current liabilities

• Accounts Payable/Sundry creditors: When organization purchase goods on credit. Such amount is payable to the suppliers. It is called Sundry creditors/Accounts payable. Such amount is generally payable in short period of time. So it is current liability

• Bills Payable: Sometimes, organization purchase goods of very big amount from suppliers on credit. In such a situation, suppliers may feel risk of recovery of such amount. In such a situation, the supplier may also prepare a legal document on which signature of both buyers and sellers are put. Also impressions of thumbs are put on the documents. Witnesses are also managed and they also put signature on the document. Such document is called Bills. And the amount payable is called Bills payable. Such amount is generally payable in short period of time. So it is current liability

• Outstanding Expenses: Sometimes organizations make a part payment of expense. Some amount may be unpaid with the promise to make payment in future. Such amount is generally payable in short period of time. So it is current liability.

(2) Non Current Liability or Long Term Liabilities:

Some liabilities are there which are payable in a long period of time. They are called Long term liabilities. Following are some of the examples of non-current liabilities

• Bank Loan: Organizations may take bank loan for their business. Such loans are generally payable in the period more than one year or long-term. Therefore it is Long-term Liability. • Debentures: Debentures are a kind of loan raised by organizations by issuing a certificate with a promise to pay periodical interests and principal amount in future. Such amount is generally paid or payable in long period of time. Therefore it is Long-term Liability

(3) Share Holders Fund:

Both current liabilities and long term loan are such a liabilities which are payable to outsiders. But some liabilities are there which are payable to the shareholders of the company. Such liabilities come under the group of “Share Holder’s fund”. Following are some of the examples of such liabilities

• Share Capital: Share capital is the amount contributed by the owners or the share holders of the company. If any shareholder wants to leave the company or quite the company, then his/her amount of share capital is paid by company to the outgoing shareholder.

• Profit and Loss Account: It is the amount of profit which belongs to the shareholders of the company. If any shareholder wants to leave the company or quite the company, then his/her share amount of the profit is paid by company to the outgoing shareholder.

• General Reserve: General Reserve is the Reserve money that is created out of the profit of the company. It is similar to Profit amount (Profit and Loss Account). If any shareholder wants to leave the company or quite the company, then his/her share amount of the Reserve is paid by company to the outgoing shareholders

Accounting Equation

In all kinds of business organizations, they maintain financial records on daily basis in order to keep information about financial position of the business. Financial position of a business is measured mainly by the following 3 components

(a) How much is the Assets of the Company?

(b) How much is the liabilities of the company?

Accounting Equation explains us that how these three components are related to each other. When we put any transactions into Accounting Equation, then we shall find that the Total Assets of a company is always equal to the total of the Capital and Liabilities. Following is the expression of Accounting Equation

Assets = Capital Fund + Liabilities

Accounting Equation is maintained in terms of INCREASE and DECREASE of Assets or Capital or Liabilities. If increase then we do PLUS and when decrease then we do MINUS. It is all about Accounting Equation

Further we observe that there are so many transactions which affect Assets, also so many transactions which affect Liabilities. But generally there are only 4 transactions, which affect Capital Fund. These transactions are as below

S No Transactions Increase/Decrease

1 Started business/Investment of Capital into business Increase Capital

2 Withdrawal of Capital from business/Drawing Decrease Capital

3 Expenses/Losses Decrease Capital

4 Income/Profits Increase Capital

Journal Entries

As we observe in the Accounting Equation, any kind of business transactions have effect on Assets and/or Capital Fund and/or Liabilities. We also observe that all kinds of business transactions have effect in two or more than two components or accounts. For example, let us take a transaction, "Purchase of Furniture for cash Rs 40000" In this transaction, there is effect in two accounts, one is Cash Account and next is Furniture Account. Here Furniture is increased and Cash is decreased. Let us take another transaction, Salary paid Rs 15000. In this transaction, there is also effect in two accounts, one is Salary Account and next is Cash Account. Salary expense is increased and Cash is decreased. The increase and decrease are recorded in the books of Accounts, which is called "Journal Entries Book" . The process of recording the transactions is called "Journal Entry"

In order to record the transactions in Journal Entries Book, all the transactions or all the accounts are divided into 3 groups. They are as follows....

Personal Account: It is account of persons. There are two kinds of persons, one is natural persons, like Shyam Account, Anita Account etc. And other kind of person is artificial person or institutions, like Birgunj Stationary Suppliers, Sagaramatha Cement Industries etc. The rule of journal entry for personal account is as follows.

Debit: Who receives

Credit: Who gives

Real Account: It is account of properties or assets. There are two forms of assets or properties. One is physical assets like Furniture, Land & Buildings, Plant & Machineries, Vehicles etc. Next form of property is in form of Receivables. Receivables are assets or properties for the business organizations. For example, when company sells goods on credit, then there shall be amount receivables from the customers. Such kind of amount receivables is called Account Receivables or Sundry Debtors. It is assets or property for the business organizations. The rule of Journal Entry for Real account is as follows.

Debit: When Comes In or When Increase

Credit: \When Goes Out of When Decrease

Nominal Account: It is account of Expenses, Losses and Incomes, Gains. For example, Salary Paid, Rent Paid, Stationary purchased are Expense for the organizations. Commission earned, Dividend Received are the examples of Incomes. The rule of journal entry for Nominal account is as follows.

Debit: Expenses and Losses

Credit: Incomes and Gains

Some Specific Forms of Journal Entries

WHEN "PURCHASE ACCOUNT" is CREDIT?

Sales Account is ALWAYS credit. It is absolutely true. Do you think "Purchase Account" is always Debit?

No. Purchase Account is not always "Debit" Sometimes Purchase Account is "Credit" also. Let us understand it in this way.

In the organization, there are two reasons of "goods" decrease, which are given below.

1. First and main reason of goods decrease is "Sales" Here "Sales Account is credit"

2. The Second reason of goods decrease in the organization is "Non Sales" which are as follows

(a) Loss of Goods by Fire or theft etc

(b) Sample conversion for Advertisement

(d) Withdrawal of Goods for private use, i.e. Drawing

(e) Other such reasons

Because of the above reasons also, goods decrease in the organization. These are "Non sales" reasons. If the "goods" decrease and the reason is "Non Sale" then in this condition "Purchase Account is Credit" The Journal Entries appears as below.

Loss of Goods by Fire A/C Dr

Purchase A/C Cr

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Advertisement A/C Dr

Purchase A/C Ct

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Charity & Donation A/C Dr

Purchase A/C Cr

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Drawing A/C Dr

Purchase A/C Cr

LOSS of GOODS and INSURANCE CLAIMS

We know that when goods is lost then "Purchase Account" is credit. Let us now discuss the "Loss of Goods" linking it with "Insurance Cover".

Generally organizations purchase "Insurance Policy" to save company from possible loss during storage the goods in warehouse. When some unforeseen event occurs like short circuit and warehouse catch fires. In such a condition, the organization may apply to Insurance company for compensation of the loss.

After the organization apply, Insurance company send surveyors to assess the actual amount of loss and determine a certain amount of the loss for the purpose of settlement.

In practical, Insurance company does not compensate always the full amount of loss. Sometimes, insurance company compensate the full amount of loss, sometimes compensate partial amount of loss and sometimes do not settle anything. Accordingly Journal entries are recorded.

Following are the different conditions of settlements and their journal entries.

1. Full amount of claim settled by Insurance Company:

Insurance Company A/C Dr

Purchase A/C Cr

2. Partial amount of claim settled by Insurance Company:

Loss of Goods A/c Dr

Insurance Company A/C Dr

Purchase A/C Cr

3. No amount of claim settled by Insurance Company:

Loss of Goods A/C Dr

Purchase A/C Cr

DEBTORS BECOME INSOLVENT

Sometimes, debtor(s) become unable to pay the debt against credit purchase. In such condition the debtor is called bankrupt or insolvent and his state of unable to pay the debt is called "bankruptcy", which is also approved/declared by court of law. When the debtor is declared insolvent or bankrupt, the the court appoint a government officer to handle the case of bankruptcy, the person appointed is called "Liquidator". The liquidator take the charge of the personal property of the debtor. Such personal property is called "Estate". The liquidator hold and sale the personal property of the debtor.

The amount realized through assets sales is normally less than the amount of debt. And generally a partial amount is realized which is paid to the company. Sometimes the debtor has no property at all and nothing is realized. There are two conditions

No amount is recovered from debtor

Partial amount is recovered from debtor

To understand the journal entry and the nature of transaction, the following two examples are taken

1. A debtor amounting to Rs 100,000 became insolvent and nothing was recovered from his estate For this transaction, two journal entries shall be passed.

(a) To record the bad debt

Bad Debt A/C Dr 100,000

Debtor A/C Cr 100,000

(b) To transfer the loss (bad debt) to Profit & Loss Account

Profit & Loss A/C Dr 100,000

Bad Debt A/C Cr 100,000

2. A debtor amounting to Rs 100,000 became insolvent and only 40% was recovered from his personal estate. For this transaction, two journal entries shall be passed.

(a) To record the bad debt and recovered amount

Cash A/c Dr 40,000

Bad Debt A/C Dr 60,000

Debtor A/C Cr 100,000

(b) To transfer the loss (bad debt) to Profit & Loss Account

Profit & Loss A/C Dr 60,000

Bad Debt A/C Cr 60,000

Ledger posting & trial balance

What are the steps of accounting one followed by another is called Accounting cycle or Accounting process. Accounting process starts with the collection of source documents of economic transactions- journal entries - leger posting - preparation of trial balance and ends with preparation of financial statements.

Journal Entries: All economic transactions are recorded one by one date wise in the book of accounts. It is called journal entry. The book where journal entry is recorded is called Journal Entry Book.

Ledger posting: The transactions recorded in journal entry book is further transferred/posted in another book on "group wise basis " The book is called ledger. The process of transferring in another book is called ledger posting.

Trial Balance: The transactions posted in Ledgers are totaled up and balance is obtained at every month end. It is possible that there may become error while totaling the posted amount in ledger. There may also become error while obtaining balances of ledgers. To find out such possible errors business organization prepares a sheet which is called trial balance. As the name suggests, trial balance is a trial or checking system of balances reflected in the ledgers.

To understand the let us take the following imaginary transactions of a business organization.

1. Commenced business with cash Rs 50000

2. Purchase goods for cash Rs 20000

3. Sold goods for cash Rs 15000

Journal Entries:

1. Cash A/C Dr 50000

Capital A/C Cr 50000

2. Purchase A/C Dr 20000

Cash A/C Cr 50000

3. Cash A/C Dr 15000

Sales A/C Cr 15000

Ledger Posting:

Cash A/C

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Date Particulars Dr amt Date Particulars Cr amt

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(1) To Capital a/c 50000 (2) By Purchase a/c 20000

(3) To Sales a/c 15000 By balance c/d 45000

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65000 65000

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To balance b/d 45000

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Capital A/C

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Date Particulars Dr amt Date Particulars Cr amt

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To balance c/d 50000 (1) By Cash a/c 50000

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50000 50000

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By balance b/d 50000

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Purchase A/C

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Date Particulars Dr amt Date Particulars Cr amt

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(2) To Cash a/c 20000 By balance c/d 20000

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20000 20000

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To balance b/d 20000

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Sales A/C

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Date Particulars Dr amt Date Particulars Cr amt

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To balance c/d 15000 (3) By Cash a/c 15000

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15000 15000

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By balance b/d 15000

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Trial Balance

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Particulars Debit amt Credit amt

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Cash Account 45000

Capital Account 50000

Purchase Account 20000

Sales Account 15000

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T O T A L 65000 65000

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When both the debit side total and credit side total in trial balance come equal amount, then it is assumed that ledger positing and balance taken out are arithmetically correct.

Cash Book

Single column cash book (Fig No 1)

Cash book is one of the very important book of accounting. The transactions which involves Cash or banking transactions, i.e. transactions by cheque, are entered into Cash Book. Cash book also includes discount given or allowed and discount received which comes along with cash and banking transactions.

Cash book is maintained on the date wise basis and it is closed generally at the end of every month.

There are a maximum of three columns for amount in a Cash Book. They are; Cash column, Bank column and discount column. On the basis of requirement of the organization, cash book is prepared bearing only one of the three or two of the three or all the threes.

Thus on the basis of the requirement of an organization, there are three types of cash book as mentioned below

Single Column Cash Book (Fig No 1)

Double Column Cash Book (Fig No 2, 3 & 4)

Triple Column Cash Book (Fig No 5)

1. Single Column Cash book generally includes cash column only

2. Double Column Cash book includes Cash and Bank column, or Cash and discount column or Bank and discount column.

3. Triple column Cash book includes all tree columns, i.e. Cash, bank and discount column

Cash & Bank Column (Fig No 2)

What is Contra Entry ?

Cash book has two sides. Debit side and Credit side. Debt side is also called "Receipt side" and Credit side is also called "Payment side". Therefore most of the transactions are entered either in Debit side or in Credit side only. For example, Goods sold for Cash Rs 50,000, Cash received from debtors Rs15,000. These transactions are receipt of cash and they are entered in Debit side of cash book. In the same way, Salary paid Rs. 20,000, Paid to creditors Rs 40,000. These are payment transactions and these transactions are entered in entered in Credit side of cash book. But there are TWO transactions which are entered in both sides of cash book together. Such transactions are called "Contra entry"

Following are contra entry transactions

1.Cash deposited into bank Rs 400 (Look into Fig No 2 above)

2. Cash withdrawal from bank Rs 150 (Look into Fig No 2 above)

Both of the above transactions are entered in both sides of Cash book and they are contra entry. Contra entries are indicated with the letter "C" in the cash book. (Look into Fig No 2 above)

Specimen of other Double Column Cash book are given below. (Fig No 3 and Fig No 4)

Cash & Discount column (Fig No 3)

Bank & Discount column (Fig No 4)

Triple column Cash book has all three columns in it. Following is the specimen of Triple column cash book (Fig No 5).

Triple Column Cash book (Fig No 5)

Bank reconciliation statement

All organizations open bank account for their banking transactions. Banking transactions refer to the transactions related to banks, mostly transactions related to checks. Followings are some of the major banking transactions.

Checks received from customers or parties and the same is sent to bank for deposits

Payment made to suppliers or parties by checks

A Customers deposited amount in outstation in our bank account

Utility bills paid by banks as per the standing order of company

Interest on Loan charged by bank

Dividend or any such incomes received by bank as per standing order of company

Above are some of the major transactions of company related to bank. All the banking transactions are entered by company in Cash book and those all are also entered by bank into Pass book or bank's statement.

It should also be noted that the transactions which are entered by company into cash book in Debit side, all those transactions are entered by bank in Credit side of Pass book and vv.

For example, checks which are received by company are entered in Debit side of Cash book and send the checks to bank for deposit. Those checks received by bank are verified then entered by bank in credit side of their book, i.e. Pass book.

In the same way, sometimes company also make payment to supplier or parties by checks. After making payment by check, company make entry in Cash book in credit side. But the bank make entry of such transactions in Debit side after making payment of checks.

Since all the bank related transactions are entered by both company and bank in Cash book and Pass book respectively. Therefore, the balance shown by Cash book and balance shown by Pass book are supposed to match. But in reality the balance shown by Cash book and Pass book generally do not match.

Here, we should carefully note that balances between both the books do not match, because the timing of making entry by company and the bank is different. For example, as soon as company receive checks, it generally immediately make entry in Debit side of Cash book, but bank do not make entry in the Pass book immediately. Bank sends such checks to to the related bank through Central bank (Nepal Rastra Bank) for verification and approval. Such process of verification is called "Process of Collection or Process of Realization". The Collection or Realization Process takes some time. Therefore, bank do not make entry of check deposit immediately. Therefore there is difference in balances between Cash book and Pass book. Such kind of difference is also there in the case of payment made by checks.

Because of such various reasons, there is always a mismatch between the balances of Cash book and Pass book. Some of the major reasons of differences are given as under.

Reasons of Differences between the balance as per Cash book and Pass book (bank's statement)

Checks (i) received by Company, (ii) entered into Cash book, (iii) and sent to bank for deposit/collection. But the same is (i) not collected/realized by bank (ii) hence not entered by bank in Pass book in time

Payments (i) made by company by Checks, (ii) and entered in Cash book. But the check may (i) not presented for payment in the bank (ii) so not entered in Pass book by bank.

A Customer deposited amount in our bank account directly and bank shows that transaction in Pass Book. But company could not make entry of such transactions in Cash book immediately until company receive information of such transactions from bank formally

Sometimes bank (i) make payment of Utility bills (like Electricity bill, Internet bill etc) periodically as per the standing order given by company, (ii) and make entry of such payments in Pass book. But company would not make entry of such payment in Cash book until company received information from bank formally.

Sometimes bank also (i) receive Dividend or any such incomes on our behalf of company as per the standing order of company, (ii) and make entry of such income received in Pass book. But company would not make such entry in Cash book in time until company receive formal information from bank.

Sometimes, bank also (i) charge interest on loan taken by company, and shows the entry in Pass book. But company would not make entry in Cash book immediately until company receive formal information from bank

Sometimes, there could also be mistakes in Cash book and/or Pass book because of oversight. For example, it could happen to write Rs 100 in place of Rs 1000. Also sometimes the entry of debit side could happen to write in credit side. Such type of mistakes also make difference in balances between Cash book and Pass book.

Above are some of the major reasons because of which there is difference in between the balances as per Cash book and Pass book. In such a condition, company prepare a statement keeping in view the reasons of differences. Such statement is called Bank Reconciliation Statement (BRS)

How to prepare Bank Reconciliation Statement (BRS): a brief discussion on technical aspects of preparation of BRS

As we know that there are two books

1. Cash book (maintained by company)

2. Pass book or bank's statement (maintained by bank)

We should note that all the transactions that increase the balance in cash book are entered in Debit side of Cash book. For example Check received and sent to bank for deposit. This transaction is entered in Debit side of Cash book. In the same way, all the transactions that decrease the balance in cash book are entered in Credit side of Cash book. For example: Check issued for payment. This transaction is entered in the Credit side of Cash book.

But Pass book is just opposite of the Cash book. The transactions which increase the balance in Pass book or the bank are entered in Credit side of Pass book. And the transactions which decrease the balance in Pass book or the bank are entered in Debit side of Pass Book. In summary, it appears as follows.

Cash Book

Debit Side/Receipt side Credit Side/Payment side

Check received & sent for deposit Check issued for payment

(It is balance increase side) (It is balance decrease side)

Pass Book

Debit side/Payment side Credit Side/Receipt side

(It is balance decrease side) (It is balance increase side)

We should also note the following:

* Debit balance of Cash book is called "Balance as per Cash book"

* Credit balance of Cash book is called "Overdraft as per Cash book"

Whereas,

* Credit balance of Pass book is called "Balance as per Pass book"

* Debit balance of Pass book is called "Overdraft as per Pass book"

We should also note that "Balance" indicates a Positive balance and "Overdraft" indicates a Negative balance. Therefore "Balance as per Cash book" or "Balance as per Pass book" is indicated with a Positive sign. And "Overdraft as per Cash book" or "Overdraft as per Pass book" is indicated with a negative sign while preparing BRS and put the amount of Overdraft in the bracket ( ).

NOW, one more thing, we need to understand before we begin "Preparation of Bank Reconciliation Statement" There are 3 steps for "Preparation of BRS", which are as follows.

Step 1: The statement is started with

Balance as per Cash Book (Debit balance) xxxx

Or Overdraft as per Cash Book (Credit balance) (xxxx)

Or Balance as per Pass Book (Credit balance) xxxx

Or Overdraft as per Pass Book (Debit balance) (xxxx)

Step 2: The transactions or the reasons of differences are adjusted ( + or - )

(While doing plus or minus, we should look into and decide following a very SIMPLE rule, i.e. as follows.)

(a) Look where from ( Cash book or Pass book ?), we are starting the reconciliation. If it is started with Cash

Book, then we should look into the "Increase or Decrease" in the Balance of Pass Book. In this case, If the transaction increase the balance of Pass book, then we should "Plus" the amount and if the transaction

decrease the balance in Pass book, then we should "Minus" the amount.

And suppose it is started with Pass Book, then we should look into the "Increase or Decrease in the Balance of Cash Book. In this case, if the transaction increase the balance in Cash book, then we should

"Plus" the amount and if the transaction decrease the balance in Cash book, then we should "Minus" the

amount

(b) While doing this STEP, do not care there is "Balance or Overdraft" Look only, it is Cash Book or Pass

Book.

Step 3: This is the last Step. Here we find out Balance. We do plus and minus of the transactions that we have

entered in Step No 1 and 2. And write the amount whatever has come.

(a) If comes +, then we write " Balance as per Cash Book or Pass Book"

(b) If comes -, then we write " Overdraft as Cash Book or Pass Book"

(We should also take care that, if we have started with Cash book in Step no 1,

= then here it shall be Balance or Overdraft as per Pass book

And if we have started with Pass book in Step no 1,

= then here it shall be Balance or Overdraft as per Cash book)

Concept of capital and revenue

In an organization, there are many transactions. Some transactions happens generally on a daily basis; whereas some transactions happens on yearly basis. These transactions are repeat daily or yearly.

For Example: Payment of Salary. It repeats generally every month. Payment of Rent. It also repeats every month. Payment for Travelling Tickets. It also happens more often many times in organization. These payments of expenses are very common and happens in the organizations in a regular basis

On the other hand, some transactions do not happens on the regular basis. It happens occasionally.

For example: Purchase of Fixed properties like Motor Vehicle, Purchase of Land & Building, Taking long term Bank Loan, Issue of Common Shares etc

On the basis of the nature of transactions, some transactions are "REVENUE" transactions and some transactions are "CAPITAL" transactions.

The Revenue and Capital transactions are studied in terms of Receipt and Payment, Income and Expenditure as described below.

1. CAPITAL PAYMENTS and REVENUE PAYMENTS:

Organizations makes payments. All payments are made to receive some kinds of benefits. Now, some benefits are very short term in nature, while some benefits are for a long period of time, they are long term in nature.

For example: Payment for Rent and Payment for acquiring new Building. Both are payments. Benefits of the payment of Rent that company gets is short term in nature, as it is generally for one month living only. But the benefits of the payment for buying a building is long term in nature, as company can use the building or take the benefits of building to live in for many years.

The payment that gives a short term benefits is a Revenue Payment. It is Revenue Expenditure. It is Expenses. It goes to Income Statement (Profit & Loss Account) for determination of Profit/Loss of a company. Therefore, Payment for Rent is expenses for company.

But the payment which gives a long term benefits is a Capital Payment. It is Capital expenditure. It creates property or Assets . It goes to Balance Sheet.

In the same way, payments for Traveling expenses like Bus tickets is a Revenue payment. It is Revenue Expenditure. But payment for buying a Motor vehicle is a Capital Payment. It is Capital Expenditure. Therefore,payment for Bus Ticket goes to Income Statement and payment for buying goes to Balance Sheet as property or assets.

In the meantime, it is also worth knowing that payment for a minor repair is Revenue Payment. It is Revenue Expenditure. But payment for a major repair is Capital payment. It is Capital Expenditure. The minor repair expense is a regular expenses. But a major repair expenses like engine overhauling. Engine overhauling increase the life of a motor vehicle substantially by generally one year or more. Such expense amount is also big. So minor repair expense go to Income Statement, whereas a major repair expense is capitalized and debited in Assets Account and obviously go to Balance Sheet.

We could also take another example of building. A building also requires a minor repair every year or most often. For example painting of building, minor repair in window panels, like change of window glass etc. It is Revenue payment. But if there is a major repair, then it is called Renovation, a repair in big scale. For example, the whole partition of rooms are rearranged, walls of a old building are reconstructed. These are a major repair. Payment for such a major repair is Capital Payment. It is a capital expenditure.

2. CAPITAL RECEIPTS and REVENUE RECEIPTS

Like Capital payments and Revenue payments, Receipts are also Capital and Revenue in nature. The Capital and Revenue concepts can be understood in different terms as described below.

Refundable and Non refundable receipts:

There are generally two kinds of receipts. Some receipts and refundable whereas some receipts are non-refundable. For example: Cash received by selling goods. When company receive cash by selling goods to customers, such receipts are not refundable. But if company takes Bank Loan. It is also a receipt of cash. But such kind of receipt is required to pay back in future. It is refundable. The receipts which are non refundable (sale of goods) is a Revenue receipt and the entry goes to Income Statement as "Income" for determination of Profit/Loss of the company. But the Loan taken is a Capital receipt and the entry go to Balance Sheet as "Liability" for determining Financial Position of the company. The another example off Capital Receipt could be "Issue of Share." The amount received by Issue of Share is also refundable, because if shareholder wants to quit company, his/her part of share money should be refunded.

Receipt against Sale of Property or Assets and Sale of Scrap

If company receive Cash by disposing or selling Assets, such kind of receipts are Capital receipts. Such receipts decrease the Assets. But if company receive cash by selling waste materials or scrap materials, then such kind of receipts are Revenue receipt and the entry goes to Income Statement as "Miscellaneous Income"

accounting for fixed assets (depreciation)

Machines

Furniture (Office Table , Chairs etc)

Vehicle (Car)

All business organizations use some kinds of properties for use in the business for a long term. Those properties are called "Fixed Assets" The assets may be Machinery, Furniture or a Car.

These assets are generally used by companies in a regular basis. Because of its continuous use in the business, the working efficiencies or the effectiveness of these assets decrease day by day, year by year. Because of decrease in the efficiencies and effectiveness of the Fixed assets, there shall also be a decrease in their values day by day, year by year. This decrease in the value of Fixed assets in measured in terms of money, which is called "Depreciation"

It is practically not possible to measure the decrease in the value of Fixed Assets day by day. Therefore it is measured once in a year at the year-end on a regular basis. Generally Depreciation is calculated on the basis of predetermined standard percentage or sometimes on the basis of a formula, if percentage of depreciation is not available.

Depreciation decreases the value of Fixed Assets year by year. It is treated as a Non Cash expenses in the accounting system. Depreciation is charged in the Income Statement (Profit and Loss Account) every year.

Methods of Charging Depreciation

There are different methods of charging depreciation. Among which following are the two major ones.

1. Fixed Installment Method (FIM) or

Straight Line Method (SLM) or

Original Cost Method (OCM)

2. Diminishing Balance Method (DBM) or

Reducing Balance Method (RBM) or

Written Down Value Methhod (WDVM)

1. Fixed Installment Method

Under FIM, depreciation is charged generally at a certain percent on the original cost only year by year. Therefore, amount of depreciation for a year is same in each year over the life of Fixed Assets.

2. Diminishing Balance Method

Under DBM, depreciation is charged at a certain percent on the diminishing balance year by year. Therefore, amount of depreciation for a year is not the same, rather amount of depreciation decreases each year over the life of Fixed Assets.

Let us understand the nature of FIM and DBM with the following example.

Suppose a company purchased a Machinery for Rs 100,000 on 1st January 2011. Rate of depreciation is 20% per year. Company closes the books of account on 31st December every year. Calculate amount of depreciation for all five years under (1) FIM and (2) DBM.

(1) Calculation of amount of Depreciation under FIM

Year Opening bal Annual Depn Closing bal

1 100,000 20,000 80,000

2 80,000 20,000 60,000

3 60,000 20,000 40,000

4 40,000 20,000 20,000

5 20,000 20,000 0

(2) Calculation of amount of Depreciation under DBM

Year Opening bal Annual Depn Closing bal

1 100,000 20,000 80,000

2 80,000 16,000 64,000

3 64,000 12,800 51,200

4 51,200 10,240 40,960

5 40,960 8,192 32,768

As it is reflected above, cost price of FA and the rate of depreciation is 20%, same under both method. But amount of annual depreciation is different. It is also observed that the closing balance at the end of useful life (at the end of year 5) under FIM is Zero. But the closing balance at the end of its useful life under DBM is not zero.

Under DBM, the closing balance of Fixed Assets at the end of its useful life is not Zero.

How to calculate annual amount of Depreciation?

Under FIM, annual amount of depreciation is generally determined at a certain percentage available. In absence of percentage rate of depreciation, annual amount of depreciation is determined by using a simple formula as given below.

Cost of FA - B S V

Annual amount of Depn = -------------------------

Life

Where, BSV = Book salvage value at the end of useful life

Life = Life of F A in years

Under DBM, percentage rate of depreciation is generally available. The annual amount of depreciation is determined on the basis of the available percentage rate of depreciation.

How to determine Cost of FA?

Cost of a FA includes different components or different costs that are paid in course of acquiring the FA or in course of building that particular FA. Let us take one example to understand the guideline.

Suppose a company has its factory place in Parwanipur, Nepal. The company purchased a Machinery at New Delhi of India at a cost of Rs 500,000. The machine is brought to Parwanipur from New Delhi. There shall be different kinds of costs on the machine, like Transportation cost from New Delhi to Parwanipur, Insurance premium to cover the loss in transit. Custom Duty to be paid at Nepal Customs, unloading charge of machine at Parwanipur. After thhe machine is unloaded to factory site, the machine needs installation (installation is a process to prepare the machine ready to start production). After the machine is installed, then only the machine become ready for production. Therefore all the costs "from purchase to installation" all are included in the cost of machine as follows.

A typical calculation of the cost of F A (Machine)

Purchase cost (invoice price) of Machine Rs 500,000

Transit Insurance premium (2% on invoice) Rs 10,000

Transportation charge Rs 40,000

(from New Delhi to Parwanipur)

Custom Duty & Clearing charge Rs 50,000

(suppose 10% on invoice value)

Unloading charge of Machine at Parwanipur Rs 20,000

Installation charge of Machine Rs 30,000

TOTAL COST OF MACHINE Rs 650,000

Purchase cost of Fixed Assets (e.g. Machinery) and all other direct expenses that incur till the machine starts production ; these all costs are included in the Total Cost of FA (as given above)

- GAAP

Let us take another example to understand the concept. Suppose a company plans to buy a piece of Land and construct its own office Building. For the project, Company purchased a piece of Land for Rs 50,00,000. There is other expenses like development of Land, bought cement, sands, concrete, Bricks, Iron Rods, windows panels, Paints etc. Company also hired a gang of labor and paid Rs 25,00,000 to them. These all costs on different shall all be added to the cost of Building Construction. A typical calculation of the cost of Building shall be as follows.

A typical calculation of the cost of F A (Land & Building)

Cost of the piece of Land Rs 50,00,000

Land development cost Rs 10,00,000

Cost of cement Rs 40,00,000

Cost of Sand and concrete Rs 20,00,000

Cost of Steel Rs 30,00,000

Cost of Windows panels Rs 10,00,000

Cost of Bricks Rs 20,00,000

Cost of Paints Rs 5,00,000

Cost of Wages to labor Rs 25,00,000

Other miscellaneous costs Rs 15,00,000

TOTAL COST of LAND & BUILDING Rs 225,00,000

All the costs from Purchase of Land till the building is fully constructed,; all these costs are included in the cost of Land & Building

- GAAP

Process of Preparation of Fixed Assets Account (e.g. Machinery Account)

The entry of transactions are posted in Ledger account of Fixed Assets year by year. In other word, entries are made in the ledger account of year one first. After completion of posting of entries in year one, then posting of the entries of second year is made. After completion of second year posting, then the posting of third year is made. And the process repeats year by year.

TWO steps are followed and repeated every year while preparing Fixed Assets account as follows.

Year 1

Step 1: Record the transactions

-> Purchase of FA

-> Sale of FA

Step 2: Close the year

-> Charge depreciation

-> Balance the ledger

The above two steps repeats every year, in the second year, then in the third year till the nth year

How to determine Profit or Loss on Sale of F A (Machinery)

Sometimes, company sale some of the F A. In such a condition, we need to look for the possible profit or loss incurred on the sold part of F A. For the purpose, a Working Note is prepared for calculation to determine Profit or Loss. The working note is prepared starting from the date of purchase of the FA (that has been sold now) and end on the date when the F A has been sold.

Let us take one example to understand the aspect. Suppose a hypothetical company purchased a Machinery on 01 Baisakh 2076 for Rs 10,000. Rate of depreciation is 10% p.a. on Fixed Installment method. The machine was sold on 01 Baisakhh 2068. To determine the profit or loss, we do the following calculation (Working Note)

Calculation of Profit or Loss on the sold machine

Date of Purchase: 1 Baisakh 2066

Date of Sale: 1 Baisakh 2068

01.01.2066: Purchased Rs 10,000

(Depn 10% for year 2066) ( 1,000)

Book value on 31.12.2066/01.01.2067 Rs 9,000

(Depn 10% for year 2067) ( 1,000)

Book value on 31.12.2067/01.01.2068 Rs 8,000

01.01.2068: Sale value Rs 8,500

Gain on sale of F A Rs 500

If Sale value is more than Book Value, it is a case of Profit. And if Sale value is less than Book Value, it is a case of Loss. Profit is posted in Debit side and Loss is posted in Credit side of Fixed assets Account

financial ratio analysis

As it is necessary to check up the health of a person, in the same way, it is also necessary to check up the financial health of an organization.

Ratio analysis helps organization to check up the financial health of the organization from different point if view. Ratio analysis shows how far the organization is financially sound both in the short term and the long term.

Ratio analysis is a numerical expression which measures the relationship between two financial variables taken out from financial statements of a firm and are presented in terms of percentage or in terms of multiples or times or in terms of a period.

Ratio analysis is useful in evaluating the financial soundness of a firm. It is also helpful in comparing the current year performance with that of previous years and also in between different firm of the business business house.

Types of Ratios

Liquidity Ratio

Leverage Ratio or Solvency Ratio

Turnover Ratio or Efficiency Ratio

Profitability Ratio

1. Liquidity Ratio:

Liquidity Ratio measures the short term or current financial health of a firm. Following are the formulas.

Current Assets

(a) Current Ratio (CR) = ---------------------

Current Liabilities

What is Current Assets, do you know?

Before you learn "What is current assets?" First you should learn to know "What is Assets?" Properties are called Assets. Like Land & Building, Plant & Machineries, Motor Vehicles, Furniture & Fixtures, Inventories, Cash in Hand, Cash at bank, etc. At the same time, Receivables are also called Assets. Like Sundry Debtors (credit sale), Bills Receivables, Account Receivables, Prepaid Expenses, etc.

Thus Properties and Receivables are called Assets. If you look precisely, then you shall also know that "All kinds of Assets are convertible into Cash. For example, Land & Building are sold and converted into cash. Inventories are sold and converted into cash. Account Receivables/Sundry Debtors (credit sale) are collected and is converted into cash.

But the nature of conversion into cash is not the same. What we generally see that Inventories, Account Receivables, Bills Receivables and the similar other assets are converted into cash very frequently, many times in a year. But Building, Furniture, Vehicles are not very frequently sold and converted into cash. Building, Furniture, Vehicles and such other assets are used in the business for very long time and very rarely such kinds of assets are sold and converted into cash.

The assets which are converted very frequently into cash, many times in a year, not exceeding generally one year and are converted into normal course of business, such assets are called "Current Assets or Short Term Assets." Examples are: Cash in hand, cash at bank, Sundry debtors, Accounts Receivable, Bills Receivables, Inventories, Prepaid Expenses, etc.

Land & Building, Plant & Machine, Motor Vehicles, Furniture & Fixture, Equipment and such others are not sold frequently, thus not converted into cash frequently. Therefore such assets are called "Non Current Assets or Long Term Assets or Fixed Assets."

Now, let us discuss about What is Current Liabilities?

In simple word, Liabilities means "Payables." For Example, If company has taken Bank Loan, this Bank Loan is payable after a certain period of time. In the same way, if company has taken money by issuing a Debenture, this is also payable in a certain future date. If company has purchased on credit, it is called Sundry Creditors and/or Account Payables. Bills Payable, these amount are payable to the supplier or the third party. If company has not paid matured amount of Salary, Wages or Rent or any other expenses. Such unpaid amount is payable in some future date. Such payable amount is called "Outstanding Expenses" These all are Payable amounts for the company. Such all payable amounts are called "Liabilities"

But we should note that the nature of all the payables or all the liabilities are not the same. For example, when company take a Bank Loan or collect money by issuing Debentures, company generally negotiate to pay back such amount in the period more than one year. But other payables like "Sundry Debtors, Accounts Payables, Bills Payable, Outstanding Expenses are generally paid by company in the period less than one year. Such liabilities which are payable in the period less than one year are called "Current Liabilities or Short Term Liabilities"

Liquid Assets or Quick Assets

(b) Quick Ratio or Liquid Ratio or Acid Test Ratio = --------------------------------------------

Current Liabilities

Till now, we have learnt that Current Assets are those assets which are convertible into cash in short period of time. Some Current Assets are very quick of faster in conversion into cash than other current assets. It is observed that all current assets except INVENTORY and PRE-PAID EXPS are much quicker in terms of conversion into cash. Hence following are Quick Assets.

Cash in Hand, Cash at Bank, Sundry Debtors, Accounts Receivable, Bills Receivable, Etc

All Current Assets (except Inventory and Prepaid Expenses) are Quick Assets

- Also Quick Assets = Current Assets - Inventory - Pre-paid expenses

2. Leverage Ratio or Solvency Ratio:

Leverage Ratio measures the long term financial health of a company. In other word, it measures whether a firm is able or not to pay its long term debt in time. If a firm is not able to pay its long term debt like Bank Loan, then bank may go to court of law to collect the debt amount from the company. In such a situation, the company shall be at a risk of close down the business. Company becomes insolvent and shall may have to close down the business. It is called Liquidation.

This ratio measures whether a company is sound or not, is there any risk of insolvency or not, is the company able to pay its long term debt in time or not? Therefore, this category of ratio is also called Solvency ratio. Following are formula

L T D

(a) Debt Equity Ratio = ------------------

S H F

Where, LTD = Long Term Debt, SHF = Share Holders' Fund. SHF is also called SHE (Share Holders' Equity)

As the name suggests, SHF refers to the stake or the wealth or amount payable to Shareholders or the owners of the company. SHF includes the following

i) Share Capital

ii) Share Premium

iii) Reserve & Surplus/Retained Earning/PL Account

iv) General Reserve

(If any Fictitious Assets are there, it shall be deducted while calculating SHE. Hence SHE is determined as below,)

SHF = Share Capital + Share Premium + Reserve & Surplus + General Reserves + Funds - Fictitious Assets

LTD = Bank Loan + Term Loan + Debentures

L T D

(b) Debt to Total Capital Ratio = -------------------

L T D + S H F

3. Turnover Ratio or Efficiency Ratio:

This ratio measures how efficiently a company is using its resources like Inventory, Capital, Fixed Assets and such others. Following are different types of turnover ratio.

C O G S Sales - Gross Profit

(a) Inventory Turnover Ratio ------------------------ = ----------------------------

Average Inventory Average Inventory

Where,

COGS = Cost of Goods Sold = Sales - GP

Opening inv + Closing inv

Average Inventory = -------------------------------------

Sometimes, Gross Profit Margin and Opening Stock is not available, in such a condition, ITOR is calculated as follows.

Sales

Inventory Turnover Ratio = ------------------------

Closing inventory

Total Sales

(b) Fixed Assets Turnover Ratio = ---------------------------

Amt of Fixed Assets

Note: FA includes Land & Building, Plant & Machinery, Motor Vehicles, Furniture, Equipment etc

Amt of Credit Sale

Average Account Receivable

Note: Account Receivables includes (i) Account Receivables, Sundry Debtors and Bills Receivables

Opening AR + Closing AR

Avg Account Receivables = -------------------------------------

Total Sales Total Sales

(d) Capital Employed Turnover Ratio (CETOR) = -------------------------------- = ---------------------

Capital Employed SHF + LTD

Note: How to determine SHF and LTD, both are discussed above under Leverage Ratio

Avg A R x 360 days

(e) Average Collection Period (ACP) = ----------------------------- = ...... days (answer)

Amt of Credit Sale

4. Profitability Ratio:

Profitability ratio measures overall profitability position of a company. Following are the major profitability ratio.

Amt of GP

(a) Gross Profit Ratio = ------------------ x 100

Total Sales

Amt of NP

(b) Net Profit Ratio = ----------------- x 100

Total Sales

N P A T or N P

Total Assets

Where, NPAT = Net Profit After Tax

N P A T

(d) Return on Equity (ROE) = ------------------

S H F

N P A T N P A T

(e) Return On Capital Employed (ROCE) = ---------------- = ----------------

C E SHF + LTD

Where, CE = Capital Employed = SHF + LTD

cash flow statement analysis

Among all, Cash is considered very important element for business organization. It is compared to the life blood in a human body.

Therefore it becomes important to be alert and maintain a specific and close supervision for inflow and outflow of cash in the organization during a period.

For this purpose, organizations prepare Cash Flow Statement every year after preparation of Income Statement and Balance Sheet at the year end.

Cash Flow Statement is a summary of Cash Book. Cash book records Cash receipt and Cash payment date wise and find out how much cash has come in and how much cash has gone out and how much is the balance on daily basis.

But Cash Flow statement is not prepared on daily basis. It is prepared at the year end.

Cash flow statement record cash in and cash out in a summarized form. It records Cash transactions on activity basis. Activity is a group of transactions. For the preparation of Cash Flow Statement, all the transactions or activities related to cash are divided into 3 groups. They are as follows.

1.Cash Flow from Operating Activities:

Operating activities means business activities. In other words, operating activities are also a daily activities. Operating activities includes the following transactions.

(a) Sales of Goods (+)

(b) Purchase of Goods (-)

(d) Operating Income (+)

(e) Current Assets (excluding cash): Assets have negative relation with cash flow

If Assets Increase, then Cash Decrease

If Assets Decrease, then Cash Increase

(f) Current Liabilities: Liabilities have Positive relation with cash flow

If Liabilities Increase, then Cash also Increase

If Liabilities Decrease, then Cash also Decrease

2. Cash Flow from Investing Activities:

Investing activities includes activities related to Long term assets or fixed assets. In other, it study the cash flow towards investment in Fixed Assets like Plant & Machinery, Motor Vehicle, Equipment and also Long Term Investment. As stated earlier, Assets are negatively related to Cash Flow, i.e.

If Assets Increase, then Cash Decrease

If Assets Decrease, then Cash Increase

Increase in assets indicates "Purchase of Assets" For Purchase, cash is paid. Therefore cash decrease. In the same way, Decrease in Assets indicates "Sales of Assets". Sales generates cash. Therefore cash increase.

Generally in academic questions, "Purchase of Assets" and "Sales of Assets" are not available. Therefore, we need to find out "Purchase of Assets" and "Sales of Assets" by doing "WORKING NOTES" as follows.

Working Note to find out the amount of "Sales of Assets"

Cost of the assets xxxxx

Less: Accumulated Depn (xxxx)

Book Value xxxxx

+ Gain on sale xxxxx

Or - Loss on sale (xxxx)

Sale value xxxxx

Working Note to find out the amount of "Purchase of Assets"

To find out the value of "Purchase of assets, we need to prepare ledger account of Fixed Assets (example Machinery Account). Following is the specimen

By preparing the above ledger in working note, the "Purchase amount" Machinery is obtained. In this way, we find out "Sale amount of Fixed Assets and "Purchase amount" of Fixed assets with the help of above two working note.

3.Cash Flow from Financing Activities:

Financing activities are related to Capital of organization. There are basically two kinds of Capital, they are as follows.

Owners Capital: It is also called Shareholders fund. It includes Share Capital, Share Premium, Retained Earning or PL Account, General Reserve etc

Borrowed Capital: It is also called Long Term Debt. It includes Bank Loan, Debentures etc

Note that in all the activities, when cash increase, it becomes + plus and when cash decrease it is - minus

Following is the specimen of Cash Flow Statement.

How to determine Tax Paid (if it is not available in question?)

We know that "Tax Paid" is Operating Activity. In some questions, "Tax Paid" is not available. In such a question, there may be given "Provision for Taxation" in Balance Sheet and Income Statement. By using "Provision for Taxation" given in the Income Statement and Balance Sheet, we could determine the amount of Tax Paid as follows.

Tax Paid = Opening of Provision for Tax + New Provision for Tax - Closing Provision for Tax

How to determine Dividend Paid (if it is not available in question?)

We know that "Dividend Paid" is Financing Activity. In some question, "Dividend Paid" is not available. In such a question. amount of Dividend Paid" could be determined in the following ways.

(i) By using "Provision for Dividend" account

As Provision for Tax could be used to determine amount of "Tax Paid". In the same way, Amount of "Dividend Paid" could be determined by using "Provision for Dividend" as follows.

Dividend Paid = Opening of Provision for Div. + New Provision for Div. - Closing of Provision for Div.

(ii) By using "Retained Earning" or PL App. account

Sometimes, "Provision for Dividend" account is also not available in question. In such a situation, we could determine amount of "Dividend paid" by using "Retained Earning" account as follows.

Dividend Paid = Opening of R.E. + Net Income - Closing of R.E.

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Cash Flow Statement under Indirect Method

Cash Flow statement is prepared by using two methods

1. Direct Method: The above all are the details for "how to prepare Cash Flow Statement under Direct Method

2. Indirect Method: Under this method also (a) Cash Flow from Investing Activity and (b) Cash Flow for Financing Activity are same just like we do under Direct Method. But the way of preparation of "Cash Flow from Operating Activity" is different under Indirect Method. .

Following is the common format for Preparation of Cash Flow from Operating Activity under "Indirect Method"

Net Income Rs xxxx

Add: Non cash & Non Operating Exps:

Depreciation xxxx

Written Offs (patent etc) xxxx

Premium on redemption of Debenture xxxx

Loss on sale of F A xxxx

xxxx

Less: Non Operating Incomes:

Gain on sale of FA (xxxx)

Fund from Operation xxxx

Adjustment of CA & CL:

Increase in CA (xxxx)

Decrease in CA xxxx

Increase in CL xxxx

Decrease in CL (xxxx)

Cash Flow from Operating Activity xxxx

Let us take a hypothetical example to understand "How to determine "Cash Flow from Operating Activity" under Indirect Method.

The following account balances of a Company are available as under.

Assets & Liabilities 2009 2008

Account Receivable 4000 6000

Inventories 32000 25000

Office Supplies 7000 10000

Account Payable 7500 4500

Salaries payable 1500 2500

Interest Payable 500 1000

I Tax Payable 4500 3000

In addition, the net Income Statement for 2009 is as follows.

Particulars Amount

Sales Revenue 100,000

Cost of Goods Sold (75,000)

(a) Gross Profit 25,000

Administrative Exps (8,000)

Depreciation Exps (3,000)

(b) Total Operating Exps 11,000

Interest Exps (3,000)

(d) Income before Tax 11,000

Income tax Exps (5,000)

(e) Net Income 6,000

Required: Determine Cash-flow from Operating Activity under

(i) Indirect Method

(ii) Direct Method

Solutions:

(i) CF from Operating Activity under Indirect Method

Particulars Amount

Net Income 6,000

Add: Non Cash & Non

operating Exps

Depreciation 3,000

Fund from Operation 9,000

Adjustment of CA & CL

Account Receivable 2,000

Inventory (7,000)

Office Supply 3,000

Account Payable 3,000

Salaries Payable (1,000)

Interest Payable (500)

Tax Payable 1,500

C F from operating Acty 10,000

(ii) CF from Operating Activity under Direct Method

Particulars Amount

Sales Revenue 100,000

Less: COGS (75,000)

General Exps (8,000)

Interest Exps (3,000)

Income Tax Exps (5,000)

Fund from Operation 9,000

Adjustment of CA & CL

Account Receivable 2,000

Inventory (7,000)

Office Supply 3,000

Account Payable 3,000

Salaries Payable (1,000)

Interest Payable (500)

Income tax Payable 1,500

CF from Operating Acty 10,000

fund flow statement analysis

Cash flow statement studies only about the changes in cash through different activities during a period.

According to Anthony " Fund Flow Statement" describes the sources from which additional funds were derived and the uses which these funds were put"

Fund flow statement is a wide concept. Fund flow statement studies not only about the changes in cash, rather it studies the changes in all other current assets including cash and and all current liabilities.

On the basis of the Working Capital concept, Fund is a net working capital. Fund is a difference between current assets and current liabilities.

Preparation of Fund Flow Statement

Following are the steps for preparation of Fund flow statement

1. Preparation of "Schedule of Changes in Working Capital"

2. Preparation of "Fund from Operation"

3. Preparation of "Fund Flow Statement"

(1) Schedule of Changes in Working Capital

This is the first step. Under it, we find out we consider current assets and current liabilities, then find out Increase or Decrease in Working Capital during a period. Following is the format.

(2) Fund From Operation

This is the second step. Under this step, Net profit for the year is adjusted with non cash and /or non operating expenses/losses and non cash and/or non operating income/gains.

What are the Non Cash and Non Operating expenses/losses, incomes/gains? Do you know?

Some expenses are cash and some expenses are non cash. In the same way, some expenses are operating while some expenses are non operating.

Cash Expenses: Those expenses which involves cash for its transactions are cash expenses. For Example: Salary, Rent, Commission, Stationary, Interest paid are few examples of Cash expenses. These transactions need cash involvement. Cash is paid for these expenses. Therefore these expenses are called cash expenses

Non Cash Expenses: Those expenses which does not involve cash for its transactions are called non cash expenses. For Examples: Depreciation of Fixed Assets, Goodwill written off etc. These transactions do not need cash involvement. These are not reduction in cash, rather these are reduction in the value of Fixed Assets.

Operating Expenses: Operating expenses are those expenses which are necessary to operate/run the business. These are regular expenses. Operating expenses generally take place many times or at least once in a year. For example, Salary, Rent, Commission paid, stationary, Interest paid. These expenses are a regular expenses and take place many times in a year. So these expenses are operating expenses. At the same time, these expenses also involves cash in its transactions. Therefore these expenses are both cash expenses as well as operating expenses.

Non Operating Expenses: Non operating expenses are those expenses which are not regular in the business. These expenses are also not a business expenses. These expenses are not necessary to run/operate the business. For example, Loss on sale of Fixed Assets, Discount on issue of share, Dividend paid, Dividend provision, Provision for Tax etc. In the same way, Gain on sale of Fixed assets is Non operating income.

While determining "Fund From Operation" Non cash and Non operating expenses/incomes are adjusted to Net profit for the year.

Statement of Fund from Operation

Difference in Retained Earning xxxxx

Add: Provision for Dividend or Div Paid xxxx

Provision for Tax or Tax Paid xxxx

Transfer to General Reserve xxxx

Net Profit for the year XXXXX

Add: Non Cash or Non Operating Exps:

Depreciation xxxx

Written Offs xxxx

Loss on sale of Assets xxxx

Premium on redemption of Deb. xxxx

XXXXX

Less: Non Cash or Non Operating Incomes:

Gain on sale of Assets (xxxx)

Dis on redemption of Deb. (xxxx)

Fund from Operation XXXXX

Note: If result comes negative (-), then it will be Loss from Operation

Sometimes question starts from Net Profit for the year. In such a situation, calculations start from Net Profit for the year as follows.

Net Profit for the year XXXXX

Add: Non Cash or Non Operating Exps:

Depreciation xxxx

Written Offs xxxx

Loss on sale of Assets xxxx

Premium on redemption of Deb. xxxx

XXXXX

Less: Non Cash or Non Operating Incomes:

Gain on sale of Assets (xxxx)

Dis on redemption of Deb. (xxxx)

Fund from Operation XXXXX

(3) Fund Flow Statement

It is the third and final step. This step include the result of the previous two steps, i.e. (1) Increase or Decrease in Working Capital and (2) Fund from Operation or Loss from Operation. This step also includes all Non Current Assets (Fixed Assets or Long Term Assets) and Non Current Liabilities (Long Term Liabilities). Following is the format of Fund Flow Statement.

The total of the both sides of Fund Flow Statement comes equal.

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Also follow the following guidelines/process to prepare "Fund Flow Statement"

* Current Assets and Current Liabilities go to "Schedule of changes in Working Capital"

* Non Cash and Non Operating items (expenses, incomes, losses and gains) to to "Fund from Operation/Loss from Operation"

* Non Current Assets (Fixed Assets) and Non Current Liabilities (Long term liabilities) come to "Fund Flow Statement"

( Note: Non Current Assets are Investing activities as per CFS. Non current Liabilities are Financing activities as per CFS)

financial statements (final accounts/work-sheet)

During the whole year, business organizations record their financial transactions starting from journal entries, then ledger positing, then trial balance.

At the end of the year, organizations prepare the following major financial statements.

Income Statements (Trading & PL Accounts): To know profit or loss in the business

Statements of Retained Earning (PL Appropriation Accounts): To record distribution of Profit

Balance Sheets (Positions of Assets & Liabilities): To know financial positions

(1) Format of Income Statement:

(2) Format of Statements of Retained Earning:

(3) Format of Balance Sheet:

Adjustments:

Some transactions take place at the end of the year and are not included in Trial Balance. Such transactions are entered in Final Accounts as adjustments. All adjustment transactions have double effect in Final Accounts. Following are major adjustments and their accounting treatments.

(1) Closing Stocks: Goes to Income statement (as part of COGS) &

Goes to Balance Sheet as Assets

(2) Depreciation on FA: Goes to Income Statement as Loss &

Goes to Balance Sheet as decrease/minus in Assets

(3) Intangible Assets Written Off: Goes to Income Statement as Loss &

Goes to BS as decrease/minus in Assets

(4) Prepaid Exp (exp. Insurance) Expired

Goes to Income Statement as Loss

Goes to BS as decrease/minus in Assets

(5) Provision for Bad & Doubtful Debt

Goes to Income Statement as Loss

Goes to BS as decrease/minus in AR/SD

(6) Outstanding Exps: Goes to Income Statement as Exp

Goes to BS as Liability/Payable

(7) Prepaid Exps: Goes to Income Statement as decrease in Exp &

Goes to BS as Assets

(8) Provision for Taxation: Goes to Income Statement as expected Exp

Goes to BS as Liability

(9) Provision for Dividend: Goes to Statement of R E as appropriation of Net Profit

Goes to BS as Liability

(10) Creation of General Reserve: Goes to Statement of R E as appropriation of N P

Goes to BS as Liability

Ques_Final Accounts

Soln_Final Accounts

Some Notes about Adjustments

The following adjustments are similar

(a) Depreciation on Fixed Assets

(b) Intangible Assets Written Off

(d) Prepaid Expense Expired

Why they are considered similar, because

(i) all the above 4 go to Income Statement as Loss &

(ii) all the above go to BS as decrease in Assets

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Sol QN 22

Book Q No 1 & 2

Single Step Income Statement & Multi Step Income Statement

Single Step Income Statement is prepared in a very simple way. From Sales Revenue all kinds of Expenses are deducted and income are added as it is prepared below in solution of question no 1 (attached). But under Multi Step Income Statement, Income Statement is prepared step by step as it is given in above format of Income Statement.

Sol_QN_1 Single Step Income Statement

Preparation of Final Accounts using Work_Sheets

Account officers prepare Final Accounts at the year year. Final Accounts include the following

1. Income Statements (Trading Account & PL Account)

2. Statement of Retained Earning (PL Appropriation Account)

3. Balance Sheet (Statement of Financial Positions)

Final Accounts can also be prepared in some other ways, i.e. by using Work_Sheet. Work Sheet is a statement that is prepared over the pages of Spread-sheets of computer software.

The concept of preparation of work sheet is similar to the Income Statement + Statement of Retained Earning + Balance Sheet. The financial results under both methods are also similar. Work Sheet is generally prepared by financial managers for a quick view of Profit (Loss), appropriation of profits and financial positions. Following is a standard format of Work_Sheet

Work_Sheet_Specimen

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PU_Exam_Ques_2018_FA

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Income_Statement_Balance_Sheet

Meaning of Corporate Annual Reports

A company registered under company act is also called Corporate business organization. All corporate business organizations prepare annual reports at the end of each year and presents in the AGM (Annual General Meeting). AGM is a meeting of General shareholders, Board of Directors and management team, where management presents the annual reports. Such report is called Corporate Annual Reports.

Components of Corporate Annual Reports

Management of the organization prepares Corporate Annual Reports and presents in the AGM (Annual General Meetings). The Corporate Annual Reports is prepared in the form of a book and it is also uploaded in the official websites of the organization. Following are the main components of Corporate Annual Reports

1. Set of Financial Statements: Following are the main financial statements included in the Corporate Annual Reports

a. Income Statement, Balance Sheet and Cash Flow Statements

b. Statement of changes in Equity
c. Major economic indicators (major Ratios)
d. Explanatory Notes
e. Inventory valuation system

2. Independent Auditor Report:

The financial statement is prepared by the account department of the organization. The financial statements prepared by the account department are audited by an independent auditor for validation, recognition and proving authenticity of the financial statements

3. Report/Message of Chairperson/Management:

It is message from the Chairperson addressing shareholders. The message of chairperson includes all the aspects of financial results, the composition of board of directors and external environment of business in the country and the world. The message also includes the vision as well as planning of organization in the future

4. Reports of Board of Directors:

The message from the board of directors is the message from the desk of CEO of the company. The message mainly discuss about the past performance and future business prospects of the organization

Question No 12 of PU model

Collection Question

Answer the following questions in a single sentence: 1 mark each

(a) Dr and Cr rule of Real Account

(b) Current Assets

(d) Corporate Annual Report

(e) Capital Expenditure

(f) What is personal account

(g) What is working capital

(h) What is Revenue Receipt

(i) What is current liability

(j) Define deferred expenses

(k) Define COGS

(l) Define Quick assets

(m) What is ledger

(n) What do you mean by investment activities

(o) Capital Expenditure

(p) Trend analysis

(q) Full Form of GAAP

(r) Corporate Governance Report

(s) Write formula for Debtor Turn Over Ratio

(t) What is business entity concept

(u) What is the rule of nominal account

Answers to the above Questions in One Sentence

(a) Debit what comes in, Credit What goes out

(b) Assets which are convertible into cash within very short time, not exceeding one year in a normal course of business

Amount of Gross Profit

Amount of Net Sales

(d) Corporate Annual Report is summary of company activities, past achievement, future plans, visions that is presented by management of the organization in the Annual General Meeting (AGM)

(e) Capital Expenditure is an expenditure on purchase of long term assets or fixed assets and such expense create property for the company

(f) Personal account is a account of natural persons like Aman Account, Madhuri Account and artificial persons like Bottlers Nepal P Ltd, Himal Iron & Steels P Ltd

(g) Working Capital is the capital required to meet daily expenses and is expressed as Current Assets - Current Liabilities

(h) Revenue receipt is the receipt from general business activities specially Sales

(i) Current Liabilities are payable amount in very short time not exceeding one year in a general course of business

(j) Deferred expenses could also be known as a "Prepaid Expenses" which has been paid in advance,and is not incurred in the business yet

(k) Cost of Goods Sold is the Cost incurred for the goods that has been sold and it could be technically presented as COGS = Sales - Gross profit

(l) Quick assets are those assets which could be converted into cash very fast within a very short period and it is presented as Quick Assets = Current Assets - Inventory - Prepaid Expenses

(m) Ledger is a grouping of similar nature transactions in a particular page of the books of accounts and it contains a detailed transactions information in one account.

(n) Investing activities is the purchase and sales activities of Fixed assets including long term investment

(o) Capital Expenditure is an expenditure on purchase of long term assets or fixed assets and such expense create property for the company

(p) Trend Analysis is a comparative study of the financial statements of two financial years and presenting the data in percentage in order to study the trend of business, it is also called horizontal analysis

(q) Full form of GAAP is Generally Accepted Accounting Principles

(r) Corporate Governance report is a study of how far organizations are following norms and rules of the organization in their daily activities and decision making procedures

(s) Formula for Debtor Turnover Ratio is as follows

Net Credit Sales

Debtor Turnover Ratio = ---------------------------

Average A R

(t) Business Entity Concept says that a business has no definite life and it is established to run for ever

(u) Rule of Nominal Account is "Debit all Expenses & Losses, Credit all incomes & gains"

Question No 04 of PU model (for 10 marks)

Question no (4): What do you mean by financial accounting? Explain any four accounting concepts using suitable illustration.

Ans: Financial Accounting is a specific branch of accounting which deals with the process of recording, summarizing and reporting the business transactions for a definite period of time in a systematic way through financial statements. These financial statements are Income Statements, Statement of Retained earning, Balance Sheets and Cash Flow Statements. Income statements give us information about expenses and incomes, then reveals the profit and loss positions of the business in one financial year. Balance Sheet gives us information about assets and liabilities positions of the business. Statement of Retained Earning give us information about Distribution of Earning of the business. Cash flow statement gives information about Cash inflows and Cash outflows in different activities like Operating activities, Investing activities and Financing activities.

Following are four important accounting concepts.

1. Business Entity Concept

2. Money Measurement Concept

3. Going on Concern Concept

4. Accounting Period Concept

1. Business Entity Concept

For example, suppose the proprietor of the business withdraw Rs 50,000 for his/her personal expense then such withdrawal is called Drawing and is deducted from Capital. But if the withdrawal for personal use is recorded as business expenses and considered as expense while determining profit/loss of the business then it is wrong and violation of Business Entity Concept

2. Money Measurement Concept

For example, suppose the organization has a very dynamic Sales manager. The manager resigned from the job. Because of his resignation Sales of the organization has gone down. This is a kind of loss for the organization. But how much exactly is the amount of loss, it can not be measured in terms of money. Therefore the organization is not supposed to record the loss in the books of account. If it does so, it shall be the violation of Money Measurement Concept

3. Going On Concern Concept

For example, suppose the organization had purchased a piece of land for Rs 25,00,000 in the last year and recorded in the books of account Rs 25,00,000. Suppose the land value as per current market value is Rs 30,00,000. But the organization does not change the record of Land value Rs 30,00,000. Since the assumption is Going On, market value is irrelevant. If the organization change the value of Land in the record as per current , it shall be the violation of Going On Concern Concept.

4. Accounting Period Concept

For example, expenses and incomes are recorded in the relevant period when it incurred. If the salary paid Rs 150,000 for the month of Asadh 2079 is recorded as Salary expense for Shawan 2079, it shall be the violent of accounting period concept.

Question No (4): Define annual reports of a company. Who prepares annual reports and why? Briefly explain the major element of an annual report.

Ans: A company registered under company act is also called Corporate business organization. All corporate business organizations prepare annual reports at the end of each year and presents in the AGM (Annual General Meeting). AGM is a meeting of General shareholders, Board of Directors and management team, where management presents the annual reports. Such report is called Corporate Annual Reports.

Management of the company prepares annual reports. The annual report is prepared to give information about company's past years performance, planning for expansion in the future, goal and vision of the organization to its stakeholders like Shareholders, members of the board of directors. Following are the major elements of annual report.

1. Set of Financial Statements: Following are the main financial statements included in the annual report

a. Income Statement, Balance Sheet and Cash Flow Statements

b. Statement of changes in Equity
c. Major economic indicators (major Ratios)
d. Explanatory Notes
e. Inventory valuation system

2. Independent Auditor's report

3. Report/Message of Chairperson/Management

4. Report of Board of Directors

The message from the board of directors is the message from the desk of CEO of the company. The message mainly discuss about the past performance and future business prospects of the organization

Questions of PU model (for 05 marks)

Question: What do you mean by Cash Flow Statement? How it is prepared?

Ans: Cash Flow Statement is a statement of cash inflow and cash outflow in a business organization during a period of one year. It gives information about the efficiency of the organization towards ability of the organization to generate cash flow. It also helps us to know the loop hole about where the organization is week and require improvement.

Cash Flow Statement is prepared by two different methods, i.e. Direct Method and Indirect Method. Under both the methods, Cash Flow, activities are divided into 3 parts. They are as follows. In all the activities, when cash increase it is plus and when cash decrease it is minus

1. Operating Activities: Operating activities include business activities. In other words, operating activities include revenue activities like Sales, Cost of Goods Sold, other administrative, financial and selling & distribution activities. Apart from these, it also includes Current Assets and Current Liabilities.

2. Investing Activities: Investing activities include activities related to Long Term Assets (Fixed Assets) like Land & Building, Plant & Machine, Long term investments etc.

3. Financing Activities: Financing activities include activities related to Long term liabilities like Share Capital, Bank Loan, Debenture and so on. It also includes Dividend paid to shareholder and premium paid on redemption of debenture to debenture holders

Question: What do you mean by accounting cycle? Explain the steps of financial accounting cycle

Ans: The process of keeping the books of accounts in a systematic way is called "Accounting cycle" It is a whole process from the start to an end. Accounting cycle helps to keep the financial records of the organization in a very systematic way so that it becomes easy to draw information from the record and reports in a meaningful way. Following are the basis steps of accounting cycle.

(a) Recognition of financial transactions: It is the first step of accounting cycle. There are various kinds of transactions in a business organization. Some are economic and other are non economic in nature. Economic transactions are recognized and selected for record in the books of accounts.

(b) Journal Entry: It is the second step of accounting cycle. Journal entries are prepared for all the economic transactions. All the economic transactions are entered in the books of account through journal entries.

(c) Ledger Posting: Once journal entry books are prepared, the entries are transferred to a separate book group wise in different pages. This is called ledger posing. It helps to know the information about a similar nature transaction separately in one place or one page.

(d) Trial Balance: After ledger positing, all the ledger accounts are totaled and balanced. The ledger balances are put in a place Debit and Credit balance wise. It is called Trial balance. The total of debit balance and credit balances are supposed to be equal in both sides. If the balances match, it is supposed that the ledger positing is arithmetically correct.

(e) Reporting the information: In the last, Income Statement, Balance Sheet, Cash Flow Statements are prepared. These reports pass out the information about expenses, incomes, assets, liabilities and position of cash etc to the stakeholders.

Question: Briefly explain the meaning of accruals and deferrals.

Ans: Generally payments are made in the organizations as soon as the goods or services are delivered. But sometimes, payments happen much after the goods and services are delivered, such payments are called accruals. Accruals are also known as "Outstanding Expenses"

On the other hands, sometimes payments happens before the goods and services are delivered, such payments are called deferrals. Deferrals are also called "Prepaid Expenses"

Accruals are recognized as Liability and Deferrals are recognized as Assets for the organizations. These assets and liabilities exist in the books of accounts till these are settled after the job is complete or payment is made.

Question: Describe "Common Size" statements with illustration

Ans: Common size financial statements displays items as percentage of a base figure. For example suppose Sales Revenue of a company is Rs 100,000 and Cost of Goods Sold is suppose Rs 60,000, Operating expense is Rs 20,000, Dividend paid is Rs 15,000 and Net Income is Rs 5,000. Common size statements displays these items in percentage of the base figure (Sales Revenue) as follows.

Particulars Amount Percentage

Sales Revenue 100,000 100%

Less: COGS (60,000) 60%

Less: Operating Exp (20,000) 20%

Net Income 20,000 20%

Less: Dividend (15,000) 15%

Retained Earning 5,000 5%

(Note: Sales is taken always 100%. COGS 60,000 is 60% of base figure 100,000, so 60% is written for COGS. Similarly, Operating exp is 20% of the base figure 100,000, so 20% is written for Operating exp. Dividend is 15% of the base figure Sales, therefore 15% is written for Dividend. This is called Common Size Statement.)

Question: Differentiate between Cash basis and Accrual basis accounting

Ans: The main difference between Cash and accrual basis lies in the timing when the revenue(income) and expenses are recognized. Under cash basis, Incomes are recorded in the books of account only when Incomes are received in Cash. In the same way, Expenses are recorded in the books of accounts only when the particular expenses are actually paid in cash.

But under accrual basis Revenue (income) is recorded as soon as it is earned and expenses is recorded as soon as it incur. For example, suppose company has made a sale of Rs 10,000, but it is in credit. Money has not come. As per Cash basis, such sales are not recorded, because cash has not come. But under accrual basis, it is recorded as Sales revenue and at the same time, since money has not come, so the amount shall also be shown as "Account Receivables"

In the same way, suppose employees have worked for the month and total Salary for the employee is Rs 500,000 for the month. Suppose the amount of salary has not yet been paid because of some reason. In such a case, under cash basis such salary is not recorded in the books of account, because money has not been paid.

But under Accrual method, the Salary is recorded in the books of account, because employees have already worked for the company. It has become expense for the company even if cash is not paid yet. Since the job is already done and time has also already passed, so Salary is recorded in the books. At the same time, since the money is still payable, so Salary Rs 500,000 shall also be shown as "Account Payable" or "Outstanding Salary"

Question: What is financial accounting? Explain the functions and limitations of financial accounting. (10 marks)

Ans: Financial accounting is a system to record business transactions in the books of accounts which aims at providing business information to the different stakeholders of the organization. Financial accounting helps to prepare different kinds of financial statements like Income statements, balance sheets, Cash flow statements etc. Following are the limitations and functions of financial accounting.

Limitations of Financial accounting

1. Historical in nature: Financial accounting records the past transactions only. For example: Salary paid, started business, Sales made etc. Financial accounting is less helpful in predicting the future business.

2. Not useful to determine or fix price: Financial accounting does not keep record in terms of per unit. It does not calculate how much is the cost to produce one unit of product. Therefore it is not useful to determine cost of one unit of product.

3. Lack of flexibility: Financial accounting is maintained strictly on the basis of guidelines like (GAAP) and on the basis of rules, regulations of business as well as company act etc. It is not flexible.

Importance and Functions of Financial accounting

1. A complete record of business transactions: Financial accounting system records all the business daily transactions. It provides all kinds of business information related to expenses, incomes, assets & liabilities, profit or loss in the business to all its stakeholders.

2. Detection of errors and frauds: Business transactions are recorded in a systematic way. If there is any kinds of error in accounting or if there is fraud in the business, these are possible to detect in time.

Question: What are the objectives of financial accounting. Write any four objectives in brief ( 5 marks )

Ans: Following are the main objectives of financial accounting.

1. Recording the business transactions: It is the first and main objective of financial accounting. It records business transactions as per the guidelines of GAAP and different rules and regulations of the company act. It helps to provide information to the stakeholders when needed.

2. Determining operating results: Meaning of operation is business. So operating results means profit and loss in the business. Financial accounting aims at determining profit or loss position in the business for a certain financial period.

3. Depicting financial position of the business: It is also one of the major objective of financial accounting. It hep to determine assets and liability position of the business by preparing balanc sheet.

4. Determining tax liability: Financial accounting helps to determine profit or loss position and helps to determine how much tax is payable for a certain financial year.

BBA 1st SEM

Accounting is a Language of Business

USERS OF ACCOUNTING INFORMATION

BASIC ACCOUNTING PRINCIPLES

EXPENSES & ASSETS, INCOMES & LIABILITIES

Accounting Equation

Journal Entries

Debit: Expenses and Losses

Credit: Incomes and Gains

Some Specific Forms of Journal Entries

Sales Account is ALWAYS credit. It is absolutely true. Do you think "Purchase Account" is always Debit?

DEBTORS BECOME INSOLVENT

Ledger posting & trial balance

Cash Book

What is Contra Entry ?

Bank reconciliation statement

Concept of capital and revenue

accounting for fixed assets (depreciation)

financial ratio analysis

cash flow statement analysis

fund flow statement analysis

financial statements (final accounts/work-sheet)

Meaning of Corporate Annual Reports