Shares and Debentures

Share: A share is a unit of ownership capital of a company. The person who buys a share becomes a part-owner (shareholder) of the company and receives dividend out of the company's profit. Shares may be equity (ordinary) shares or preference shares.

Debenture: A debenture is a written acknowledgement of a debt taken by a company. The person who buys a debenture is a creditor of the company, not an owner, and receives a fixed rate of interest whether or not the company earns a profit.

Main Differences between Shares and Debentures

Conclusion: Shares represent ownership capital and carry both ownership rights and business risk, whereas debentures represent borrowed capital and carry only a fixed interest with the right to repayment.

Trial Balance

Introduction

A trial balance is a statement prepared at a particular date showing the debit and credit balances of all the ledger accounts of a business, arranged in two columns, in order to test the arithmetical accuracy of the books of accounts. It is not an account but a statement or a list. It is usually prepared at the end of the accounting period, after all the transactions have been journalised and posted to the ledger and the ledger accounts have been balanced. Since every debit has an equal credit under the double entry system, the total of the debit column of a correctly prepared trial balance must be equal to the total of its credit column. If the two totals agree, it is a prima facie (though not conclusive) proof that the books are arithmetically accurate.

Format

Reasons for Preparing a Trial Balance

1. To test arithmetical accuracy: It checks whether the total of debits equals the total of credits, thereby detecting errors of posting, addition and balancing.
2. To detect errors: Errors such as wrong posting, posting to the wrong side, omission of posting and errors in balancing are revealed by a disagreement of the trial balance.
3. To help in preparing final accounts: The balances appearing in the trial balance are directly used to prepare the trading account, profit and loss account and balance sheet.
4. To provide a summary of ledger accounts: It presents, at a glance, the balances of all ledger accounts on a particular date.
5. To serve as a basis for audit and comparison: It gives the auditor a ready statement to verify, and allows comparison of balances of one period with those of another.
6. To locate and rectify errors: When the trial balance does not agree, it helps in tracing the errors and taking corrective steps before final accounts are prepared.

Characteristics of Nepal Accounting Standards (NAS) and Nepal Financial Reporting Standards (NFRS)

Introduction

Nepal Accounting Standards (NAS) and Nepal Financial Reporting Standards (NFRS) are the accounting frameworks issued by the Accounting Standards Board (ASB) of Nepal (now the Financial Reporting Standards Board under ICAN) for the preparation and presentation of financial statements in Nepal. NAS was introduced in phases from 2003 (BS 2060), while NFRS was adopted from 2014 (BS 2071) to bring Nepali practice in line with IFRS.

Characteristics of Nepal Accounting Standards (NAS)

1. Nepal-specific framework — NAS was developed by the ASB based on the Nepali legal, tax and business environment, with IFRS/IAS as reference.
2. Prescriptive and rule-based — It gives detailed formats, disclosures and measurement rules, leaving little room for professional judgement.
3. Historical cost basis — Assets and liabilities are generally recorded at historical cost; fair value is used only in limited cases.
4. Tax-oriented — Provisions are closely aligned with the Income Tax Act and other Nepali laws.
5. Simple and less complex — Fewer disclosure requirements and simpler measurement, suitable for small and medium entities.
6. Applicable to all entities — Designed for general-purpose financial statements of companies, cooperatives and other reporting entities in Nepal.
7. Phased implementation — Applied in stages according to the size and nature of the entity.

Characteristics of Nepal Financial Reporting Standards (NFRS)

1. IFRS-converged — NFRS is substantially converged with International Financial Reporting Standards, making Nepali statements internationally comparable.
2. Principle-based — It states principles rather than rigid rules, so professional judgement is required in application.
3. Fair value orientation — Greater use of fair value measurement for financial instruments, investment property and business combinations.
4. Substance over form — Transactions are recorded according to their economic substance, not merely their legal form.
5. Extensive disclosure — Requires detailed notes, segment reporting, related-party disclosures and risk information.
6. Complex and costly — Needs trained accountants, valuation experts and strong information systems, so implementation cost is high.
7. Phased applicability — Implemented in phases: mandatory for listed companies and large public entities from FY 2071/72, and gradually extended to other entities.
8. Going concern and accrual assumptions — Financial statements are prepared on going concern and accrual bases.

Conclusion

In short, NAS is a simple, rule-based, Nepal-specific framework, whereas NFRS is a complex, principle-based, IFRS-converged framework ensuring global comparability. NFRS is gradually replacing NAS in Nepal.

Financial Ratios: Meaning, Need and Major Types

A financial ratio is a mathematical relationship between two related figures taken from the financial statements (balance sheet and profit and loss account) of an organisation. It expresses one amount as a proportion of another and thus converts raw, scattered figures into meaningful, comparable information. Ratio analysis is one of the most widely used tools of financial analysis in banks, insurance companies, cooperatives and investment institutions such as the Citizen Investment Trust.

Why Financial Ratios are Calculated

1. To judge financial health and performance — Ratios reveal the liquidity, solvency, profitability and efficiency position of an organisation in a condensed form.
2. To simplify and summarise statements — Absolute figures are difficult to interpret; ratios reduce them to a few meaningful indicators.
3. To compare (inter-firm and intra-firm comparison) — Ratios allow comparison of one firm with another of similar nature, and of one year with another, irrespective of size.
4. To help in decision-making and planning — Management uses ratios for forecasting, budgeting, fixing credit policy, and deciding on expansion or borrowing.
5. To evaluate operational efficiency — Turnover ratios show how efficiently assets, inventory and receivables are being used.
6. To assess the ability to pay interest and repay loans — Lenders and depositors examine solvency and coverage ratios before extending credit.
7. To measure the return to owners — EPS, dividend payout and return on equity show the benefit accruing to shareholders.
8. To locate weak spots and take corrective action — Deviations from standard or past ratios indicate problem areas requiring remedy.

Five Major Financial Ratios (with examples)

For illustration, assume the following figures of a company:

1. Liquidity Ratios — measure the ability to meet short-term obligations.

• Current Ratio = Current Assets ÷ Current Liabilities = 5,00,000 ÷ 2,00,000 = 2.5 : 1 (ideal 2 : 1)
• Quick Ratio = (Current Assets − Inventory) ÷ Current Liabilities = 4,00,000 ÷ 2,00,000 = 2 : 1 (ideal 1 : 1)

2. Leverage / Capital Structure Ratios — show the long-term solvency and the proportion of debt in total capital.

• Debt–Equity Ratio = Total Debt ÷ Equity = 4,00,000 ÷ 6,00,000 = 0.67 : 1
• Debt to Total Assets = 4,00,000 ÷ 10,00,000 = 40%
• Interest Coverage Ratio = EBIT ÷ Interest = 2,00,000 ÷ 40,000 = 5 times (safe)

3. Activity / Turnover Ratios — indicate efficiency in using assets.

• Inventory Turnover = COGS ÷ Inventory = 9,00,000 ÷ 1,00,000 = 9 times
• Debtors Turnover = Sales ÷ Debtors = 12,00,000 ÷ 1,50,000 = 8 times; Collection Period = 365 ÷ 8 = 45.6 days
• Total Asset Turnover = Sales ÷ Total Assets = 12,00,000 ÷ 10,00,000 = 1.2 times

4. Profitability Ratios — measure earning capacity.

• Gross Profit Margin = 3,00,000 ÷ 12,00,000 = 25%
• Net Profit Margin = 1,20,000 ÷ 12,00,000 = 10%
• Return on Assets = 1,20,000 ÷ 10,00,000 = 12%
• Return on Equity = 1,20,000 ÷ 6,00,000 = 20%

5. Market Value / Valuation Ratios — relate the share price to earnings and dividends. If the market price per share is Rs 100:

• Earnings Per Share = 1,20,000 ÷ 12,000 = Rs 10
• Price–Earnings Ratio = 100 ÷ 10 = 10 times
• Dividend Payout Ratio (if dividend is Rs 4 per share) = 4 ÷ 10 = 40%

Conclusion

Ratios are calculated because they turn complex financial statements into simple, comparable and decision-useful measures of liquidity, leverage, activity, profitability and market value. However, ratios are only indicators — they must be interpreted with reference to industry norms, past trends and the qualitative factors of the organisation.