Financial Accounting

Users of accounting information are the persons and groups who use financial data to make decisions. They are divided into internal and external users.

Internal users

1. Owners: want to know the profit earned, return on investment and financial position.
2. Management: uses accounting data for planning, budgeting, controlling costs, pricing and decision making.
3. Employees and trade unions: look at profitability and stability for wages, bonus and job security.

External users

1. Investors and shareholders: decide whether to invest in, hold or sell shares, and expect dividends.
2. Creditors, banks and suppliers: judge the creditworthiness of the business and its ability to repay debts and interest.
3. Government and tax authorities: calculate taxes such as income tax and VAT, and collect statistics.
4. Customers: concerned about the continuity of supply and quality.
5. Regulatory agencies (Securities Board, Nepal Rastra Bank, Company Registrar): check legal compliance.
6. Researchers, analysts and the general public: study the performance and social role of businesses.

Internal users can obtain detailed information from the business directly. External users depend mainly on published financial statements.

(No opening balances are given, so all accounts are assumed to start at nil. The receipt on Aug 7 is treated as revenue for services rendered, and the advance on Aug 29 as unearned revenue.)

Journal (Rs)

Ledger (balances after posting)

The cash account has a credit balance only because no opening cash is given; with an opening balance it would normally be a debit balance.

Trial balance as at August 31 (Rs)

International Financial Reporting Standards (IFRS) are a set of accounting standards issued by the International Accounting Standards Board (IASB), London. Their aim is a single set of high quality, understandable and globally accepted standards, so that financial statements of companies in different countries are comparable.

Key points

• The earlier standards were called International Accounting Standards (IAS) issued by the IASC. IASB replaced it in 2001, and new standards are named IFRS (e.g. IFRS 15 Revenue from Contracts with Customers).
• They apply mainly to listed companies and other public-interest entities. A separate IFRS for SMEs exists for small entities.
• A full set of statements includes the statement of financial position, statement of profit or loss and other comprehensive income, statement of changes in equity, statement of cash flows and notes.
• They are principle-based and make wide use of fair value.

Benefits: comparability, transparency, easier cross-border investment and listing, lower cost of capital.

In Nepal: the Accounting Standards Board of Nepal has adopted IFRS as NFRS (Nepal Financial Reporting Standards).

A source document is the written or printed evidence of a business transaction. It is the first record of the transaction and the basis for making entries in the journal. It provides proof that the transaction took place and supports auditing.

Examples

• Invoice or bill (sales invoice, purchase invoice)
• Cash memo and receipt
• Cheque and bank deposit slip
• Debit note and credit note
• Voucher (payment, receipt)
• Purchase order and delivery challan
• Payroll sheet and bank statement

Importance

1. Gives evidence for recording a transaction, so entries are objective and verifiable.
2. Helps auditors and tax officers to check the accounts.
3. Helps settle disputes with customers and suppliers.
4. Helps detect errors and fraud.
5. Provides details such as date, amount, parties and nature of the transaction.

Source documents must be kept safely for the period required by law.

Under the accrual basis of accounting, revenues are recognised when they are earned and expenses are recognised when they are incurred, regardless of when cash is received or paid. It follows the revenue recognition and matching principles.

Example: Goods sold on credit in Poush are revenue for Poush even though cash is received in Magh. Salary of Chaitra paid in Baisakh is an expense of Chaitra.

Features

• Records receivables, payables, prepaid and outstanding items.
• Requires adjusting entries (accrued and unearned items, depreciation) at the period end.
• Matches expenses with the revenue they help to earn in the same period.

Advantages

1. Gives a true and fair picture of profit for the period.
2. Gives a complete financial position, including assets and liabilities not yet settled in cash.
3. Allows comparison of different periods and firms.
4. It is required by NAS/NFRS and the Companies Act for companies.

Disadvantage. Profit may not equal cash, so a cash flow statement is also needed. It is more complex than cash basis accounting.

Cash basis (opposite) records items only when cash is received or paid, and is used by small businesses and some professionals.

Closing entries are journal entries made at the end of an accounting period to transfer the balances of temporary (nominal) accounts (revenues, expenses and dividends/drawings) to the permanent equity account (retained earnings), so that the temporary accounts start the new period with zero balance and net income is recorded.

Steps

1. Close revenue accounts to Income Summary: Revenue A/c Dr; To Income Summary A/c.
2. Close expense accounts to Income Summary: Income Summary A/c Dr; To each Expense A/c.
3. Close Income Summary to Retained Earnings: if profit, Income Summary A/c Dr; To Retained Earnings A/c (the reverse for a loss).
4. Close Dividends to Retained Earnings: Retained Earnings A/c Dr; To Dividends A/c.

Purpose

• Shows the net profit or loss of the period in one place.
• Updates retained earnings.
• Keeps each period's revenue and expenses separate.
• Followed by a post-closing trial balance, which contains only balance sheet accounts.

Real (permanent) accounts such as assets, liabilities and equity are never closed.

Journal

T-Ledger accounts (Rs)

Trial balance as at January 31, 2024

Total debits equal total credits, so the trial balance agrees. (Interest on the note is not accrued, as no adjustment is asked.)

Bank reconciliation statement of Bhatbhateni Super Market Pvt Ltd. as at December 31 (Rs)

Method: start from the bank statement balance, adjust for items that affect only the bank side, and compare with the adjusted cash book balance.

Adjusted cash book balance (proof)

Both balances equal Rs 6,174.10, so the reconciliation is correct. The correct cash balance to show in the balance sheet is Rs 6,174.10.

Bank reconciliation statement of Wall Mart Company as at December 31 (Rs)

Proof from the cash book (Rs)

Both sides give Rs 6,174.10, which is the correct cash balance.

Goods available for sale

Units sold = 10,000, so ending inventory = 3,000 units. Sales = 10,000 x 50 = Rs 500,000.

(i) Ending inventory and COGS

1. Weighted average: average cost = 156,000 / 13,000 = Rs 12 per unit.

   • Ending inventory = 3,000 x 12 = Rs 36,000
   • COGS = 10,000 x 12 = Rs 120,000

2. FIFO: ending inventory is made of the latest purchases: 1,500 x 15 + 1,500 x 13 = 22,500 + 19,500.

   • Ending inventory = Rs 42,000
   • COGS = 156,000 - 42,000 = Rs 114,000

3. LIFO: ending inventory is made of the oldest costs: 2,000 x 10 + 1,000 x 11 = 20,000 + 11,000.

   • Ending inventory = Rs 31,000
   • COGS = 156,000 - 31,000 = Rs 125,000

(ii) Tax effect (30%)

Using FIFO instead of LIFO, Kalika Construction will pay Rs 3,300 more tax ($11,000 \times 30\% = 3,300$). Prices are rising, so FIFO assigns older, lower costs to COGS and gives a higher profit, while LIFO charges the newer, higher costs to COGS and gives a lower profit and lower tax.

Goods available for sale

Units sold = 1,000, so ending inventory = 300 units.

(i) Ending inventory and cost of goods sold (periodic system)

Weighted average: average cost per unit $= 15{,}600 / 1{,}300 = \text{Rs } 12$

• Ending inventory = $300 \times 12 = \text{Rs } 3{,}600$
• COGS = $1{,}000 \times 12 = \text{Rs } 12{,}000$

FIFO: the ending inventory consists of the latest purchases: 150 units at Rs 15 + 150 units at Rs 13

• Ending inventory = $2{,}250 + 1{,}950 = \text{Rs } 4{,}200$
• COGS = $15{,}600 - 4{,}200 = \text{Rs } 11{,}400$

LIFO: the ending inventory consists of the earliest costs: 200 units at Rs 10 + 100 units at Rs 11

• Ending inventory = $2{,}000 + 1{,}100 = \text{Rs } 3{,}100$
• COGS = $15{,}600 - 3{,}100 = \text{Rs } 12{,}500$

(ii) Tax effect

Prices are rising, so FIFO gives a lower COGS (11,400) than LIFO (12,500). Taxable income under FIFO is therefore higher by $12{,}500 - 11{,}400 = \text{Rs } 1{,}100$.

Extra tax under FIFO = $1{,}100 \times 30\% = \text{Rs } 330$

Capital will pay Rs 330 more tax by using FIFO instead of LIFO. LIFO charges the higher recent costs to expense, which lowers reported profit and tax in a period of rising prices.

Journal (January 2020)

T-accounts (Rs)

Trial balance as on 31 January 2020

Users of accounting information

Accounting information is used by many groups. They are classified as internal and external users.

Internal users

1. Owners and managers: use it for planning, controlling, decision making and evaluating performance.
2. Employees: use it to judge the stability of the business, job security, wages and bonus.

External users

1. Investors and shareholders: decide whether to buy, hold or sell shares, and assess profit and dividends.
2. Creditors and lenders (banks, suppliers): judge the ability of the business to repay loans and pay dues.
3. Government and tax authorities: assess tax liability, and monitor compliance with law.
4. Customers: want to know the business will continue to supply goods and services.
5. Regulators, researchers and the public: study the economic role and performance of the business.

Why financial accounting is most important for external users

• External users cannot ask for internal records, so they depend on published financial statements (income statement, balance sheet, cash flow statement).
• Financial accounting follows GAAP and NFRS, so the statements are reliable, consistent and comparable between companies and years.
• It provides an independent, audited view of profit, financial position and cash flows.
• Their decisions on investing, lending, taxation and regulation depend on it.
• Managerial accounting reports are internal and are not available to them.

Generally Accepted Accounting Principles (GAAP)

GAAP is the set of rules, concepts, conventions and standards that accountants follow in recording transactions and preparing financial statements. "Generally accepted" means they are broadly approved by the accounting profession, regulators and users. GAAP makes financial statements:

• consistent from year to year,
• comparable between firms,
• reliable and understandable for users.

It includes accounting concepts such as business entity, going concern, accrual, matching, and conventions such as consistency and conservatism.

Nepal Financial Reporting Standards (NFRS)

NFRS are the accounting and reporting standards issued by the Accounting Standards Board (ASB) Nepal and the Institute of Chartered Accountants of Nepal (ICAN). They are the Nepali version of the International Financial Reporting Standards (IFRS) issued by the IASB, and were adopted from the fiscal year 2013/14 onward.

Main features:

• Companies listed on the stock exchange, banks, financial institutions, insurance companies and other public interest entities must prepare their financial statements under NFRS.
• A smaller version, NFRS for SMEs, exists for small and medium entities.
• They bring Nepali financial reporting in line with international practice, so statements are accepted by foreign investors and lenders.
• A full set of financial statements comprises the statement of financial position, statement of profit or loss and other comprehensive income, statement of changes in equity, statement of cash flows and notes.

Thus GAAP is the general framework of principles, and NFRS is the specific set of standards that forms Nepal's GAAP.

Accounting concepts are the basic assumptions and rules on which accounting is built.

1. Business entity concept: the business is treated as separate from its owner. The owner's personal transactions are not recorded in the business books.
2. Money measurement concept: only transactions that can be expressed in money are recorded.
3. Going concern concept: the business is assumed to continue indefinitely, so assets are recorded at cost and not at forced sale value.
4. Accounting period concept: the life of the business is divided into equal periods (usually one year) for reporting profit and position.
5. Cost concept: assets are recorded at their original purchase cost, not at market value.
6. Dual aspect concept: every transaction has two equal effects, a debit and a credit, which gives the equation Assets = Liabilities + Owner's equity.
7. Realisation (revenue recognition) concept: revenue is recognised when it is earned (goods delivered or service rendered), not when cash is received.
8. Accrual concept: revenues and expenses are recorded when they occur, regardless of cash receipt or payment.
9. Matching concept: expenses of a period are matched against the revenues they helped to earn in the same period.
10. Objectivity concept: records should be based on verifiable documents (vouchers, invoices) and be free from personal bias.
11. Consistency, materiality and conservatism are conventions: the same methods are used each year, only significant items are reported separately, and losses are anticipated but profits are not.

"Accounting activities are a never ending process"

A business continues from one period to the next. When one accounting period closes, the balances are carried forward and a new period begins with the same steps. The accounting cycle therefore repeats again and again for as long as the business operates. For this reason accounting is called a never ending process or a continuous cycle.

Steps in the accounting cycle

1. Identifying and analysing transactions: from source documents such as invoices, receipts and vouchers, decide which transactions are to be recorded and their effect on accounts.
2. Journalising: record each transaction in the journal in chronological order with debit and credit.
3. Posting to the ledger: transfer journal entries to the respective ledger accounts.
4. Preparing the unadjusted trial balance: list ledger balances to check that total debits equal total credits.
5. Adjusting entries: record accruals, prepayments, depreciation, and similar items at the period end.
6. Preparing the adjusted trial balance: confirm equality after adjustments.
7. Preparing financial statements: income statement, statement of retained earnings (or changes in equity), balance sheet and cash flow statement.
8. Closing entries: close temporary accounts (revenue, expenses, dividends) to retained earnings so that they start the next period at zero.
9. Post-closing trial balance: prepared from the permanent accounts (assets, liabilities, equity) to check balance before the next period.

The balances of the post-closing trial balance become the opening balances of the next period, and step 1 starts again. This is why the process never ends.

Retail inventory system

The retail inventory method is a way of estimating the cost of ending inventory using the selling prices of goods. Retail stores keep records of goods at both cost and retail (selling) price. At the period end, the inventory is counted at retail prices, and this retail value is converted to cost using the cost-to-retail ratio.

$\text{Cost-to-retail ratio} = \frac{\text{Cost of goods available for sale}}{\text{Retail value of goods available for sale}}$

$\text{Ending inventory at cost} = \text{Ending inventory at retail} \times \text{Cost-to-retail ratio}$

Ending inventory at retail is found as: retail value of goods available for sale less net sales.

Why retail stores use it instead of the inventory costing system

1. A store has thousands of items of different cost. Keeping the cost of each item (as in FIFO, LIFO or average cost) is very time consuming and costly.
2. Items are marked with selling prices, so it is easy to count stock at retail prices.
3. It gives a quick estimate of ending inventory and cost of goods sold without a physical count at cost.
4. It is useful for preparing monthly or interim statements without taking a full physical inventory.
5. It helps control stock because inventory at retail is compared against the physical count, which shows shortages or theft.
6. It is accepted for tax and external reporting.

Working notes

Salaries Rs 195,000: administrative 80% = Rs 156,000; selling 20% = Rs 39,000. Utilities Rs 40,000: administrative 60% = Rs 24,000; selling 40% = Rs 16,000. Repairs, general and insurance expenses are treated as administrative expenses.

(a) Multistep income statement for the year (Rs)

(b) Statement of retained earnings (Rs)

(c) Classified balance sheet (Rs)

Working notes (Rs)

• Cash received from customers = Sales + decrease in receivables = $246,000 + (14,500 - 6,000) = 254,500$
• Purchases = COGS + increase in inventory = $140,000 + 2,000 = 142,000$; cash paid to suppliers = purchases - increase in payables = $142,000 - 2,000 = 140,000$
• Cash operating expenses = $46,000 - 2,500$ (depreciation) $= 43,500$; less decrease in prepayment (1,000) plus decrease in accrued liabilities (500): $43,500 - 1,000 + 500 = 43,000$
• Income tax paid = tax expense + decrease in tax payable = $15,000 + 3,500 = 18,500$
• Land sold at book value = $70,000 - 60,000 = 10,000$
• Plant and equipment purchased = $85,000 - 60,000 = 25,000$
• Loan repaid = $25,000 - 20,000 = 5,000$; stock issued = $45,000 - 40,000 = 5,000$

Cash flow statement (direct method) for the year ended 31 December 2024 (Rs)

The closing cash of Rs 14,000 agrees with the balance sheet.

Units and cost available for sale

Units sold = 20,000, so ending inventory = 26,000 - 20,000 = 6,000 units.

FIFO (periodic): the oldest costs go to COGS, the latest costs remain in inventory.

• Ending inventory = 3,000 x 30 + 3,000 x 26 = 90,000 + 78,000 = Rs 168,000
• COGS = 624,000 - 168,000 = Rs 456,000

LIFO (periodic): the latest costs go to COGS, the oldest costs remain in inventory.

• Ending inventory = 4,000 x 20 + 2,000 x 22 = 80,000 + 44,000 = Rs 124,000
• COGS = 624,000 - 124,000 = Rs 500,000

Tax comparison (sales = 20,000 x 40 = Rs 800,000)

LIFO provides less tax: Rs 90,000 against Rs 103,200 under FIFO, a saving of Rs 13,200. In a period of rising prices LIFO charges the higher recent costs to COGS, so profit and tax are lower.

Cost of goods sold (COGS) is the total cost of the goods that a business sold during an accounting period. It includes the purchase cost of the goods (and, for a manufacturer, the cost of materials, labour and factory overhead) but not selling or administrative expenses. It is deducted from sales to find gross profit.

$\text{Gross profit} = \text{Sales} - \text{COGS}$

For a merchandising business under the periodic system:

$\text{COGS} = \text{Beginning inventory} + \text{Net purchases} - \text{Ending inventory}$

where net purchases = purchases + freight-in - purchase returns and allowances - purchase discounts.

Example: beginning inventory Rs 20,000, net purchases Rs 100,000, ending inventory Rs 30,000 gives COGS = 20,000 + 100,000 - 30,000 = Rs 90,000.

The amount depends on the inventory costing method (FIFO, LIFO, weighted average). In a perpetual system COGS is updated with every sale; in a periodic system it is calculated at the end of the period.

In the periodic inventory system the Inventory account is not updated every time goods are bought or sold. Purchases are debited to a Purchases account, and the cost of goods sold is found only at the end of the period after a physical count of the goods on hand.

$\text{COGS} = \text{Beginning inventory} + \text{Net purchases} - \text{Ending inventory}$

Features

• No continuous record of inventory and COGS; sales are recorded at selling price only.
• Physical stock-taking is needed at the end of the period.
• Closing entries adjust the Inventory account to the new ending balance.

Advantages: simple and cheap to maintain; suitable for businesses selling many low-value items.

Disadvantages: no up-to-date information about stock during the period; losses from theft or damage are hidden inside COGS; weak control over inventory.

An NSF (not sufficient funds) cheque is a cheque that a bank refuses to pay because the drawer's account does not have enough money. It is also called a bounced or dishonoured cheque.

A business deposits a customer's cheque and records it as cash. If the cheque is later returned by the bank as NSF, the bank deducts the amount from the business's account, and the business must correct its books:

$\text{Accounts Receivable Dr.}\quad \text{To Cash}$

The customer again owes the amount. In the bank reconciliation statement, the NSF cheque is deducted from the cash book balance because the bank has already reduced the bank balance but the company has not yet recorded it. Any bank charge for the returned cheque is also deducted. The company then follows up with the customer for payment.

Computers are now used widely in accounting. Their association with the accounting process can be seen at every step of the cycle.

1. Data entry and recording: transactions are entered once, and the software creates journal entries automatically.
2. Posting and processing: the ledger posting, balancing and trial balance are produced automatically, so posting errors are avoided.
3. Speed and accuracy: large volumes of data are processed in seconds with fewer arithmetic errors.
4. Financial statements and reports: income statement, balance sheet, cash flow statement and customised reports are generated at the click of a button.
5. Storage and retrieval: records are kept in a database and can be searched and retrieved quickly. They need less space than paper and can be backed up.
6. Integration: modules for sales, purchases, payroll, inventory and fixed assets update the general ledger together.
7. Analysis and decision support: spreadsheets and analysis tools help in budgeting, ratio analysis and forecasting.
8. Communication: accounting data can be shared across branches and with banks and tax authorities through networks, for example for online VAT filing.

Examples of accounting software: Tally, QuickBooks, SAP and local software used in Nepal.

Limitations: cost of hardware and software, need of trained staff, risk of data loss or fraud, virus and security threats, and dependence on power and the internet. Despite these, computers have made accounting faster, more accurate and more useful.

Audit is the examination of books of accounts by an independent person to give an opinion on whether the financial statements give a true and fair view. In Nepal, audit is regulated by several laws.

1. Companies Act, 2063

   • Every company must appoint an auditor, who must be a registered auditor with ICAN, at the annual general meeting (AGM). The first auditor is appointed by the board.
   • The auditor reports to the shareholders on the balance sheet and the profit and loss account, and whether proper books have been kept.
   • The auditor has the right to access books, vouchers and information. The audit report must be attached to the annual report presented at the AGM.
   • Companies must keep an audit committee in cases specified (for example public companies).

2. Nepal Chartered Accountants Act, 2053: sets up the Institute of Chartered Accountants of Nepal (ICAN), which registers auditors, issues certificates of practice, sets a code of ethics and takes disciplinary action. Only a person holding the certificate can conduct statutory audit.

3. Audit Act, 2075 and the Constitution of Nepal: the Auditor General audits government offices, constitutional bodies, and government-owned enterprises. The Office of the Auditor General reports annually to the President.

4. Income Tax Act, 2058: requires audited financial statements to be submitted with the tax return, depending on the size of turnover. The audit must be done by a registered auditor.

5. Other laws: the Banks and Financial Institutions Act (bank audit under Nepal Rastra Bank directives), Insurance Act, Securities Act (listed companies publish audited reports), and the Local Government Operation Act (internal and final audit of local bodies).

6. Auditing standards: Nepal Standards on Auditing (NSA), based on International Standards on Auditing, are issued by the Auditing Standards Board and must be followed.

Inventory costing

Inventory costing is the process of assigning costs to the goods sold and to the goods remaining in ending inventory. The methods used include specific identification, FIFO, LIFO and weighted average. The result affects COGS, gross profit, tax and the balance sheet value of inventory.

Difference between perpetual and periodic systems

Perpetual system

Advantages:

• Continuous up-to-date information on stock and COGS.
• Better control; shortages and theft are discovered.
• Helps reordering and avoids stockouts.

Disadvantages:

• Costly and complex; needs computerised records.
• More clerical work.

Periodic system

Advantages:

• Simple and cheap.
• Less record keeping during the period.

Disadvantages:

• No current information about stock.
• Losses from theft or damage are included in COGS, so cannot be seen.
• A physical count is needed to prepare interim statements.

Adjustments (Rs)

• Outstanding salaries 4,000: salaries expense becomes 20,000 + 4,000 = 24,000; salaries payable 4,000.
• Supplies in hand 3,000: supplies used = 8,000 - 3,000 = 5,000.
• Prepaid insurance expired 1,000: insurance expense 1,000; prepaid insurance becomes 5,000 - 1,000 = 4,000.
• Depreciation 4,000: accumulated depreciation becomes 10,000 + 4,000 = 14,000.

(a) Multistep income statement for the year ended December 31, 2024 (Rs)

The business is a service business, so there is no cost of goods sold or gross profit, and no non-operating items.

Statement of retained earnings (supporting): 5,000 + 11,000 - 4,000 dividends = 12,000.

(b) Classified balance sheet as at December 31, 2024 (Rs)

Working notes (Rs)

• Loss on sale of land: land costing 30,000 sold for 27,500 gives a loss of 2,500 (added back in operating activities; the 27,500 is an investing inflow).
• Land check: opening 80,000 + purchased 70,000 - sold 30,000 = 120,000.
• Equipment rose by 60,000 (130,000 to 190,000), acquired by issuing capital stock, so it is a non-cash transaction.
• Capital stock rose by 100,000: 60,000 issued for equipment (non-cash) and 40,000 issued for cash.
• Retained earnings check: 74,300 + 5,200 - 600 = 78,900.

Statement of cash flows for the year ended December 31, 2024 (indirect method, Rs)

Non-cash investing and financing activity: equipment of Rs 60,000 acquired in exchange for capital stock.

The closing cash of Rs 12,000 agrees with the balance sheet.

Cash is the most liquid and easily stolen asset, so a business needs strong controls over its receipts and payments.

Cash control techniques

1. Separation of duties: the person who handles cash should not keep the accounting records or reconcile bank accounts.
2. Depositing receipts daily and intact, so that cash is not used for personal purposes or payments.
3. Making payments by cheque with proper authorisation and supporting vouchers; blank cheques are kept safe and cheques are serially numbered.
4. Bank reconciliation every month by a person who does not handle cash, to find errors or fraud.
5. Use of cash registers, receipts and tills that record every sale, with the totals checked against the cash counted.
6. Imprest (petty cash) system with a fixed float for small expenses, which is replenished against vouchers.
7. Surprise checks and internal audit of cash balances.
8. Fidelity bonds and insurance for staff who handle cash, and job rotation and compulsory leave.
9. Cash budgets to plan receipts and payments and avoid cash shortages or idle cash.

Qualitative characteristics are the attributes that make financial information useful to users. The conceptual framework divides them into fundamental and enhancing characteristics.

A. Fundamental qualitative characteristics

1. Relevance: information is capable of influencing decisions of users. It has predictive value (helps forecast future), confirmatory value (confirms past evaluations) and materiality (omitting or misstating it could change decisions).
2. Faithful representation: information must truly represent what it claims to represent. It should be complete, neutral (free from bias) and free from error.

B. Enhancing qualitative characteristics

1. Comparability: users can compare the statements of the same firm over different periods and of different firms. Consistent use of accounting methods supports this.
2. Verifiability: different knowledgeable and independent observers would reach the same conclusion that the information is a faithful representation.
3. Timeliness: information is available in time to influence decisions. Old information is less useful.
4. Understandability: information is classified, characterised and presented clearly and concisely so that users with reasonable knowledge of business and accounting can understand it.

Constraint: the benefits of information should exceed the cost of providing it.

Together these make accounting information reliable and useful for investors, creditors, managers and other users.

The statement is correct. Accounting information is the language of business: it converts the day-to-day transactions of an enterprise into financial statements and reports, and managers, owners, lenders and others rely on these to choose between alternative courses of action. Without reliable accounting information, decisions would be based on guesswork.

How accounting information supports decisions

1. Planning and budgeting. Past revenues, costs and profits are used to forecast sales, set budgets and fix targets for the next period.
2. Pricing and product decisions. Cost information (material, labour, overheads) helps management fix selling prices, decide whether to make or buy, and drop or continue a product line.
3. Investment decisions. Information on profitability, cash flows and return on capital helps decide whether to buy new machinery, expand a branch or invest in securities.
4. Financing decisions. Balance sheet data on debt and equity helps decide how much to borrow, whether to issue shares and whether the firm can repay interest and principal.
5. Control and performance evaluation. Comparing actual results with budgets shows variances, so corrective action can be taken and managers' performance can be judged.
6. Credit and working-capital decisions. Receivable, payable and inventory balances guide credit policy, collection efforts and the level of stock to hold.
7. Decisions by outsiders. Investors decide to buy or sell shares, banks decide whether to lend, suppliers decide whether to give credit, and the government decides how much tax is due, all from published statements.
8. Legal and tax compliance. Accurate records support VAT and income tax returns, audit and company law requirements.

Conclusion. Accounting information is useful only if it is relevant, reliable, timely and comparable. When it has these qualities, it reduces uncertainty and lets users take informed economic decisions about the business.

Annual report. An annual report is a comprehensive document that a company prepares at the end of each financial year to inform shareholders, regulators and other stakeholders about its activities, financial position and performance during the year. In Nepal, the Companies Act, 2063 requires a company to place its annual report, including audited financial statements and the auditor's report, before the annual general meeting (AGM).

Major components

1. Chairman's message / Directors' report. Reviews the year's performance, business environment, future plans, dividend recommendation and risks.
2. Management discussion and analysis. Explains operating results, trends in sales and costs, and prospects in plain language.
3. Auditor's report. The independent auditor's opinion on whether the financial statements give a true and fair view and follow accounting standards.
4. Financial statements
   • Statement of financial position (balance sheet): assets, liabilities and equity at year-end.
   • Income statement (profit or loss): revenues, expenses and net profit for the year.
   • Statement of changes in equity / retained earnings.
   • Cash flow statement: cash from operating, investing and financing activities.
5. Notes to the accounts. Accounting policies, details of items in the statements, contingent liabilities and related-party transactions.
6. Corporate governance report. Board composition, committees, internal control and compliance with laws.
7. Other information. Shareholding pattern, five-year financial summary, notice of the AGM, corporate social responsibility activities and company profile.

The annual report thus helps users judge management's stewardship and make investment, credit and policy decisions.

In Nepal, the profession of accountancy is regulated mainly through the Nepal Chartered Accountants Act, 2053 (1997), which created the Institute of Chartered Accountants of Nepal (ICAN), together with the Companies Act, 2063, the Auditors Act and the Income Tax Act, 2058.

Main legal provisions

1. Institute and membership. ICAN is an autonomous body that registers and regulates chartered accountants. Only a person who passes its examinations, completes the required practical training and is enrolled as a member can use the title Chartered Accountant (CA).
2. Certificate of practice. A member may carry on audit practice only after obtaining a certificate of practice from ICAN, renewed periodically.
3. Audit rights. Audit of companies, banks, insurance companies and other specified bodies must be done by a registered auditor (CA). The auditor is appointed by the shareholders at the annual general meeting and reports on whether the accounts give a true and fair view.
4. Accounting and auditing standards. The Nepal Accounting Standards Board (ASB) issues Nepal Financial Reporting Standards (NFRS) and Nepal Standards on Auditing, which accountants must follow.
5. Books of account. Under the Companies Act and Income Tax Act, a business must keep proper books of account and supporting records, generally for at least six years, and prepare financial statements each year.
6. Code of ethics. Members must observe integrity, objectivity, professional competence, confidentiality and professional behaviour. Independence from the client is required for auditors.
7. Disciplinary provisions. The Act sets up a disciplinary committee to deal with misconduct. Penalties include warning, suspension, removal from the register and fines.
8. Tax duties. Accountants and auditors must support correct VAT and income tax returns and certify statements where the law requires.
9. Prohibited acts. Issuing a false report, practising without a certificate, or allowing a non-member to use one's name is punishable.

A computer can perform every stage of the accounting process (recording, classifying, summarising, reporting and analysing) faster and more accurately than manual methods. Accounting software such as Tally, QuickBooks, SAP or locally used packages is now standard in Nepali businesses and banks.

Uses of computers in the accounting process

1. Recording transactions. Journal entries, cash and bank vouchers, sales and purchase invoices are keyed in once. The software checks that debits equal credits.
2. Posting and classification. Entries are automatically posted to the ledger accounts, so the chance of posting errors and omissions is removed.
3. Trial balance and adjustments. The trial balance, adjusted trial balance and worksheet are produced at a click, and adjusting and closing entries can be generated.
4. Financial statements. Income statement, balance sheet, cash flow statement and schedules are prepared automatically for any period.
5. Subsidiary functions. Payroll, inventory control, accounts receivable and payable, fixed asset registers and depreciation are maintained and linked to the general ledger.
6. Bank reconciliation and reminders. Statements can be matched and dues, overdue invoices and cheque dates tracked.
7. Taxation. VAT invoices, TDS and income tax computations and returns are prepared and filed.
8. Analysis and reporting. Ratios, trends, budgets, variances and graphs help management; spreadsheets and databases support what-if analysis.
9. Storage and retrieval. Large volumes of data are stored securely, backed up and searched quickly. Access can be restricted with passwords.
10. Communication. Data can be shared across branches over a network and over the internet (e-banking, e-filing).

Advantages. Speed, accuracy, less labour and paperwork, timely reports and better control. Limitations. Cost, need for trained staff, risk of virus, power failure and data theft, so backup and security controls are necessary.

(i) Gross profit method

Goods available for sale = Opening inventory + Purchases

$= 320 + 16{,}400 = \text{Rs } 16{,}720$

Estimated cost of goods sold = Sales $\times (1 - \text{gross profit ratio})$

$= 11{,}350 \times 60\% = \text{Rs } 6{,}810$

Estimated inventory before the explosion = $16{,}720 - 6{,}810 = \text{Rs } 9{,}910$

Less: inventory saved = Rs 400

Estimated inventory lost = Rs 9,510

(ii) Journal entries (insurance company will pay Rs 650)

When the insurance company pays:

The uninsured loss of Rs 8,860 (9,510 - 650) is shown as an expense or loss in the income statement.

Workings

Cost of goods sold = Opening inventory + Purchases - Closing inventory = $20{,}000 + 150{,}000 - 30{,}000 = \text{Rs } 140{,}000$

Depreciation on machinery = $15\% \times 250{,}000 = \text{Rs } 37{,}500$

Prepaid insurance remaining = $25{,}000 - 15{,}000 = \text{Rs } 10{,}000$

(a) Pokhara Noodles Pvt. Ltd.: Multi-step Income Statement for the year ended December 31, 2023

(b) Classified Balance Sheet as at December 31, 2023

Workings (all figures in Rs)

• Cash received from customers = Sales - increase in receivables = $89{,}000 - 3{,}600 = 85{,}400$
• Purchases = COGS + increase in inventory = $57{,}000 + 4{,}900 = 61{,}900$; cash paid to suppliers = $61{,}900 - 3{,}200$ (increase in payables) $= 58{,}700$
• Advertising paid = $3{,}200 + 1{,}400$ (increase in prepaid) $= 4{,}600$
• Salaries paid = $12{,}000 + 2{,}400$ (decrease in salaries payable) $= 14{,}400$
• Income tax paid = $2{,}600 - 500$ (increase in tax payable) $= 2{,}100$
• Land: opening 80,000 + purchased 70,000 - cost of land sold = closing 120,000, so land sold had cost 30,000. Sale price 27,500 gives the loss of 2,500.
• Equipment increased by 60,000, entirely acquired by issuing stock (non-cash).
• Capital stock increased by 100,000; 60,000 was issued for equipment, so cash issue = 40,000.
• Dividends paid = Opening retained earnings + Net income - Closing = $74{,}300 + 5{,}200 - 78{,}900 = 600$

ST Company: Cash Flow Statement for the year ended 31 December 2023 (direct method)

Non-cash investing and financing activity: equipment of Rs 60,000 acquired by issuing capital stock.

Adjusted cash book balance

(i) Abacus Company: Bank Reconciliation Statement as at April 30

The two balances agree, so the reconciliation is complete.

(ii) Journal entries (to correct the cash book)

Perpetual inventory system. The inventory account is updated continuously after every purchase and sale. Each purchase is debited to Inventory, and at each sale two entries are made: one for the sales revenue and one transferring the cost of the goods sold from Inventory to Cost of Goods Sold. The balance of the inventory account therefore always shows the cost of goods on hand, and COGS is known at any time. It needs more record-keeping (usually a computerised system with bar codes) but gives better control and quick detection of shortage or theft.

Periodic inventory system. The inventory account is not updated during the period. Purchases are debited to a Purchases account, and no entry is made for the cost of goods sold at the time of sale. At the end of the period a physical count is taken, and

$\text{COGS} = \text{Opening inventory} + \text{Net purchases} - \text{Closing inventory}$

It is cheaper and simpler and suits small businesses selling low-value items, but loss or theft is hidden in COGS and up-to-date inventory figures are not available during the year.

Petty cash is a small amount of cash kept in the office to pay minor, routine expenses such as postage, stationery, tea and snacks, local transport, and small repairs, for which paying by cheque would be inconvenient.

Imprest system. Under this common method, a fixed sum (the imprest) is given to the petty cashier, who keeps the cash and a petty cash book. The main cashier checks the vouchers and, at the end of the period, reimburses exactly the amount spent so that the fund returns to its original amount.

Procedure and entries

• Establishing the fund: Petty cash A/c Dr; To Cash/Bank A/c.
• Payment from the fund: a voucher is prepared for every payment and recorded in the petty cash book in an analysis column (columnar format).
• Reimbursement: Expense accounts Dr (postage, stationery etc.); To Cash/Bank A/c. Only the expense accounts are debited; the petty cash account does not change.

Advantages. Saves the time of the main cashier, ensures control over small payments, makes it easy to find the spending on each head, and reduces the risk of fraud because the amount is limited and supported by vouchers.

Accounting information is used by many parties, each interested in a different aspect. They fall into two groups.

Internal users

1. Owners and shareholders. They want to know the profitability, dividend capacity and growth of the business to decide whether to retain, increase or sell their investment.
2. Management. Managers use cost, revenue and cash information to plan, budget, price products, control costs, evaluate departments and make investment and financing decisions.
3. Employees and trade unions. They look at profit and liquidity to judge job security, the ability to pay salaries and bonuses, and bargaining for wages.

External users

4. Investors (potential). They compare earnings, risk and dividends before buying shares.
5. Lenders and banks. They study liquidity, solvency, cash flows and security to decide whether to give a loan and on what terms, and later whether interest and principal will be paid.
6. Suppliers and creditors. They examine the ability to pay on time before giving goods on credit.
7. Customers. They want assurance that the business will continue and keep supplying goods and after-sales service.
8. Government and tax authorities. The Inland Revenue Department uses accounts to assess income tax and VAT; regulators such as the Securities Board and the Registrar of Companies check compliance, and statistical bodies use them for national statistics.
9. Researchers, analysts and the public. They study the effect of the business on the economy, environment and society.

Accounting information serves all of these users only if it is relevant, reliable, comparable and understandable, which is why financial statements are prepared under accepted standards and audited.

Bank reconciliation statement. A bank reconciliation statement is a statement prepared on a given date to reconcile (agree) the balance shown by the cash book (bank column) with the balance shown by the bank statement (passbook). The two balances usually differ because of timing differences and because some items are known to only one party.

Reasons for the difference

• Cheques issued but not yet presented for payment.
• Cheques deposited but not yet collected or credited by the bank.
• Direct deposits, interest and dividends collected by the bank, not yet entered in the cash book.
• Bank charges, standing-instruction payments, and dishonoured cheques not yet entered in the cash book.
• Errors made by the business or by the bank.

Importance

1. Detects errors. Mistakes in the cash book or bank statement (wrong amounts, omissions, double entries) are discovered and corrected.
2. Prevents and detects fraud. Unauthorised withdrawals, forged cheques and misappropriation of cash are revealed.
3. Finds the true cash position. Management knows the correct bank balance that can really be used, avoiding overdrafts and dishonoured cheques.
4. Updates the cash book. Items like bank charges, interest and direct receipts are identified and recorded.
5. Controls outstanding items. Stale (old) cheques and cheques lost in transit can be followed up.
6. Supports the audit and the financial statements. The auditor relies on it to confirm the cash balance shown in the balance sheet.
7. Better internal control. It is a check on the person who handles cash by a different person who prepares the statement.

For these reasons it should be prepared regularly, at least monthly.

Cost of goods sold (COGS). COGS is the cost of the merchandise (or the manufacturing cost of goods) that a business actually sold during an accounting period. It is the main expense of a merchandising firm and is deducted from net sales to find gross profit.

Under the periodic system

COGS is calculated at the end of the period, after a physical count of the closing stock:

$\text{COGS} = \text{Opening inventory} + \text{Net purchases} - \text{Closing inventory}$

where Net purchases = Purchases + Freight in - Purchase returns - Purchase discounts. The cost of the closing inventory is found by the chosen cost flow assumption (FIFO, LIFO or weighted average) applied to the whole period. No entry for COGS is made when a sale is made. At the year end the entry is made: COGS Dr; Opening inventory is closed and closing inventory is brought in.

Example: Opening inventory Rs 10,000, net purchases Rs 50,000, closing inventory Rs 12,000 gives COGS $= 10{,}000 + 50{,}000 - 12{,}000 = \text{Rs } 48{,}000$.

Under the perpetual system

The Inventory account is updated with every transaction. Purchases are debited to Inventory. At the time of every sale, an additional entry is made:

Cost of goods sold A/c Dr; To Inventory A/c (with the cost of the goods sold, determined by FIFO, LIFO or moving average applied at the date of sale).

COGS at the end of the year is simply the total of the COGS debits during the year; no calculation or physical count is needed to determine it (a count is made only to check against the records and adjust for shortages).

Difference. In the periodic system COGS is a residual figure obtained by subtraction (so losses are included in it), while in the perpetual system it is a directly recorded figure and the closing inventory is the balance of the ledger account.

Assumption: there were no opening balances at August 1.

Journal

Ledger (posting, in T-account form)

Trial balance as at August 31

(i) Estimate of inventory lost (gross margin method)

Net purchases = $12{,}300 - 700 + 1{,}200 = \text{Rs } 12{,}800$

Net sales = $25{,}300 - 1{,}300 = \text{Rs } 24{,}000$

(ii) Why the gross margin method is suitable here

• After a fire the inventory has been destroyed, so a physical count cannot be made and the periodic or perpetual records may be incomplete.
• The method uses figures that survive in the accounting records (opening inventory, purchases, sales) and a stable historical gross margin percentage, giving a reasonably reliable estimate for the insurance claim.
• It is quick and cheap, and the insurer usually accepts it as evidence of the amount of loss.
• It also serves for interim reports where no physical stock-taking is done.

The estimate is only as good as the assumption that the gross margin percentage was the same as in the past.

Adjusted cash book balance

ABC Company: Bank Reconciliation Statement as at June 30, 2024

Check: $4{,}450 + 1{,}500 - 1{,}200 = 4{,}750$, which agrees with the adjusted cash book.

Adjusting entries in the cash book

(a) XYZ Company: Multi-step Income Statement for the year ended December 31, 2023

Classified Balance Sheet as at December 31, 2023

(b) Ratios

(i) Current ratio $= \dfrac{105{,}000}{33{,}000} = 3.18 : 1$

Quick ratio $= \dfrac{50{,}000 + 30{,}000}{33{,}000} = \dfrac{80{,}000}{33{,}000} = 2.42 : 1$

Both are well above the usual norms (2:1 and 1:1), so the company can easily meet its short-term obligations; it may even hold more liquid assets than needed.

(ii) Inventory turnover $= \dfrac{\text{COGS}}{\text{Inventory}} = \dfrac{120{,}000}{20{,}000} = 6$ times (using closing inventory, as no opening figure is given), meaning inventory is sold and replaced about every 61 days. This is a satisfactory rate of movement.

(iii) Debt to total assets $= \dfrac{133{,}000}{255{,}000} = 52.16\%$. About half the assets are financed by outsiders, a moderate level of financial risk.

(iv) Return on assets $= \dfrac{37{,}000}{255{,}000} = 14.51\%$. Each rupee of assets earned about 14.5 paisa of net profit, which indicates good use of assets.

Year 2022 is the later year (second column of the balance sheet figures given). All figures are in Rs.

Workings

• Cash received from customers = $310{,}000 + 2{,}100$ (decrease in receivables) $= 312{,}100$
• Purchases = $195{,}000 + 3{,}500$ (inventory increase) $= 198{,}500$; cash paid = $198{,}500 - 3{,}500$ (payables increase) $= 195{,}000$
• Rent paid = $4{,}800 + 200$ (prepaid increase) $= 5{,}000$
• Other operating expenses paid = $22{,}900$
• Salaries paid = $36{,}000 - 2{,}000$ (payable increase) $= 34{,}000$
• Equipment purchased: $175{,}000 - 80{,}000 + X = 120{,}000$, so $X = 25{,}000$
• Dividends = Opening retained earnings + Net income - Closing = $168{,}600 + 23{,}300 - 165{,}900 = 26{,}000$
• Common stock increased by 5,000 (issued for cash); notes payable 10,000 issued.

Samrat Shoes: Cash Flow Statement for the year ended 31 December 2022 (direct method)

Meaning. The double entry system is the method of recording transactions in which every transaction affects at least two accounts, and is recorded with an equal amount on the debit side of one account (or more) and on the credit side of another. It follows from the dual aspect concept: every transaction has two aspects, a receiver (debit) and a giver (credit), so that

$\text{Total debits} = \text{Total credits}$

and the accounting equation $\text{Assets} = \text{Liabilities} + \text{Equity}$ always remains in balance.

Example: Purchase of furniture for cash Rs 10,000: Furniture A/c Dr 10,000; To Cash A/c 10,000.

Rules of debit and credit

Characteristics

1. Every transaction is recorded in two accounts, with equal debit and credit.
2. Both aspects (the effect on assets, liabilities, equity, revenue and expense) are recorded.
3. It is the base of the accounting equation and complete record-keeping of personal, real and nominal accounts.
4. A trial balance can be prepared to check arithmetical accuracy (total debits equal total credits).
5. Complete information is available for preparing the income statement and the balance sheet.
6. Errors and fraud are easier to detect, though some errors (such as errors of principle or compensating errors) do not affect the trial balance.
7. It is scientific and accepted universally, and is the basis of modern accounting.

NAS (Nepal Accounting Standards) are the accounting standards issued by the Accounting Standards Board (ASB), Nepal, formed under the Nepal Chartered Accountants Act, 2053. They are written policy documents that set out how particular transactions and events should be recognised, measured, presented and disclosed in financial statements.

Objectives

• To bring uniformity and consistency in accounting practice.
• To make financial statements comparable between enterprises and over time.
• To improve reliability and transparency so that users can trust them.
• To reduce alternative treatments and the scope for manipulation.

Background. NAS were based on the International Accounting Standards (IAS). Standards such as NAS 1 (Presentation of Financial Statements), NAS 2 (Inventories) and NAS 7 (Cash Flow Statements) were issued. Nepal has since moved to Nepal Financial Reporting Standards (NFRS), which are based on IFRS, and NAS remain for small and medium enterprises and as a base where NFRS does not apply.

Importance. They guide accountants and auditors, provide a framework for legal enforcement and give investors and lenders confidence. Auditors must report any departure from them.

Convention in accounting means a custom or practice, generally accepted by accountants, that guides how financial information is prepared and presented. Conventions are not legal rules but have gained acceptance by long use. The main conventions are consistency, full disclosure, materiality and conservatism.

Conservatism (prudence). Conservatism is the convention that requires an accountant to be cautious in reporting: anticipate no profits, but provide for all possible losses. When there is doubt between alternatives, the one which gives the lower profit or the lower asset value is chosen.

Applications

• Closing stock is valued at cost or net realisable value, whichever is lower.
• Provision for doubtful debts and discount on debtors is made, but no provision for expected gain.
• Provision for contingent losses is created, while contingent gains are not recorded.
• Goodwill and other intangible assets are written off in early years.

Merits. It protects creditors and investors from overstated profit and strengthens the financial position. Criticism. Excessive conservatism creates secret reserves, understates profit and assets, and distorts the true and fair view, so it should be applied with reasonable care only.

Dynamic Service Inc.: effect of transactions on the accounting equation (March 2023, Rs)

$\text{Assets} = \text{Liabilities} + \text{Equity}$

Total assets $= 21{,}000 + 1{,}500 + 350 + 5{,}400 = \text{Rs } 28{,}250$

Total liabilities and equity $= 7{,}500 + 350 + 20{,}000 + 400 = \text{Rs } 28{,}250$

The equation balances. Retained earnings of Rs 400 is the net income for March: revenues $(2{,}000 + 1{,}400) = 3{,}400$ less expenses $(650 + 1{,}650 + 700) = 3{,}000$.

The accounting cycle is the complete sequence of steps followed in each accounting period, from the first recording of transactions to the preparation of financial statements and the closing of the books, so that the process can begin again in the next period.

Steps in the accounting cycle

1. Identifying and analysing transactions. Business events measurable in money are identified from source documents (invoices, vouchers, cheques) and their effect on assets, liabilities, equity, revenue and expenses is analysed.
2. Journalising. Transactions are recorded in chronological order in the journal (book of original entry) with debit and credit and a short narration.
3. Posting to the ledger. Journal entries are transferred to the respective ledger accounts, which are balanced.
4. Preparing the unadjusted trial balance. A list of ledger balances is prepared to check that total debits equal total credits.
5. Adjusting entries. At the period end entries are made for accruals, prepayments, depreciation, supplies used, unearned and earned revenue and bad debts, to follow the accrual basis.
6. Adjusted trial balance. A new trial balance is prepared after posting the adjustments.
7. Preparing financial statements. The income statement, statement of retained earnings (changes in equity), balance sheet and cash flow statement are prepared from the adjusted trial balance.
8. Closing entries. Revenue and expense accounts (temporary accounts) and dividends are closed to the Income Summary and retained earnings, so that they start with zero in the next period.
9. Post-closing trial balance. Prepared to check that only the permanent (balance sheet) accounts remain open and that debits equal credits.
10. Reversing entries (optional). Certain accruals are reversed on the first day of the next period to simplify recording.

A worksheet can be used between steps 4 and 7 to collect the data in one place.

Workings

Net sales = $14{,}600 - 20 - 44 = \text{Rs } 14{,}536$

Net purchases = $6{,}000 + 75 - 100 - 82 = \text{Rs } 5{,}893$

(i) Dinesh: Multi-step Income Statement for the year ended 31 Chaitra 2079

(ii) Statement of Retained Earnings for the year ended 31 Chaitra 2079

Check: assets $19{,}663 + 1{,}880 + 8{,}000 = 29{,}543$ equal liabilities and equity $700 + 10{,}000 + 18{,}843 = 29{,}543$.

The balance sheet (statement of financial position) shows the financial position of a business on a particular date. It has three major elements, linked by the accounting equation:

$\text{Assets} = \text{Liabilities} + \text{Owners' equity}$

1. Assets. Economic resources owned by the business from which future benefits are expected.
   • Current assets: cash, bank, accounts receivable, inventory, prepaid expenses (converted to cash within a year or the operating cycle).
   • Non-current assets: property, plant and equipment, land, buildings, long-term investments and intangible assets (goodwill, patents).
2. Liabilities. Obligations to outsiders that will be settled by paying cash or other assets.
   • Current liabilities: accounts payable, bills payable, outstanding expenses, tax payable, short-term loans (due within a year).
   • Long-term liabilities: bank loans, bonds and debentures payable.
3. Owners' (shareholders') equity. The residual interest of the owners in the assets after liabilities: share capital, reserves and retained earnings.

Assets are listed in order of liquidity (or permanence) and liabilities in order of their due date.

(a) Ten-column worksheet

Adjustments (one month, since the policy and the statements are for January 2024):

1. Insurance expense $= 18{,}000 \div 24 =$ Rs 750.
2. Depreciation: warehouse $= (40{,}000 - 4{,}000)\div 20 \div 12 =$ Rs 150; truck fleet $= (240{,}000 - 15{,}000)\div 6 \div 12 =$ Rs 3,125; total Rs 3,275.
3. Interest for January $= 50{,}000 \times 9\% \times 1/12 =$ Rs 375.
4. Customer deposits earned Rs 4,500 are transferred to freight revenue.
5. Accrued wages Rs 8,200.

Rubina Trucking Company, worksheet for the month ended 31 January 2024 (Rs)

(b) Closing entries (31 Jan 2024)

Retained earnings after closing $= 40{,}470 + 89{,}290 - 20{,}000 =$ Rs 109,760.

All figures are in Rs. Year 2022 is the later year.

Workings

• Cash from customers = $507{,}000 + 10{,}000$ (decrease in receivables) $= 517{,}000$
• Purchases = $150{,}000 + 5{,}000$ (inventory increase) $= 155{,}000$; paid to suppliers $= 155{,}000 - 16{,}000$ (payables increase) $= 139{,}000$
• Operating expenses paid = $111{,}000 + 4{,}000$ (prepaid rent increase) $= 115{,}000$
• Interest paid = $42{,}000$ (no interest payable)
• Income tax paid = $47{,}000 + 2{,}000$ (decrease in tax payable) $= 49{,}000$
• Land increased by 110,000 and bonds by 110,000 (exchange, a non-cash transaction).
• Cash dividends 29,000; check: $48{,}000 + 145{,}000 - 29{,}000 = 164{,}000$.

Mayas Company: Cash Flow Statement for the year ended 31 December 2022 (direct method)

Non-cash investing and financing activity: land of Rs 110,000 acquired by issuing long-term bonds.

Multi-step Income Statement for the year ended 31 December 2024

Statement of Retained Earnings for the year ended 31 December 2024

Classified Balance Sheet as at 31 December 2024

The adjusted trial balance shows no cash balance, so none is reported.

Computerized accounting means keeping accounts with accounting software (such as Tally, QuickBooks or SAP) instead of manual books.

Advantages

1. Speed. Posting, balancing, trial balance and financial statements are produced in seconds.
2. Accuracy. Calculations are automatic and a double entry is checked, which removes arithmetical and posting errors.
3. Time and cost saving. Less clerical staff, paper and space are needed once the system is installed.
4. Timely and varied reports. Statements, ageing of debtors, stock reports, VAT and tax returns, budgets and ratios are available any time and for any period.
5. Easy storage and retrieval. Large data is stored in a small space, can be searched quickly and backed up for safety.
6. Integration. Sales, purchases, inventory, payroll and ledger are linked, so one entry updates all of them.
7. Better control and security. Passwords and audit trails restrict access and show who made each change.
8. Support for decisions. Analysis and what-if tools help management to plan and decide.
9. Multi-user and remote access. Branches can work on the same data over a network.

Definition. Financial accounting is the branch of accounting that identifies, records, classifies, summarises and reports the financial transactions of a business, mainly through the income statement, balance sheet, statement of changes in equity and cash flow statement. These statements follow generally accepted accounting principles and accounting standards (NAS/NFRS in Nepal) and are prepared for a past period for users outside as well as inside the business.

How it serves different users

• Owners and shareholders use the statements to judge profit, return on investment, dividend capacity and the value of their stake, and to hold management accountable.
• Management uses them to plan, control and make decisions on pricing, expansion, borrowing and cost control, and to assess performance.
• Creditors and lenders (banks, suppliers) study liquidity, solvency and cash flow to decide whether to grant credit or loans and on what terms, and whether interest and principal will be repaid.
• Investors and potential investors compare earnings, risk and growth with other companies before buying or selling shares.
• Employees and trade unions look at profitability and stability to judge job security, wages, bonus and retirement benefits.
• Government and tax authorities (Inland Revenue Department, regulators) use the information to assess income tax and VAT, and to regulate companies, for example through the Company Registrar and Nepal Rastra Bank.
• Customers want to know that the business is stable enough to keep supplying goods, warranties and services.
• Researchers, analysts and the public use published reports to study industry trends and the firm's contribution to the economy.

Thus financial accounting converts business activity into reliable, comparable information that each group uses to make its own economic decisions.

A worksheet is a columnar working paper, usually with ten columns, that helps the accountant move from the unadjusted trial balance to the financial statements. It is not part of the formal records. It brings several steps of the accounting cycle together on one page.

Steps with the worksheet

1. Collect and analyse transactions, journalise and post to the ledger. These steps happen before the worksheet.
2. Unadjusted trial balance. Enter all ledger account titles with their balances in the first pair of columns (Dr and Cr) and check that the totals agree.
3. Adjustments. In the second pair of columns enter the year-end adjusting entries (accrued expenses, prepaid expenses, depreciation, supplies used, unearned and accrued revenue), keyed with letters or numbers. New accounts are added below the trial balance. Total the columns to prove that debits equal credits.
4. Adjusted trial balance. Combine each balance with its adjustments (add if on the same side, subtract if on opposite sides) and extend it to the third pair of columns. Total again.
5. Income statement columns. Extend revenue and expense accounts to the income statement Dr and Cr columns. Total both. The difference is net income (credit larger) or net loss (debit larger).
6. Balance sheet columns. Extend assets, liabilities, capital, drawings/dividends and retained earnings to the balance sheet columns. Add the net income to the credit side (or net loss to the debit side) so that the two totals balance.
7. Prepare financial statements from the worksheet columns.
8. Journalise and post adjusting entries to the journal and ledger from the adjustment columns.
9. Closing entries. Close revenues and expenses to Income Summary, close Income Summary to retained earnings (or capital), and close dividends or drawings.
10. Post-closing trial balance to confirm that only permanent accounts remain, with debits equal to credits.
11. Reversing entries (optional) at the start of the next period.

Format of the ten columns: Account title | Trial balance (Dr, Cr) | Adjustments (Dr, Cr) | Adjusted trial balance (Dr, Cr) | Income statement (Dr, Cr) | Balance sheet (Dr, Cr).

The worksheet reduces errors, shows the effect of adjustments at a glance and speeds up the preparation of the statements.

(i) Multi-step income statement

Pokhara Trading House, income statement for the year ended 31 December 2022

(ii) Statement of retained earnings for the year ended 31 December 2022

(iii) Classified balance sheet as on 31 December 2022