Accounting & Taxation

Training
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Simant Giri 6/25/21 Accounting and Taxation Training

 Accounting and Taxation Training

ACCOUNTING
INTRODUCTION TO ACCOUNTING
1.1. MEANING OF ACCOUNTING
Accounting is a means of collecting, summarizing, recording and reporting in monetary
terms the information and transaction of the business. The basic objective of accounting
is to provide useful information to the interested group of users, both external and
internal. The necessary information, particularly in case of external users, is provided in
the form of financial statements, viz., profit and loss account and balance
sheet. Besides these, the management is provided with additional information
from time to time from the accounting records of business.

1.2. BASIC TERMS IN ACCOUNTING

Basic Terms in Accounting
Entity Transaction Assets
Liabilities Capital Sales
Expenses Profit Gain
Loss Discount Voucher
Goods Drawings Purchase
Stock Debtors Creditors

Entity
Entity means a reality that has a definite individual existence. Business entity means a
specifically identifiable business enterprise. An accounting system is always devised for
a specific business entity (also called accounting entity).
Transaction
An event involving some value between two or more entities. It can be a purchase of
goods, receipt of money, payment to a creditor, incurring expenses, etc. It can be a cash
transaction or a credit transaction.
Assets
Assets are economic resources of an enterprise that can be usefully expressed in
monetary terms. Assets are items of value used by the business in its operations. Assets
can be broadly classified into two types: current and non-current (Fixed).

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Liabilities
Liabilities are obligations or debts that an enterprise has to pay at some time in the future.
They represent creditors’ claims on the firm’s assets. Liabilities are classified as current
and non-current.

Capital
Amount invested by the owner in the firm is known as capital. It may be brought in the
form of cash or assets by the owner for the business entity capital is an obligation and a
claim on the assets of business.
Sales
Sales are total revenues from goods or services sold or provided to customers. Sales may
be cash sales or credit sales.

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Expenses
Costs incurred by a business in the process of earning revenue are known as
expenses. The usual items of expenses are: depreciation, rent, wages, salaries, interest,
cost of heater, light and water, telephone, etc.
Profit
The excess of revenues of a period over its related expenses during an accounting
year is profit. Profit increases the investment of the owners.
Gain
A profit that arises from events or transactions which are incidental to business
such as sale of fixed assets, winning a court case, appreciation in the value of
an asset.
Loss
The excess of expenses of a period over its related revenues its termed as loss. It
decreases in owner’s equity. It also refers to money or money’s worth lost (or
cost incurred) without receiving any benefit in return, e.g., cash or goods lost by
theft or a fire accident, etc. It also includes loss on sale of fixed assets.
Discount
Discount is the deduction in the price of the goods sold. It is offered in two ways.
Offering deduction of agreed percentage of list price at the time selling goods is
one way of giving discount. Such discount is called ‘trade discount’. After
selling the goods on credit basis the debtors may be given certain deduction in
amount due in case if they pay the amount within the stipulated period or earlier.
This deduction is given at the time of payment on the amount payable. Hence, it
is called as cash discount. Cash discount acts as an incentive that encourages
prompt payment by the debtors.
Voucher
The documentary evidence in support of a transaction is known as voucher.
Goods
It refers to the products in which the business unit is dealing, i.e. in terms of
which it is buying and selling or producing and selling. The items that are
purchased for use in the business are not called goods. For example, for a
furniture dealer purchase of chairs and tables is termed as goods, while for
other it is furniture and is treated as an asset.
Drawings
Withdrawal of money and/or goods by the owner from the business for personal
use is known as drawings. Drawings reduces the investment of the owners.
Purchases
Purchases are total amount of goods procured by a business on credit and on

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cash, for use or sale. In a trading concern, purchases are made of merchandise
for resale with or without processing. In a manufacturing concern, raw materials
are purchased, processed further into finished goods and then sold. Purchases
may be cash purchases or credit purchases.
Stock
Stock (inventory) is a measure of something on hand-goods, spares and other
items in a business. It is called Stock in hand. In a trading concern, the stock on
hand is the amount of goods which are lying unsold as at the end of an accounting period
is called closing stock (ending inventory).
Debtors
Debtors are persons and/or other entities who owe to an enterprise an amount
for buying goods and services on credit.
Creditors
Creditors are persons and/or other entities who have to be paid by an enterprise
an amount for providing the enterprise goods and services on credit.
Activity: Tick the appropriate one:

Current Non-Current Current Non-Current

Items
Assets Assets Liabilities Liabilities
Machinery
Sundry Creditors
Cash at Bank
Bills Payable
Land & Building
Furniture
Computer Software
Motor Vehicles
Inventory
Investments
Loan from Bank
Sundry Debtors
Patents
Air-Conditioners
Loose tools

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1.3. Basic Accounting Principles

The basic accounting concepts are referred to as the fundamental ideas or basic
assumptions underlying the theory and practice of financial accounting and are broad
working rules for all accounting activities and developed by the accounting profession.
The important concepts have been listed as below:
• Business entity; • Revenue recognition (Realization);
• Money measurement; • Matching;
• Going concern; • Consistency;
• Accounting period; • Conservatism (Prudence);
• Cost • Materiality;
• Dual aspect (or Duality); • Objectivity

1.3.1. Business Entity Concept

The concept of business entity assumes that business has a distinct and separate
entity from its owners. It means that for the purposes of accounting, the business
and its owners are to be treated as two separate entities. The accounting records are
made in the book of accounts from the point of view of the business unit and not that of
the owner. The personal assets and liabilities of the owner are, therefore, not considered
while recording and reporting the assets and liabilities of the business. Similarly,
personal transactions of the owner are not recorded in the books of the business, unless
it involves inflow or outflow of business funds.
1.3.2. Money Measurement Concept
The concept of money measurement states that only those transactions and happenings
in an organization which can be expressed in terms of money such as sale of goods or
payment of expenses or receipt of income, etc. are to be recorded in the book of accounts.
1.3.3. Going Concern Concept
The concept of going concern assumes that a business firm would continue to
carry out its operations indefinitely, i.e., for a fairly long period of time and would
not be liquidated in the foreseeable future.
1.3.4. Accounting Period Concept
Accounting period refers to the span of time at the end of which the financial statements
of an enterprise are prepared, to know whether it has earned profits or incurred
losses during that period and what exactly is the position of its assets and liabilities at
the end of that period.

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1.3.5. Cost Concept

The cost concept requires that all assets are recorded in the book of accounts
at their purchase price, which includes cost of acquisition, transportation,
installation and making the asset ready to use.
1.3.6. Dual Aspect Concept
Dual aspect is the foundation or basic principle of accounting. It provides the
very basis for recording business transactions into the book of accounts. This
concept states that every transaction has a dual or two-fold effect and should therefore
be recorded at two places. In other words, at least two accounts will be involved in
recording a transaction.
The duality principle is commonly expressed in terms of fundamental Accounting
Equation, which is as follows:

Assets = Liabilities + Capital

1.3.7. Revenue Recognition (Realization) Concept

The concept of revenue recognition requires that the revenue for a business transaction
should be included in the accounting records only when it is realized.
1.3.8. Matching Concept
It states that expenses incurred in an accounting period should be matched with
revenues during that period. It follows from this that the revenue and expenses incurred
to earn these revenues must belong to the same accounting period.
1.3.9. Consistency Concept
The accounting information provided by the financial statements would be useful in
drawing conclusions regarding the working of an enterprise only when it allows
comparisons over a period of time as well as with the working of other enterprises. Thus,
both inter-firm and inter-period comparisons are required to be made. This can be
possible only when accounting policies and practices followed by enterprises are
uniform and are consistent over the period of time.
1.3.10. Conservatism Concept
The concept of conservatism (also called ‘prudence’) provides guidance for recording
transactions in the book of accounts and is based on the policy of playing safe. The
concept of conservatism requires that profits should not to be recorded until realized but
all losses, even those which may have a remote possibility, are to be provided for in the
books of account.
1.3.11. Materiality Concept

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The concept of materiality requires that accounting should focus on material

facts. Efforts should not be wasted in recording and presenting facts, which
are immaterial in the determination of income.
1.3.12. Objectivity Concept
The concept of objectivity requires that accounting transaction should be recorded in an
objective manner, free from the bias of accountants and others. This can be possible when
each of the transaction is supported by verifiable documents or vouchers.

Test Your Understanding - I

Choose the Correct Answer

1. During the life-time of an entity accounting produce financial statements in

accordance with which basic accounting concept:
(a) Conservation
(b) Matching
(c) Accounting period
(d) None of the above

2. A concept that a business enterprise will not be sold or liquidated in the

near future is known as:
(a) Going concern
(b) Economic entity
(c) Monetary unit
(d) None of the above

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Test Your Understanding - II

Fill in the correct word:
1. Recognition of expenses in the same period as associated revenues is called
_______________concept.
2. Revenue is generally recognized at the point of sale denotes the concept of _______________.
3. The _______________concept requires that the same accounting method should be used from
one accounting period to the next.
4. The_______________concept requires that accounting transaction should be free from the
bias of accountants and others.

1.4. Double Entry System of Accounting

Double entry system is based on the principle of “Dual Aspect” which states
that every transaction has two effects, viz. receiving of a benefit and giving of a
benefit. Each transaction, therefore, involves two or more accounts and is
recorded at different places in the ledger. The basic principle followed is that
every debit must have a corresponding credit. Thus, one account is debited and
the other is credited.

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RECORDING OF TRANSACTION

2.1. Accounting Equation

Accounting equation signifies that the assets of a business are always equal to the total
of its liabilities and capital (owner’s equity). The equation reads as follows:
A=L+C
Where,
A = Assets
L = Liabilities
C = Capital

2.2. Rules of Debit and Credit

An account is divided into two sides. The left side of an account is known as debit and the
credit. The rules of debit and credit depend on the nature of an account. Debit and Credit
both represent either increase or decrease, depending on the nature of an account. All
accounts are divided into five categories for the purposes of recording the
transactions:
(a) Asset
(b) Liability
(c) Capital
(d) Expenses/Losses
(e) Revenues/Gains

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2.3. Types of Account

There are 3 types of accounts
Real account − It relates assets and liabilities; it does not include people accounts. They
carry forward every year.
Personal account − Connects individuals, firms and associations accounts.
Nominal account − Relates all income, expenses, losses and gains accounts.

2.4. Journal
This is the basic book of original entry. In this book, transactions are recorded in the
chronological order, as and when they take place. Afterwards, transactions from this
book are posted to the respective accounts. Each transaction is separately recorded after
determining the particular account to be debited or credited.

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Illustration 1
Samir Mart furnishes the following information:
Transactions during the month of April, 2021 are as under:
Date Details
01.4.2021 Business started with cash Rs. 1,50,000.
01.4.2021 Goods purchased form Manisha Rs. 36,000.
01.4.2021 Stationery purchased for cash Rs. 2,200.
02.4.2021 Open a bank account with SBI for Rs. 35,000.
02.4.2021 Goods sold to Priya for Rs. 16,000.
03.4.2021 Received a cheque of Rs. 16,000 from Priya.
05.4.2021 Sold goods to Nidhi Rs. 14,000
08.4.2021 Nidhi pays Rs. 14,000 cash.
10.4.2021 Purchased goods for Rs. 20,000 on credit from Ritu.
14.4.2021 Insurance paid by cheque Rs. 6,000.
18.4.2021 Paid rent Rs. 2,000.
20.4.2021 Goods costing Rs. 1,500 given as charity.
24.4.2021 Purchased office furniture for Rs. 11,200.
29.4.2021 Cash withdrawn for household purposes Rs. 5000.
30.4.2021 Interest received cash Rs.1,200.
30.4.2021 Cash sales Rs.2,300.
30.4.2021 Commission paid Rs. 3,000 by cheque.
30.4.2021 Telephone bill paid by cheque Rs. 2,000.
30.4.2021 Payment of salaries in cash Rs. 12,000

Illustration 2
Prove that the accounting equation is satisfied in all the following transactions of Sita
Ram house by preparing the analysis table. Also record the transactions in Journal.
(i) Business commenced with a capital of Rs. 6,00,000.
(ii) Rs. 4,50,000 deposited in a bank account.
(iii) Rs. 2,30,000 Plant and Machinery Purchased by paying Rs. 30,000 cash immediately.
(iv) Purchased goods worth Rs. 40,000 for cash and Rs. 45,000 on account.
(v) Paid a cheque of Rs. 2, 00,000 to the supplier for Plant and Machinery.
(vi) Rs. 70,000 cash sales (of goods costing Rs. 50,000).
(vii) Withdrawn by the proprietor Rs. 35,000 cash for personal use.
(viii) Insurance paid by cheque of Rs. 2,500.
(ix) Salary of Rs. 5,500 outstanding.

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(x) Furniture of Rs. 30,000 purchased in cash.

2.5. The Ledger

The ledger is the principal book of accounting system. It contains different accounts
where transactions relating to that account are recorded. A ledger is the collection of all
the accounts, debited or credited, in the journal.

Illustration 3
Journalize the following transactions of M/s Mallika Fashion House and post the entries
to the Ledger:
June 05 Business started with cash 2,00,000
June 08 Opened a bank account with Syndicate Bank 80,000
June 12 Goods purchased on credit from M/s Gulmohar Fashion House 30,000
June 12 Purchase office machines, paid by cheque 20,000
June 18 Rent paid by cheque 5,000
June 20 Sale of goods on credit to M/s Mohit Bros 10,000
June 22 Cash sales 15,000
June 25 Cash paid to M/s Gulmohar Fashion House 30,000
June 28 Received a cheque from M/s Mohit Bros 10,000
June 30 Salary paid in cash 6,000

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Test Your Understanding - III 6. Cash withdrawn by the Proprietor

should be credited to:
Select Right Answer:
(i) Drawing account
1. Voucher is prepared for:
(ii) Capital account
(i) Cash received and paid
(iii) Profit and loss account
(ii) Cash/Credit sales
(iv) Cash account
(iii) Cash/Credit purchase
7. Find the correct statement:
(iv) All of the above
(i) Credit a decrease in assets
2. Voucher is prepared from:
(ii) Credit the increase in expenses
(i) Documentary evidence
(iii) Debit the increase in revenue
(ii) Journal entry
(iv) Credit the increase in capital
(iii) Ledger account
8. The book in which all accounts
(iv) All of the above
are maintained is known as:
3. How many sides does an account
(i) Cash Book
have?
(ii) Journal
(i) Two
(iii) Purchases Book
(ii) Three
(iv) Ledger
(iii) one
9. Recording of transaction in the
(iv) None of These
Journal is called:
4. A purchase of machine for cash
(i) Casting
should be debited to:
(ii) Posting
(i) Cash account
(iii) Journalizing
(ii) Machine account
(iv) Recording
(iii) Purchase account
(iv) None of these
5. Which of the following is correct?
(i) Liabilities = Assets + Capital
(ii) Assets = Liabilities – Capital
(iii) Capital = Assets – Liabilities
(iv) Capital = Assets + Liabilities.

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TRIAL BALANCE

3.1. Meaning of Trial Balance

A trial balance is a statement showing the balances, or total of debits and credits, of all
the accounts in the ledger with a view to verify the arithmetical accuracy of posting into
the ledger accounts. Trial balance is an important statement in the accounting process as
it shows the final position of all accounts and helps in preparing the final statements.

Test Your Understanding - IV

Indicate against each amount whether it is a debit or a credit balance, and prepare a trial
balance as at March 31, 2014 based on the following balances:
Account Title Amount (NRs.)
Capital 1,00,000
Drawings 16,000
Machinery 20,000
Sales 2,00,000
Purchases 2,10,000
Sales return 20,000
Purchase return 30,000
Wages 40,000

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Goodwill 60,000
Interest received 15,000
Discount allowed 6,000
Bank overdraft 22,000
Bank loan 90,000
Debtors:
Nathu 55,000
Roopa 20,000
Creditors:
Reena 35,000
Ganesh 25,000
Cash 54,000
Stock on April 01, 2013 16,000
3.2. Unadjusted Trial Balance
The unadjusted trial balance is the listing of general ledger account balances at the end
of a reporting period, before any adjusting entries are made to the balances to create
financial statements.

3.3. Adjusted trial balance

A trial balance prepared by incorporating adjustments is called adjusted trial balance.
The adjusted trial balance is a compiled worksheet of adjustments. A new account
balance is obtained in adjusted trial balance. The total of debit and credit of adjusted trial
balance should always remain equal.
Question for Practice
-Consider the following trial balance of ABC Company Limited for the year ended 31st
Ashadh, 2076
Particulars Debit (NRs.) Credit (NRs.)
Fixed Assets 71,000.00
Opening Stock 20,000.00
Purchases 70,000.00
Sales 90,000.00
Office Expenses 10,000.00
Salaries 15,000.00
Rent 8,000.00
Debtor 12,000.00
Provision for Bad Debt 1,000.00
Bills Payable 20,000.00
Internet Expense 5,000.00
Share Capital 100,000.00
Total 211,000.00 211,000.00

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Additional Information:
1) Depreciation on Fixed Assets @10%
2) Closing Stock Rs.30,000
3) Outstanding Office Expenses Rs.2,000
4) Provision for Bad Debt 5%
5) Prepaid Internet Expense Rs.1000
Required: Prepare Adjusted Trial Balance

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Bank Reconciliation Statement

The amount of balance shown in the passbook or the bank statement must tally with the
balance as shown in the cash book. But in practice, these are usually found to be different.
Hence, we have to first ascertain the causes of difference thereof and then reflect them in
a statement called Bank Reconciliation Statement to reconcile (tally) the two balances.
In order to prepare a bank reconciliation statement, we need to have a bank balance as
per the cash book and a bank statement as on a particular day along with details of both
the books. If the two balances differ, the entries in both the books are compared and the
items on account of which the difference has arisen are ascertained with the respective
amounts involved so that the bank reconciliation statement may be prepared.

Reasons for Difference:

• Cheques issued by the bank but not yet presented for payment
• Cheques paid into the bank but not yet collected

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• Direct debits made by the bank on behalf of the customer

• Amounts directly deposited in the bank account
• Interest and dividends collected by the bank
• Direct payments made by the bank on behalf of the customers
• Errors committed in recording transaction by the firm
• Errors committed in recording transactions by the bank

Illustration 4
From the following particulars of Mr. Vinod, prepare bank reconciliation statement as on
March 31, 2017.
1. Bank balance as per cash book Rs. 50,000.
2. Cheques issued but not presented for payment Rs. 6,000.
3. The bank had directly collected dividend of Rs. 8,000 and credited to bank account but
was not entered in the cash book.
4. Bank charges of Rs. 400 were not entered in the cash book.
5. A cheques for Rs. 6,000 was deposited but not collected by the bank.
Prepare Bank Reconciliation Statement.

Illustration 5
From the following particulars, prepare a bank reconciliation statement as on March 31,
2017.
(a) Debit balance as per cash book is Rs. 10,000.
(b) A cheque for Rs. 1,000 deposited but not recorded in the cash book.
(c) A cash deposit of Rs. 200 was not recorded in cash book.
(d) A cheque issued for Rs. 250 was recorded as Rs. 205 in the cash column.
(e) The debit balance of Rs. 1,500 as on the previous day was brought forward as a credit
balance.
(f) The payment side of the cash book was under cast by Rs. 100.
(g) A cheque of Rs. 500 received from a debtor was recorded in the cash book but not
deposited in the bank for collection.
(h) One outgoing cheque of Rs. 300 was recorded twice in the cash book.

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Prepare Bank Reconciliation Statement.

Illustration 6

Prepare Bank Reconciliation Statement.

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Rectification of Error

It is important for an accountant that the trial balance should tally. Normally a tallied trial
balance means that both the debit and the credit entries have been made correctly for
each transaction. However, as stated earlier, the agreement of trial balance is not an
absolute proof of accuracy of accounting records. A tallied trial balance only proves, to a
certain extent, that the posting to the ledger is arithmetically correct. But it does not
guarantee that the entry itself is correct. There can be errors, which affect the equality of
debits and credits, and there can be errors, which do not affect the equality of debits and
credits. Some common errors include the following:
• Error in totaling of the debit and credit balances in the trial balance.

• Error in totaling of subsidiary books.

• Error in posting of the total of subsidiary books.
• Error in showing account balances in wrong column of the trial balance, or in the wrong
amount.
• Omission in showing an account balance in the trial balance.
• Error in the calculation of a ledger account balance.
• Error while posting a journal entry: a journal entry may not have been posted properly
to the ledger, i.e., posting made either with wrong amount or on the wrong side of the
account or in the wrong account.
• Error in recording a transaction in the journal: making a reverse entry, i.e., account to
be debited is credited and amount to be credited is debited, or an entry with wrong
amount.
• Error in recording a transaction in subsidiary book with wrong name or wrong amount.

5.1. Classification of Error

Keeping in view the nature of errors, all the errors can be classified into the following
four categories:
• Errors of Commission
• Errors of Omission
• Errors of Principle
• Compensating Errors

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5.1.1. Errors of Commission

These are the errors which are committed due to wrong posting of transactions,
wrong totaling or wrong balancing of the accounts, wrong casting of the
subsidiary books, or wrong recording of amount in the books of original entry.
5.1.2. Errors of Omission
The errors of omission may be committed at the time of recording the transaction in the
books of original entry or while posting to the ledger. These can be of two types:
(i) error of complete omission
(ii) error of partial omission
When a transaction is completely omitted from recording in the books of original record,
it is an error of complete omission.
5.1.3. Errors of Principle
Accounting entries are recorded as per the generally accepted accounting
principles. If any of these principles are violated or ignored, errors resulting
from such violation are known as errors of principle. An error of principle may
occur due to incorrect classification of expenditure or receipt between capital
and revenue. This is very important because it will have an impact on financial
statements.
5.1.4. Compensating Errors
When two or more errors are committed in such a way that the net effect of these
errors on the debits and credits of accounts is nil, such errors are called
compensating errors. Such errors do not affect the tallying of the trial balance.
Practice Questions:
(a) Wages paid for installation of Machinery Rs.600 was posted to wages account.
(b) Repairs to Machinery Rs.400 debited to Machinery account.
(c) Furniture purchased for Rs.5,000 was posted to purchase account as Rs.500.
(d) Credit sales to Mohan Rs.7,000 were recorded as Rs.700.
(e) Cash received from Kohli Rs.2,000 was posted to Kapur’s account.
(f) Cash paid to Babu Rs.1,500 was posted to Sabu’s account.
(g) Credit sales to Mohan Rs.10,000 were not recorded in the sales book.
(h) Credit sales to Mohan Rs.10,000 were recorded as Rs.1,000 in the sales book.
(i) Credit sales to Mohan Rs.10,000 were recorded as Rs.12,000. This is an error of
commission.
(j) Cash sales Rs. 2,000 were posted as Rs.200.
(k) Sales book undercast by Rs.300.
(l) Purchase book undercast by Rs.400.
(m) Sales book overcast by Rs.700.
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(n) Credit Sales to Mohan Rs.7,000 were recorded in purchases book.

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Inventory Valuation

When it comes time for businesses to account for their inventory, businesses may use the
following three primary accounting methodologies:
• Weighted average cost accounting
• First in, first out (FIFO) accounting
First In, First Out (FIFO)
The first in, first out (FIFO) accounting method relies on a cost flow assumption that
removes costs from the inventory account when an item in someone’s inventory has been
purchased at varying costs, over time. When a business uses FIFO, the oldest cost of an
item in an inventory will be removed first when one of those items is sold.
Weighted Average
The weighted average method, which is mainly utilized to assign the average cost of
production to a given product, is most commonly employed when inventory items are so
intertwined that it becomes difficult to assign a specific cost to an individual unit.
Weighted Average Cost = Total cost of goods in inventory
number of items in inventory
Weighted Average vs. FIFO Example
Consider this example: Suppose you own a furniture store and you purchase 200 chairs for
$10 per unit. The next month, you buy another 300 chairs for $20 per unit. At the end of an
accounting period, let's assume you sold 100 total chairs. The weighted average costs, using
both FIFO and LIFO considerations are as follows:
200 chairs at Rs.10 per chair = Rs.2,000. 300 chairs at Rs.20 per chair = Rs.6,000
Total number of chairs = 500
Weighted Average Cost
Cost of a chair: Rs.8,000 divided by 500 = Rs.16/chair
Cost of Goods Sold: Rs.16 x 100 = Rs.1,600
Remaining Inventory: Rs.16 x 400 = Rs.6,400
First In, First Out Cost
Cost of goods sold: 100 chairs sold x Rs.10 = Rs.1,000
Remaining Inventory: (100 chairs x Rs.10) + (300 chairs x Rs.20) = Rs.7,000

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Illustration 7

Ashok Patel runs a Furniture Shop. One of the items stocked is the Sofa.
To show how the stores ledger records would appear under FIFO and AVCO, the following
data is used:
20-7
Jan 1 Opening inventory of 100 units at a cost of Rs.300 each
Jan 3 Bought 200 units at a cost of Rs.360 each
Jan 5 Sold 250 units for Rs.400 each
Jan 7 Bought 350 units at a cost of Rs.375 each
Jan 15 Sold 200 units for Rs.420 each
Prepare store ledger using FIFO and Weighted Average Method.

Illustration 8

Your friend, Mr. Ram, has recently set up in business selling plastic toys.
The transactions for his first month of trading are:
1 April Bought 500 toys at Rs.150 each
3 April Sold 250 toys at Rs.250 each
7 April Bought 1,000 toys at Rs.140 each
14 April Sold 600 toys at Rs.260 each
20 April Sold 300 toys at Rs.270 each
27 April Bought 1,050 toys at Rs.162 each
At the end of April, he asks you to help him to value his closing inventory.
He has heard that other firms in the toy trade value their inventory using either FIFO or
Weighted Average Method.
You are to:
(a) Calculate his closing inventory valuation using each of the two methods using Stock
Ledger.

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Financial Statement

It has been emphasized that various users have diverse informational requirements.
Instead of generating particular information useful for specific users, the business
prepares a set of financial statements, which in general satisfies the informational needs
of the users.
The basic objectives of preparing financial statements are:
(a) To present a true and fair view of the financial performance of the business;
(b) To present a true and fair view of the financial position of the business
For this purpose, the firm usually prepares the following financial statements:
1. Profit and Loss Account
2. Balance Sheet
3. Cash Flow Statement
4. Statement of Changes in Equity
5. Notes to Account

ABC Pvt. Ltd.

Kathmandu
Profit & Loss Account
for the period from Shrawan 01, 2075 to Ashadh 31, 2076

Amount ( NRs) Amount ( NRs)

Particulars Schedules
Current Year Previous Year
Sales
COGS
Gross Profit
Other Income
Administrative & Office Expenses
Financial Expenses
Depreciation
Profit/(loss) before Tax
Provision for Tax
Net Profit/(Loss) for the year

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ABC Pvt. Ltd.

Kathmandu
Balance Sheet
As at Ashadh 31, 2076
Amount (NRs) Amount (NRs)
Particulars Schedules
Current Year Previous Year
EQUITY AND LIABILITIES
Capital & Reserve Fund
Share Capital
Reserves & Surplus

Loan
Secured Loan
Unsecured Loan

Current Liabilities & Provisions:

Short Term Loan
Current Liabilities & Other Payables

TOTAL -
ASSETS
Fixed Assets
Net Fixed Assets

Investment

Current Assets, Loans & Advances

Loan, Advances & Other Receivables
Cash & Bank Balance

TOTAL

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ABC Pvt. Ltd.

Kathmandu
Cash Flow Statement
for the period from Shrawan 01, 2075 to Ashadh 31, 2076

Amount (NRs) Amount (NRs)

Particulars
Current Year Previous Year
(A) Cash flow from operating activities
Net Profit / (Net Loss)
Adjustment for:
Depreciation
Interest expenses
Provision for income tax
Net cash flow from operating activities before working
capital movement
Increase/Decrease in Current Assets/Liabilities
(Increase)/Decrease in Closing Stock
(Increase)/Decrease in Receivables
(Increase)/Decrease in Deposits, Loans & Advances
Increase /(Decrease) in Current Liabilities
Net flow from change in Current Assets/Liabilities
Net cash flow from operating activities

(B) Cash flow from investing activities

Fixed Assets purchased
Increase in Investment
Increase/(Decrease) in Pre-Operating Expenditure
Net cash flow from investing activities

(C) Cash flow from financing activities

Increase in Paid-up Capital
Decrease in secured loan
Increase/ (Decrease) Unsecured Loan
Interest paid
Net cash flow from financing activities
NET CASH FLOW DURING THE YEAR (A+B+C)
Opening Cash & Bank Balance
Closing Cash & Bank Balance

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ABC Pvt. Ltd.

Kathmandu
Statement of Changes in Equity
for the period from Shrawan 01, 2075 to Ashadh 31, 2076
(NRs)
Share Translation Revaluation Other
Particulars Share Capital Retained Earnings Total
Premium Reserve Reserve Reserves
Balance at July 16, 2016
Net profit/(loss) for the period
Dividend
Issue of share capital
Balance at July 15, 2017

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ABC Pvt. Ltd.

SCHEDULE FORMING PART OF BALANCE SHEET
AS AT ASHADH 31, 2074 ( JULY 15, 2017)

Schedule-1: Share Capital

Current Year Previous Year
Particulars
Amount(NRs) Amount (NRs)
AUTHORISED

ISSUED

SUBSCRIBED & PAID UP

Total

Schedule-2: Unsecured Loan

Current Year Previous Year
Particulars
Amount(NRs) Amount (NRs)

Total - -

Schedule-3: Current Liabilities & Other Payables

Current Year Previous Year
Particulars
Amount(NRs) Amount (NRs)
Rent Payable
Audit Fee Payable
Salary Payable
TDS Payable on Audit Fees
TDS Payable on Rent
Total

Schedule-5: Loan ,Advances & Other Receivables

Current Year Previous Year
Particulars
Amount(NRs) Amount (NRs)
Hari Bhakta Sigdel
Advance Tax
VAT Receivable
Total - -

Schedule-6: Cash & Bank Balance

Current Year Previous Year
Particulars
Amount(NRs) Amount (NRs)
Cash Balance
Total

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ABC Pvt. Ltd.

SCHEDULE FORMING PART OF PROFIT & LOSS ACCOUNT
For the period from Shrawan 01, 2075 to Ashadh 31, 2076

Schedule-7: Administrative Expenses

Current Year Previous Year
Particulars
Amount(NRs) Amount (NRs)
Audit Fees
Office Rent
Fine & Penalty
VAT Expenses w/o
Total

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SIGNIFICANT ACCOUNTING POLICIES & NOTES TO ACCOUNTS

A. SIGNIFICANT ACCOUNTING POLICIES

1. CORPORATE INFORMATION
ABC Pvt. Ltd. is a company domiciled in Nepal registered as per the Company Act 2063 of
Nepal as Private Company. The registered office of the company is in Kalanki, Kathmandu. It
was established in Baishakh 26, 2062. Registration Number of the company is ******, PAN
Number of the company is *******.
2. PRINCIPAL ACTIVITIES AND OPERATIONS
ABC Pvt. Ltd. is a private company established with the main objectives of construction of
residential complex, apartment, buildings, hospital, nursing home and education and training
institution and doing all the work related to same.
3. RESPONSIBILITY FOR FINANCIAL STATEMENTS
The company management is responsible for the preparation of financial statements. These
financial statements include following components:
a) Balance Sheet disclosing the information on financial position of ABC Pvt. Ltd. as on July
15, 2017;
b) Income Statement disclosing the financial performance of ABC Pvt. Ltd. for the year ended
on July 15, 2017;
c) Statement of Changes in Equity showing all changes in equity of ABC Pvt. Ltd. during the
year ended on July 15, 2017;
d) Cash Flow Statement disclosing the cash flows of ABC Pvt. Ltd. during the year ended on
July 15, 2017; and
e) Notes to the Financial Statements comprising a summary of principal accounting policies
and other relevant explanatory notes.

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1. STATEMENT OF COMPLIANCE
The Financial Statements that comprise of components mentioned above have been
prepared in accordance with Nepal Accounting Standards (“NAS”) pronounced by the
Institute of Chartered Accountants of Nepal and its disclosure requirement and in compliance
with Company Act, 2063 unless otherwise stated.
2. ACCOUNTING CONVENTION FOR PREPARATION OF FINANCIAL STATEMENTS
The financial statements have been prepared under historical cost convention. The company
follows the mercantile system of accounting and recognizes income and expenditure on
accrual basis except in case of significant uncertainties relating to Income. Expenses are
recognized when it is probable that asset shall be decreased or liability shall be increased and
cost of transaction can be measured reliably.

3. FIXED ASSETS & DEPRECIATION:

Fixed assets are stated at cost less accumulated depreciation and impairment of losses, if any.
Cost comprises of the purchase price and any attributable costs of bringing the assets to its
working condition for its intended use. The depreciation on assets has been calculated on
diminishing balance value (WDV) method by applying rate prescribed under Schedule 2 of the
Income Tax Act, 2058 .Further, Intangible asset comprising of License fee shall be amortized
from the commercial generation of electricity.
Particulars Block Rate (%)
Furniture and Fixture B 25

4. INCOME TAX & DEFERRED TAXATION

The liability of company on account of income tax is estimated considering the provisions of
the Income Tax Act, 2058. Deferred tax is recognized, subject to the consideration of
prudence, on deductible temporary differences being the difference between taxable income
and accounting income that originate in one year and capable of reversal in one or more
subsequent years. No deferred tax has been recognized since there is no timing difference.

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1. CASH & CASH EQUIVALENTS

Cash & Cash equivalents for the purpose of Cash Flow Statement comprise of cash in hand
and balance with banks
2. RELATED PARTY DISCLOSURE
Key Management Personnel
Key Management Personnel of the company includes members of the Board, Chief Executive
Officer and all managerial level executives. The related parties are as follows:

1. Mr. A
2. Mr. B

Related party transactions:

Related Party’s Name Nature of Relation Amount(NRs.)
transaction

3. PREVIOUS YEAR FIGURES

Previous year figures have been regrouped and rearranged, wherever necessary.

4. Figure has been rounded off to the nearest Rupees.

5. The financial statements are prepared in Nepalese Rupees, which is the company’s
functional currency.

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Illustration 9
The following is the trial balance of Kumar & Bros Co. Ltd. The Company has an authorized
capital of Rs.10,00,000 divided into 10,000 shares of Rs.100.
Particulars Debit (Dr) Credit (Cr)
Opening Stock 65,000.00
Purchase 450,000.00
Sales 750,000.00
Carriage Outward 6,000.00
Equity Share 200,000.00
10% Preference Share 150,000.00
Debtors 60,300.00
Creditors 80,500.00
Land and Building 350,000.00
Salary 62,000.00
Telephone Expenses 6,200.00
Office Expenses 3,100.00
Bad Debts 5,000.00
Commission Received 500.00
10% Bank Loan 80,000.00
Provision for doubtful debts 10,000.00
Rent 2,200.00
Rent Income 500.00
General Reserve 15,000.00
Retained Earning 25,000.00
Other Income 1,300.00
Interest on Bank Loan 5,000.00
Internet Expenses 35,000.00
Audit Fee 15,000.00
Bills Receivable 22,000.00
Bills Payable 18,000.00
Cash in Hand 23,000.00
Investment 200,000.00
Furniture 21,000.00
Total 1,330,800.00 1,330,800.00

Additional Information:
i. Closing Stock is valued at Rs.125,000
ii. Bad debt is to be written off Rs.5,300 and make provision for discount on debtor
5%.
iii. Rent includes Rs.200 received for next year and Rs.200 paid for next year.

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iv. Salary is to be paid Rs.5,000 per month

v. Depreciate furniture by 10%
vi. Outstanding audit fee Rs.5000
Opening Balance Sheet
Particular Schedule Amount
Equities and Liabilities
Equity
Share Capital A 350,000.00
Reserve and Surplus B 40,000.00

Non-Current Liabilities
Loan 200,000.00
Current Liabilities
Creditors 90,000.00
Provision C 25,000.00
Other Liabilities D 15,000.00

Total 720,000.00

Assets
Non-Current Assets
Land and Building 300,000.00
Furniture 21,000.00

Investment 200,000.00

Current Assets
Cash in Hand 67,000.00
Closing Stock 65,000.00
Debtor E 55,000.00
Other Assets F 12,000.00
Total 720,000.00

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