Krishna Niraula (CA)

Accounting System
There are two types of accounting systems: The first is a Single Entry System where a small
business records every transaction as a line item in a ledger. The other is a Double Entry
System, where every transaction is recorded both as a debit and credit in separate accounts.

A Double Entry System ensures a company’s books balance.

A. Single Entry System:

A single entry system of accounting is a form of bookkeeping in which each of a
company’s financial transactions are recorded as a single entry in a log. This process
does not require formal training and is usually used by new small businesses because of
its simplicity and cost effectiveness.
Users of Single Entry System:
Many small businesses use a single entry system mainly for the convenience it offers.
Although a single entry system records only the bare essentials, it is attractive for
companies that:

● have no or few employees

● use “Cash basis accounting” over “Accrual accounting”
● the firm has few financial transactions
● do not sell on credit or installment plans
● have few physical assets like buildings, equipment and vehicles.

Features of Single Entry System

1. As the owners or partners of the small businesses can directly control its affairs, so this
system is useful for these types of businesses.
2. Normally under single entry system, only personal accounts are taken whereas the
impersonal accounts are not recorded at all.
3. This system is not governed by a set of definite rules so we can say that this is a flexible
and changeable system.
4. This system can help in calculating the profit or loss but not its composition.
5. As under this system, records are incomplete, due to which trial balance cannot be
prepared. In this way, the arithmetical accuracy of the work done cannot be calculated.
6. Under this system balance sheet cannot be prepared as there is absence of ledger and
trial balance.
7. This system is a mixture of double-entry, single entry and no entry.

Limitations of Single entry System

1. As trial balance cannot be prepared so the arithmetical accuracy of the work completed
cannot be checked.
2. This system gives way to frauds and misappropriations.
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3. Under this system nominal accounts are not maintained due to which final accounts
cannot be prepared.
4. Various important ratios like operating cost ratio, Gross Profit Ratio etc. cannot be
computed.
5. Due to incomplete records, proper appraisal of the financial position of a business is
impossible.
6. Because of legal restrictions, no limited company can keep records under this system.

How to determine Profit and Loss under Single Entry System

There are mainly two approaches about the determination of profit or loss under single entry
system:

(a). The Balance Sheet Approach or Net Worth Method

(b). The Transaction Approach or Conversion Method

(a) The Balance Sheet Approach or Net Worth Approach

Here, in order to calculate the profit or loss under single entry system we can use the following
fundamental Balance Sheet equation:

Capital (Net Worth) = Assets — Liabilities

Here, one Statement of Affairs which will be prepared at the start of the year will give “Opening
Capital” whereas, the second Statement of Affairs which will be prepared at the end of the year
will give “Closing Capital”. By comparing the “Opening Capital” and “Closing Capital” we can get
the profit or loss.
The above formula can be written down in the form of the following statement:
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(b). The transaction approach or Conversion Method

This approach is applicable where double-entry system is maintained. In this approach, each
and every transaction is analyzed and the net result of the business is calculated. Under this
approach following steps are adopted:

(i). First of all, transactions are recorded in the Journal.

(ii). After recording transactions, these are classified into ledger.

(iii). Then to check the arithmetical accuracy of the work done, Trial Balances is prepared from
the ledger.

(iv). Adjusting entries are then passed to record the internal transactions like depreciation, etc.

(v). Next step is to prepare the second Trial Balance which is called Adjusted Trial Balance to
incorporate adjusting entries.

(vi) From the Trial Balance, Nominal Accounts are transferred to Trading and Profit and Loss
Account.

(vii). And finally, Trading and Profit and Loss Account shows Gross Profit and Net Profit of the
business.

(c). Short Cut Method

The above methods are too much laborious. Instead of using them, we can apply another
method which is a short cut way to convert single entry into double entry. That’s why this
method is termed as short cut or Abridged Conversion Method.

This method can be used when summary of cash and other transactions are given. Also
beginning and ending information regarding Assets and Liabilities should be available. Under
this method, trading and Profit and Loss account and balance sheet are prepared. In this
system, following items if missing may be found out from the data available.

(i). Opening Capital

(ii). Sundry Debtors

(iii). Credit Sales

(iv). Sundry Creditors

(v). Credit Purchases

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(vi). Cash in hand

(vii). Cash at bank

(viii). Cash purchases

(ix). Cash sales

(x). Bills receivable

(xi). Bills payable

Government Accounting System Vs. Bank Accounting System

Government Accounting System Bank Accounting System

1. Prepared by the Central, Provincial or 1. Prepared by banks just like commercial

Local Government. banking.

2. Prepared with non-profit objective. 2. Prepared with profit motive.

3. Mostly Cash basis is followed. 3. Accrual basis is followed.

4. Based on Nepal Public Sector Accounting 4. Based on Nepal Financial Reporting

Standards (NPSAS) Standards (NFRS)

5. Cash basis or Modified Accrual Basis is 5. Pure Accrual basis is followed.

followed.

6. There are several reporting units. 6. Reporting units are handled by Finance
Department of Banks.

7. Prepared with objective to know the 7. Prepared with the objective of knowing
position of public fund. profit/loss and financial position of banks.

8. It provides information to the government 8. It provides information to the stakeholders

about the receipts, transfer and deposition of about the operating result and financial
public funds. position of the business.

9. An Auditor General Office audits the book 9. A professional auditor can audit the books
of accounts kept under this accounting. of accounts kept under this accounting.

Journal Voucher
Journal voucher is called ' goswora voucher' in Nepal. Journal voucher is a primary and most
importat record of financial transaction in new accounting system. It is a kind of voucher, which
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is used for recording financial transaction of the government is regular order of dates. It is also
known as book of original entry because every financial transaction of the government is
recorded first of all in this journal voucher. It is based on the principle of double entry system of
book keeping i.e. every transaction has two aspects one debit and another credit. The office of
audit general has prescribed the form of journal voucher in Ma.Le.Pa form no. 103, 203 to
record revenue and expenditure respectively, which is maintained by central, provincial and
local levels.

The following are the main objectives of journal voucher: -

● To make systematic and permanent record of financial transactions of government
offices in sequential order.
● To show debit and credit accounts of each financial transaction.
● To show financial transactions in sequential order.
● To present detailed information about the financial transactions of government offices.
● To help for preparing ledger and financial statements.

Importance and Advantages of Journal Voucher

Journal voucher is important document of government because it:

● Keeps the systematic record of financial transactions of government offices.

● Provides information of debit and credit aspects of each financial transactions.
● Acts as an evidence in the future.
● Help to detect and rectify errors.
● Acts as a basis for preparation of accounts and statements.
Format of Journal Voucher
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Considerations for Preparing Journal Voucher

The following points should be considered while preparing journal voucher: -

● Each transaction must be recorded in a separate journal voucher.

● While preparing a journal voucher, the principle of double entry syste of book keeping
must be followed.
● The word B.E. must be used immediately after the word 'Dr" in the case of budget
expenditure.
● The supporting documents of the transaction must be attachment to the voucher, while
making its approval.
● Sufficient narration must be written for each transaction.
● Dr. before debit transaction and Cr. before a credit transaction must be written.
● Each transaction must be recorded in a separate journal voucher.

Ledger Account
What is a Ledger Account?

A ledger account contains a record of business transactions. It is a separate record within the
general ledger that is assigned to a specific asset, liability, equity item, revenue type, or expense
type. Examples of ledger accounts are:
Cash, Accounts receivable, Inventory, Fixed assets, Accounts payable, Accrued expenses,
Debt, Stockholders' equity, Revenue, Cost of goods sold, Salaries and wages, Office expenses,
Depreciation, Income tax expense, etc.
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Information is stored in a ledger account with beginning and ending balances, which are
adjusted during an accounting period with debits and credits. Individual transactions are
identified within a ledger account with a transaction number or other notation, so that one can
research the reason why a transaction was entered into a ledger account. Transactions may be
caused by normal business activity, such as billing customers or recording supplier invoices, or
they may involve adjusting entries, which call for the use of journal entries.

The information in a ledger account is summarized into the account-level totals shown in the
trial balance report, which in turn is used to compile financial statements.

The ledger account may take the form of an electronic record, if an accounting software
package is used, or a page in a written ledger, if the accounting records are kept by hand.

Subsidiary Books
Subsidiary Books are books of Original Entry. They are also known as Day Book or special
journals. We record transactions of similar nature are in Subsidiary Books. They are helpful in
overcoming the limitations of journal book or journal entries.
Different Types of Subsidiary Books

We can divide the subsidiary books into the following types:

1. Cash book
2. Purchases book
3. Sales book
4. Purchases return or return outwards book
5. Sales return or return inwards book
6. Bills receivable book
7. Bills payable book
8. Journal proper

Cash Book
It records all the cash and bank receipts and payments. It is a book of original entry as we
record transactions in it for the first time from the source documents such as vouchers, invoices,
etc.

A cash book has a debit and a credit side both. Thus, it is similar to a ledger account. Hence, it
acts as a subsidiary book as well as a ledger account.

An organization can maintain a single column, double column or triple column cash book as per
its requirements. A single column cash book consists of only cash column.

A double column cash book consists of cash and bank column. While the triple column cash
book consists of cash, bank, and discount column. Usually, the firms use triple column cash
book.
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Some organizations also maintain a petty cash book which records the petty or small cash
expenses of the firm.

Purchases book
A firm records all its credit purchases of goods in Purchase Book or Purchase Day Book. While
it records all the cash purchases of goods in the Cash Book.

Sales Book
A firm records all credit sales of goods in the Sales Book or Sales Day Book. It records cash
sales of goods in the Cash Book.

Purchase Return or Return Outward Book

We record the return of goods purchased in the Purchase Return Book. A Debit Note is
prepared for every return of goods in duplicate.
It contains the name of the supplier, details of goods returned and reason thereof. It needs to be
dated and serially numbered.

Sales Return or Return Inwards Book

We record the return of goods sold in the Sales Return Book. A Credit Note is prepared for
every return of goods in duplicate.
The Credit Note contains the name of the customer, details of goods returned and reason
thereof. It also needs to be dated and serially numbered.

Bills Receivable Book

We record all the acceptance of the bills in our favor in the Bills receivable book. We need to
post the total of bills receivable book to the Bills receivable A/c. Also, we need to post the
individual accounts of the customers.

Bills Payable Book

We record all the acceptance of the bills that we issue in favor of others in the Bills payable
book. We need to post the total of bills payable book to the Bills payable A/c. Also, we need to
post the individual accounts of the suppliers.

Journal Proper
It includes transactions relating to credit purchase and sale of assets, depreciation, outstanding
and pre-paid expenses, accrued and unearned income, opening and closing entries, adjustment
entries and rectification entries.

Topic: Income and Expenditure Account

Income and expenditure is a nominal account which includes all revenue items. It is prepared
same as profit and loss account i.e. on accrual basis. The difference of this account will
represent surplus or deficit. It is prepared by non-profit organization.
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Features of Income & Expenditure Account

The features of income and expenditure a/c are as follows:

● It is a nominal account.
● It includes all revenue items.
● It includes accrued income or expenditure related to current year only.
● The difference of this account is surplus or deficit.
● It is similar to Profit and Loss Account of a profit-seeking concern.
● All expenses are recorded on debit side and all revenues on credit side of income and
expenditure account.
● It deals with only revenue transaction.
● Surplus or deficit of a concern is ascertained through this account. Credit balance
indicates surplus, while debit balance indicates deficit.
● Its balance is transferred to Capital Fund Account.
● It is prepared on the last day of an accounting year.
● It does not need opening balance.

Topic: Trial Balance

A trial balance is a statement of debit & credit balance of the ledger accounts which is prepared
in order to prove the arithmetical accuracy which is prepared in order to prove the arithmetical
accuracy of the books of account.
It is prepared after the preparation of various personal, real and nominal accounts. It is also
called the summary of assets, capitals, liabilities, expenses, income, etc. drawn from the ledger
account.

The following are the main definitions of trial balance:

“Trial balance is the list of debit and credit balances taken out from the ledger, it also includes
the balances of cash and bank taken from cash book.” – R. N. Carter

“Trial balance is a list of balances debit or credit standing in the books of the trader at any given
date.” – J. R. Batliboi
Objectives of Trial Balance
The following are the main objectives of a trial balance:
● To obtain summary information
● t provides summary information of all the ledger accounts in one place. It presents the
balances of all the assets, liabilities, capital, incomes and expenses relating to a
particular date.
● To help in making comparison and decision
● It helps in comparing the balances of assets, liabilities, capital, incomes, and expenses
between two different periods. Such comparison helps in making a proper judgment of
different activities of the business and arriving at important decisions.
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● To check arithmetical accuracy

The trial balance checks an arithmetical accuracy of the books of accounts. It checks
whether the total of debit balances equals the total of credit balances or not. If the trial balance
agrees, it proves the arithmetical accuracy. If it does not agree, it indicates the existence of
errors in the books of accounts, which are to be located and rectified.
● To facilitate for preparing the final accounts
It serves the basis for preparing the final accounts. From the trial balance, the balances
of incomes and expenses are placed on the trading and profit and loss accounts and balances
of assets, liabilities and capital are placed on the balance sheet.

● To help for locating and rectifying errors

It helps to locate the accounting errors at an early stage. Its disagreement is the signal
for the existence of accounting errors in the books of accounts, which compels the accountant
to locate and rectify them in time.

● To help in minimizing errors and frauds

It helps in minimizing the different types of accounting errors and frauds. If the errors and
frauds are committed, the trial balance disagrees. Hence, it gives moral pressure to the
accounting personnel to maintain books of accounts with great care and honesty.

Advantages of Trial Balance

The trial balance is advantageous to prepare because of the following reasons:

It supplies in one place ready reference of all the balances of all the ledger accounts.
It helps to prepare final accounts.
If any error is found, it can easily be rectified
It helps in the internal audit by supplying complete, reliable and accurate accounting
information.
It proves the authenticity of the balance sheet prepared by the business on the given
date.
It proves the arithmetical accuracy of accounting entries in the ledger.

Procedures of preparation

The trial balance can be prepared on daily or monthly or yearly basis as per the requirement of
the business. It is prepared on a given date in a separate sheet of paper. It is prepared either
using total method or balance method or compound method.

Total method
in this method, the debit and credit of each ledger accounts is written in trial balance.
The trial balance in this method should be prepared immediately after the completion of
postings from journal and subsidiary books ledger.
Balance method
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In this method, the balance of each ledger account is entered in the trial balance. The
debit balances are entered in debit side and credit balances are entered in credit side. It is
prepared after balancing the ledger.
Compound method
The compound method is the combination of total and balance methods, which is also
known as total cum balance method. Under this method, the trial balance with total and balance
of all the ledger accounts.

5 Errors not Disclosed by a Trial Balance

A Trial Balance will not disclose the following errors:

The Trial Balance is not absolute proof of the accuracy of ledger accounts. It is a proof only of
the arithmetical accuracy of the postings. The total of debits may be equal to the total of credits
yet still there may be errors.

Such errors are not disclosed by a trial balance and they are:
1. Errors of Principle:
An error of principle is an error which violates the fundamentals of book-keeping. For instance,
purchase of furniture is debited to Purchase Account, instead of Furniture Account; Wages paid
for the erection of plant is debited to Wages Account, instead of Plant Account; the amount
spent on extension of building is debited to Repairs Account instead of Building Account etc.
These types of errors do not affect the total debits and total credits but affect the principle of
book-keeping.
2. Errors of Omission:
If a transaction is completely omitted, there will be no effect on the Trial Balance. When a
transaction goes completely unrecorded in both aspects or a transaction after being recorded in
the books of primary entry is not at all posted in the ledger, the error is an error of omission. For
instance, if a credit purchase is omitted to be recorded in the Purchase Day Book, then it will be
omitted to be posted both in the Purchase Account and the Supplier’s Account. This error will
not, however, result in the disagreement of Trial Balance.
3. Posting to Wrong Account:
Posting an item to wrong account, but on the correct side. For instance, if a purchase of Rs 200
from Ramu has been credited to Raman, instead of Ramu and this error will not affect the
agreement of Trial Balance. Thus, Trial Balance will not detect such an error.
4. Error of Amounts in Original Book:
If an invoice for Rs 632 is entered in Sales Book as Rs 623, the Trial Balance will come out
correctly, since the debit and credit have been recorded as Rs 623. The arithmetical accuracy is
there, but in fact there is an error.
5. Compensating Errors:
If one account in the ledger is debited with Rs 500 less and another account in the ledger is
credited Rs 500 less, these errors cancel themselves. That is, one error is neutralized by similar
error on the opposite side.
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Profit and Loss Account

Format of Consolidated Statement of Profit or Loss as per NRB Directive No. 4.

Name of the Bank or Financial Institution
Consolidated Statement of Profit or Loss
For the year ended ...Asar 20xx
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Balance Sheet
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Cash Flow Statement

The statement of cash flows, or the cash flow statement, is a financial statement that
summarizes the amount of cash and cash equivalents entering and leaving a company.

The cash flow statement (CFS) measures how well a company manages its cash position,
meaning how well the company generates cash to pay its debt obligations and fund its
operating expenses. The cash flow statement complements the balance sheet and income
statement and is a mandatory part of a company's financial reports.
The Structure of the Cash Flow Statement

The main components of the cash flow statement are:

1.Cash from operating activities

2. Cash from investing activities
3. Cash from financing activities
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4. Disclosure of noncash activities is sometimes included when prepared under the

generally accepted accounting principles (GAAP)

Cash From Operating Activities

The operating activities on the CFS include any sources and uses of cash from business
activities. In other words, it reflects how much cash is generated from a company's
products or services.
These operating activities might include:
Receipts from sales of goods and services
Interest payments
Income tax payments
Payments made to suppliers of goods and services used in production
Salary and wage payments to employees
Rent payments
Any other type of operating expenses
Cash flow from this activity may be calculated as per direct or indirect method.

Cash From Investing Activities

Investing activities include any sources and uses of cash from a company's investments. A
purchase or sale of an asset, loans made to vendors or received from customers, or any
payments related to a merger or acquisition is included in this category. In short, changes
in equipment, assets, or investments relate to cash from investing.

Cash From Financing Activities

Cash from financing activities includes the sources of cash from investors or banks, as
well as the uses of cash paid to shareholders. Payment of dividends, payments for stock
repurchases, and the repayment of debt principal (loans) are included in this category.

Format of Cash Flow Statement

Name of the Bank or Financial Institution
Consolidated Statement of cash flows
For the year ended ……..Asar 20…….
Current Year Previous Year
CASH FLOWS FROM OPERATING ACTIVITIES
Interest received
Fees and other income received
Divided received
Receipts from other operating activities
Interest paid
Commission and fees paid
Cash payment to employees
Other expense paid
Operating cash flows before changes in operating assets and liabilities
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(Increase)/Decrease in operating assets

Due from Nepal Rastra Bank
Placement with bank and financial institutions
Other trading assets
Loan and advances to bank and financial institutions
Loans and advances to customers
Other assets
Increase/(Decrease) in operating liabilities
Due to bank and financial institutions
Due to Nepal Rastra Bank
Deposit from customers
Borrowings
Other liabilities
Net cash flow from operating activities before tax paid
Income taxes paid
Net cash flow from operating activities

CASH FLOWS FROM INVESTING ACTIVITIES

Purchase of investment securities
Receipts from sale of investment securities
Purchase of property and equipment
Receipt from the sale of property and equipment
Purchase of intangible assets
Receipt from the sale of intangible assets
Purchase of investment properties
Receipt from the sale of investment properties
Interest received
Dividend received
Net cash used in investing activities

CASH FLOWS FROM FINANCING ACTIVITIES

Receipt from issue of debt securities
Repayment of debt securities
Receipt from issue of subordinated liabilities
Repayment of subordinated liabilities
Receipt from issue of shares
Dividends paid
Interest paid
Other receipt/payment
Net cash from financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at Sawan 1, 20…….
Effect of exchange rate fluctuations on cash and cash equivalents held
Cash and cash equivalents at Asar end 20…..
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Role and Importances of Financial Statements

The importance of financial statements lies in their utility to satisfy the varied interest of
different categories of parties such as management, creditors, public, etc.
1. Importance to Management:

Increase in size and complexities of factors affecting the business operations necessitate a
scientific and analytical approach in the management of modern business enterprises.

The management team requires up to date, accurate and systematic financial information
for the purposes. Financial statements help the management to understand the position,
progress and prospects of business vis-a-vis the industry.

By providing the management with the causes of business results, they enable them to
formulate appropriate policies and courses of action for the future. The management
communicates only through these financial statements, their performance to various
parties and justify their activities and thereby their existence.

A comparative analysis of financial statements reveals the trend in the progress and
position of enterprise and enables the management to make suitable changes in the
policies to avert unfavorable situations.

2. Importance to the Shareholders:

Management is separated from ownership in the case of companies. Shareholders cannot,

directly, take part in the day-to-day activities of business. However, the results of these
activities should be reported to shareholders at the annual general body meeting in the
form of financial statements.

These statements enable the shareholders to know about the efficiency and effectiveness
of the management and also the earning capacity and financial strength of the company.

By analyzing the financial statements, the prospective shareholders could ascertain the
profit earning capacity, present position and future prospects of the company and decide
about making their investments in this company.

Published financial statements are the main source of information for the prospective
investors.

3. Importance to Lenders/Creditors:

The financial statements serve as a useful guide for the present and future suppliers and
probable lenders of a company.
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It is through a critical examination of the financial statements that these groups can come
to know about the liquidity, profitability and long-term solvency position of a company. This
would help them to decide about their future course of action.

4. Importance to Labour:

Workers are entitled to bonus depending upon the size of profit as disclosed by audited
profit and loss account. Thus, P & L a/c becomes greatly important to the workers. In
wages negotiations also, the size of profits and profitability achieved are greatly relevant.
5. Importance to the Public:
Business is a social entity. Various groups of society, though directly not connected with
business, are interested in knowing the position, progress and prospects of a business
enterprise.
They are financial analysts, lawyers, trade associations, trade unions, financial press,
research scholars and teachers, etc. It is only through these published financial
statements these people can analyze, judge and comment upon business enterprise.

6. Importance to National Economy:

The rise and growth of corporate sector, to a great extent, influence the economic
progress of a country. Unscrupulous and fraudulent corporate managements shatter the
confidence of the general public in joint stock companies, which is essential for economic
progress and retard the economic growth of the country.

Financial Statements come to the rescue of general public by providing information by

which they can examine and assess the real worth of the company and avoid being
cheated by unscrupulous persons.

The law endeavors to raise the level of business morality by compelling the companies to
prepare financial statements in a clear and systematic form and disclose material
information.

This has increased the confidence of the public in companies. Financial statements are
also essential for the various regulatory bodies such as tax authorities, Registrar of
companies, etc. They can judge whether the regulations are being strictly followed and
also whether the regulations are producing the desired effect or not, by evaluating the
financial statements.