aakar account 10 final_080

151 Approved by CDC, Nepal Final Accounts Balance Sheet 9. Introduction Final Accounts have two basic objectives viz. (a) ascertainment of profit or loss, and (b) measurement of the true financial position of a business concern, at a given date. The first objective is fulfilled by preparing trading A/c and profit and loss A/c and the second, by preparing the balance sheet. The determinants of the profit or loss of a business concern are its incomes, gains and expenses and losses of revenue nature, which are entered either in trading A/c or in profit and loss A/c. Similarly, the determinants of the financial position of a concern are the owners’ capital, liabilities and assets. A balance sheet is a statement of assets, capital and liabilities of a business enterprise at a given date. It depicts the true financial position of a concern at the close of each accounting year. Thus, a balance sheet may be defined as a statement of assets, capital and liabilities of a concern, prepared at a particular given date in order to measure the true financial position of the concern on that date. A balance sheet is prepared in the form of statement by mentioning all capital and liabilities on one side and all the assets on the other. Thus, it does not have debit and credit sides like other books of accounts but instead it has two sides; left hand side and right hand side. Capital and liabilities are mentioned in the left hand side and assets, in the right hand side. The totals of left-hand side and right-hand side should be equal if the accounting information is numerically accurate. That means ‘Capital + Liabilities =Assets’ is the fundamental of balance sheet. Every business transaction is entered in the original entry and concluded in the balance sheet. A balance sheet is prepared at the last step after preparing trading A/c and profit and loss A/c and then it is the final step of final accounts. According to Palmer, “Balance sheet is a statement at a particular date showing on one side the trader’s property and on the other side, the liabilities.” According to O.P. Gupta, “Balance sheet is a mirror, which reflects the true position of assets and liabilities of a business on a particular date.” From the above definition, it may be concluded that balance sheet is a statement which is prepared to know about the financial position of an organization at the end of accounting period. It is not an account rather a financial statement. It presents the liabilities and the assets either in order of performance or in order of liquidity. Key Point A balance sheet is a statement of assets, capital and liabilities prepared at the last step of final account to ascertain the financial position of the concerned. 10. Objectives of Balance Sheet There are many objectives of a balance sheet. The important objectives are mentioned below: i. To measure the true financial position of a firm by presenting the true value of assets, capital and liabilities at a certain given date.

152 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal ii. To see the details of the structure of capital i.e. the equity capital, preference capital and loan capital and assets so that, necessary improvements, to make an optimal structure, can be made. iii. To satisfy the legal obligation. It is legally a must for the joint stock companies to prepare a balance sheet and other financial statements and should get them audited in time at the close of each accounting year. It can also be produced as a proof when disputes take place regarding its items i.e. capital, liabilities and assets. iv. To measure the short term liquidity of a firm by comparing the current assets and current liabilities. Similarly, to see the long term solvency of a firm. v. To make an easy valuation of a firm when it is sold or liquidated. A balance sheet provides a base for such a valuation. vi. To support for planning, policy making, decision making, etc. by supplying reliable information. vii. To provide interpretation of various ratios and comparative study. viii. To serve as an evidence for settling disputes. ix. To help to evaluate the strengths and weaknesses of the business. x. To know the amount of trade debtors and creditors. 11. Importance/Advantages of Balance Sheet A balance sheet is a very important financial document of a business concern. The importance of a balance sheet may be studied in term of the following advantages: i. It depicts the true financial position of a business firm by presenting true value of assets, capital and liabilities at a certain period. ii. It shows the structure of assets, capital and liabilities. Thus, necessary ratios, for short term liquidity and long term solvency can be calculated and efforts can be made for improvement, if required. iii. It satisfies the legal formalities in the case of joint stock companies and can also be produced as a proof when required. iv. It gives knowledge about the debtors and creditors and thus efforts can be made for timely collection from the debtors and making payment to the creditors. It increases reliability and confidence. v. It helps in the valuation of a firm or company, specially at the time of selling or liquidation. vi. It also gives knowledge about the profit/loss of the entire organization as the profit/ loss is transferred to capital A/c in the balance sheet. vii. It helps for settling disputes. Since, it provides the real information about the financial position of a firm, it creates confidence to the creditors (loan creditors) and banks, and thus, becomes easy for obtaining loan and other credit facility. 12. Terms that Appear in Assets Side in Balance Sheet (Assets and Their Classification) Assets are those physical or non-physical i.e. tangible or intangible properties, which are acquired by a business firm at a measurable monetary value. Assets are acquired to increase the efficiency of a firm. There may be various types of assets. They are:

153 Approved by CDC, Nepal Final Accounts i. Fixed/Permanent or Long Term Assets The assets, which have more than one year’s life and used in the business permanently up to their economic life are known as fixed or permanent assets. The following are the examples of this sort of assets: Land and building Plant and machinery Furniture and fitting Motor vehicles Business premises Factory shed Lease holds Tools and equipments Livestock Carts and horses Lorries ii. Intangible Assets The assets, which do not have physical existence but are purchased by a firm at a monetary price for using special rights or reputations of others, are intangible assets. These are taken as assets in legal grounds. The examples of such assets are: Goodwill Patent right Copyright Trade marks iii. Fictitious Assets The assets, which do not have real existence but taken as assets in technical grounds are known as fictitious assets. The large amount of expenditure on some revenue headings for more than one year’s period and the capital losses are the examples of fictitious assets. Generally, deferred revenue expenditures like advertisement, development expenses preliminary expenses, research and development expenses survey expenses, etc. are fictitious assets. A certain portion of such an expenditure is charged in profit and loss A/c of the current year and the remaining balance is regarded as asset at that date and this process goes onward until it is totally charged in the profit and loss A/c. Besides, capital losses like discount on issue of shares, discount on issue of debentures, etc. are also, treated as fictitious assets. iv. Investment Assets Investment assets refer to the investment in other companies by purchasing their shares or debentures and also loan given to others on condition of getting dividend or interest there from. v. Current Assets/ Floating Assets Current assets, also, termed as circulating assets, are those assets, which are either in hard cash form or supposed to be converted into cash within an accounting year, are known as current assets. These are not of permanent nature. Such assets are frequently changed from one form to another in course of business dealing. The examples of such assets are: Cash Bank Debtors Trade debtors Stock Bills receivables (B/R) Notes receivables (N/R) Accrued income Pre-paid expenses Accounts receivable (A/R) Marketable securities Stores and spare parts Loose tools

154 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal 13. Terms that Appear in Capital and Liabilities Side of Balance Sheet (Liabilities and Their Classification) Liabilities are the claims of the outsiders against the firm, which are payable by the firm during a short term or long term period. In other words, liabilities are the debts owed by the firm to the outsiders during a specified time period or to the proprietor at the time of liquidation. There are various types of liabilities, which maybe categorised as below: i. Capital/ Permanent Liability It is the investment of the owner or owners in the business in the form of cash or kind. This is also, termed as permanent liability in the sense that it is the owners’ claim against the firm and which is repayable only at the time of liquidation or otherwise at retirement of a co-owner. The headings that fall under this category are: Capital Share premium Retained earning Net profit Reserve fund ii. Long Term Debts All the liabilities, which are repayable after a series of years. i.e. after more than a year are termed as long term liabilities. The maturity period of this sort of liabilities is more than one year. These are also, termed as long term debts. Since such debts are borrowed for a long time to invest in the business, these are also, termed as borrowed capital. The following are the examples of long term liabilities: Loan Secured loan Unsecured loan Long term loan Mortgages Debentures Bonds Borrowed capital, etc. iii. Short Term/Current Liabilities All the liabilities or obligations, which are payable during a short period of time, usually within one year’s period are known as short term or current liabilities. The examples are: Bank overdrafts S/creditors Trade creditors Bills payables Accounts payables Outstanding expenses Advance income (receipt), etc. iv. Provisional Liabilities There are some liabilities, which are not certain to occur in the future but some sorts of incidents may create such liabilities. Therefore, some provisions are made to discharge such liabilities in the future. Provisions for bad debts, provision for tax, provisions for depreciation, etc. are some examples of provisional liabilities. 14. Important Terms used in a Balance Sheet i. Drawing Drawing is the withdrawal of the owner or owners out of their capital from the business in the form of cash or any kinds of assets. It is either deducted from capital in the balance sheet or mentioned in the assets side.

155 Approved by CDC, Nepal Final Accounts ii. Bank Overdraft It is a kind of facility provided by the banks to their clients to withdraw money from the banks in excess than their deposit against some security deposit or as the faith and confidence. This facility is not allowed to every client but only to some prestigious and regular clients for a short period (mostly of 90 days term) Since, it is to be repaid to the bank within the specified period, it is regarded as a current or short-term liability for the firm. iii. Reserve Fund Future is uncertain; thus, any contingent event may take place in the future. In order to cover up the financial loss in the future caused by the uncertain incidents, a fund is created from out of profit each year. Such a fund is known as reserve fund. If it is created for general purpose, it is called general reserve. But if it is created for a particular purpose, it is known as specific fund. A specific fund cannot be used in other situation rather than for the specific incident. Since reserves are created from profit, it is associated with capital. iv. Bills Receivables and Payable The person or firm, who is entitled to receive money, draws a bill and gets it accepted from the person who is liable to pay the bill. As such, a bill is created between two parties and the same bill is bills receivables (B/R) to the former and bills payables (B/P) to the latter. Thus, from the drawer’s point of view, it is bills receivable, an asset to him and from the acceptor’s point of view, it is bills payable, a liability to him. 14. Specimen and Preparation of Balance Sheet Balance Sheet of .................. Co. As on ............... Capital & Liabilities Amount Assets Amount Capital .......... Add: Interest on Capital .......... Add: Net profit .......... (Less Net loss) .......... (Less: Drawing) .......... Development fund Pension fund Sinking fund Reserve fund General reserve Specific reserve Mortgage loan Retained earning Loan Secured loan Unsecured loan Debenture Bond Long term loan .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... Fixtures and Fittings Freehold Land Land and Building Plant and Machinery Furniture and Fitting Motor Vehicles Business/ Office Premises Factory shed Lease holds Livestock Tools and equipments Cart and horses Lorries Railway sidings Goodwill Patents right Copyright Trade mark Investment .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... ..........

156 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal Bank overdraft Sundry creditors Bills payables Notes payables Outstanding expenses/rent/wages/etc. Advance income Loan and advances from .... Accrued expenses Accumulated depreciation Commission due Customers’ deposits Interest due Interest payable Suppliers Trade creditors Unexpired incomes Provision for depreciation Provision for tax Other provisions .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... Investment in securities Investment in shares/bonds Investment in debentures Preliminary expenses Research & development expenses Survey expenses Advertisement Loan and advance to (staff/...........) Development expenses Cash in hand Bank/Bank deposit Debtors Stock (closing stock) Bills receivables Notes receivables Marketable securities Loose tools Accrued income/receivable Prepaid expenses Spare parts Advance payment / expenses Book debts Customers Outstanding incomes Petty cash in hand Store supplies Trade debtors Unexpired expenses .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... Total: .......... Total: .......... Note: Finally, total amount of capital and liabilities should be equal to total amount of assets. Illustration - 6 From the following information, prepare a Balance Sheet of ABC Co., Kathmandu as on 30th Chaitra, 2078: Particulars Amount Particulars Amount Machinery Building Debtors Creditors Closing stock Bills payable Vehicles Cash at bank 2,000 2,400 7,800 5,015 1,700 900 1,035 755 Furniture Goodwill Loan from bank Capital Net profit Bills receivables Reserve Cash in hand 955 3,100 1,000 8,500 4,285 1,245 1,300 10

157 Approved by CDC, Nepal Final Accounts Solution: Balance Sheet of ABC Co., Kathmandu As on 30th Chaitra, 2078 Capital and Liabilities Amount Assets Amount Capital 8,500 Add: Net profit 4,285 Reserve Loan from bank Creditors Bills payables 12,785 1,300 1,000 5,015 900 Goodwill Machinery Furniture Building Vehicles Debtors Closing stock Bills receivables Cash at bank Cash in hand 3,100 2,000 955 2,400 1,035 7,800 1,700 1,245 755 10 Total: 21,000 Total: 21,000 15. Similarities between Trial Balance and Balance Sheet Trial Balance and Balance Sheet have some similarities, even though these two headings are different. These are mentioned below: i. Both the trial balance and balance sheet are statements and not accounts. ii. Both of them are prepared on the basis of the balances of ledger headings. They record only the accounts, which have got a balance to each. iii. Both of them help in checking the arithmetic accuracy by showing the agreement in totals. Again, when there’s a difference in trial balance, the same difference takes place in the balance sheet. But remember that the totals of trial balance and balance sheet do not equal. iv. There’s no use of the words ‘To’ and ‘By’ in both the statements. v. Both statements are prepared on a particular date. 16. Differences between Trial Balance and Balance Sheet Trial balance and balance sheet are exactly different headings in spite of their minor similarities. The main differences between them are mentioned below: Trial Balance Balance Sheet i. Meaning A trial balance is a statement of all the ledger balances of a certain point of time to see the arithmetical accuracy of the books of account of a firm. A balance sheet is a statement of only the assets capital and liabilities on a certain date to see the financial position of a firm. ii. Time interval A trial balance may be prepared periodically, specially at the end of each month. A balance sheet is prepared at the close of each accounting year.

158 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal iii. Disclosing profit /loss A trial balance does not show the profit or loss, even though it contains all the relevant information like expenses and losses and incomes and gains. A balance sheet shows the net profit or loss during a certain period as it is transferred from the profit and loss account to capital A/c. iv. Stock A trial balance contains opening stock but generally does not include closing stock in it. A balance sheet does not contain the opening stock but includes the closing stock as asset. v. Format A trial balance has debit and credit sides in which assets expenses and losses are mentioned on debit side, and capital, liabilities incomes and gains are mentioned on the credit side. A balance sheet does not have debit and credit sides but it has left hand side and right hand side in which capital and liabilities are mentioned in the left hand side, and assets are mentioned in the right hand side. vi. Legal obligation It is not legally obliged to prepare a trial balance. It is prepared only for the confidence about the arithmetic accuracy of the ledger postings and to facilitate the preparation of final accounts. It is legally a must, specially in the case of joint stock companies as it is one of the components of the financial statement of a company. vii. Proof A trial balance is not accepted by courts as a documentary evidence in settling disputes and thus, can not be produced as a proof. A balance sheet is accepted by courts as a documentary evidence in settling disputes regarding its assets, capital and liabilities and thus, it can be produced as a proof. viii. Time A trial balance is prepared before final account. A balance sheet is prepared at the last step of final account. 18. Final Account with Adjustments or Additional Information Those transactions, which are related with the current accounting year but not included in the trial balance are called adjustments. These transactions are not included in the trial balance because they have not yet been recorded in the books of account. Besides, the transactions, which have been recorded in the books of account but are not related with the current accounting period, are also called adjustments. All the transactions of the current accounting year should be included in the final accounts whether they are cleared or not. Similarly, the transactions related with the previous or coming accounting year should be excluded from the final accounts of the current accounting year. Thus, there should be an appropriate accounting treatment of the adjustments. Note: All the adjustments are shown twice in the final accounts to complete the double entry principle because they are not entered in the books of account earlier.

159 Approved by CDC, Nepal Final Accounts Some of the Common Adjustments i. Closing Stock It is the unused materials or unsold goods remained at the close of an accounting year. It is determined after the books of accounts are closed and thus, it appears outside the trial balance. According to the double entry principle, it is shown in two places, on credit side of trading A/c and then in the assets side of balance sheet. i. If closing stock is given in T/B Assets side of balance sheet only. ii. If closing stock is given in adjustment i. Cr. side in trading account ii. Assets side of balance sheet ii. Outstanding/Accrued/Payable/Unpaid/Due Expenses Some expenses of business become due during the current accounting period but remained unpaid. Such expenses are known as outstanding expenses, expenses due but not paid or accrued expenses. These expenses are generally paid in the coming accounting period. Such expenses are once debited in trading or profit and loss A/c by adding to the concerned expense heading and then in the liabilities side of the balance sheet as a short term liability. For example, if salary is unpaid to the extent of Rs. 1000 and the salary given in the trial balance is 6000; then the entry is : Salary A/c Dr. 1000 To O/c Salary A/c 1000 Profit and Loss A/c Particulars Amount Particulars Amount To Salary 6,000 Add: Outstanding +1.000 7,000 Balance Sheet Liability Amount Assets Amount Outstanding salary 1,000 If due expenses are given in T/B Liabilities side of balance sheet only If due expenses are given in adjustments i. Liabilities side in B/S ii. Dr. Side in Trading or Profit and Loss account add on respective head iii. Prepaid Expenses or Unexpired Expenses Sometimes, the expenses related with the coming accounting period may be paid during the current accounting year. It takes place when an excess amount is paid on

160 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal any head of expense. Mostly, it happens because of the difference in the fiscal year. The expense in extent to the pre-paid amount should be deducted from the concerned head in trading or profit and loss A/c and shown the same in the assets side of the balance sheet. If T/B Assets side of B/S If in adjustments i. Assets side of B/S ii. Dr. side of T/P/L account less from respective expenses iv. Accrued Income Accrued income refers to the income, which is related with the current accounting year but not yet received. It is also, termed as outstanding income or income earned but not received or income receivables, etc. It should be credited in profit and loss A/c and shown in the assets side of balance sheet. If T/B Assets side of B/S If in adjustments i. Assets side of B/S ii. Cr. side of P & L a/c and on related income head v. Unearned Income/Advance income When an income of the coming accounting year is received during the current accounting year, it is known as unearned income. It should be deducted from the concerned income head in the credit side of profit and loss A/c and should be shown in liabilities side of the balance sheet. If a advance income is given in T/B Liability side of B/S If advance income is given in adjustment i. Liability side of B/S only ii. Cr. side of profit and loss account, less from related income head vi. Depreciation Depreciation is a gradual loss or reduction in the value of a fixed asset due to its constant use, wear and tear, obsolescence, etc. It is an expense but of non-cash nature. It is charged in the profit and loss A/c on debit side in each year and the same is deducted from the concerned asset in the balance sheet. If in T/B Profit and loss account Dr. side If in adjustment i. Dr. Side of P and L account ii. Assets side of B/S less from respective assets

161 Approved by CDC, Nepal Final Accounts vii. Bad Debt (Loss) Bad debt is an irrecoverable debt from the customers or from a customer during the period of an accounting year. It results in the reduction of the customers’ debit balance and addition to the loss. Thus, it is once charged on debit side of profit and loss A/c as a loss and then deducted from the debtors in the balance sheet. If bad debts in T/B Dr. Side of profit and loss A/c only. If bad debt in adjustment i. Dr. Side of profit and loss A/c. ii. Assets side of B/S, less from debtor. viii. Provision for Bad and Doubtful Debts At the end of an accounting year, after writing off the bad debt about whom it is declared irrecoverable, there may still be some customer balances from whom it is doubtful to collect the total amount. However, it can’t be written off as bad debt because non recovery of such amount is not certain. Thus, a provision or reserve to such loss is created to cover any possible loss likely to occur in the near future. Such a provision is known as the provision for bad and doubtful debts. Such a provision is created at a fixed percentage on the customers or debtors each year. It is debited in the profit and loss A/c as a provisional expenditure and deducted from the debtors in the balance sheet. If a reserve is also created at 5% in addition to the bad debt of 10% on debtors, it is shown as: Dr. P & L A/c Cr. Particulars Amount Particulars Amount To Salary 2,000 Add: Outstanding +900 2,900 Balance Sheet Particulars Amount Particulars Amount Debtors 20,000 Less: New bad debts 2000 18,000 Less: New reserve 900 17,100 Note: The bad debt and provisions/reserve for bad or doubtful debt in the trial balance are old ones, and the ones given in the adjustments are new. When only old bad debt and provisions for bad debts are given, then it is better to debit the bad debt and credit the provision for bad debt in the profit and loss A/c. But when old and new information is given, then the old bad debt, new bad debt and the new provisions are totaled in the debit side of P & L A/c in inner column and the old provision is deducted and the net value should be shown in the outer column. In the above example, debtors, 20,000, bad debt 1,000, provision for bad debt 1500 are given in the trial balance and adjustment is given as declare further bad debt at 10% and provision for doubtful debt at 5 % on debtors, the accounting treatment is:

162 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal Dr. P & L A/c Cr. Particulars Amount Particulars Amount To Old bad debt 1,000 Add: New bad debt 2,000 Add: New provision 900 3,900 Less : Old provision 1.500 2,400 Balance Sheet Capital/Liabilities Amount Assets Amount Debtors 20,000 Less: New b/d 2.000 18,000 Less: New provision 900 17,100 Effects of Adjustments S.N. Transactions Effect on final accounts Treatment in final accounts 1. Closing stock Trading account Balance sheet Credit Assets 2. Outstanding expenses Trading or P/L account Balance sheet Debit (Add to the concerned item) Liabilities 3. Prepaid expenses Trading or P/L account Balance sheet Debit (Deduct from concerned item) Assets 4. Accrued incomes P/L account Balance sheet Credit (Add to the concerned item) Assets 5. Advance incomes P/L account Balance sheet Credit (Deduct from concerned item) Liabilities 6. Depreciation P/L account Balance sheet Debit Assets 7. Bad debts/Provision for bad debts P/L account Balance sheet Debit Assets (Deduct from debtors) 8. Interest on capital P/L account Balance sheet Debit Liabilities (Add to the capital) 9. Interest on loan P/L account Balance sheet Debit Liabilities

163 Approved by CDC, Nepal Final Accounts Illustration - 7 From the following Trial Balance, prepare Trading A/c, Profit and Loss A/c and Balance Sheet as on 30th Chaitra, 2078 of ABC Co. Palpa. Trial Balance of ABC Co., Palpa As on 30-12-2078 Particulars Dr. Balance (Rs) Cr. Balance (Rs) Capital Purchase Discount Salaries Wages Sales Carriage inward Rent, rates and taxes Plant and machinery Stock on 1-1-2078 S/debtors S/creditors Return inward Cash in hand Cash at bank Commission - 7,200 100 1,740 460 - 55 240 3,065 3,100 4,040 - 220 20 2,020 140 8,000 - - - - 12,000 - - - - - 2,400 - - - - 22,400 22,400 Stock on 30-12-2078 was Rs. 4,035. Solution: Trading A/c and Profit and Loss A/c of ABC Co. Palpa Dr. For the year ended 2078-12-30 Cr. Particulars Amount Particulars Amount To Opening stock To Purchase To Wages To Carriage inward To Gross profit c/d To Discount To Salaries To Rent, rates & taxes To Commission To Net profit c/d 3,100 7,200 460 55 5,000 15,815 100 1,740 240 140 2,780 By sales 12,000 Less: Returns 220 By Closing stock By Gross profit b/d 11,780 4,035 15,815 5,000 5,000 5,000

164 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal Balance Sheet As on 30-12-2078 Capital & Liabilities Amount Assets Amount Capital 8,000 Add: Net profit 2 780 S/creditors 10,780 2,400 13,180 Cash in hand Cash at bank Plant and machinery S/debtors Closing stock 20 2,020 3,065 4,040 4,035 13,180 Illustration - 8 From the following Trail Balance of Harihar & Sons, prepare Trading and Profit and Loss A/c for the year ended 32nd Ashadh, 2079 and Balance Sheet as on that date: Debit Balance Amount Credit Balance Amount Drawing Plant and machinery Fixtures and fittings Loose tools Cash at bank Cash in hand Stock (1-4-2078) Purchase Sales returns Wages Carriage inward Salaries Office & general expenses Rent and taxes Postage and telegrams Packing and distribution Sundry debtors 100 5,000 600 1,000 1,000 200 600 11,000 400 4,000 1,600 2,080 3,500 720 300 400 2,400 Capital Sales Purchase returns Discount received S/ creditors Provision for bad debts 8,800 23,400 200 300 2,100 100 Total 34,900 Total 34,900 The following adjustment should be taken into account. a. Stock on 32-3-2079 was valued at Rs. 1,540 b. Depreciate plant and machinery at 10% and furniture and fitting at 5%

165 Approved by CDC, Nepal Final Accounts Trading and Profit and Loss A/c of Harihar & Sons Dr. For the year ended 32-3-2079 Cr. Particulars Amount Particulars Amount To Opening stock 600 By Sales 23400 To Purchase 11,000 Less: Returns 400 Less: return 200 23,000 10,800 By Closing stock 1,540 To Wages 4,000 To Carriage inward 1,600 To Gross profit c/d 7,540 24,540 24,540 To Salaries 2,080 By Gross profit b/d 7,540 To Office & general expenses 3,500 By Discount received 300 To Rent & taxes 720 To Postage & telegram 300 To Packing & distribution 400 To Depreciation on : Plant & machinery 500 Fixtures fittings 30 530 To Net profit c/d 310 7,840 7,840 Balance Sheet of Harihar & Sons As on 32-3-2079 Capital and Liabilities Amount Assets Amount Capital 8,800 Add: Net profit 310 9,110 Less: Drawings 100 S/creditors Provision for bad debt 9,010 2,100 100 Cash in hand Cash at bank Plant machinery 5000 Less: Depreciation 500 Fixtures & fittings 600 Less: Depreciation 30 Loose tools S/debtors Closing stock 200 1,000 4,500 570 1,000 2,400 1,540 11,210 11,210

166 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal Illustration - 9 From the following Trial Balance of Ramesh & Bros., prepare Trading A/c, Profit & Loss A/c for the year ending 30th Chaitra, 2078 and Balance Sheet as on that date: Debit Balance Amount Credit Balance Amount Opening stock Purchase Sales returns Debtors Building Machinery Furniture Bills receivables Salaries Tax Insurance Carriage on purchase Trade expenses Travelling expenses Wages Cash 5,200 15,500 300 4,000 5,000 4,000 1,600 2,000 1,600 200 300 900 300 500 1,000 800 Capital Creditors Sales Commission Rent 16,000 2,000 20,000 3,200 2,000 Total 43,200 Total 43,200 Adjustments: Rent due but not received Rs. 500. Commission to the extent of Rs. 200 received in advance. Charge depreciation @ 10% on building and machinery Bad debt declared @ 10% on debtors. Closing stock was valued at Rs. 12,000. Insurance pre-paid in extent to Rs. 50.

167 Approved by CDC, Nepal Final Accounts Solution: Trading and Profit and Loss A/c of Ramesh & Bros. Dr. For the Year ended 30-12-2078 Cr. Particulars Amount Particulars Amount To Opening stock To Purchase To Carriage on purchase To Wages To Gross profit c/d To Salaries To Tax To Insurance 300 Less: Prepaid 50 To Trade expenses To Travelling expenses To Depreciation on: Building @ 10% 500 Machinery @ 10% 400 To New bad debt. @ 10% To Net profit c/d 5,200 15,500 900 1,000 9,100 31,700 1,600 200 250 300 500 900 400 10,450 By Sales 20,000 Less: Returns 300 By Closing stock By Gross profit b/d By Commission 3,200 Less: Advance received 200 By Rent 2,000 Add: accrued 500 19700 12000 31700 9100 3,000 2500 14,600 14,600 Balance Sheet of Ramesh & Bros. As on 30-12-078 Capital and Liabilities Amount Assets Amount Capital 16000 Add: Net profit 10450 Creditors Unearned commission 26,450 2,000 200 Cash Debtors 4,000 Less. Bad debt 400 Building 5,000 Less: Depreciation 500 Machinery 4,000 Less: Depreciation 400 Furniture Bills receivables Accrued rent Insurance prepaid Closing stock 800 3,600 4,500 3,600 1,600 2,000 500 50 12,000 28,650 28,650

168 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal Exercise A. Answer the following questions in one sentence. 1. What are prepaid expenses? 2. What are bad debts recovered? 3. What is Reserve Fund? 4. What is bank overdraft? 5. What is adjustment? 6. What is accrued income? 7. What is drawing? 8. Write any two examples of intangible asset. 9. What is liabilities? 2068 (R) B. Give short answers to the following questions. 10. Define a balance sheet. Mention its any four objectives. 11. Describe any five points of importance of balance sheet. 12. Briefly describe the advantages of balance sheet. 13. Draw-up a specimen of a balance sheet along with its left hand side and righthand side items. 14. Distinguish between a trial balance and a balance sheet. 15. Write short notes on the following Capital & drawing Bank overdraft Fictitious assets Revenue income and expenses Outstanding expenses Depreciation Capital income and expenditure Fixed assets NUMERICAL PROBLEMS 16. Prepare Balance Sheet in the book of Kaji Lal & Co. as on 30-12-2078, with the help of the following balances: Capital Leasehold land Goodwill Plant and machinery Bills payable Sundry debtors Cash in hand Reserve fund Stock 60,000 25,000 13,000 15,000 6,000 16,000 700 20,000 20,000 Drawing Freehold premises Trade mark Fixtures and fitting Bills receivables Sundry creditors Cash at bank Net profit 5,000 20,000 7,000 2,000 4,000 24,000 1,000 18,700 Ans: B/S. Total: 1,23,700

169 Approved by CDC, Nepal Final Accounts 17. The following are the balances of assets, capital and liabilities of Shakya Enterprises as on 30-12-078. Plant and machinery Livestock Capital Loan from bank Book debt (sundry debtors) S/creditors Stock 12000 10,000 30,000 2,500 2,800 3,000 15,000 Freehold premises Cash in hand Mortgage loan Drawing Bills receivables Bills payables Net profit 14,000 500 7,000 3,200 1,900 2,500 14,400 You are required to prepare Balance Sheet as on that date. Ans: Balance Sheet Total: 56200 18. Prepare a Balance Sheet of M/S. Ganesh & Co. for the year ended 32nd Asadh 2079, from the following particulars. Description Amount Description Amount Cash in hand Bank balance Bills receivables Bank overdraft Land and building Machinery 1,000 12,000 7,000 24,000 65,000 22,000 Capital Reserves Debtors Bills payables Creditors Closing stock 1,00,000 6,000 5,000 5,000 2,000 25,000 Ans: B/S. Total: 1,37,000 19. Prepare a Balance Sheet of Kamal & Co. for the year ended Ashadh 31st, 2079, from the following particulars: Description Amount Description Amount Capital Cash in hand Bank balance Bills receivables Bank overdraft Creditors Net profit 20,000 1,500 5,000 3,000 5,000 3,000 5,000 Reserve fund Debtors Furniture Building Machinery Closing stock Loan 1,000 8,000 500 9,000 4,000 12,000 9,000 Ans: B/S. Total: Rs. 43,000 20. Prepare Balance Sheet of B & D Distributors on the basis of following particulars as on 31st Ashadh 2079. Description Amount Description Amount Capital Investment Bank overdraft Net profit 1,75,000 80,000 30,000 40,000 Land Accrued income Debtor Wages payable 1,25,000 10,000 35,000 5,000 Ans: B/S. Total: Rs. 2,50,000

170 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal 21. Prepare the Balance Sheet of Mero & Tero Distributors on the basis of the following particulars as on 31st Ashadh, 2079. Particulars Amount Particulars Amount Capital Investment Net Loss Accrued Income 300,000 70,000 40,000 20,000 Building Reserves Rent due Closing stock 190,000 40,000 5,000 25,000 Ans: B/S. Total: Rs. 3,05,000 22. Prepare the Balance Sheet of C & V Distributors on the basis of the following particulars as on 31st Ashadh, 2079. Particulars Amount Particulars Amount Capital Stock (31 Ashad) Vehicles Advance Rent received 1,50,000 45,000 1,00,000 15,000 Short term Loan Prepaid Expenses Sundry Debtors Net Profit 30,000 20,000 40,000 10,000 Ans: B/S. Total: Rs. 2,05,000 23. Prepare the Balance Sheet of C & U Distributors on the basis of the following particulars as on 31st Ashadh, 2079. Particulars Amount Particulars Amount Capital Investment Long Term Loan Net Loss 155,000 70,000 50,000 25,000 Copy Right Preliminary Expenses Advance Expenses Reserve for Provident Fund 55,000 40,000 40,000 25,000 Ans: B/S. Total: Rs. 2,05,000 24. Prepare Trading and P/L account on the basis of the following transactions of ABC Company at the end of fiscal year 2079 Ashadh. Description Amount Description Amount Purchase Opening stock Purchase return Sales Sales return Salary Carriage inwards 1,50,000 2,15,000 11,000 4,02,500 7,500 87,000 1,000 Wages Rent and fee Printing and Stationery Trading Expenses Advertisement Legal fees Closing stock 7,500 1,500 2,500 32,150 2,500 1,500 1,00,000 Gross profit Rs.1,32,500 Net Profit Rs. 5,350 25. From the following, prepare a Profit and Loss A/c. Description Amount Description Amount Salaries Postage & Telegram Travelling & Conveyance Law Charges Discount Received 42,000 2,400 5,200 1,400 3,000 Gross Profit Insurance Advertisement Bad Debts Discount Allowed 1,32,000 1,800 8,000 5,000 1,000 Net Profit Rs. 68,200

171 Approved by CDC, Nepal Final Accounts 26. Prepare the Profit and Loss A/c of B & B Traders, Kathmandu for the fiscal year 078/079 from the following particulars. Gross Loss Profit on Sale of Fixed Assets Interest Received Bank Charge 35,000 85,000 12,000 15,000 Office Expenses Bad Debts Recovered Entertainment Expenses Bonus Received 45,000 30,000 8,000 20,000 Net Profit Rs. 44,000 27. Prepare the Profit and Loss A/c of Bhoj & Company, Kathmandu on the basis of the following particulars as on 31st Ashadh, 2079. Bad debts recovered Gross Loss Depreciation Bonus received 40,000 55,000 5,000 19,000 Loss by theft Miscellaneous income Commission received Printing & Stationery 15,000 24000 5,000 15,000 Net less Rs. 2,000 28. Prepare the Profit and Loss A/c of Uchit & Ujjwal Company, Chitwan on the basis of the following particulars as on 31st Ashadh, 2079. Gross Profit Carriage on sale Packing charge Renewal Charge Discount Received 15,000 5,000 10,000 15,000 8,000 Interest received on development Bond Share transfer fees Bank charge 9,000 10,000 9,000 Net loss Rs. 17,000 29. Prepare the Profit and Loss A/c of Suman & Bhuwan Brothers, Itahari on the basis of the following particulars as on 31st Ashadh, 2079. Loss by Fire Salary & wages Discount received Insurance Charge 15,000 15,000 15,000 5,000 Dividend received Freight outward Travelling Expenses Discount on Purchase 30,000 10,000 15,000 20,000 Net Profit Rs. 5,000 30. Prepare the Profit and Loss A/c of Usha & Nirmala Pvt. Ltd., Pokhara on the basis of the following particulars as on 31st Ashadh, 2079. Gross profit Selling expenses Carriage out Interest received 40,000 20,000 20,000 9,000 Commission received Discount allowed Bad debts Apprenticeship Premium 3,000 7,000 18,000 8,000 Net Profit Rs. 5,000 31. Prepare the Balance Sheet of Khanal & Dhungana Distributors on the basis of the following particulars as on 31st Ashadh, 2079. Capital Advance Expenses Proprietor’s Drawing Net Profit 1,50,000 20,000 20,000 15,000 Motor Closing Stock Loan on Mortgage Commercial Building 1,25,000 10,000 60,000 50,000 Total B.S. Rs. 2,05,000

172 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal 32. Prepare the Balance Sheet of Dhakal & Pokhral Distributors on the basis of the following particulars as on 31st Ashadh, 2079. Capital Prepaid Expenses Interest on capital Net Loss 2,60,000 30,000 10,000 20,000 Patents Closing Stock Contingency reserve Land 80,000 80,000 40,000 1,00,000 Total B.S. Rs. 2,90,000 33. Prepare the Balance Sheet of Gurujee Stores on the basis of the following particulars as on 30th Ashadh, 2079. Additional Capital Short term investment Interest on capital Net Profit 1,40,000 40,000 20,000 30,000 Loan to Hari Leaseholds assets Drawing Furniture 30,000 40,000 20,000 60,000 Total B.S. Rs. 1,70,000 34. Prepare the Balance Sheet of Uchchata & Soniya Company, Narayangard, on the basis of the following particulars as on 31st Ashadh, 2078/079 fiscal year. Capital Fixed assets Loan on Mortgage Debenture 90,000 75,000 20,000 30,000 Preliminary Expenses Accured Income Dividend Equalization Fund Goodwill 10,000 30,000 15,000 40,000 Total B.S. Rs. 1,55,000 35. Prepare Trading A/c and Profit and Loss A/c for the year ended 30th Chaitra 2078 and a Balance Sheet as on that date. Dr. Balance Amount Cr. Balance Amount Drawing Goodwill Land and building Plant and machinery Loose tools Bills receivables Stock (1-1-2078) Purchase Wages Carriage outward, Carriage inward Coal Salaries Rent, rates & taxes Discount Cash at bank Cash in hand Sundry debtors Repairs Bad debt Sales returns Furniture General expenses 4,500 8,000 6,000 4.000 400 300 4,000 25,100 2,000 50 100 580 3,500 280 150 2,500 40 4,500 180 120 100 1,120 525 Capital Bills payable Creditors Purchase returns Sales 16,000 3,380 7,000 265 41,400 68,045 68,045 Stock on 30-12-2078 was Rs. 3500 Ans: Gross profit Rs. 13,285, Net profit Rs. 8,480, B/S. Total: 30,360

173 Approved by CDC, Nepal Final Accounts 36. From the following Trial Balance of Shyamjee & Sons, prepare Trading and Profit and Loss Account for the year ended 31st Ashadh, 2079 and Balance Sheet as on that date. Dr. Balance Amount Cr. Balance Amount Plant and machinery Drawings Fixtures and fittings Loose tools Cash at bank Cash in hand Stock (1-4-2078) Purchases Sales return Wages Carriage inward Salaries Office and general expenses Rent and taxes Postage and telegrams Packing and distribution Sundry debtors 5,000 100 2,600 1,000 1,100 100 600 9,000 400 4,000 1,600 2,080 3,500 720 250 450 2,400 Capital Sales Purchase returns Discount received Sundry creditors Provisions for bad debts 8,800 23,400 200 300 2,100 100 34,900 34,900 The following adjustments should be taken into account. Stock on 31-3-2079 was valued at Rs. 1,540. Depreciate plant and machinery at 10% and furniture and fittings at 5%. Ans: Gross profit Rs. 9540, Net profit Rs. 2210, Balance Sheet (total) Rs. 13110. 37. From the following Trial Balance, prepare Trading Account, Profit and Loss A/c. for the year ended 30th Chaitra, 2078 and Balance Sheet as on that date. Particulars Dr. (Rs.) Cr. (Rs.) Capital 8,000 Purchases 7,200 Discount 100 Salaries 1,740 Wages 460 Sales 12,000 Carriage inwards 55 Rent, rates and taxes 240 Plant and machineries 3,065

174 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal Stock (1-1-2078) 3,100 Sundry debtors and creditors 4,040 2,400 Return inwards 220 Cash in hand 420 Cash at bank 2,020 Commission 140 400 Total 22,800 22,800 Stock on 30-12-2078 was Rs. 4035. Outstanding wages Rs. 40 Bad debts written off @ 10% Prepaid rent Rs. 100 Advance commission received Rs. 200 [Ans: GP Rs. 4960, NP Rs. 2636, Balance Sheet (total) Rs. 13276.] S.L.C/SEE Examination Questions. Theoretical 1. In which side of the balance sheet is net profit adjusted? 2067(S) 2. What is gross profit ? 2067 (R) 3. Write any two examples of intangible assets. 2073(S) 4. What type of asset is goodwill ? 2066(R) 5. Which account is prepared before balance sheet? 2065(S) 6. How is the net profit or net loss adjusted in Balance Sheet ? 2071(R)/2072(S) 7. Write any three types of indirect expenses. 2074 8. In which part of balance sheet does bank overdraft recorded. 2073(R) 9. How is drawing adjustment in balance sheet? 2072(R) 10. Write any two manufacturing expenses. 2071(S) 11. What are the assets which are known as intangible? Write any two examples. 2070(S) 12. What is cash in hand? 2070(R) 13. What is meant by outstanding expenses? 2069(R) Practical 14. Prepare a Balance Sheet of National Trading Limited for the last day Ashad, 2059 from the following particulars. 2060(S) Capital Cash in hand Bills receivable Building Drawing 3,20,000 20,000 10,000 2,00,000 50,000 Bank balance Net profit Creditors Reserve fund Debtors 70,000 80,000 15,000 35,000 1,00,000 (Ans: B/S Total Rs 4,00,000)

175 Approved by CDC, Nepal Final Accounts 15. Prepare a Balance Sheet of Kusum and Company for the end of fiscal year 2062/063 from the following particulars. 2063(R) Capital Loan Advance income Machinery Reserve fund 6,00,000 65,000 45,000 35,000 80,000 Goodwill Land Trademark Net loss Closing 50,000 3,20,000 95,000 1,70,000 1,20,000 (Ans: B/S Total Rs 6,20,000) 16. From the following particulars, prepare a profit and loss account of Nepal Gudpak Bhandar for the fiscal year 2066/067. 2067(S) Gross profit Depreciation Advertisement Interest received Insurance Bonus received Salary Legal expenses Rs. 11,00,000/- Rs. 75,000/- Rs. 63,000/- Rs. 25,000/- Rs. 10,000/- Rs. 50,000/- Rs. 1,40,000/- Rs. 27,000/- Ans: Gross profit 4,05,000 17. On the basis of following information prepare profit & loss account of Shah Furniture House for the fiscal year end of Ashadh 2066/067 and find out Net Profit or Net Loss. 2067(R) Stationary Dividend Bad debts Carriage out Rs. 11,000/- Rs. 14,000/- Rs. 17,000/- Rs. 3,000/- Salary Gross profit Discount received Insurance premium Rs. 69,000/- Rs. 1,26,000/- Rs. 7,000/- Rs. 9,000/- Ans: Net profit Rs. 38,000 18. From the following particulars prepare a profit and loss account of Morang Sugar Industry Pvt. Ltd. as on 31st Asar, 2065: 2066(S) Gross profit Salary Advertisement Stationery Rs. ,75,000/- Rs. ,60,000/- Rs. 8,000/- Rs. 25,000/- House rent Discount received Interest received Bonus received Rs. 40,000/- Rs. 18,000/- Rs. 12,000/- Rs. 10,000/- Ans: Rs. 18000 19. Prepare a profit and loss account of Khanal and Company for the fiscal year 2064/65 from the transactions : 2066(R) Gross profit Advertisement Stationery Depreciation Rs. 4,50,000/- Rs. 5,000/- Rs. 7,000/- Rs. 2,000/- Salary Interest Discount received Legal charge Rs. 90,000/- Rs. 15,000/- Rs. 9,000/- Rs. 3,000/- Ans: Net Profit = Rs. 3,37,000

176 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal 20. From the following particulars prepare a profit and loss account of Ilam Tea Industries Pvt. Ltd. as on 31st Asar, 2065. 2065(S) Gross profit Discount received Bonus received Audit fee Rs. 5,00,000/- Rs. 7,000/- Rs. 31,000/- Rs. 14,000/- Advertisement Salary House rent Rs. 20,000/- Rs. 1,25,000/- Rs. 1,00,000/- Ans: Net Profit Rs. 279000 21. From the following particulars, prepare P/LA/C ‘Deaurali Dhaka Udyog’ for the fiscal year 2064/65 : 2065(R) Description Amount Description Amount Gross profit Discount received Bad debt Advertisement Rs. 2,80,000 Rs. 3,000 Rs. 1,700 Rs. 16,000 Repair expenses Legal charge Depreciation Bad debt recovered Rs. 14,500 Rs. 2,500 Rs. 16,200 Rs. 700 Ans: Net profit = Rs. 2,32,800 22. Prepare profit and loss A/c of Kusum Cosmetics Shop, Kathmandu on the basis of the following particulars as on 31st Ashad, 2073. 2074 Particulars Amount Particulars Amount Gross Profit Income of Investment Interest on Loan Sale of Scrap 50,000 70,000 15,000 10,000 Audit Fees Rent Received Bad Debt Repairs 20,000 45,000 30,000 15,000 (Ans: Net Profit, Rs 95,000) 23. Prepare profit and loss A/c of Karnali Ghee Industry, on the end of Ashad, 2073 from the given transactions: 2073(R) Particulars Amount Particulars Amount Gross Loss Purchase Discount Commission Received Carriage Outward 3,50,000 50,000 60,000 55,000 Interest Received Salaries Stationery 90,000 70,000 25,000 (Ans: Net Loss, Rs 3,00,000) 24. Prepare profit and loss A/c of Karnali Wood House, on the end of Ashad, 2073 from the given transactions: 2072(R) Particulars Amount Particulars Amount Gross Loss Received House Rent Stationery Advertisement 1,75,000 30,000 19,000 15,000 Salaries Commission Received Purchase Discount Carriage Outward 70,000 10,000 12,000 20,000 (Ans: Net Loss, Rs 2,47,000)

177 Approved by CDC, Nepal Final Accounts 25. Prepare a balance sheet of Kumari Cenema Industries private limited for the fiscal year 2066/067 from the following particulars. 2068(R) Capital Cash in Hand Creditors Loan 5,00,000/- 50,000/- 3,70,000/- 1,00,000/- Bank Balance Prepaid Expenses Debtor Net Profit 7,00,000/- 40,000/- 4,10,000/- 2,30,000/- Ans: Balance sheet total = Rs. 1200000 26. Prepare balance sheet of ‘D.B Agrovet’ on the basis of the following particular as on 32nd Asar, 2068. 2067 (S) Description Amount Description Amount Capital Drawing Creditor Investment Rs. 1,00,000/- Rs. 50,000/- Rs. 1,00,000/- Rs. 1,50,000/- Debtor Land Net profit Bill receivable Rs. 1,00,000/- Rs. 1,25,000/- Rs. 1,00,000/- Rs. 7,500/- Ans: 6,00,000 27. Prepare balance sheet of City Super Market Pvt. Ltd. as on 32nd Ashadh, 2067 on the basis of following particulars. 2067(R) Capital Outstanding wages Reserve fund Bank and cash Rs. 2,50,000/- Rs. 10,000/- Rs. 60,000/- Rs. 1,20,000/- Goodwill Furnitures Closing stock Net profit Rs. 55,000/- Rs. 25,000/- Rs. 1,50,000/- Rs. 30,000/- Ans: Balance sheet total Rs. 3,50,000 28. Prepare Balance Sheet of Mahalaxmi Gas Company Pokhara for the fiscal year 2064/2065 upto the end of Asar from the following particulars : 2066(S) Capital Prepaid expenses Acquired income Bills receivable Rs. 10,00,000/- Rs. 32,000/- Rs. 13,000/- Rs. 1,70,000/- Creditors Bankers Land and building Net profit Rs. 45,000/- Rs. 42,000/- Rs. ,00,000/- Rs. 28,000/- Ans: Rs. 11,15,000 29. Prepare Balance Sheet of Pashupati Rubber Industry on the basis of following particular as on 31st Ashad, 2063 : 2065(R) Description Amount Description Amount Capital Reserve fund Building Machine Rs. 1,50,000 Rs. 60,000 Rs. 2,00,000 Rs. 60,000 Prepaid expenses Debtors Bank overdraft Net profit Rs. 75,000 Rs. 45,000 Rs. 90,000 Rs. 80,000 Ans: Balance sheet total = Rs. 3,80,000

178 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal 30. Prepare a balance sheet of Kali Gandaki Furniture Industry, Murmi as Asdhad and of 2069 from following particulars. (SLC 2069) Description Amount Description Amount Capital Outstanding wages Reserve Fund Machine 10,40,000 72,000 68,000 6,80,000 Goodwill Furniture Prepaid expenses Net loss 37,000 3,25,000 58,000 80,000 Ans: B/S Rs. 11,00,000/- 31. Prepare a balance sheet of Laxmi Medical Hall, Janakpur, for the fiscal year 2069/70 from the given particulars. (SLC 2070) Description Amount Description Amount Capital Machinery Accrued income Bank loan 5,00,000 1,82,000 3,00,000 80,000 Furniture Net profit Debtor Reserve fund 2,25,000 1,75,000 1,93,000 1,45,000 Ans: B/S: Rs. 9,00,000 32. Prepare a balance sheet of XYZ Enterprises as an last of Asar, 2071 from the following particulars. 2071 Description Amount Description Amount Capital Goodwill Furniture General Revenue 10,00,000 2,00,000 2,20,000 2,30,000 Advance income Building Net profit Closing stock 30,000 80,000 1,20,000 1,60,000 Ans: B/S Total Rs. 13,80,000/- 33. Prepare a balance sheet of Karnali Wood House for the fiscal year 2073/074 on the basis of the following particulars. (SLC 2074) Particulars Amount Particulars Amount Capital Bill Payable Goodwill Furniture 11,58,000 72,000 37,000 3,25,000 Reserved Fund Pre-paid Expenses Net Loss Land 70,000 60,000 80,000 7,98,000 Ans: Rs. 12,20,000/- 34. Prepare a balance sheet of Sharma Guest House, Saptari on the last of Asar for the fiscal year 2072/073 according to the following particulars. 2073(R) Description Amount Description Amount Capital Debtor Net profit Bills payable 5,83,000 17,000 1,98,000 54,000 Machinery Reserve fund Cash balance Business premises 26,000 65,000 22,000 8,35,000 Ans: Rs. 9,00,000

179 Approved by CDC, Nepal Government Accounting System Final Accounts Unit 7 Government Accounting System CDC Syllabus 7.1 Introduction, objectives and features of New Accounting System 7.2 Office of Auditor General Introduction 7.3 Office of Comptroller General-introduction 7.4 Treasury and Comptrollers Office: introduction 7.5 Introduction of auditing, difference between internal and final audit and importance 7.6 Classification of budget heads 10 Periods After studying this unit, students will be able to : know the origin and growth of government accounting in Nepal, know the concept, features, importance and objectives of present accounting system, write the differences between central and operating level accounting, explain the introduction and right, duties and functions of Office of Auditor General, Office of Finance Comptroller General and Office of the Treasuring and Comptroller, describe concept, importance, types and development of auditing in Nepal, write the differences between government accounting and business accounting, elucidate the classification of budget expenditure and their budget head numbers. Learning Objectives

180 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal 1. Introduction The accounting system maintained in government office is known as Government Accounting. Ministries, Departments and operating level offices of different districts are government offices. Government Accounting is concerned with keeping records of government revenues and their proper utilisation in different developmental and administrative works. It provides all the necessary financial information for decision making, formulation of future plans, budgets and policies. Financial administration is an essence of an organization, whether it is government or non-government. Accounting provides the entire financial information to the financial management by identifying, recording, classifying and summarizing the financial transactions, and interpreting their results. Then the general management takes decisions on the basis of such information, specially in financial matters. Thus, accounting is an important portion of every organizational entity, which identifies records, classifies and summarizes the financial transactions and interprets the results thereof. It is the compulsory duty of the government of every country to maintain rule and order and peace and security to develop every sector on the equitable basis and establish and develop the sound defense system and maintain due stability in all the sectors of the national economy in the country. For this, the government establishes various ministries, departments, constitutional bodies and a number of sub-ordinating offices under them. It also conducts various government activities through these offices and sometimes some special projects are also conducted in different sectors of social life. A number of financial resources are used in the conduct of such regular activities and the special projects. The government should make a number of systematic records of the financial activities in order to see the performance efficiency, control fraud and leakage of resources, see the application of the budgetary rules in controlling expenditures and so forth. It is the government accounting, which helps the government to satisfy all such objectives. Thus, a government accounting refers to the accounting used in government offices to satisfy the objectives of controlling the government expenses and financial resources, measuring the efficiency of the government offices and projects, and to determine the accountability of the concerned authority in the conduct of such activities. In this regard, Oshisami & Dean have defined government accounting as: “The process of recording, analysing, classifying, summarising, communicating and interpreting financial information about government in aggregate and in detail, reflecting all transactions involving the receipt, transfer and disposition of government funds and property.” In conclusion, we can say that government accounting is the branch of accounting of the systematic process of recording, classifying, summarizing, analysing, presenting, interpreting and communicating the financial transactions of all government offices for effective utilization of resources. Key Point Government accounting is the systematic and scientific process of recording, classifying and summarizing the government revenue and expenditure for the proper utilization of public fund in development and administrative works.

181 Approved by CDC, Nepal Government Accounting System 2. Differences Between Government Accounting and Business Accounting As there are some notable differences between government and business organizations, the objectives of maintaining books of account in both types of offices differ to some extent. But the accounting, in both types of offices, must be based on the fundamental principles of double entry system in order to make the complete records of the financial/ business transactions. In this sense, accounting may be studied under the following two topics viz. (a) business accounting and (b) government accounting. Basis Government Accounting Business Accounting 1. Meaning Accounting which is used by the government offices to keep records of government transactions is known as government accounting. Accounting which is used by the business offices to keep records of business transactions is known as business accounting. 2. Prepare of Account The main purpose of the government is to provide administrative and financial service to the general public; so, it prepares accounts of government revenues and their expenditures. The main purpose of commercial firm is to perform business activities to earn profit. For this purpose, they prepare Trading Account, Profit and Loss A/c and Balance Sheet. 3. Budget Head It is based on budget. All expenses of government offices are pre-determined on the basis of budget. Similarly, revenues are also projected by the budget. It is not necessary to prepare all statements of accounts on the basis of a budget head. However, budgets are used to compare the actual performance with the budgeted performance. 4. Rules and Regulations It has to be maintained as per the government rules and regulations. It is not based on government rules and regulations; rather it is based on the Generally Accepted Accounting Principles (GAAP) evolved over the years. 5. Basis level of Accounting It has the system of central level and operating level accounting. It does not divide the accounting system. 6. Auditing The Office of Auditor General audits books of account kept under government accounting. A professional auditor can audit the books of account kept under commercial accounting. 7. Control It is controlled according to the financial act, rule and regulation of the government within budgetary limit. It is controlled by the owner of the business. 8. Purpose The main purpose of government accounting is to reflect the plans and politics of the government in financial terms. The main purpose of business accounting is to find out the profit earned or loss suffered during a financial year. 9. Responsible It is responsible towards the people and the government. It is responsible towards the owner of the business.

182 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal 3. Historical Development of Government Accounting in Nepal There is not any evidential proof about the origin of accounting system in Nepal. Lichchhavi and Malla periods were of great importance from the viewpoint of financial administration. During the Lichchhavi period, the government revenues were collected from Panchali (local government body), Guthi (trust),Jinsi Kar(property tax), Sharmdan (voluntary work), etc. and expenditures were made for war, renovation, construction and repairs of temples, tapes, ponds, holy-shrines and worshiping expenses, etc. During Malla period, with the beginning of a trade relation with Tibet, revenues from customs and trade were also added in the line of government revenue and expenses were incurred on the same head but to larger and more frequent extent. Thus, accounting is found to have started form the Lichhavi period in a form according to the need and knowledge of the ruler and then continued onward to the Malla period. But such an accounting system was not scientific and long lasting. The need of accounting was felt necessary with the increase of transactions, in course of time. Later, in the beginning of the unification of Nepal in 1825 B.S., it is believed that a memorandum record of government revenues and expenditures as an accounting system was developed to maintain. In this regard, two books called Laldhadda and Mothdhadda were introduced in the years 1871 and 1879 B.S. respectively. The book Laldhadda was used to record the government revenues and administrative expenditures whereas the book Mothdhadda for recording the transactions of Kipat Byabstha (land management). These two books have proven to be the foundation for the origin and development of accounting systemin Nepal.Inthe year 1925 B.S., anoffice, called, ‘Nepal Kitabkhana’ was formed to register the name of the government employees and to record the salaries paid to them, which is still in use to record the salary transactions and the pension transactions of the retired government employees. The accounting record of salary expenses used to be recorded in Kaushi Tosha Khana, a section under Kitab Khana. Again, with the passage of time, transactions were also increased in different sectors like land revenue in the name of Malpot (land tax), revenue from forest, trade and customs, etc. in the revenue side and war, peace and security, religious activities, salaries to the government employees, administrative expenses, government subsides, pension expenses and other developmental expenditures on the expenditure side. Such an increase in government transactions led the development of accounting system in the country. Towards 1936 B.S. Khardar, Gunwanta, a senior official of that time, introduced a new sort of accounting system called Shyaha Shresta Pranali, with a view to record the government revenues and expenditures in a simple, uniform and systematic way so as to exhibit revenues and expenditures in a simple, uniform and systematic way, and to exhibit the actual position of the government revenue and expenditure. This system remained in practice in the country till 2022/23 fiscal year and ultimately replaced by the New Accounting System of Government of Nepal. Even though Shyaha Shresta Pranali was comparatively more systematic and scientific accounting system, it could not cover the numerous and complicated transactions in the Terai-region of the country. As a result, in about 1968 B.S. Faram Shresta Pranali (Form Accounting System) was introduced and brought into practice in the Terai region. It had

183 Approved by CDC, Nepal Government Accounting System 51 different forms to record and report the transactions and thus named as Faram Shresta Pranali. In this way, after 1968 B.S. and until the implementation of New Accounting System of Government of Nepal, there were two accounting systems, Shyaha Shresta Pranali in the Mountainous region and Faram Shresta Pranali in the Terai region and Kathmandu valley. Since, the autocratic Rana rulers did not give any importance to the accounting system and to the entire financial administration, the accounting system could not be developed during the period of Rana-Regime. After the historical movement of 2007 B.S., the autocratic Rana Regime was overthrown and democratic government was established in the country. Since, then the government seemed to be more responsible forthe people, the government declared budget system for the first time, in the country, in 2008 B.S. to let the people know about the government’s projected revenues and expenditures. Again, economic planning was started from 2013 B.S. for the balanced economic development of the country. But because of the lack of appropriate accounting system,thenecessarydata,figures, andotherfinancialinformation could not be obtained for the preparation of a sound budget and economic plans and for their implementation. Thus, the government felt the necessity of an appropriate accounting system for recording the government transactions. But due to the political instability and lack of the guiding rules during the first decade of the democratic era, such an accounting system could not be introduced. Thus, in the year 2016 an Act called “Procedural Rules for Government Fund Expenditure 2016” was passed and enacted by the government in order to establish the uniformity in financial administration. On the other hand, the Auditor General was appointed as per the `Constitution of Nepal 2015’ as a constitutional body to check the frauds and misappropriation of government budget and to audit the accounting thereto. After the enactment of the Act “Procedural Rules for Government Fund Expenditure 2016”, Bhuktani Shresta Pranali (Payment Accounting System) was introduced in 2017 B.S., which was based on the principle of double entry system. But within a very short period, it was proven to be insufficient to cover the government transactions, specially the revenues, foreign aids and donation and budget transfer, etc. Thus, it was replaced, in a short time, by New Accounting System, which is still in use throughout the country. Even though the political system was changed from multiparty democratic system to partyless Panchayat System, it did not disturb the development of accounting. Because of some serous limitations of the Payment Accounting System, a new accounting system was introduced as per the recommendation of `Accounting Committee 2017’. It replaced the Payment Accounting System and all other old accounting systems. It is completely based on the principle of double accounting system. This system is used, nowadays throughout the country. Payment Accounting System was replaced by the New Accounting System in the fiscal year 2019/020 as per the recommendation of the ‘Accounting Committee 2017’. It was aimed to remove the difficulties and limitations of old accounting systems and even of the Payment Accounting System and to establish uniformity in account keeping throughout the country.

184 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal New Accounting System 3. Introduction As the autocratic Rana Regime was overthrown by the historic people’s movement in 2007 and a democratic government was established in the country. The democratic government declared the budget system in 2008 B.S. to let the people know about the financial affairs of the government. Similarly, it started in 2013 B.S. the economic planning in the country for the all round development of the country. The existing accounting systems i.e. the Shyaha and Faram Shresta Pranali, could not supply the necessary data and financial information to the government for the preparation and execution of the budget and the economic planning. Then it was felt necessary of a scientific system of accounting for the government offices to make complete record of the transactions, to facilitate the preparation and execution of budget and economic planning, to decentralise the job of accounting and to establish uniformity in accounting and so forth. As a result, Payment Accounting System was brought into practice in the year 2017 as the outcome of the “Procedural Rule for Government Fund Expenditure 2016”. But this system, although, was scientific and based on the principle of double entry system, could not fulfil the accounting need of the government offices because of its serious limitations and practical difficulties, such as lack of the provision of budget transfer, non-unifomity of advance transactions, concentrations only towards the payments, etc. Besides, the Payment Accounting System could not show the actual position of the foreign aid and donation and the picture of their utilization to the foreign countries because of the lack of such a provision under this system. Hence, for the improvement, decentralisation, and modernisation of the accounting system in the country, the government formed a committee in the name of ‘Account Committee 2017’ on the 20th Magh, 2017. It was of 4 members: i. Accountant General of Government, ii. Under Secretary, Ministry of Finance, Foreign Aid Department, Government of Nepal. iii. Account Specialist, UNO. iv. Public Administration Advisor of U.S. Aid. The committee studied, in detail, about such an accounting system, for 288 days and presented a draft to the finance secretary on the 18th of Kartik 2018 B.S. by suggesting a New Accounting System for the country. Since, it was quite a new system of accounting, it was implemented in the country on trial basis. It was first implemented in the offices of Kathmandu Valley from the fiscal year 2019/ 020, then in the offices on Narayani Zone and the rest of Bagmati Zone from the fiscal year 2020/021 and again in the phase, it was implemented in the offices of Janakpur and Gandaki Zone from the fiscal year 2021/022, and finally, all over the country from the fiscal year 2025/026, after being proved as an appropriate accounting system. According to the ‘Accounts Summary Book’ of Government of Nepal, “The act of all those processes of collecting revenue, making expenditure and recording them as well as preparing statements of those transactions or their result in part or full.”

185 Approved by CDC, Nepal Government Accounting System In this way, the New Accounting System of Government of Nepal may be defined as the accounting system recommended by ‘The Accounting Committee 2017’ for systematic recording of government revenue and expenditure preparing statements of those records and summarising all the government statements so as to facilitate the preparation and implementation of government budget, economic planning and utilization of government properties in the welfare of the people. New Accounting System of Government of Nepal was viewed to avoid the drawbacks of the previous accounting systems and has become successful in doing so. It has brought a revolution in the field of accounting. Being an indispensable part of the financial administration of Government. Key Point The New Accounting System is the accounting system based on double entry book-keeping system recommended by the `Accounting Committee 1017’ for systematic recording of government revenue and expenditure. 4. Objectives of New Accounting System New Accounting System of Government has a number of objectives, from the recording of the financial transactions of the government to the observation of utilisation ofresources and efficiency of the government office. The objectives of the New Accounting System, as determined by ‘The Account Committee 2017’, are as follows: i. To Keep Proper Record The main objective of New Accounting System is to keep the records of the financial accounts properly. All financial transactions of government office must be recorded in their respective accounts promptly. There is greater possibility of misuse of cash income and expense which should be controlled by accounting system. ii. To Make Expenditure within the Budget Limit The Government of Nepal allocates a fixed amount for each organization as its budget. The organization can not spend more than what has been spent. New Accounting System does not allow any government organization to exceed the limit fixed by budget. There is an instrument called `Budget sheet’ to control the expenses by limiting to the budget through it. iii. To Provide Information for the Preparation of Budget The objective of New Accounting System is to provide information which helps to prepare the coming year’s budget. For the preparation of budget of new year, government needs actual financial information of income and expense of previous year. Underthis system, monthly statements and Monthly Statement of Expenditures help to provide financial information for the preparation of budget. iv. To Provide Information about Fund This accounting has objectives to inform that whether income is generated as per estimated or not, how much is available and for different jobs and projects and how much progress is made, whether released funds have been reached to the destination or not can be known from New Accounting System.

186 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal v. To Safeguard Physical Properties Government invests lots of its scarce resources in various properties and assets like machinery, furniture, land, buildings, vehicles, etc. So such various assets are received and used in the organizations. This accounting has objectives to maintain the store record of such assets when received and used. vi. To Make Auditing Simple and Economical New accounting system uses accounting forms uniformly in every office of all over the country. This uniformity has made the auditing works simple and economical. vii. To Help in Preparation of Periodical Reports and Statements Government officials need to prepare various types of reports and statements at the end of every fiscal year to inform the people how the taxes paid by the people have been expensed and what the economical situation of the country. viii. To Help in Planning and Decision Making New accounting system provides reliable financial data to the concerned authority. It helps to prepare different plans and policies and to take right decisions. Points to Remember i. To keep proper record ii. To make expenditure within the budget limit iii. To provide information for the preparation of budget iv. To provide information about funds v. To safeguard physical properties vi. To make auditing simple and economical vii. To help in preparation of periodical reports and statements viii. To help in planning and decision making 5. Characteristics/Features of New Accounting System The important characteristics/features of the New Accounting System are discussed as below: i. Based on the Principle of Double Entry Book Keeping System New Accounting System is completely based on the principle of double entry system. Double Entry Principle refers to the recording of a transaction with double effect with same monetary value, i.e. it is debited once in one account and the same is credited on the other account with the same value. Under New Accounting System, all the government transactions are recorded twice by showing their two effects: debit and credit. It helps to detect and prevent errors and frauds. ii. Simplicity and Uniformity This system is simple to understand and use. Before the introduction of New Accounting System, there were multi form of systems causing difficulty in auditing and proper evaluation of financial projects. Similarly, it was difficult forthe personnel

187 Approved by CDC, Nepal Government Accounting System to understand the accounting of an office when they were transferred from one office/ place to another. On the otherhand, the accounting systems were also not based on the double entry principle. Nowadays, with the use of New Accounting System, the same style of accounting is followed throughout the country and the forms and formats are used for the accounting and reporting of similar type of transactions and thus it is uniform throughout the country and has become simple to understand and use with a little knowledge of the principle of accounting. iii. History of Financial Transactions New Accounting System of Government of Nepal presents historical information about the financial transaction of government offices for a series of years in the past. Under this, all financial transactions are recorded when they occur, and they are later summarised in the form of reports and statements and they are preserved for future purposes, systematically and scientifically, which become the historical evidence. iv. Branch of Financial Administration It is one of the most important parts of financial administration. All financial activities become handicapped in the lack of proper accounting system, which causes the failure of financial administration. New Accounting System presents the data and other financial information required for the financial administration from time to time and assists in taking various financial decisions. Besides, it helps to detects and prevent errors and frauds, which is a must for the financial administration. v. Basis for Budgeting and its Control After the declaration of budget system in 2008 B.S., the existing accounting system could not supply the necessary data, statistics and other financial information for the preparation and execution of budget. New Accounting System was brought into practice to fulfil the necessity of budgeting. Thus, this system is the basis for budgeting. It maintains the records of all the transactions regarding budget approved in different heads, there is no ground for manipulation of government revenue and expenditure so that, proper control can be achieved. vi. Keeping Accounts under Budget Heads Budget is not only a statement of estimated revenue and expenditure but also a financial regulation. With the annual appropriation and regular and additional budget for each head allocated and the expenditure made are set according to the budget prescription and thus, New Accounting System keeps the records of revenue and expenses under the given heads in budget. Ledger accounts are also maintained in accordance to the budgeted heads of revenue and expenditures. vii. Confidentiality/Secrecy As there is no provision of getting signatures of the outsiders in the main accounting documents under New Accounting System as was in Shyaha Shresta Pranali, there is no risk of leakage of any official information, moreover, there are separate forms, slips, receipts, etc. for different transactions and only the responsible officials are entrusted with the responsibility of maintaining accounting records. Thus, it ensures the secrecy of accounting records.

188 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal viii. Changeability New Accountancy System is changeable as accordance to the time and situation. As no single system can remain static forever, the `Account Committee 2017’ has mentioned that this system of accounting can also be changed or amended as per the time and situation or as the need of the government for making it more advanced and scientific. ix. Emphasis on Banking Transactions It has emphasized upon the performance of government transactions through bank. Cash is manipulative and misusable and thus, in order to have proper control over the fund, the New Accounting System has given emphasis on banking transaction. According to this, every government office should deposit allreceipts and collections into bank, i.e. Nepal Rastra Bank and make payments through cheques except for petty expenses made out of petty cash fund. x. Provision of Central and Operating Level Offices For accounting purposes, government offices are divided into operating level and central level offices. Operating level offices maintain the records of the advance budget releases, their expenditures and forwards the monthly reports to the respective central level offices. Similarly, the central level offices maintain their own accounting and the summary of the reports and statements are obtained from their operating level offices. There is no interference from the central level offices in account keeping but the operating level offices should be always responsible for their respective central level offices. xi. Use of Brackets Use of brackets is another important characteristic of the New Accounting System. The mentioning of amount in the brackets indicates the deduction from the amount mentioned openly. Brackets are used in maintaining ledger accounts and only in case of clearance of advance and closing of the books to denote the opposite entry of the amount or deduction. xii. Inter-head Transfer of Budget Out of the budget allocated to a number of heads of an office, sometimes there may be surplus budget under some heads and scarce under some other heads. In such a situation, the amount, which is surplus under a head can be transferred to the one having scarce according to the budget limitation and financial rules under the New Accounting System. There was not such a provision in the other accounting systems. Such a provision is known as inter-head transfer of budget. Thus, it is also a notable feature of this system. xiii. Use of Different Forms for Accounting and Reporting Under the New Accounting System, there is a provision of different forms for the accounting and reporting of different types of transactions to ensure the uniformity of records. AGF No. 1.1, forrevenue and Journal Voucher, AGF No. 203 for expenditure

189 Approved by CDC, Nepal Government Accounting System and miscellaneous expenditure for the original record of the transactions; Bank Cash Book, AGF No. 209, for the general ledger of the transactions: Budget Sheet, AGF No. 208, for budget expenditure, Monthly Statement of Expenditure AGF No. 210, for the details about the position of expenditure and fund, etc. and other a number of forms for accounting and reporting are used under the New Accounting System. Operating level offices use some of the forms for recording the regular transactions and to furnish the necessary information to the respective central level offices, central level offices use some of the forms for recording their regular transactions and for the preparation of the statements to be submitted to the Ministry of Finance. Thus, use of different forms for accounting and reporting is also another notable feature of the New Accounting System of Government. Points to Remember i. Based on the principle of double entry book-keeping system ii. Simplicity and uniformity iii. History of financial transactions iv. Branch of financial administration v. Basis for budgeting and its control vi. Keeping accounts under budget heads vii. Confidentiality/secrecy viii. Changeability ix. Emphasis on banking transaction x. Provision of central and operating level offices xi. Use of brackets xii. Enter head transfer of budget xiii. Use of different forms for accounting and reporting 6. Kinds of Government Accounting After the implementation of New Accounting System in Nepal, the offices of Government have been divided into central level and operating level offices in accounting point of view and the accounting also has been divided accordingly as central level accounting and operating level accounting. The ministries, departments and constitutional bodies are called central level offices and the accounting maintained by these offices is called central level accounting. Similarly, the lower level or branch offices like regional, district level and other local offices, which are responsible for the respective central level offices are called operating level offices and the accounting maintained by these offices is called operating level accounting. i. Central Level Accounting The act of accounting performed by the central level offices is known as central level accounting. It refers to the recording of the release of budget to the operating level offices in terms of advance, clearing of advance against the monthly report submitted by each operating level office and summarising the report of the operating level along with its own. Thus, the budget release is a downward process and the report is an upward process.

190 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal The following are the forms used by central level offices: a. GoshwaraVoucher,(AGFNo. 103)forRevenue andAGFNo. 203 forExpenditure and Miscellaneous b. Ledgers c. Budget Summary and Expenditure Control A/c d. Other Statements and Reports ii. Operating Level Accounting The accounting, which is performed by the operating level office, is known as operating level accounting. It refers to the recording of the budget releases obtained from the respective central level offices as advances, recording the transactions in the primary book of account i.e. Goshwara Voucher, posting them into ledger accounts like Bank Cash Book, Budget Sheet, etc. and preparation of the monthly report to submit to the central level office. After the budget release is obtained from the central level office as advance, through the Office of the Treasury and Comptroller, it is recorded under the operating level accounting by incurring the expenditures under different heads of expenses. In this way, an operating level office serves the functions like receiving budget as advance under different heads, making expenditures as per the prescribed rules and creating records of budget received and spent, forwarding monthly reports of expenditure to clear the advance remaining in their names, getting accounting audited internally and preparing budget estimate for the next year, etc. There are a number of forms and records, which are to be maintained by an operating level office. a. Goshwara Voucher, (AGF No. 103) for Revenue and AGF No. 203 for Expenditure and Miscellaneous b. Cash Receipt Book (AGF No. 108) Sub-ledger Account (AGF No. 207) Budget Sheet (AGF No. 208) Bank Cash Book (AGF No. 209) c. Forms used for Monthly Statements and Reports Monthly Statement of Expenditure (AGF No. 210) Monthly Statement of Outstanding Advance (AGF No. 211) Statement of Bank Reconciliation Statement (AGF No. 212) Statement of Outstanding Payments (AGF No. 221) Monthly statements of Security Deposit (AGF No. 607) d. Forms used for miscellaneous purpose Cash payment Slip and Cash Payment Control (AGF No. 7)

191 Approved by CDC, Nepal Government Accounting System 7. Differences between Central & Operating Level Accounting S.N. Central Level Accounting Operating Level Accounting 1. Central level accounting is prepared by central level offices like ministries, departments and constitutional bodies, which have the subordinating offices working under them. Operating level accounting is prepared by the operating level offices like regional, district level and other local offices, which get budget releases from the respective central level offices. 2. It acts as a link and intermediary between the operating level offices and Ministry of Finance. It has link only with its Central level offices and has no any concern with the Ministry of Finance. 3. It records the budget releases in the advance account of each of its operating level offices. It records the budget releases received from its central level offices and its expenditures as the instruction of the central level office according to the financial rules. 4. Central level accounting is the record of central level office for its own operation and also, the accounts of the operating level offices. Operating level accounting is just the accounting of the operating level offices and not of any other offices. 5. Central level accounting gets the accounts and financial statements internally and externally audited by the Office of the Auditor General. Operating level accounting gets the accounts and statements internally audited and they are submitted to the central level office. 6. Central level accounting uses small number of forms for accounting and reporting. Operating level accounting uses comparatively a large number of forms for accounting and reporting. 7. Central level accounting helps the Ministry of Finance, Office of the Comptroller General to prepare central accounts. It does not directly help in the preparation of central accounts but it helps in the preparation of central level accounting. Office of Auditor General There is a provision of Auditor General Office in Nepal. Auditor General is the chief of the office. Auditor General is responsible to check the books of accounts of all the government offices, constitutional bodies and corporations fully owned or more than 50% shares owned by government. Functions, duties and powers of the Auditor General as stated by the Act. Supreme Court, the Legislature Parliament, the Constituent Assembly, the Commission forthe Investigation of Abuse of Authority, the Office of the Auditor General, the Public Service Commission, the Election Commission, The National Human Rights Commission, the Office of the Attorney General and other offices of the Constitutional Bodies, the Nepal Army, the Armed Police or Nepal Police, and all other government offices and courts are audited by the Auditor General in manner as maybe determined by

192 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal law, also having regard to the regularity, economy, efficiency, effectiveness and the propriety thereof. King Mahendra appointed the Auditor General on 16th Ashadh, 2016 B.S. for the first time in Nepal. Now, as per the provision made as section 22 of the Constitution of Nepal 2072, the Auditor General is appointed by the President on the recommendation of Constitutional Council for 6 years. The Auditor General is responsible for preparing and presenting the audited financial reports to the President of the government of Nepal for its final approval after the completion of each fiscal year. Key Point The office which performs auditing in Government offices, constitutional organs and corporations having full or partial ownership of the government taking the responsibility of maintaining financial accuracy according to the specified principle is called Office of Auditor General. Functions, Duties and Rights of the Office of Auditor General As per the provision made an section 22 of Constitution of Nepal, 2072, the functions, duties and rights of the Auditor General are as follows: i. Auditing the books of accounts of all constitutional organs, army, police, government offices and court. ii. Prescribing forms for making accounting work uniform and effective. iii. Auditor general should be consulted while appointing the auditor of all corporations owned by government at least 5 l% of total shares. iv. Auditor general should prepare and present report to the head of the state for final approval. The head of state shall refer that report to the parliament. v. Auditor general and his subordinates can check the books of accounts at any time for the purpose of auditing and it is the duty of all government offices to give documents and information to them. vi. Auditor general can be made liable to audit the book of accounts of any government office or institutions by making rules. Office of Finance Comptroller General Financial Comptroller General Office is the main government agency responsible for the treasury operation of Government of Nepal. This office is under the Ministry of Finance and is headed by Financial Comptroller General who is a special class officer of Government of Nepal. Financial Comptroller General Office is responsible for observing Office of Auditor General

193 Approved by CDC, Nepal Government Accounting System all government expenditure against budget, tracking revenue collection and other receipts and preparation of consolidated financial statements of the government. It also provides necessary advice, suggestion and remedial measures to the government on the problems related with financial acts, rules and regulations. It is also called Mahalekha Niyantrak Ko Karyalaya in Nepal. It was established in 2008 B.S. as the Office of Account General which has been converted the Office of Financial Comptroller General in 2032 B.S. Key Point Office of the finance Comptroller General is a department level government office established under the Ministry of Finance which prepares the central level account relating to the government revenues and expenditures. Functions, Duties and Rights of Office of Finance Comptroller General According to the Financial Administration Act, 2056, the functions, duties and rights of Financial Comptroller are as follows: i. Preparing central account of government revenue, expenditures, financial assistance, loan, interest, dividend, etc. ii Implementing forms for keeping record of financial transactions of government offices recommended by the Auditor General. iii. Keeping record of consolidated fund i.e. Sanchit Kosh, emergency fund and other government funds. iv. Inspection of government offices whether financial rules and regulations are followed or not. v. Preparing accounts related with appropriation, revenue and expenditures of government and getting them audited from the Office of the Auditor General. vi. Solving any misunderstanding or disputes regarding financial administration. vii. Recording irregularities based on the annual list of irregularities received from Ministries and constitutional bodies. viii Providing direction to Treasury and Comptroller Office for making internal audit of budget, collection of tax and security deposit. ix. Other works which are decided by the Finance Ministry as the functions of Office of Comptroller General. Office of Finance Comptroller General

194 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal Office of the District Treasury and Comptroller (DTCO) This office was established in the fiscal year 2038/039 B.S. in all 77 districts managed and directed under the Comptroller General’s Office. It still exists as one of major financial offices. The office of the treasury and comptroller of each district releases the approved budget to all the district level government offices and conducts internal audit of appropriation, budget release, budget expenditure, revenues and security deposits. This office is responsible to provide essential fund for implementing approved budget. This office works under the supervision and guidance of the Office of the Comptroller General. It is called Kosh Tatha Lekha Niyantrak Ko Karyalaya in Nepal. Key Point The office which is established to conduct internal audit, monitor and supervise the financial activities of district level government offices is known as Office of the District Treasury Comptroller. Functions, Duties and Rights of Office of the Treasury and Comptroller (DTCO) According to the provision made on the “Government Revenue and Expenditure Operation Rules 2064”, the duties, rights and functions of Office of the District Treasury Controller’s Office are as follows: i. Releasing the amount of impress fund equivalent to 1/6th of last fiscal year’s budget expenditure in the amounts of concerned offices in case budget approval letter is not received. ii. Releasing the amount of impress fund equivalent to the 1/6th of current fiscal year’s budget after adjusting already released imprest fund. iii. Reimbursing revolving fund by releasing budget equal to the expenditure of previous month after receiving Monthly Statement of Expenditure. iv Updating list of the offices which are situated in the working area of treasury and comptroller’s office. v. Monitoring and supervising the financial activities of offices of the concerned district and providing directions and suggestions as prescribed by the rules. vi. Receiving monthly statement of revenues from the concerned offices. Preparing integrated report of revenue and submitting to the concerned authority. vii. Conducting internal audit of the accounts maintained by all district level government offices. viii Preparing annual statement of budget release after the completion of fiscal year. ix. Verifying and depositing unspent amount of budget into consolidated fund. x. If any office has not maintained account properly or misused budget or not presented regular reports, it can stop bank account of the concerned office. xi. Other works which are decided by the Office of Comptroller General as the functions of Treasury and Comptroller’s Office. xii. DTCO Handling the Treasury Single Account (TSA) of each government offices.

195 Approved by CDC, Nepal Government Accounting System Auditing 8. Introduction In English audit means examination of accounts. It is derived from Latin word ‘audire’. Its meaning is to hear. At the end of fourteenth century, auditors were to read the status of accounting information in front of the kings or the rulers of that time and in the later days the ‘audire’ turned as audit. In the ancient days, the works of the auditors were mainly to check the arithmetical accuracy. In the modem period, the auditors not only check the arithmetical accuracy but also see whether the rules have been followed or not, whether the entries have been made according to companies policies or not and whether complete and full accounting have been maintained or not. A.W. Hanson has defined auditing as “An auditing is an examination of such records to establish their reliability and reliability of statements drawn from them.” The United Nations has given a comprehensive definition through the book “Government Auditing in Developing Country’, that auditing refers to the systematic, managed and objective oriented professional examination of the books to improve that if any inefficiencies, undue expenses; and mismanagement occur in the financial and administrative works of government office and programs.” In the word of L.R. Dickse, “Auditor is an examination of the accounting records under taken with a view of establishing whether they correctly and completely reflect the transactions to which they purpose to relate.” In conclusion, it is an examination of the books of accounting data to ascertain correctness, reliability, efficiency, etc. depending upon the financial data and statements. Key Point Auditing is the systematic examination, review and verification of the accounting records or books for the, accuracy and reliability of accounting statements and reports. 9. Development of Auditing In Nepal The Office of the Auditor General (OAG) was established with the appointment of the first Auditor General as per the Constitution of the Kingdom of Nepal, 2015 B.S. Prior to establishment of Office of the Auditor General, the institution named Kumari Chowk Adda used to review the government accounts. It is assumed that Kumari Chowk Adda was established in the year 6th Baishakh, 1828 B.S. with the aim of strengthening administrative system after the unification of Nepal. It is also anticipated that there was also existence of audit institution prior to unification. Since the fiscal year 2031/32, some new forms were brought into use on the recommendation of Auditor General. After the historical change of 2046, Constitution of 2047 and Auditing Act 2048 brought changes in the field of auditing system of government office. According to Company Act 2063, every business office should audit the accounts and present the audit report in Annual General Meeting and Company Registrar’s Office.

196 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal 10. Types of Auditing i. Internal Auditing Internal auditing is the act of examining the accounts and reporting by the employee of same organizations considering the organizational objectives and activities. Purpose of the internal audit is to assist the board of directors and managers in promoting sound operations of the company and reasonably ensuring the objectives listed. At the same time, purpose is to make timely recommendations forimprovements to ensure sustainable operating effectiveness of the internal control system and to provide a basis for review and correction for the system. Office of the Treasury and Comptroller has the power and rights to check the books of financial transactions as internal audit. For this government of Nepal has established the office of the Treasury Comptroller in all 77 districts providing responsibility of internal audit of government offices. This office uses the red ink to audit the books. Final audit is conducted after the completion of internal audit. Following are the main objectives of internal audit: 1. To detect the errors and frauds and prevent them. 2. To verify the books of accounts and statements continuously. 3. To give suggestions to the management in accounting and financial matter of the organization. 4. To prepare basis for final audit. 5. To ensure the reliability in way of keeping accounting records. 6. To assist the management. Key Point It is the act of examining the books of account by an internal staff to ensure proper result and correction of error. ii. Final Auditing Final auditingis the auditingofpresentedfinancial statements andrelateddocuments, done by independent body under the prevalent rules and regulations. This auditing is done for a certain period, for example, Department of Auditor General conducts such audit for the government offices. Business organizations are audited by the registered auditors according to the provisions mentioned in the existing act and rules. In case of companies, the auditor appointed by the Annual General Meeting conducts such audit. Thus, final audit refers to the act of checking the books of accounts of all the government office, constitutional bodies in corporation with the Office of the Auditor General. This office uses green ink to audit the books of accounts. In Nepal, Auditor General has got sole right to conduct audit of government organizations under the provision of Auditing Act, 2048. The scope and functions of final auditing are provisioned by the constitutions and laws. So, auditor is free to put any comments freely on the irregularities. Therefore, the auditors conduct auditing on the basis of legality, economy, efficiency, effectiveness, and reasonability.

197 Approved by CDC, Nepal Government Accounting System Following are the main objectives of final audit. a. To fulfil the legal requirement. b. To examine the financial records and transactions as per prevailing financial rules and regulation or not. c. To detect and prevent the errors and frauds. d. To show the real and fair financial position of the firm. e. To evaluate the effectiveness, efficiency, economy and authenticity of the financial transactions. f. To encourage the firm to maintain public account ability and transparency, etc. Key Point It is the act of examining the books of account by an individual auditor to disclose the real and true financial position for a certain period. Differences Between Internal Auditing and Final Auditing Internal Auditing Final Auditing Internal auditing is conducted by the employees of the same organizations. Final auditing in the company is done by the auditor appointed by AGM. The duties and responsibilities of internal auditors are fixed by the management. The duty of final auditors is to certify truth. Internal auditor works as the helper of office chief. The final auditor works as controller. In government organizations, the employees of the Treasury and Comptroller Office conduct internal audit. Auditor General or by the auditor stated by the office conducts external auditing. Internal auditing is done to correct mistake and for advice. Final auditing is done to find mistake and take actions to the faulty. The faults found by internal auditor can be corrected before the final auditing. The faults found by final auditors are forwarded for action. Internal audit is carried out on a detailed basis. External audit is carried out generally on a random sampling basis. 11. Importance of Auditing There is increasing importance of auditing in both the sectors: government and business. Auditing makes the accounts transparent, so creditability to business and government from the people increases. Some benefits are given below: i. Detect and Prevent Frauds and Mistakes Mistakes committed unintentionally or intentionally in the government and businesses are found by the internal and external auditing. So personnel involved will be cautious for doing such mistake in the future.

198 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal ii. Depicts Financial Position Auditor checks the crucial financial documents of business and government; So, true picture of the financial position can be depicted. So helps and belief from different sectors increase towards the organizations. iii. Formulation of Plans The data of the reports after auditing are true; so, the works of planning and budgeting work will be easy and valid. iv. Helps in Tax Fixation The tax can be fixed on the basis of audited accounts and government will have easiness to frame tax policies in the future. v. Helps in Financial Administration of Government Government can find defaulters through the internal and external auditing and forward action against them. This way financial administration becomes sound and fair. vi. Helps to Obtain Loan Financial institutions or banks provide loan on the basis of audited financial statements. So an organization should make audit compulsorily to obtain loan. Points to Remember i. Detect and Prevent Frauds and Mistakes ii. Depicts Financial Position iii. Formulation of Plans iv. Helps in Tax Fixation v. Helps in Financial Administration of Government vi. Helps to Obtain Loan Classification of Budget Expenditures under New Accounting System To have proper control over the expenditures and to make the recording work simple, clear and accurate, government expenditures have been classified into different budget heads. Numerical codes are allocated for every budget expenditure account. The code number is called budget head number and the amount is called budget expenditure amount. The new budget heads classification is implemented since the fiscal year 2076/77 after the approval of “Unified Economic Codes, Classification and Interpretation, 2078” by the Office of Auditor General on Kartik 1, 2078. It was implemented in providence and local level in the fiscal year 2078/079 and central level in 2078/079. Again, as per the recommendations received from the different institutions and agencies, unified and implemented since 2079-02-15. All budget expenditures are allocated under budget expenditure head no. 20000 to 28911. They are categorized as base heads, main heads, heads and sub expenditure heads. The expenditure heads having ‘000’ at last like 24000, 22000, etc. are base heads, heads having ‘00’ at last like 21100, 22200, etc. are main heads, heads having ‘0’ at last like 21110, 21120 are heads and other heads having no ‘0’ at last like 21111, 22111, etc. are sub expenditure heads. Only the sub expenditure heads are treated as expenditures but other base heads, main heads and heads are not treated as budget expenditures. As per new classification

199 Approved by CDC, Nepal Government Accounting System of budget, the code numbers from 20000 to 28911 are assigned to regular expenditures and the code number from 30000 to 34211 are assigned to capital expenditures. The new classification budget head, the code number and sub classification are as follows: 1. Current Expenditure In this section,there are indications ofthe expenditure to be made by the governments of all the three levels for the current nature. B.H.No. Budget Heads Interpretation/Explanation 20000 Expenditure This includes all types of current expenditure and intergovernmental transfers. 21000 Compensation of Employees/benefits This includes total remuneration paid to the office bearers and employees for their work performance. But, the remuneration for any work performed in the course of capital creation shall not be included here. Instead, it shall be included in the program of concerned expenditure head. 21110 Remuneration and benefits in cash This includes all kind of expenditures on the remuneration and provident fund given to the office bearers and employees for providing services. No amount can be debited in this heading. 21111 Employee remuneration (Salary) This includes following amount: (a) The salaries, provident fund, annual grade increments received by the employees. (b) Wages, honorarium and other remuneration expenditure for the work performed after being appointed for the entire period of the project or sanctioned temporary post, and (c) The amount for the accumulated home leaves, sick leaves, alternative leaves, and festival expenses of the employees in service. 21131 Official remuneration This includes the amount for the remuneration to be paid to the office bearers of constitutional and other public entities as sanctioned by law for assuming the public post/office. 21120 Wages and salaries in kind This includes amount given as benefit to the employees to obtain facility in kind, or the amount given to the employee specifying its purpose to obtain facility in kind. Expenditure cannot be entered under this head. 21121 Dresses/Uniform This includes expenditure amount for all kind of tunic/cloth provided to the employees and others (like police, army, hospital staff, postman and other government employee) for dress, boot, cap, shoes and uniform allowance for working in mountainous region. 21122 Food material This includes amount for the provision of food and supplies, or to provide equivalent amount in cash.

200 Aakar’s Office Practice and Accountancy - 10 Approved by CDC, Nepal 21123 Medical treatment expenses This includes amount for the health insurance fee, amount given for medical treatment, and for that purpose, the cost of transportation and care-taker. 21130 Employee Allowance This includes any other allowances other than the remuneration given to the employees by rule. No amount can be deposited in herein. 21131 Local Allowance This includes prevailing amount of the local allowance provided by rule for working in the specified remote areas. 21132 Dearness Allowance This includes prevailing amount of the dearness allowance provisioned by rule for the employees. 21133 Field Allowance This includes prevailing amount of the field allowance provisioned for the employees by rule. 21134 Meeting Allowance of Employees This includes allowance provisioned for the employee participating in the meeting convened as required to perform work. 21135 Employee Incentives and Rewards Allowances This includes expenses for incentive allowance and prizes given to the employees pursuant to the prevailing act, rules and decision. 21136 Foreign Allowances This includes amount for the foreign allowance given to the employees of Nepal Government working in the foreign countries. 21139 Other Allowance Except for those mentioned above, this includes the other allowances ( the allowance provided to baby seater, over time allowance, the allowance provided to the Office Assistant deputed during the festivals like, Dashain and Tihar) 21140 Allowance for Officials and other Benefits This includes payment to be made to the office bearers except the employees for allowances other amount of benefits. No amount shall be debited in this head. 21141 Official Meeting Allowance This shall include meeting allowance of the authorities. 21142 Other Facilities for the Official This include, the other benefits (Communications, Attire/ Cloth, Medical and Treatment) provided to the office bearer under the prevailing rule. 21200 Employer’s Social Contributions This includes amount to be spent on the social security of the employees. No amount shall be in this main head. 21210 Social Security Expenses for the Employee. This includes amount to be spent on the social security of the employees. No amount shall be debited in this head. 21211 Social Security Fund Expenses This includes amount to be spent on the social security of employees, and amount to be deposited by the government in the social security fund pursuant to the prevailing rule.