Principles of Accounting:

1. Going Concern: An entity is ordinarily viewed as continuing in business for the foreseeable future with
neither the intention nor the necessary of liquidation. Ex: there are many companies having existence of
more than 100 years.

2. Consistency: Accounting principles & method of applying such principles are use consistency from one
accounting period to another on so that performance of the entity can compare from one accounting
year to another and from one organization to another.

Ex: Depreciation charged on SLM basis shouldn’t be changed to WDV basis until and unless the change
improves presentation.

3. Accrual: The revenue & cost are recognized as thy earned or incurred and not on the basis of cash
received or paid. Ex: rent for the month should be recorded in such month as expenses, whether paid or
not.

4. Business Entity/Economic Entity: It explains that business has a distinct entity which is separate from
its owner. Ex: owner’s deposit or withdrawal is recorded in the capital portion of financial statements.

5. Money Measurement: Those t/ns which can be expressed in the term of money are to be recorded.

6. Fair Value Concept: It is state that assets and liabilities should be recorded in the fair value. Ex: Fixed
assets should be revalued and recorded at fair value, and not on the basis of the historical cost.

7. Dual Concept: Every t/n has a two folds aspect, i.e giving certain benefits and receiving certain
benefits. Every debit has a corresponding & equal amount of credit.

Ex: Business started with cash Rs. 10000 should be recorded in assets and capital.

8. Revenue Recognition/Realization: The revenue t/n should be recorded in the books of accounts only
when it is realized or obtained the legal right to receive the money. Ex: on sale of goods, revenue can be
recognized when goods are delivered along with invoice.

9. Matching Concept: Expenses incurred in an accounting period should be matched with revenues
during that period. Ex: salary expenses of a year are matched with total sales turnover.

10. Full Disclosure: It is required that all material and relevant facts concerning the financial
performance must be fully disclosed in the fi. sts. Ex: Share capital should be fully disclosed in the notes
to accounts.

11. Conservatism/Prudence: All anticipated losses should be accounted for but all unrealized gains
should be ignored. Ex: Provision for doubtful debts are recorded but contingent gain are ignored.
12. Materiality: All the items having significant economic effect should be disclosed & any insignificant
items which will only increase the work of the accountant but will not be relevant to the user’s need
should not be disclosed in the fi. st.

Hence, the above concept provides a basis for recording t/n in accounting.

Q. What is mean by accounting? Explain the process of accounting?

“Accounting is the language of business”

It included in process of identifying, measuring, recording, classifying, summarizing, analyzing and

interpreting and reporting or communicating of financial t/n which may incur during the period of time
(IMRC SIR).

It provides information on the resources available to a stakeholder. The person who handles the
accounting is known as an accountant. It allows a company to analyze the financial performance of the
business.

*Accounting cycles means the overall steps involved in accounting of t/n and records.

Process/Function/Cycle of Accounting:

1. Identifying: Identifying fi. t/n out of various t/ns which incurred during pre-defined period.

2. Measuring: Measuring those identified fi. t/ns in terms of money.

3. Recording: Recording of fi. t/ns in to relevant books of accounts with accounting policies, standards in
systematic and scientific manner.

4. Classifying: Classifying of preliminary recorded fi. t/ns with the help of ledger.

5. Summarizing: Summarizing of fi. information, t/n or ledger by preparing statements or reports.

6. Analyzing and Interpreting: Analyzing and interpreting of fi. information & reports by comparison with
past data, competitors etc.

7. Reporting or Communication: Reporting to such fi. information, reports or statements to internal and
external stakeholder through AGM, web-side & publication.

Q. What is Accounting System?

“System used to manage the financial activities”

An accounting system is a set of accounting process with integrated procedures and controls.

It includes input, process and output of accounting activities.

Input: Process: Financial statements

Financial t/ns Journal Financial results & performance
Financial documents Subsidiary books Guideline for policies & planning
Accounting policies, standards &concepts Ledger Basis for decision etc.
Relevant rules and regulations Trial Balance Output^.

Conclusion: It is a system implemented by companies to record financial information, including income,

expense and other accounting t/ns.

Book-keepings Accounting
Its major objective to record financial t/n Its objective to report fi. t/ns to stakeholder.
It start from an initial activities of accounting. It starts after completion of book keeping process
It includes IMRC of a fi. t/n It includes SIR of a fi. t/n.
Preparation of journal entries, subsidiary books, Preparation of fi. st. is an accounting work
ledger accounts are book keeping activities
It is to make posting in ledger To examine posting in order to ascertain its accuracy.
Special knowledge is not required Required
It is often routine and clerical It is creative and judgmental
It doesn’t have any branches *Branches: Cost a/c, Financial a/c, mgmt. a/c.
It takes less time than accounting It takes more time than book keeping
Managers do not take decisions on the basis of Accounting records are used to assist managers in
Book keeping making decision
It aids to accounting work It aids decision making
A book keeper is not liable for accounting work An accountant is liable for the work of book keeping
It is carried out by book-keeper It is carried out by accountant
Basically there are 2 types of book keeping- There are three types of an account: Real, Personal
single entry and double entry book keeping. and nominal.

Financial accounting Cost accounting

It is to reveal accurate fi. position It is to provide product cost or unit cost
It considers only actual cost It consider actual and estimate cost
It focus on accuracy of t/ns It focus on controlling of cost
Reporting period is generally quarterly & annually Reporting period is determined as per needs
It is not determine selling price It provides information about selling prices
It includes only financial t/ns It includes fi. t/ns and operational information
GAAP and IFRS regulates it It is not fall under any regulatory framework
Stock valuation at lesser of cost or market price It values stock at cost price
It records and reports in format set by IFRS There is no set reporting format under costing
It is use by internal and external stakeholders It is use by internal stakeholders
It doesn’t involve forecasting It involves forecasting
It is mandatory by regulators This is necessary when advice by government
Q. Who are the Users of Accounting Information?

The basic objective of accounting is to provide information which is useful for persons and groups inside
and outside the organization. Various users of the financial information are given bellow:

Users and classification: Information the user wants:

1..Internal: -
i…Owner Return on their investment, financial health of their business
ii..Management To evaluate the performance to take various decision
iii.Employees Profitability to claim higher wages and bonus, whether their dues i.e PF
deposited regularly
2..External: -
i…Investors & potential To know about safety, growth of their investments and future of the
investors business
ii..Creditors Assessing the financial capability, ability of the business to pay its debts
iii.Lenders Repaying capacity, credit worthiness
iv.Tax authorities Assessment of due taxes, true & fair disclosure of accounting information
v..Government To compile national income & other information. Helps to take decisions
vi..External auditor To express opinion is whether the fi. st. reflects a fair view of fi. position,
operating results & cash flow in accordance with applicable fi. reporting
framework.
vii. Others Researchers, donors, trade unions, customer, public etc. may seek
different information for different reason.

Objectives of Accounting:

- To maintain book of accounts

- To provide detail information

- To maintain supervision and controlling

- To prepare financial statements

- To determine financial results

- To present financial situation

- To support an audit process

- To established corporate governance

- To formulate financial planning and policies

- To analyze financial pictures and performance

- To detect and minimize frauds, error & mistakes

Cash basics of Accounting Accrual basics of Accounting
All income and expenses are recognized only when The revenue and cost are recognized as they
cash is actually receipt or paid earned or incurred
It includes only cash expenses and income It includes all expenses and all incomes
It is focus on liquidity It is focus on revenue & expenditure or P&L
It is not holistic in approach because it only talks It is holistic in approach because it includes all of
about cash the t/ns
It is simple and easy to understand It is complex and difficult to understand
Tax liability incurred when the income is received Tax liability incurred when the income is recorded
It is suit for small organization, NPO Best suit for entity whose fi.st need to be audited
Doesn’t required this method for tax filling Required this method for tax filling
Not suitable for trend analysis Suitable for trend analysis
It doesn’t follow IAS It follows IAS
It doesn’t provide accurate result It provides accurate results
Use to prepare receipt and payment account Use to prepare income and expenditure account
Difficult to prepare financial statements Provides picture to prepare financial statements
Accepted by GAAP It is doesn’t accepted by GAAP
It is less scientific and systematic It is more scientific and systematic
Doesn’t use for forecasting & decision making Use for forecasting and decision making
It is rarely used It is widely used.

Double Entry Accounting System:

“Double entry system: Every t/ns have two effects”

Single Entry Accounting System Double Entry Accounting System

It is a book keeping system in which only one part It is a method of recording t/ns in which both sides
of t/ns is recorded, such as debit or credit. of t/ns are recorded.
It is incomplete system of accounting It is a complete system of accounting
It is not based on duality It is based on duality
It is a simple form of accounting It is a complex form of accounting
It maintains only personal a/c of debtors and It maintains all personal, real and nominal a/c
creditors and cash book
It cannot prepare t/b & hence, arithmetic accuracy It prepare t/b & hence, arithmetic accuracy of
of books of a/c cannot be checked books of a/c be checked
It cannot ascertain the true amount of P/L of the It ascertain the true amount of P/L of the business
business as it doesn’t maintain nominal a/c as it maintain nominal a/c
It cannot ascertain the true financial position of It ascertain financial position of the business as it
business because it doesn’t maintain real account maintains all personal and real account
Fi. information are recorded in unsystematic and Fi. information are recorded in systematic and
unscientific manner scientific manner
There is difficult to prepare financial statements by There is easy to prepare financial statements by
using the accounting information contained in using the accounting information contained in
such system such system
It is not acceptable for the purpose of assessment It is acceptable for the purpose of assessment of
of tax tax
It doesn’t facilitates for auditing & internal control It facilitates for auditing & internal control system
It is not based on various principles, conventions It is based on various principles, conventions and
and accounting accounting
It isn’t costly as it doesn’t increase size of books of It is costly as it increase size of books of accounts
accounts
It isn’t expensive, time consuming & labor It is expensive, time consuming & labor consuming
consuming
Difficult to calculate income tax and VAT Easy to calculate income tax and VAT
It is suitable to a small entity where only limited It is suitable for a large business
no. of the t/ns are recorded

History of Accounting:

The Italian luca pacioli 1494, recognized as the father of the accounting and book keeping was the first
person to public a book named “Summa de arithmetica” & introduced it in Italy.

In Nepal, Kumari-chowk adda was established in 1769 Bs. In 1993 Bs, Biratnagar jut mill used the double
entry system for the first time in the private sector in Nepal. The OAG was established on 2016/3/15 Bs.

New accounting system was formed in 2017 Bs was started in the government office in Nepal.

Establishment of Institute of Chartered Accountants of Nepal in 2030

In 2058 initiation of Nepal Public Accounting Standards

In 2063 introduction of electronic accounting system in public sector

Nepal now, gradually adopts International Financial Reporting Standards and International public Sector
Accounting Standards

Features/Principles of Double Entry System:

1. Two Parties: Two parties are involved. One is the receiver and another is giver.

2. Equal Effects: Each t/ns have an equal effect. The debit amount should be equal to the credit amount.

3. Separate Legal Entry: This accounting system records the t/ns separate from its owner.

4. Dual Aspect: There are 2 aspects of recording i.e the debit aspect and credit aspects.

5. Giver and Receiver: Every t/ns must have one giver and one receiver.

6. Exchange of Equal Amount: The amount of money of t/n the party gives is equal to the amount the
party receives.

7. Complete a/c System: It is scientific and complete accounting system.

Q. Explain the types of Double Entry System/Accounts?

Also explain the rules of Debit and Credit?

Under modern approach:

Debits and credit are equal but opposite entries in accounting books. Debits and credits affect the 5 core
types of accounts:

1. Assets: They are resources owned by a business that have an economic value. Eg……

2. Expenses: They are cost that occurs during business operation. Eg…..

3. Liabilities: They are amounts owned to another person or business. Eg….

4. Equity: They are owner’s capital and additional investment and profit into business.

5. Income and Revenue: They are cash earned from sales.

Accounting rules of Debit and Credit:

Accounts Increased by Decreased by

Assets Debit Credit
Expenses Debit Credit
Liabilities Credit Debit
Equity Credit Debit
Revenue Credit Debit

Under Traditional Approach:

Under this approach, account may be divided into 2 major classes:

1. Personal Account: All accounts bearing personal names are termed as personal accounts. It includes:

i. Natural Personal Accounts: It includes natural person’s accounts like Ram account.

ii. Artificial Personal Accounts: It includes accounts of corporate body.

iii. Representative Personal Accounts: These are accounts which represent certain person. Eg: O/S salary
a/c, Prepaid rent a/c, Accrued interest a/c, Unearned brokerage a/c.

2. Impersonal a/c: Accounts which are not personal in nature is known as Impersonal a/c. It includes:

i. Real Account: They are related to property or assets of the firm.

ii. Nominal Account: These accounts relate to expenses, losses, income and gains.

Accounting rules of Debit and Credit:

Account Rules Effects
Personal Account Debit the Receiver; Credit the giver Debit=Credit
Real Account Debit what comes in; Credit what goes out Debit=Credit
Nominal Account Debit all expenses; Credit all incomes Debit=Credit

Conclusion: Modern approach of debit and credit rules is easy to understand than traditional approach
of debit and credit rules.

Cash Book:

It is a ledger designated in the form of a cash account where cash receipts are recorded on the debit
side and cash payments are recorded on the credit side. Thus, it is both a journal & a ledger. It is also a
principal book.

*Element of Cash Book: Date; Particulars; Vouchers No; Ledger Folio No; Cash column; Bank column;
Discount column.

Features of cash book:

1. Dual Role: It works as a journal as well as a ledger.

2. Dual System: It has 2 sides. One shows increase in cash other shows a decrease in cash.

3. Always Debit Balance: The closing balance will always be debit that is a positive balance.

4. Chronological Order: The entries are date wise. The t/ns that took place first will be entered first.

5. Cross Verification: One can cross verify the cash book by matching the closing balance of the cash
book with the physical cash present.

6. T form: Unlike other journal registers, the cash book is in T form just like a ledger.

7. Transferred to Trial Balance: The closing balance is directly transferred to the trial balance.

Petty Cash Book:

A petty cash book is a book in which all petty or small payment made through petty cash fund are
recorded systematically.

It is maintained to record small expenses such as postage, cartage, refreshment, miscellaneous. A

separate column is used for each type of expenditure.

It is created to facilitate small payments in a business. It is mean to meet day to day expenses. It is
maintained by petty cashier. It can be maintained either in simple or in an analytical way.

Features of Petty Cash Book:

1. Cash Received is recorded on the left-hand side column

2. Payments are recorded on the right-hand side in the respective column

3. Cash payments can never exceeds the cash receipts

4. The remaining balance represent un-spend cash in hand

5. Both internal and external vouchers are used as a base for recording

6. All the columns of the expenses are totaled from time to time

7. Periodic totals are posted to the respective debit side of the expense account

8. It is both a book of original entry as well as a book of final entry.

Similarities between them:

- Both record the t/ns related with cash

- The main cashier supervise the keeping of cash book and petty cash book

- Both account flow the double entry system

- Both accounts are balance at the end of given accounting period to determine the amount left.

Difference between them:

Cash Book Petty Cash Book

It is maintained by main cashier It is maintained by petty cashier
All t/ns in relation to cash are recorded here All petty expenses in relation to cash are recorded
here
It deals with reasonably large t/ns It deals with small cash t/ns
Credit t/ns end here when cash is actually received Credit t/ns don’t end here when cash is actually
or paid received or paid
Balance brought down appear in the B/S Balance brought down don’t appear in the B/S
Balance brought down appear in the CFS Balance brought down don’t appear in the CFS
There is not exist of imprest system There is exist of imprest system
It has maximum of 3 columns for 3 columns cash It has more than 3 columns for number of columns
book are determined by the number of expenses
Discount allowed and discount received t/ns are Discount allowed and discount received t/ns are
recorded here not recorded here
Dominated by contra entry t/ns Doesn’t dominated by contra entry t/ns
It can be classified into single column, double It can be classified into simple & analytical petty
column & triple column cash book. cash book
There is no imprest system in a cash book A fixed advance is collected from head cashier by
petty cashier
Total of cash expenses are not transferred Total of petty expenses are transferred to the cash
anywhere else, but summarized book.
Conclusion: Cash book is the main book while petty cash book is in support of the cash book in order to
reduce the burden of large and heavy amounts of cash paid or received.

Q. What are the types of Cash Book/Petty Cash Book along with format?

Q. Explain the process of preparing Cash Book/Petty Cash Book?

Q. Explain rules for recording/posting/preparing Cash Book/Cash Book?

It is a principal book. It is prepared on double entry system. The main cash book may be of 4 types:

1. Simple Cash Book: It is use for recording cash t/ns only. Cash receipts & payment are recorded in debit
side & credit side respectively. Its types are:

- Single column cash book with cash column

- Single column cash book with bank column

Format: Single Column Cash Book

Date Particulars LF Amount Date Particulars LF Amount

2. Double Column Cash Book: It is use for recording cash and bank t/ns. Cash receipts & payment are
recorded in debit side and credit side respectively. Discount allowed and received are recorded in debit
side and credit side respectively. At the end of the year, balance amount of cash column, bank column
and discount column are totaled and transfer appropriately. Its types are:

- Double column cash book with cash and bank column

- Double column cash book with cash and discount column

- Double column cash book with bank and discount column

Format no. 1. Double Column Cash Book (Cash and Discount Column)

Date Particulars LF Cash Discount Date Particulars LF Cash Discount

Format no. 2. Double Column Cash Book (Cash and Bank Column)

Date Particulars LF Cash Bank Date Particulars LF Cash Bank

Format no. 3. Double Column Cash Book (Bank and Discount Column)

Date Particulars LF Bank Discount Date Particulars LF Bank Discount

3. Three Column Cash Book: It is use for recording cash and bank t/ns involving loss or gain on account
of discount. . Cash receipts & payment are recorded in debit side and credit side respectively. Discount
allowed and received are recorded in debit side and credit side respectively.

Format: Triple Column Cash Book:

Date Particulars LF Cash Bank Discount Date Particulars LF Cash Bank Discount

*The payment side of cash book records the following entries:

Salary paid Amount paid to the suppliers

Expenses paid Tax paid

*The receipt side of the cash book contains the followings entries:

Cash sales Interest received

Advance received by a customer Payment received from customer and so on.

4. Multi-Column Cash Book: This is the book where receipts and payments are recorded either based no
departments or products or banks.

5. Petty Cash Book: It is use for recording petty payments. It types are:

- Simple Petty Cash Book: This is the simple type of petty cash book where cash receipt and payment are
recorded. No categories of petty expenses are used in this type of petty cash book.

- Analytical Petty Cash Book: This is more comprehensive type of petty cash book. This consists of
separate columns for different petty expenses heads.

Format of Simple Petty Cash Book:

Receipts (Rs.) Date Particulars Voucher No. Amount (Rs.)

Format of Analytical Petty Cash Book:

Receipts Date Particulars Voucher Total Postage Cartage Refreshment Misc.

(Rs.) No.

Important of Petty Cash Book:

Records small day to day expensive

Reduces burden on main cashier

Improves internal control system

Helps in budgeting petty expenses

Provides quick reference for small expenses details

Minimizes misuse of cash through proper documentation

Simplified reimbursement process for small payment

Q. How Petty Cash Fund Work? Explain process of running Petty Cash Fund?

Different expenses have to be incurred by an office. Most of such expenses are paid through cheque. But
some small amount expenses cannot be paid by cheque.

To solve such problem, offices establish a petty cash fund. It helps in paying, managing and controlling
such petty expenses. The size of the petty cash fund depends upon the system, practice and preference
of the office. The person operating such a fund is called petty cashier.

System of Petty Cash Fund/process of Petty Cash Fund:

1..Imprest System:

The main cashier provides the petty cash fund amount to the petty cashier. The petty cashier makes all
the payments of petty expenses. After a specific period, the petty cashier submits all the expenses
details to the main cashier.
The petty cashier then takes the reimbursement for the expenses made. By doing so, the full limit of the
petty cash fund is maintained for the next period. This continuous throughout the year and at the end of
the year, the petty cash fund is closed. After closing it for the preceding year, the petty cash fund is
opened again and the previous system of operation continuous.

2. Non-Imprest System:

This is a system of petty cash funds in which the main cashier gives the fund to the petty cashier to make
specific expenses only. After making such expenses, the remaining balance and expenses details are
submitted to the main cashier by the petty cashier.

Advantages of Petty Cash Fund:

- It makes the payment of petty expenses easy and fast

- It reduces unnecessary paper works for petty expenses

- It minimize the size of the main cash book

- The main cash book is not filled with records of petty expenses

- Easy to understand, implement and practice

- To make responsible and accountable to staffs

- To support for reduce overall cost

- No special or highly competent skill is required

Limitation of Petty Cash Fund:

Risk of misuse or theft

Lack of proper documentation

Difficult to track small expenses

Error in manual recording

Limited to small expenses only

No interest or returns

Mau lack transparency

Q. What are the Branches of Accounting?

1. Financial Accounting: It is concerned with preparation of financial statements that communicates a
company’s financial performance to external stakeholders such as investors, creditors and regulatory
bodies.

2. Managerial Accounting: It is concerned with providing information to internal stakeholders, such as

managers, to help them make informed business decision.

3. Tax Accounting: This is concerned with preparing tax returns and ensuring compliance with tax laws
and regulations.

4. Auditing: Auditor provides an opinion to express is whether the financial statement reflects a fair view
of financial position, operating results and cash flow in accordance with applicable financial reporting
framework.

5. Forensic Accounting: It is concerned with investing financial crimes such as fraud, embezzlement and
money laundering.

6. Cost Management: It is concerned with determining the cost of producing goods or services and
helping companies to make decisions related to pricing, profitability, and cost management.

7. Accounting Information System: They are software tools used to manage financial information within
an organization. It is use for recording t/ns, preparing financial statements and analyzing financial data.

Trial Balance:

“Summary of ledger”

A Trial Balance is a statement of debit and credit balance of the ledger accounts which is prepared in
order to prove the arithmetic accuracy of the books of accounts.

It is prepared after the preparation of various personal, real and nominal accounts. It is also called the
summary of assets, capital, liabilities, expenses, income, etc. drawn from the ledger account.

Format of TB:

In the books of …………..

Trial Balance as on …………

Heads of account L.F Debit amount Credit amount

Capital: Credit side
Issued and paid up share capital
Share premium
Retained earnings
Reserve and surplus
Liabilities: Credit side
1.long term liabilities:
Preference share capital
Debentures/bonds
Bank term loan
Other long term borrowed fund
2.Short term liabilities:
Director’s loan
Short term banks loan
Other short term borrowed fund
3.Current liabilities:
Sundry creditors
Payables
Outstanding expenses
Provisions
Advance income
Advance received from customers
Other current liabilities
Assets: Debit side
1.Fixed assets:
Buildings/Land and buildings
Office equipment
Vehicles
Plant and machinery
Goodwill and intangible assets
2.Fictitious assets:
Preliminary expenses
Discount on issue of shares
3.Investments
4.Current Assets:
Cash and bank balance
Stock or inventory
Sundry debtors
Receivables
Prepaid expenses
Advance payment to suppliers
Accrued income
Other current assets
Expenses: Debit side
1.Direct expense:
Purchase
Freight inward
Wages/labor charge
Import charges
Other direct overheads
2.Indirect expenses:
i.Office and administrative expenses:
Salary
Office rent
Audit fees
Printing and stationary
Repaired and maintenance
Meeting fees
Other administrative expenses
ii.Selling and distribution expenses:
Advertisement and publicity
Freight outward
Discount allowed
Commission/incentives for sales
Other selling & distribution expenses
3.Financial cost/Expenses:
Interest on loan and borrowed fund
4.Non-cash expenses:
Depreciation and amortization
Provisions
Income: Credit side
1.Direct income:
Sales/service revenue
Other direct income
2.Indirect income:
Interest income
Discount received
Dividend yield
Commission earned
Other indirect income
Gain/Abnormal gain: Credit side
Gain on sale of fixed assets
Other gain or abnormal gains
Loss/Abnormal loss: Debit side
Total: XXXX XXXX

Objectives of TB:

- To detect accounting fraud & errors

- To take decision by manager

- To formulate short term planning

- To summarize all the ledger account

- To make adjustment of financial t/ns

- To list out the number and heads of the ledger

- To make available all the accounts in a one place

- To check arithmetical errors in accounting process

- To rectify if there are any inaccuracies in the accounts

- To support to prepare financial statements and report

- To make easy to an audit and cross check process

- To maintain internal control system efficient and effective

- To play a role as a bridge of book keeping and accounting

- To make various comparisons among the accounts

Conclusion: Despite certain limitation like it doesn’t guarantee freedom from recording errors. Trial
balance is an essential part of the accounting process. It helps to maintain arithmetic accuracy. It helps
to provides summary of the financial activities of a company and it also helps in preparing financial
statements.

Methods of preparing Trial Balance:

There are 3 types of method of preparing

1 Total Method/Gross Trial Balance Method:

Total of each side in the ledger (debit and credit) is ascertained separately and shown in the trial balance
in the respective columns.

The total of debit column of trial balance should agree with the total of credit column in the trial balance
because the accounts are based on double entry system.

However, this method is not widely used in practice, as it does not help in assuming accuracy of
balances of various a/c & preparation of the financial statements.

2. Balances Method/Net Method:

This is the most widely used method in practice.

Trial balance is prepared by showing the balances of all ledger accounts and then totaling up the debit
and credit columns of the trial balance to assure their correctness.

The account balances are used because the balance summarize the net effect of all transactions relating
to an account and helps in preparing the financial statements.

3. Totals-Cum-Balances Method/Total and Balance Method:

This method is a combination of totals method and balances method.

Under this method, 4 columns are prepared for both totals as well as balances

However, this method is also not used in practice because it is time consuming.
Examples:

Ledger account under total method:

Machinery a/c

Date Particulars JF Amounts (Rs) Date Particulars JF Amount (Rs)

To balance b/d 100000 By depreciation a/c 20000
To bank a/c 100000

Trial balance under Total Method:

Trial Balance of …………

As on…………………………..

S.N Particulars L.F Debit Total (Rs) Credit Total (Rs)

1. Machinery a/c 200000 20000
2. - - -
Total Xxx Xxx

Ledger Account under Balance Method:

Machinery a/c

Date Particulars JF Amount (Rs) Date Particulars JF Amount (Rs)

To balance b/d 100000 By deprecation a/c 20000
To bank a/c 100000
By balance c/d 180000
200000 200000

Trial Balance under Balance Method:

Trial balance of ………………………..

As on ………………………………………….

S.N Particulars L.F Debit Balance (Rs) Credit Balance (Rs)

1. Machinery a/c 180000 -
2.
Total Xxx Xxx

Trial Balance under Total and Balance Method:

Trial balance of ……………….

 As on …………………………………

S.N Particulars L. Debit total (Rs) Credit total (Rs) Debit Balance Credit
F (Rs) Balance (Rs)
1. Machinery a/c 200000 20000 180000 -
2.
Total Xxx Xxx Xxx xxx

Q. What are the steps should be followed while preparing Trial Balance?

Trial Balance is normally prepared at the end of an accounting year. However, an organization may
prepare a trial balance at the end of any chosen period depending upon its requirements.

In order to prepare a trial balance following steps are taken:

- Ascertain the balance of each account in the ledger.

- List each account and place its balance in the debit or credit column, as the case may be.

If an account has a zero balance, it may be included in the trial balance with zero in the column for its
normal balance.

- Compute the total of debit balances column.

- Compute the total of the credit balances column.

- Verify that the sum of the debit balances equal the sum of credit balances.

If they do not tally, it indicates that there are some errors. So accountant must check the correctness of
the balances of all accounts.

It may be noted that all assets, expenses and receivable accounts shall have debit balances.

It may be noted that all liabilities, revenue and payables accounts shall have credit balances.

Trial Balance Balance Sheet

Records all the closing balance of the general Records the assets, liabilities and equity of the
ledgers of accounts company
It is use to verify if the total credits and debits of It is used to check if the assets of the company are
all the ledgers are balanced equal to the liabilities plus equity.
It is used to demonstrate the accuracy of the
company’s finances
It is not a financial statements It is a financial statements
All the accounts are divided into the balances of All the accounts are divided into assets, liabilities,
debits and credits and equity
It is used internally within the company It is use for the external purposes
It is recorded at the end of the quarter, half-yearly It is recorded at the end of every financial year
and year
It doesn’t need signature of the auditor Requires the signatures of an auditor
There is no particular rule according to which the There is a particular format by which the items are
ledgers are to be arranged arranged
It is not component of the final accounts It is an essential part of the final account
It is optional to prepare It is mandatory to all company to prepare
It doesn’t requires audit It requires audit
Ledger account provides source of information to Trial balance provides source of information to
prepare trial balance prepare balance sheet
It is prepared after posting all journal entries in It is prepared after preparation of P/L a/c
ledger
It is middle stage in the account preparation It is last stage in the account preparation
It includes opening stock It includes closing stock
Methods of preparation: Total; Balances; total cum Method: Horizontal and vertical.
balance method
It is debit and credit column It has assets and liabilities heads
It is prepared in columnar format It is usually prepared in “T” format.

Conclusion: Trial balance is to prepare to verify the arithmetic accuracy of the ledger account where as
the main purpose of balance sheet to show the financial position of the business.

Process of preparing Trial Balance:

- Enter all liabilities in the credit column and all assets in the debit column.

- Gains and revenue appear on the credit side.

- Losses and expenses are appears on the debit side.

- Consider all the nominal, personal and real accounts while preparing the trial balance.

- Avoid any ledger that shows a zero balance.

- Enlist the opening stock figures in the profit and loss account.

- Show the sales and purchase returns either as reductions from the main purchase and sales ledger or
as separate line items in the trial balance.

- Ensure that the debit and credit balances are identical at the end.

Q. What are the tips to identify/detecting errors in the Trial Balance?

- Check for any calculation errors by adding up the totals of debit and credit columns of the TB.

- Check if accountant have added the t/ns from the ledger to the correct account head in the TB.
- Check for partial and complete omissions of a t/n.

- Go through each ledger account balance one by one and balance them once more.

- Examine the posting from subsidiary books or journal entries to the ledger.

- Check the additions of the subsidiary books and ledger accounts.

- Compare with the previous year’s trial balance to check for any major additions & deletions of a/cs.

- Divide the difference between the debit and credit balances by 2 and scan for that amount on the side
with the higher amount.

Q. Explain the procedures of rectifying an incorrect Trial Balance?

- At the outside casting of trial balance is to be checked carefully

- It is to be ensured that all ledger account has been posted in the trial balance properly

- It is to be ensured that all the t/ns have properly been posted from journal to ledger

- Calculation of totals of ledger accounts and balancing of ledger accounts are to be checked properly

- Verification of correct posting of debit and credit ledger balance is needed

- Correct trial balance is to be compared with the past one

- It is to be checked that totals of cash and bank a/c and balancing and inclusion of these balances in trial
balance have been made properly

- It is to be checked that casting of purchase journal, sales journal and other subsidiary journal are
correct and these are posted into the ledger a/c properly

- It is to be observed that the totals of accounts receivable and account payable and recorded amount of
the same a/c in the trial balance are same.

Q. Explain the limitation of Trial Balance?

Q. What are the errors which are not disclosed by Trial Balance?

Q. Equal balance of two sides of Trial Balances does not indicate accounts are correct?

Q. What are the errors a Trial Balance cannot show?

Q. What are the errors that do not affect the agreement of the Trial Balance?

When the totals of debit and credit columns are equal then the trial balance is regarded as balanced in
term of arithmetical accuracy. However, certain errors are still there that might occur during journalizing
and posting the entries into a ledger are explained bellow:
1. Errors of Principle: It doesn’t affect the agreement of the trial balance because the amount gets
recorded on the correct side, through in the wrong account.

For Example: Treating a revenue expenses as a capital expenses.

2. Clerical Errors: These types of errors are arisen due to negligence of accounting staff and lack of
internal control system. Its types are:

= Errors of Complete Omission: If t/n has not been recorded at all in the books of original entry, it shall
not affect the agreement of the trial balance.

For Example: If Rs. 5000 is received from customer is not recorded at all, trial balance will agree even
through there is an error.

*Errors of Partial Omission affect the agreement of trial balance.

= Errors of Commission: If a t/n is debited or credited to a wrong account but with the correct amount
and on the correct side of the ledger, the trial balance will remain unaffected.

For example: On receipt of Rs. 12000 from customer X, cash is debited and instead of customer X,
customer Y’s account is credited with Rs. 12000.

= Errors of Duplication: This type of error occurs when an entry is recorded twice in journal book and
automatically posted twice to the ledger.

= Compensating Error: Sometimes an error is counter-balanced by another error in such a way that it is
not disclosed by the trial balance.

For Example: A’s account which was supposed to be debited for Rs. 500, was credited for Rs. 500 & B’s
account which was supposed to be credited for Rs. 500 was debited for Rs. 500. These 2 errors will
cancel out the effect of each other.

Conclusion: For errors not disclosed by trial balance, attention should be paid to the internal process of
accounting, fundamental principles of recording t/ns and maintenance of ledger books, etc. so that such
errors can be identified and rectified.

Q. What are the types of Errors effect on Balance Sheet?

If there is an error in an income statement then it will directly affect the balance sheet because
increased or decreased profit is required to get transferred to the capital account which is accounted in
the balance sheet and in this manner it will affect the total amount of liabilities side of balance sheet
and show an inaccurate result.

Another example of an error is depreciation entry which would directly and simultaneously affect the
balance sheet and the statements of profit and loss account because depreciation is an expense that will
directly impact the amount of profit and the final figure of fixed assets as well which is a part of the
balance sheet as a contra assets account.
Q. What types of effect of errors on profit and loss account?

Q. What types of errors occurred in nominal account and store ledger effect on profit or loss?

Errors in nominal accounts and store ledger affect either profit or loss of the business.

The errors relating to the personal and real accounts neither affects profit nor loss.

Hence, Types of errors and their effect either on profit or on loss:

Errors in nominal account Effect on profit Effect on loss

Errors in debit side Decrease Increase
Excess entry on debit side Decrease Increase
Less amount entry on debit side Increase Decrease
Less total on debit side Increase Decrease
Omission on debit side Increase Decrease
Error on credit side Increase Decrease

Q. How can accounting errors affect business?

- Incorrect income reporting

- Incorrect cash flow information

- Incorrect expenses reporting

- Increased labor cost

- Late payment fees

- Improper matching of income and expenses

- Detecting fraud during investing accounting errors.

Q. How to minimize Accounting Error?

- Train staff on data entry accuracy

- An audit trial may be necessary

- Timely preparation of Bank reconciliation statements

- Don’t overload employees

- Utilize the newest accounting software

- Implement internal control system

- Check for differences between the budget and actual expenses

- Conduct a periodic professional review of accounts

- Adopt best accounting practices and standards.

*Accounting errors are the mistakes which are committed either in journalizing or posting.

From the point of view of rectification of the errors, these can be divided into two groups:

1. The error that affects the trial balance (trial balance will not agree):

It includes following errors which are disclosed by trial balance:

- Errors of commission:

= Wrong casting of subsidiary book

= Wrong balancing of an account

= Posting an amount on the wrong side

= Wrong posting i.e writing the wrong amount

= Writing the balance in the wrong column of the trial balance

= Totaling the trial balance wrongly.

- Errors of omission (Partial omission): TB may or may not agree:

= Omitting to post an amount from subsidiary books in the ledger

= Omitting to post the totals of subsidiary books in the ledger

= Omitting to write the cash book balances in the trial balance

= Omitting to write the balances of an account in the trial balance.

2. The errors that do not affect the trial balance (Trial balance will agree):

It includes following errors which aren’t disclosed by trial balance:

- Errors of omission (Complete omission):

= Omitting an entry altogether from the subsidiary book.

- Errors of commission:

= Making an entry in the wrong subsidiary book.

= Posting an amount in a wrong account but on the correct side

- Error of principle:

= Treating capital expenditure as a revenue expenditure

= Treating revenue expenditure as a capital expenditure

= Treating an income as a liability

= Treating a liability as income.

*Rectification of errors (Stages):

1. Before preparation of trial balance:

i. Rectification of one sided errors directly without preparing journal entries:

One sided error in trial balance (Example)

- Errors due to partial omission

- Errors of casting

- Errors of carrying forward

- Errors in totaling of balancing of an a/c

- Errors of posting

- Omission of posting the total of subsidiary book

- Omission of an account from trial balance

- Entering the balance of an account in the wrong amount column of the TB

- Wrong totaling of the trial balance.

ii. Rectification of two sided error and more:

Example: The purchase of machinery for Rs 200000 has been entered in the purchase book.

Wrong entry: Purchase a/c Dr 200000; To creditors a/c 200000

Correct entry: Machinery a/c Dr 200000; To creditors a/c 200000

Rectification entry: Machinery a/c Dr 200000; To purchase a/c 200000.

2. Rectification after preparing trial balance but before the final account by using suspense a/c:

Example: A cheque from A for Rs 150 had been posed to the credit of A as Rs 100:
Suspense a/c Dr 50; To A’s a/c 50.

Example: Discount received of Rs 1420 had been debited to discount allowed account:

Suspense a/c Dr 2840; To discount allowed a/c 1420; To discount received a/c 1420.

3. Rectification in the Next accounting period (After preparation of final account):

Example 1. While carrying forward the total of one page of the sales book to the next, the amount of Rs
1850 was written as Rs 1580:

Before final a/c: Suspense a/c Dr 270; To sales a/c 270.

After final a/c: Suspense a/c Dr 270; To P/L adjustment a/c 270.

Example 2. Goods bought from a trader amounting to Rs 152 had been posted to the credit of his
account as Rs 125.

Before final a/c: Suspense a/c Dr 27; To suppliers a/c 27.

After final a/c: : Suspense a/c Dr 27; To suppliers a/c 27.

*Suspense a/c:

It is opened when one-sided errors detected after preparation of the trial balance. It is the account
opened for the temporary period till one-sided errors are rectified.

It is debited when the debit total of the trial balance remains less. It is credited when the credit balance
remain less.

It doesn’t show any balance after the rectification of all one-sided errors.

It can create several problems if not balanced correctly. Carrying a balance in the suspense account each
month can cause financial information to become overlooked and unallocated to the proper account.

If it has a high volume of t/ns, reconciling the account to find out where the remaining balance goes can
be time-consuming.

Having a suspense a/c presented on the financial statements with a balance can weaken the statements
to outside investors. Suspense a/cs are viewed negatively, since the information contained in the
suspense account is an unallocated amount.

*Trial Balance is prepared at a point of time.

Q. Explain the types of Trial Balance?

Particulars Unadjusted TB Adjustment Adjusted TB

- Dr Cr Dr Cr Dr Cr
Total Xxx Xxx Xxx

Q. What is Profit and Loss Account? Write its objectives.

“To measure profitability of business”

Profit and loss account is a part of the financial statements of profit motive entity which is prepare for
the period of time to determine net profit or loss with the help of income and expenses which incurred
for such period.

It is a part of financial statement which is used to show profit and loss of a company for a given period of
time. It is always prepared under double entry system with accrual basis of accounting which may
prepare in the format of horizontal or vertical nature.

*Types of profit and loss account: Cash method and accrual method.

BFIs always prepared profit and loss account as a consolidated statement of profit or loss account under
directive number 4 of unified directives of NRB.

Horizontal Format: In the book of …………………

Profit and loss account

For the ………………………………

Particulars Amount Particulars Amount

Gross loss (If any) Xxx Gross profit (If any) Xxx
1. Indirect expenses: 1. Indirect Income:
i. Office & Administrative expenses: Interest income
Salary Discount received
Office rent Dividend yield
Audit fees Commission earned
Printing and stationary Other indirect income
Repaired and maintenance 2. Gain/Abnormal gain:
Meeting fees Gain on sale of fixed assets
Other administrative expenses Other gain or abnormal gains.
ii. Selling and distribution expenses: Net loss (c/d or b/f)
Advertisement and publicity
Freight outward
Discount allowed
Commission/incentives for sales
Other selling & distribution
expenses
2. Financial cost/Expenses:
Interest on loan and borrowed fund
3. Non-cash expenses:
Depreciation and amortization
Provision
4. Loss/Abnormal loss:
Loss on sale of fixed assets
Loss of goods by fire
Other loss or abnormal loss.
Net profit(c/d or b/f)
Total Xxx Total Xxx

Vertical Format: In the book of……………..

Profit and loss account

For the period of ………………..

Particulars Amount (Rs.)

Sales/service revenue/Direct Income: Xxx
Less: Cost of goods sold(O+P+DE-C) Xxx
Gross profit Xxx
Add: Indirect Income Xxx
Less: Indirect Expenses Xxx
Less: Abnormal Loss Xxx
Add: Abnormal Gains Xxx
Net Profit/Loss before Tax Xxx
Less: Provision for Tax Xxx
Net Profit/Loss after Tax Xxxx

Objectives of Profit and Loss Account:

- To check profitability of the company for the particular period

- To know selling and distribution expenses for the particular period

- To know the office and administrative expenses for the particular period

- To know the indirect income of business for the particular period

- To know the abnormal gains and loss for the particular period

- To compare current year profit or loss with that of previous period

- To control unnecessary indirect expenses which lead to profitability

- To show how revenue is change into net-profit or net-loss for the particular period

- To find the relation between gross profit/gross loss and net profit/net loss
- To provide necessary information to various stakeholders

- To determine the tax amount payable to the government

- To support financial analysis and comparative analysis

- To determine the consideration for workers

- To find the relation between net profit and sales

- To aids in preparation of financial statements

- To make budget and policy documents

- To control over expenses.

Conclusion: Profit and loss account is a part of financial statements which is prepared by profit motive
entity to determine net profit or loss during the period of time with the help of income, expense, gain
and loss which are main components of profit and loss account including gross profit and loss if already
prepared trading account.

Income and Expenditure Account Profit and Loss Account

It is prepared for finding net surplus or net deficit It is prepared for finding net profit or loss
It is prepared by NPO It is prepared by PO
It is prepared on the basis of receipt& payment a/c It is prepared on the basis of trial balance
The balance amt will be net surplus or net deficit The balance amount will be net P/L
The balance of surplus amount is either It is either transferred to account or distributed to
transferred to capital fund or it accumulated in a shareholders
separate heading

Trading Account Profit and Loss Account

It is prepared to find out the GP/GL It is prepared to find out the NP/NL
It is prepared before preparation of P/L a/c It is prepared after preparation of Trading a/c
It is the first step of final account It is second step of final account
It is not dependent upon trial balance It is dependent upon trading a/c
Direct expenses and direct incomes are posted Indirect expenses & indirect income are posted
The balance amount is transferred to P/L a/c The balance amount is transferred to B/S
It deals with purchasing & manufacturing cost of It deals with administrative, selling & distribution
goods expenses etc.
*It is not treated directly in the B/S. The balance of It is treated directly in the B/S by adding or
trading a/c is transferred to P/L a/c only that subtracting from the capital.
combine effect of both a/cs are posted in the B/S
either by Net Profit or by the Net loss.
Trading and Profit and Loss Account Balance Sheet
It is prepared to ascertained net profit or loss It is prepared to know the financial position
It records nominal account It records personal and real account
Left hand side is the debit side represent expenses Left hand side is the liabilities side
Right hand sides is the credit side represent losses Right hand side is the assets side
It is an account It is an statements
It is prepared for a specific period It is prepared for a point of time
It is not dependent on the B/S because it is It is dependent upon P/L a/c because information
prepared before the preparation of B/S about net profit/loss collected from P/L a/c
It has balance amount which represent the net Both side of the B/S always equal to each other. So
profit/loss for the year it doesn’t has a balance amount
No information is provided for opening or closing Information is provided for only closing stock
stock

Gross Profit Net Profit

It is the excess of net sales over cost of purchase It is the excess of gross profit over all indirect
or manufacture of goods expenses
It is not true profit of the business It is the true profit of the business
It show credit balance of the trading account It show credit balance of the P/L a/c
The progress of the business can be judged by the The profitability of the business can be measured
comparison of gross profit with net sales by the comparison of net profit with net sales
Calculation: GP=Net sales-COGS Calculation: NP=Operating profit-(Interest + Tax)
It is transfer to P/L a/c It is transfer to B/S
It can be determined through trading account It can be determined through P/L a/c
It cannot be distributed as dividend It can be distributed as dividend.

Profit and Loss a/c Balance Sheet

It is an account that show the revenue & expenses It is a statements that disclose the financial
from business operations during a financial year position of its assets, liabilities & capital on a
specific date
It is prepared to ascertain the net profit or loss It is prepared to show the true or fair financial
position of an entity
It includes only nominal account It includes real and personal account
It is not dependent on the B/S because it is It is dependent upon P/L a/c to take a balance of
prepared before the preparation of B/S P/L a/c
It is prepared after preparation of trading a/c and It is prepared after preparation of P/L a/c and
before preparation of B/S before preparation of CFS
All gains are recorded in credit side and all losses All assets are recorded in assets column and all
are recorded in debit side liabilities are recorded in liabilities column
No information is provided for opening or closing Information is provided for only closing stock.
stock
Q. How to prepare Profit and Loss Account with Accounting Entries?

The starting point of preparation of P/L A/C is the transfer of GP or GL reported by Trading Account.

Before a final P/L A/C is drawn, attention has to be paid toward matching principles & adjustments are
done accordingly.

The major adjustments that a P/L A/C requires are:

- Valuation of the closing stock (If Trading A/C is not prepared)

- Depreciation of fixed assets

- Provision for doubtful debts

- Prepaid expenses

- Outstanding expenses

- Accrued income

- Revenue collected in advance.

The ledger balance of accounts arrived after above adjustments make the final preparation of P/L A/C
easier.

The nominal accounts will be closed by transferring to the P/L A/C.

Nominal Account with Debit Balances:

Profit and loss A/C Dr; To, All Expenses Accounts.

Nominal Accounts with Credit Balances:

All Income Accounts Dr; To, Profit and loss A/C.

Nominal account heads are to be closed at the end of every accounting period by transfer to the P/L A/C
as shown above.

By this act, these accounts will have nil balance.

No nominal account shall be carried forward to subsequent accounting period.

P/L A/C show balances either in net profit or net loss by subtracting debit balance from credit balance.

It shows net profit if there is credit balance is higher than debit balance & vice-versa.

Balance in P/L A/C is transferred to P/L appropriation account or capital account.

Q. What are the steps to prepare profit and loss account?

- Prepare format of P/L A/C after declaration of period to prepare P/L A/C: Vertical and Horizontal.

- In case of preparing P/L A/C needs to post or determine GP/GL for such period.

- Indirect expenses or expenses which are not included in trading account to be posted into debit side of
P/L A/C.

- Indirect income or incomes which are not included into trading A/C to be posted into credit side of P/L
A/C.

- If any gains or incurred during such period to be included into credit side and debit side respectively.

- Determine net profit or loss in which debit side shortage than such value known as net profit or credit
side shortage then such value known as net loss.

- If any adjustment regarding indirect income and expenses including gains and loss then must be adjust
with relevant heads of account.

- All the income and expenses to be included under accrual system of an accounting.

Q. What is Balance Sheet? Explain objectives?

Q. Why B/S is known as mirror of Financial Position?

“It is a mirror of financial position”

It is a statement presenting the value of assets, liabilities and capital of any organization at point of time.

It is also known as a major financial indicator as it shows the condition of assets, liabilities and capital.

It can be shown by accounting equation: Assets=Capital + Liabilities.

Before preparing a B/S, Trial Balance is prepared. And then P/L A/C is prepared from which net
profit/loss is taken to balance sheet and condition of assets, liabilities and capital is known.

Horizontal format of B/S:

In the book of ……………….

Balance sheet

As on ………………………

Liabilities and capital Amounts Assets Amounts

Capital: Fixed Assets:
Equity share capital Land and Buildings
Share premium Office Equipment
Retained earning Vehicles
Reserve and surplus Plant and machinery
Liabilities: Good-will and
Long term liabilities Intangibles
Short term liabilities Investments
Current liabilities Short term or current
assets:
Stock or inventory
Cash and bank
balance
Sundry debtors
Receivables
Prepaid or Advance
Income
Other current assets
Total Xxx Total Xxx

Vertical format of B/S:

In the book of ……………

Balance sheet as on…….

Particulars Current year amount Previous year amount

Assets:
Fixes assets:
Land and buildings
Office equipment
Vehicles
Plant and machinery
Good-will and intangible assets
Investments
Short term or current assets
Stock or Inventory
Cash and bank balance
Sundry debtors
Receivables
Prepared or advance income
Other current assets
Total Assets Xxx Xxx
Liabilities:
Long term liabilities
Short term liabilities
Current liabilities
Total liabilities Xxx Xxx
Capital:
Equity share and capital
Share premium
Retained earning
Reserve and surplus
Total Capital Xxx Xxx
Total liabilities and capital Xxxx Xxxx

*Note: current liabilities can deduct from current assets to determine net working capital.

Objectives of B/S:

- To aids in preparation of cash flow statements and fund flow statements

- To analyze the financial history to determine the trend and progress

- To calculate accounting ratio for analyze by using the data from B/S

- To make provision against future loss in form of reserve

- To describe the firm’s economic condition at a point of time

- To know the short term and long term financial position of the firm

- To know the value of assets and liabilities at a point of time

- To know the true picture of trade creditors and debtors at a point of time

- To know the liquidity and solvency status at a point of time

- To help manager to know the strength and weakness of the business

- To provide true, fair and reliable financial statements to stakeholders

- To ascertain working capital and capital employed by the firm

- To provide relevant information to the stakeholder for making decision making

- To forecast financial status and guide current financial decisions and strategies

- To show the investment made by the bank in different sector

- To show the advance tax payment by the bank

- To show the deposit collection made by the bank

- To determine overall risk.

Conclusion: B/S is not only a statement of assets and liabilities, rather it has several uses. It shows the
financial condition so it is known as mirror of financial position. It forecasts the current position and also
the long term sustainability of any business. So organization must prepares it by considering accounting
principles, NAS, IFRS, IAS, Unified directives and relevant rules and regulation.
Q. How do banks present B/S?

Banks prepare B/S by following the NAS as per NFRS and also as per IFRS for sectors not covered by
NFRS, and present B/S as per the format prescribed in NRB Directives 4.

The major presentation formats of B/S of banks are briefly mentioned below:

- Banks have to present annual B/S after statutory audit and have to submit to NRB within 3 months
after the end of fiscal year.

- Banks have to present quarterly B/S after certification from internal auditor within 15 days after the
end of quarter to NRB and also publish it in their web-side.

- The accounting policies followed while presenting B/S should be clearly mentioned.

- The fair value gain in revaluation of assets and liabilities should be separately disclosed in regulatory
reserve.

- Banks present B/S on the basis of liquidity, i.e, more liquid assets and liabilities are presented first.

- Assets and liabilities are presented on fair value basis, and if show on cost basis, the fair value is
disclosed in the notes to the financial statements.

- Equity portion of B/S shows the capital positions as well as the reserves and retained earnings along
with share premium.

Conclusion: Banks should consider NFRS, NAS, IFRS, Unified directives and other laws, rules and
regulations for the preparation and presentation of B/S.

Q. Inter relation between P/L A/C and B/S?

P/L A/C is prepared to show the profitability & B/S show the financial position of business.

Inter-relationships between P/L A/C & B/S are shown in following points:

- Result of P/L A/C to be transfer into B/S as a part of capital and capital fund

- P/L A/C and B/S both are major part of financial statements of business entity

- In the process of financial decision, stakeholder need to analysis of both statements otherwise such
decision may be wrong.

- Financial ratio established a relation between P/L A/C & B/S to evaluate fi. performance & situation.

- In case of total expenditure incurred, some types of expenditure appear in the P/L A/C & some in the
B/S. Consider few examples:
 Example 1: Salaries paid show on the Dr. side of P/L A/C but outstanding salaries is shown on liabilities
side of B/S and is added to salaries.

P/L A/C

Particulars Amount (Rs) Particulars Amount (Rs)

To salaries 25000
Add: O/S 1500
Salaries 26500

B/S

Liabilities Amount (Rs) Assets Amount (Rs)

O/S salaries 1500

Example 2: When a machine is purchased, the part of it which is attributable to the year considered as
depreciation is debited to the P/L A/C and the balance is shown in the B/S as an assets.

P/L A/C

Particulars Amount (Rs) Particulars Amount (Rs)

To depreciation 50000

B/S

Liabilities Amount (Rs) Assets Amount (Rs)

Fixed Assets 500000
Less: Depreciation 50000 450000

Above example show that the amount to be charged to the P/L A/C should be properly determined as
otherwise both statements will show an incorrect position. The principle that governs this is called the
Matching Principles.

Conclusion: Above points show that the preparation of P/L A/C and B/S are inter-related.

Classification of format:

1. Horizontal Format vs. Vertical Format of B/S:

Horizontal format Vertical format

It present information from left to right It present information from top to bottom
It is present side by side It has only a single side
The left side shows liabilities & right side shows It has only a single side firstly show assets and
assets after that it show liabilities
It has include a single year data It has include a 2 years data
Difficult to compare with previous year data Easy to compare
Less used by companies Mostly used and also advised by IFRS.

2. Comparative B/S:

It is the method of preparation of B/S in such a way that contains four columns for each asset and
liabilities side of two consecutive financial periods which creates easy for comparison of financial
information of two consecutive financial periods.

B/S

Liabilities Amount of current Amount of Assets Amount of current Amount of

year previous year year previous year

Total Xxx Xxx xxx Xxx

While preparing B/S following difficulties arises:

- Difficult to follow the principle, policies, NAS, NFRS, IFRS, unified directive & other rules & regulations.

- Difficulties arises due to accounting structure and system

- Difficult to complete accounting cycles and steps

- Change in accounting policies from one period to another period provides greater challenges

- Limited time period allotted by management to prepare final account

- Difficulties regarding to prepare journal entries, ledgers, subsidiary books etc.

- Difficulties regarding to marshaling on the basis of liquidity and consistency

- Difficult to comply according to direction of authority body

- Difficult to make B/S understandable for every one

- Chance of accounting errors due to lack of proper skill of accountant

- Lack of reliable and appropriate data and information.

Q. Grouping and Marshalling of Assets and Liabilities?

The term grouping means putting together items of a similar nature under a common heading.

Example: Under the heading trade creditors the balance of the ledger alc of all the suppliers from whom
goods have been purchased on credit will be shown.
The term marshaling refers to the order in which the various assets and liabilities are shown in the B/S.

The assets and liabilities can be shown in the order of liquidity or in the order of permanency.

Order of liquidity:

The assets are arranged in the order of their liquidity. i.e. the most liquid assets i.e cash in hand are
shown first. The least liquid assets i.e goodwill is shown last.

The liability are arranged in the order of their urgency of payment i.e The most urgent payment to be
made i.e short term creditors is shown first. The least urgency short term payment to be made i.e long
term creditors is shown last.

Usually the banking and financial company prepares their B/S in the order of liquidity.

Order of permanency:

The assets are arranged in the order of their permanence i.e The least liquid assets I.e good-will is
shown firs. The most liquid assets i.e cash in hand are shown last.

Then liabilities are arranged in the order of their payment i.e the least urgent long term creditors is
shown first. The most urgent payment to be made i.e short term creditor is shown last.

Format: B/S (Order of Liquidity)

Liabilities Amount (Rs) Assets Amounts (Rs)

Current liabilities Current Assets
Long term liabilities Investments
Reserve and Surplus Fixed Assets
Capital
Total xxx Total Xxx

Format: B/S (Order of permanence)

Liabilities Amounts (Rs) Assets Amounts (Rs)

Capital Fixed Assets
Reserve and Surplus Investments
Long term liabilities Current Assets
Current liabilities
Total xxx Total xxx

Ledger Account:

A Ledger is a book or digital record that contains individual accounts where all business transaction
related to a particular accounts are recorded in a classified and summarizes form.
1. Important:

Helps in classifying all financial transaction systematically

Facilitates preparation of trial balance and final account

Shows individual account balances (cash, debtors, sales)

Helps in financial analysis and decision making

Essential for auditing and internal control

2. Posting to ledger:

Posting means transferring transaction from the journal to the respective ledger accounts

Steps in Posting:

Identifying the accounts involved in the journal entry

Debit the concerned account on the left side

Credit the concerned account on the right side

Mention date, journal folio, and amount

Example: Make a journal entries and posting it to ledger account in their respective side.

3. Balancing Ledger Account:

Balancing means finding the differences between total debit and credit sides of an account to determine
its closing balance

Steps:

Total both side of the account

Find the differences between debit and credit side

Enter the balance as “Balance c/d” (carried forward) on the side with the lesser amount

Bring the balance down as “Balance b/d (brought down) on the opposite side in the next period

4. Closing Ledger Account:

Closing a ledger account means bringing it to a zero balance at the end of the accounting period

Rules:

Nominal account are closed to Trading/profit and loss account

Real, Personal account are carried forward to the next period

Basis Journal Ledger

Meaning First book of original entry Book of secondary entry
Purpose To record all transaction in chronological To classify and summarize transaction
order
Order of Recording Date wise (sequential) Account wise (grouped)
Type of entry Debit and credit recorded together in one Debit and credit recorded separately
entry in each account
Format Date, particular, ledger folio, Dr. and Cr. Date, particular, folio, Debit and
amount Credit
Balancing Balancing not done in journal Balancing is done in ledger
Helps in Initial recording of transaction Preparing trial balance and financial
statements