Business Accounting

Nepal Accounting Standards

NAS stands for Nepal Accounting Standards, the accounting standards issued by the Accounting Standards Board (ASB) of Nepal that prescribe the rules for recognising, measuring and presenting items in financial statements.

Goodwill and patent

Intangible assets are assets that have no physical existence but have a measurable value, e.g. goodwill, patents, trademarks, copyrights and software.

Introduction of Financial Accounting

Financial accounting is the branch of accounting that records, classifies and summarises the financial transactions of a business in a systematic manner and presents the results in the form of financial statements, namely the Trading and Profit and Loss Account and the Balance Sheet, at the end of an accounting period. It follows the double-entry system and the generally accepted accounting principles, and its main purpose is to supply reliable financial information to owners, creditors, investors, government and other interested parties for taking economic decisions.

Four objectives of financial accounting:

1. To keep systematic records: To record all financial transactions of the business in the books of account (Journal, Ledger, etc.) in a systematic and orderly manner so that complete information is available when needed.
2. To ascertain profit or loss: To determine the net profit earned or net loss suffered by the business during a particular accounting period by preparing the Trading and Profit and Loss Account.
3. To ascertain the financial position: To show the true financial position of the business as on a particular date by preparing the Balance Sheet, which discloses the assets, liabilities and capital of the business.
4. To provide information to various users: To supply useful financial information to owners, management, creditors, investors, employees and the government for taking proper decisions and for purposes such as taxation and control.

Five importance of financial accounting:

1. Keeps a systematic record of transactions – Every business transaction is recorded in a systematic and orderly manner (journal, ledger, etc.), so the financial activities of the business are preserved for future reference.

2. Shows the true financial position – By preparing the Trading and Profit & Loss Account and the Balance Sheet, financial accounting reveals the profit or loss of the business and its assets and liabilities on a particular date.

3. Helps in decision making – The owner and management use the accounting information to plan, control and take important decisions such as expansion, investment or cost reduction.

4. Provides information to interested parties – Investors, creditors, banks, government and other stakeholders rely on financial statements to judge the solvency, profitability and creditworthiness of the business.

5. Helps in tax assessment and legal compliance – Proper accounting records make it easy to compute income tax, VAT and other taxes and to satisfy the legal requirements of the government.

(Any five points, each properly explained, carry full marks.)

Five importance of financial accounting in a business organisation:

1. Recording of financial transactions: Financial accounting keeps a complete and systematic record of all financial transactions of the business in the books of accounts (journal, ledger, etc.). This permanent record can be used for reference at any time.

2. Determining profit or loss: By preparing the Trading Account and Profit and Loss Account, financial accounting helps to find out the net profit earned or net loss suffered by the business during a particular accounting period.

3. Showing financial position: Through the preparation of the Balance Sheet, financial accounting shows the true financial position of the business — what it owns (assets) and what it owes (liabilities) on a particular date.

4. Providing information to various parties: It supplies useful financial information to owners, investors, creditors, banks, government and other interested parties for taking decisions such as granting loans, investing capital or paying taxes.

5. Helping in decision making and control: Financial accounting provides reliable data on income, expenses, assets and liabilities, which helps management in planning, budgeting, comparing performance of different years and controlling the activities of the business.

Other acceptable points: helps in payment of taxes to the government, acts as legal evidence in courts, helps in valuation of business at the time of sale, and helps in attracting investors by presenting a true picture of the business.

Private sector accounting standards (such as NFRS) are applied to business organisations that aim at profit and use accrual accounting, whereas public sector accounting standards (such as NPSAS) are applied to government and public bodies that provide services for public welfare.

An accounting standard is a set of rules, principles and guidelines issued by a recognised authority that must be followed in recording, preparing and presenting financial statements, so that they are uniform, reliable and comparable.

NFRS stands for Nepal Financial Reporting Standards.

Why Business Organisations Use Accounting

Accounting is the process of identifying, recording, classifying, summarising and communicating the financial transactions of a business. Every business organisation, whether small or large, uses accounting because of the following reasons:

1. To keep a systematic record of transactions A business carries out a large number of transactions every day — purchases, sales, payments, receipts. It is impossible to remember all of them. Accounting records every transaction in a systematic and orderly manner in the books of accounts (journal, ledger, etc.), so that the details of any transaction can be traced whenever needed.

2. To ascertain profit or loss Every business organisation runs with the main objective of earning profit. Accounting prepares the Trading Account and Profit and Loss Account (Statement of Profit or Loss) at the end of the accounting period. These statements compare the revenues earned with the expenses incurred and show whether the business has earned a profit or suffered a loss during the period.

3. To know the financial position Accounting prepares the Balance Sheet (Statement of Financial Position), which shows the assets, liabilities and capital of the business on a particular date. This helps the owner to know what the business owns and what it owes, and how sound its financial position is.

4. To help in decision making Owners and managers need reliable financial information to take decisions such as whether to expand the business, buy new machinery, take a loan, or control expenses. Accounting supplies this information in the form of reports, budgets and comparative statements, which form the basis of rational decisions.

5. To provide information to interested parties Many parties are interested in the financial affairs of a business — owners, creditors, banks, investors, employees and the government. Accounting communicates the financial results to all of them. Banks and creditors study the accounts before granting loans, investors before investing, and the government for assessing tax.

6. To fulfil legal requirements Business organisations are required by law to maintain proper books of accounts and to prepare financial statements. For example, companies must prepare financial statements as required by law and pay tax on the basis of their accounts. Accounting helps the business to comply with these legal obligations.

7. To control the activities of the business Accounting provides information about income and expenses under different heads. By comparing actual figures with planned figures, the owner can find out where expenses are excessive or income is low, and can take corrective action. Thus accounting helps in controlling the operations of the business.

8. To help in valuation of the business When a business is to be sold or merged, or when a partner is admitted or retires, the value of the business and of its assets and liabilities must be determined. Proper accounting records make such valuation possible.

Conclusion Thus, accounting is used by business organisations to keep systematic records, ascertain profit or loss and financial position, assist in decision making, communicate results to interested parties, satisfy legal requirements, control business activities and help in valuation. It is therefore called the language of business.