Office Practice and Accounting 10

Functions of Development Banks
Functions of development banks can be classified as :


1. Development functions:
i. Special sectors promotion: Development bank contributes financial and technical
assistance for the establishment, development and growth of special sectors like
agriculture, transportation, hydro power, and other infrastructural sectors. Not
only financial and technical assistance is provided but administrative support
and suggestions are also provided.
ii. Identification of development need: Development need in economy is also
assessed by development bank. After the identification of such need and
feasibility study necessary resources are provided to materialize the possibilities.
iii. Market and product research: It is not a big challenge to produce the goods
but the real challenge is to have sustainable market for produced goods.
Development banks analyse the nature of the product and its market.
iv. Help in plans and policy: Development bank helps the special sectors to prepare
good plans and policies. For the smooth operation of the industry of special
sector, it helps to formulate plans, policies and to implement them.

2. Banking functions:
i. Accepts deposits: Like commercial banks, development bank also operates
accounts to accept the deposits from its clients.
ii. Provides loan: Development bank specially provides long–term and mid–term
loan for the development of agriculture, and industrial sectors. It provides
loan against either security deposit or on the guarantee of community. It
also provides short–term loan as per the need of clients. Mid-term and long-
term loans are provided for capital nature expense such as purchase of land,
machinery, technology support, etc.
iii. Purchase and sale of securities: It also performs agency like function of
commercial bank on behalf of customer. It performs the act of purchasing and
selling of shares, debenture and securities of various organizations.

Cheque


Meaning
A cheque is an unconditional written order issued by an account holder (drawer) to
bank (drawee) to make payment of written amount to a party or person specified.
It is commonly used in home trade for making payment of larger amount of bill.
Comparatively payment through cheque is considered as safe and comfortable
in business. A cheque may be thus defined as a document by means of which the
depositor can withdraw money from account. Cheques pass from hand to hand till


Office Practice and Accounting 10 45

they are encashed; they thus perform the same function as money. Normally, three
types of cheque like Bearer Cheque, Order Cheque and Crossed Cheque are used to
settle the financial liabilities.

A legal definition of cheque- ‘’A cheque is an unconditional order, drawn upon a
specified banker, signed by the maker, directing the banker to pay on demand a certain
sum of money only to or to the order of a person or to the bearer of the instrument.’’
According to it , the following are the essentials of a cheque :

- It is an unconditional order.
- It must be drawn upon a specified banker.
- It must be signed by the maker.
- The amount must be payable on demand.
- It is payable either to bearer or ordered.

Specimen of Cheque




























Parties involved in a cheque
a. Drawer : The person or depositor who writes cheque is known as drawer.
Drawer must have account in bank.
b. Drawee : The bank on which the cheque is drawn is known as drawee. A cheque
is always drawn on a bank, so bank is drawee.
c. Payee : The person or party to whom the cheque is paid is known as payee.
Sometimes the drawer makes the cheque payable to self. In such case he himself
becomes the payee.






46 Office Practice and Accounting 10

Types of Cheque
a. Bearer cheque : A bearer cheque is made payable to the bearer, i.e., it is payable
to the person who presents it to the bank for endorsement. The language of such
cheque runs thus "Pay to X or bearer....". It is payable to anybody who presents
it at the counter. The bank is under no liability to ascertain that the payment is
made to the right person. Thus it is regraded as unsafe type of cheque.


















b. Order cheque : An order cheque is one made payable to a certain person or
ordered one. The language of such cheque runs thus – "Pay to Mr. X or order.....".
An order cheque can be transferred only by endorsement and delivery. Putting
a signature at the back is called endorsement. This type of cheque is safer than
bearer cheque because the bank pays to the person or party whose name is
written on cheque.
If a cheque is made payable to a certain person without addition of the word
‘bearer’ or ‘order’ it is regarded as order cheque.


















c. Crossed cheque : Crossed cheques are those which can't be encashed at the
counter but can be presented and collected only by a bank from the drawee
bank. Such cheques are deposited into the account and the account holder
should issue bearer or order cheque to withdraw the amount from the bank. A
cheque is crossed by drawing two parallel line across its face, with or without
certain words.




Office Practice and Accounting 10 47

Specimen of crossed cheque



















Crossed cheque is of two types

General crossing: A general crossing is one where two parallel lines are drawn across
the face of a cheque with or without the words "and Co." but not including the name
of the bank. The effect of general crossing is that the holder cannot encash it himself
at the counter of the bank. If a crossed cheque is lost , the person who happens to find
and try to encash it through a bank can be easily traced. Thus, the system of crossing
has made the use of cheque more safe.


Specimen of general crossing




















Special crossing: A special crossing is one which contains the name of a banker
in between the two parallel lines drawn across the face of a cheque. In such case
the drawee bank shall pay the amount only to the bank mentioned in the crossing.
Generally, the payee instructs the drawer to put the name of his bank in the crossing.
Special crossing makes the payment to the right person perfectly certain.

Sometime the words “account payee only” are written between the two parallel
lines. This is a direction to the collecting banker to collect the cheque and to place the
amount to the credit of the payee only.




48 Office Practice and Accounting 10

Similarly the words “Not Negotiable” appear in crossing implies that the transferee
shall not obtain amount directly from counter. Generally crossed cheques are received
and transferred between known parties.


Specimen of special crossing






















Endorsement of Cheque
Endorsement is an act of signing a cheque for the purpose of transferring it to
somebody else. The endorsement can be made by the payee or any subsequent holder.
Endorsements are generally made at the back of the cheque. The person making the
endorsement is known as endorser and the person to whom it is transferred is known
as the endorsee.

Encashment of Cheque

For encasement of the cheque some of the points should be taken into consideration
which are also known as rules of encasement. These rules are as follows :
1. Date on the cheque must be verified by bank whether the cheque is expired or
of future date.
2. Name of the payee should be checked .
3. The bank should confirm that the amount written in the figure matches with the
amount written in words.
4. The bank should verify the signature of drawer.
5. Bank should check whether there is any crossing, rubbing and overwriting on
cheque. If so, signature of drawer should be given at such instances.
6. Bank should check the account number if not printed or written on cheque.
7. The bank should confirm that the balance available in account is sufficient to
pay the cheque.
8. If the cheque is endorsed, the bank should make sure of it.



Office Practice and Accounting 10 49

Dishonour of Cheque
A cheque is ordinarily paid by the drawee bank if it is in perfect order. But sometimes
a cheque is not paid. When a cheque is not paid it is termed as dishonor of cheque. In
the following cases the bank may dishonor the cheque :
a. If the date is not written on cheque.
b. If the balance of account holder is insufficient to pay the cheque.
c. If the cheque is postdated or stale, i.e. old.
d. If a crossed cheque is presented at counter for payment.
e. If the drawer directed the bank to stop payment.
f. If the amount in words and figures differs.
g. If the signature of the drawer differs from his specimen signature.
h. If the account has already been closed.
i. If the words or figures on the cheque are not clear.
j. If the drawer becomes insolvent, or insane ,or dies within the knowledge of the
banker.

Computerized Payment System of Cheque
Modern banks use computers for storing financial information and processing
transactions. Tellers and other employees also use them to log information. Customers
often use computers for online banking. Computerized banking system is user
friendly, easy to manage, and easy to operate information system, based on fully
integrated and co-operative components.
Computers have revolutionized accounting and bookkeeping, and banks are some of
the first to switch to computers. Processing transactions manually takes a considerable
amount of time, and even expensive computers have allowed banks to save money
on labor costs. These systems are also great at avoiding mistakes. Banking tellers also
use computers to access customer data quickly. Instead of having to find a file for
every customer who enters, tellers can simply type in the customer's name and bring
up relevant data instantly. These systems can also process many transactions when
the customer is present, so tellers can give customers receipts reflecting deposits and
withdrawals. The bank can establish its branches at different locations of the country
and operate it through computerized system. Customers can deposit and withdraw
the amount from any branch which is known as ABBS (Any Branch Banking System).
Online banking has become more popular over the years, and people do not have to
go to the bank as often as they once did. Some banks even operate exclusively online
by providing online banking functionality and phone support when needed. These
banks have lower operating costs, and many are able to provide lower fees for their
customers. Credit card companies and other financial institutes allow customers to
access information and process transactions online.





50 Office Practice and Accounting 10

Insurance
The normal activities of daily life carry the risk of enormous financial loss. Many
persons are willing to pay a small amount or protection against certain risks because
that protection provides valuable peace of mind. The term insurance describes any
measure taken for protection against risks.

In an insurance contract, one party, the insured, pays a specified amount of money
called a premium to another party, the insurer. The insurer in turn agrees to compensate
the insured for specific future losses. The losses covered are listed in the contract, and
the contract is called a policy. Insurance may be defined as a contract whereby one
party agrees to pay to another a sum of money in exchange for the same consideration
on the happening of a certain event. It is a contract in which a sum of money is paid
by the assured in consideration of the insurer’s incurring the risk of paying a larger
sum upon a given contingency. The person or organization that protects another
against risk is known as the insurer; while the person who is protected against the
risk is called the insured. The document containing the agreement is the insurance
policy. The amount for which the insurance policy is taken is the insured amount. The
consideration which the insured has to pay to the insurer is known as the premium.
Insurance is an arrangement by which a company or the state undertakes to provide
a guarantee of compensation for specified loss, damage, illness, or death in return
for payment of a specified premium. Insurance is a contract of reimbursement. For
example, it reimburses for losses from specified perils, such as fire, hurricane, and
earthquake. An insurer is the company or person who promises to reimburse. The
insured (sometimes called the assured) is the one who receives the payment, except
in the case of life insurance, where payment goes to the beneficiary named in the life
insurance contract. The premium is the consideration paid by the insured—usually
annually or semiannually—for the insurer’s promise to reimburse. The contract itself
is called the policy. The events insured against are known as risks or perils. Insurance
is the process through which risk is transferred from the individual to the insurance
who takes into account the total likely loss in a certain period and then fixes the
premium to be charged from each person or property insured.


Legal definition of insurance is “A contract whereby, for specified consideration,
one party undertakes to compensate the other for a loss relating to a particular
subject as a result of the occurrence of designated hazards.”



According to E. W. Patterson, "Insurance is a contract by which one party for
compensation called premium assumes particular risk of the other party and
promises to pay to him or his nominee a certain sum of money on a specified
contingency".





Office Practice and Accounting 10 51

There is no single and universal definition of insurance. Insurance can be defined
from the view point of several disciplines including law, economics, history, actuarial
science, risk theory and sociology but the following two concepts are popular while
giving the meaning of insurance:-
Financial concept : According to this concept, insurance is a co-operative device to
spread the loss caused by a particular risk over a number of people, who are exposed
to it and who agree to insure themselves against the risk.

Contractual concept : According to this concept, insurance has been defined to be
that in which a sum of money as a premium is paid in consideration of the insurer's
incurring the risk of paying a large sum upon given contingency.


Functions of Insurance
The functions of insurance can be studied into two parts:

i. Primary Functions
ii. Secondary Functions.

Primary Functions
i. Insurance provides certainty : Insurance provides certainty of payment at the
uncertainty of loss. The uncertainty of loss can be reduced by better planning
and administration. But the insurance relieves the person from such difficult
task. Moreover, if the subject matters are not adequate, the self-provision may
prove costlier. There are different types of uncertainty in a risk. The risk will
occur or not, when will occur, how much loss will be there. In other words, there
are uncertainty of happening of time and amount of loss. Insurance removes all
these uncertainty and the assured is given certainty of payment of loss. The
insurer charges premium for providing the said certainty.
ii Insurance provides protection : The main function of the insurance is to provide
protection against the probable chances of loss. The time and amount of loss are
uncertain and at the happening of risk, the person will suffer loss in absence of
insurance. The insurance guarantees the payment of loss and thus protects the
assured from sufferings. The insurance cannot check the happening of risk but
can provide for losses at the happening of the risk.
iii. Insurance shares risk : The risk is uncertain, and therefore, the loss arising from
the risk is also uncertain. When risk takes place, the loss is shared by all the
persons who are exposed to the risk. The risk sharing in ancient time was done
only at the time of damage or death, but today, on the basis of probability of
risk, the share is obtained from each and every insured in the shape of premium
without which protection is not guaranteed by the insurer.








52 Office Practice and Accounting 10

Secondary Functions

i. It prevents loss : The insurance joins hands with those institutions which are
engaged in preventing the losses of the assured and so more saving is possible
which will assist in reducing the premium. Lesser premium invites more
business and more business causes lesser share to the assured. So again premium
is reduced to, which will stimulate more business and more protection to the
masses. Therefore, the insurance assists financially to the health organization,
fire brigade, educational institution and other organizations which are engaged
in preventing the losses of the masses from death or damage.
ii. It provides capital : The insurance provides capital to the society. The
accumulated funds are invested in productive channel. The dearth of capital
of the society is minimized to a greater extent with the help of investment of
insurance. The industry, the business and the individual are benefited by the
investment and loans of the insurers.
iii. It improves efficiency : The insurance eliminates worries and miseries of losses
at death and destruction of property. The care-free person can devote his body
and soul together for better achievement. It improves not only his efficiency, but
the efficiencies of the masses are also advanced.
iv. It helps in economic progress : The insurance protects the society from huge
losses of damage, destruction and death; provides an initiative to work hard for
the betterment of the masses. The next factor of economic progress, the capital,
is also immensely provided by the masses. The property, the valuable assets,
the man, the machine and the society cannot lose much at the disaster.

Types of Insurances

Life Insurance
Life insurance contract may be defined as the contract, whereby the insurer in
consideration of a premium undertakes to pay a certain sum of money either on the
death of the insured or on the expiry of a fixed period. Life insurance is a financial
cover for a contingency linked with human life, like death, disability, accident,
retirement, etc. It is a contract between the policy owner and the insurer. Human
life is subject to risks of death and disability due to natural and accidental causes.
When human life is lost or a person is disabled permanently or temporarily, there is
loss of income to the household. Though human life cannot be valued, a monetary
sum could be determined based on the loss of income in future years. Hence, in life
insurance, the sum assured (or the amount guaranteed to be paid in the event of a
loss) is by way of a ‘benefit’. Life insurance products provide a definite amount of
money in case the life insured dies during the term of the policy or becomes disabled
on account of an accident.
Types of Life Insurance

i. Term Insurance : Under a Term Insurance, the insurance company pays a specific
lump sum to the designated beneficiary in case of the death of the insured.
Office Practice and Accounting 10 53

These policies are usually for 5, 10, 15, 20 or 30 years. Term life insurance is the
most popular in advanced countries but not so popular in developing countries
like Nepal. However, after the entry of the private operators and aggressive
marketing by few players this kind of policies are becoming popular. The
premium on such type of policies is comparatively quite low when compared
with other types of life insurance policies, mainly due to the fact that these
policies do not carry cash value.
ii. Endowment Policy : An endowment policy is a life insurance contract designed
to pay a lump sum after a specific term (on its 'maturity') or on death. Typical
maturities are ten, fifteen or twenty years up to a certain age limit. Some policies
also pay out in the case of critical illness. An Endowment Policy is a savings
linked insurance policy with a specific maturity date. If an unfortunate event
by way of death or disability occurs during the period, the sum assured will be
paid to beneficiaries.
iii. Whole Life Insurance : With whole life insurance, insurers are guaranteed
lifelong protection. Whole life insurance pays out a death benefit so insurers
can be assured that the family is protected against financial loss that can happen
after death. It is also an ideal way of creating an estate for heirs as an inheritance.
iv. Anticipated Endowment Life Insurance : Under this scheme, a definite
fixed amount of money is reimbursed to the insured in the designated period
in between the insurance period. This insurance can be activated only by
participating in the profits accrued. This insurance can be done for periods
of 15, 20 or 25 years and in this scheme, the insurance sum is reimbursed 3
times in installments within the total insurance period. However, for 25 years
of insurance period, the reimbursement is made 4 times. But the bonus amount
can only be paid to the insured upon the maturity of insurance period. In case
the insured expires prior to the maturation of insurance period, whole of the
insurance sum and the earned bonus is awarded.
v. Money Back Plans or Cash Back Plans : These policies provide for periodic
payments of partial survival benefits during the term of the policy itself. A
unique feature associated with this type of policies is that in the event of death
of the insured during the policy term, the designated beneficiary will get the
full sum assured without deducting any of the survival benefit amounts, which
have already been paid as money-back components. Moreover, the bonus on
such policies is also calculated on the full sum assured.
vi. Children Policies : These types of policies are taken on the life of the parent/
children for the benefit of the child. By such policy the parent can plan to get
funds when the child attains various stages in life. Some insurers offer waiver of
premiums in case of unfortunate death of the parent/proposer during the term
of the policy.
vii. Annuity (Pension) Plans : When an employee retires he no longer gets his
salary while his need for a regular income continues. Retirement benefits like
provident fund and gratuity are paid in lump sum which are often spent too


54 Office Practice and Accounting 10

quickly or not invested prudently with the result that the employee finds himself
without regular income in his post - retirement days. Pension is therefore
an ideal method of retirement provision because the benefit is in the form of
regular income. It is wise to provide for old age, when we have regular income
during our earning period to take care of rainy days. Financial independence
during old age is a must for everybody.

There are two types of annuities (pension plans)

i. Immediate Annuity : In case of immediate annuity, the annuity payment from
the insurance company starts immediately. Premium for immediate annuity is
to be paid in lump sum in one installment only.
ii. Deferred Annuity : Under deferred annuity policy, the person pays regular
contributions to the insurance company, till the vesting age/vesting date. He
has the option to pay as single premium also. The fund will accumulate with
interest and fund will be available on the vesting date.


General or Non-life Insurance
The insurance other than life insurance is known as General or Non-life insurance.


Fire insurance
Fire insurance is an insurance that is used to cover damage to a property caused by
fire. Fire insurance is a specialized form of insurance beyond property insurance,
and is designed to cover the cost of replacement, reconstruction or repair beyond
what is covered by the property insurance policy. Fire insurance is a form of property
insurance which protects people from the costs incurred by fires. When a structure is
covered by this type of insurance, the insurance policy will pay out in the event that
the structure is damaged or destroyed by fire. Some standard property insurance
policies include fire coverage in their coverage, while in other cases, it may need to be
purchased separately.

Depending on the terms of the policy, fire insurance may pay out the actual
value of the property after the fire, or it may pay out the replacement value. In a
replacement value policy, the structure will be replaced in the event of a fire, whether
it has depreciated or appreciated: in other words, if homeowners purchase a home
and the value increases, as long as it is covered by a replacement value policy, the
insurance company will replace it. An actual cash value policy covers the structure,
less depreciation. Most accounts come with coverage limits which may need to be
adjusted as property values rise and fall.


Marine insurance
Marine insurance is a type of insurance that covers boats and ships, as well as their
cargo and in some instances the places where the boat or ship is docked. Ships sailing
on sea are subject to very many risks. They may collide against another ship, or be

Office Practice and Accounting 10 55

captured by thieves or founder on a rock. The ships and the cargo (i.e., the goods
on board) may be lost in such a case and a tremendous financial loss may be caused
to their owners. Such risks, if not covered, will constitute a great obstacle to the
international trade. It is to safeguard against them that marine insurance has been
devised. Marine insurance was the first type of insurance to make its appearance in
the early days of maritime commerce and was followed by life and fire insurance.
Marine insurance has a colorful history, beginning informally in England during the
17th century. In 1906, the Marine Insurance Act was passed under British law, creating
a standard operating procedure for policies that dictates the world's policies to this
day. The standards set forth by the act are considered reasonable, but due to changes
in technology and social standards, the act is generally seen as obsolete and is being
replaced by more modern legislature.
There are several varieties of insurance that can be taken out by a boat or ship owner.
Marine cargo insurance covers whatever goods the boat is carrying. Inland marine
insurance can be procured for floating vessels that are not ocean-bound, but travel
primarily on lakes, rivers and reservoirs. There are also more general policies that
cover the boat itself and its passengers, liability for damages to other moving vehicles
and liability during an encounter with a non-moving object. These all fall under the
heading of a marine insurance policy.

Motor insurance

A motor insurance policy is a mandatory policy issued by an insurance company as
part of prevention of public liability to protect the general public from any accident
that might take place on the road. It is insurance for a motor vehicle such as a car,
which provides protection against loss in the event of an accident, theft, etc
There are two types of motor insurance - The 'Act only policy' and a 'Comprehensive
policy'. The scope of the 'Act only' policy is to pay compensation for death or any
bodily injuries and for damage to property of third parties. While the insured is
treated as the first party and the insurance company as the second party, all others
would be third parties.

In case the vehicle is purchased under a hire-purchase agreement, the financiers insist
upon a comprehensive policy to take care of their interest as collateral security. The
perils covered under the comprehensive policy are fire or theft or both fire and theft
in combination with the minimum requirements of the act (i.e. third party liability).
Now in Nepal, the law mandates that every owner of a motor vehicle must have one
motor insurance policy.

Aviation insurance
Aviation insurance is insurance against claims and losses arising from the ownership,
maintenance, or use of aircraft, hangars, or airports including damage to aircraft,
personal injury, and property damage.



56 Office Practice and Accounting 10

It is a policy that offers property and liability coverage for aircraft. It covers losses
resulting from aviation risks that come about due to the maintenance and use of
aircraft, property damage, loss of cargo, or injury to people. It protects both its owners
and aircraft operators from unforeseen losses.
Aviation insurance is also known as aircraft insurance.


Employer's Liability Insurance
It is the insurance which intends to give the compensation to the employee in the case
of accident. It is a project for employers that protects them from major financial loss if
a worker experiences a job-related injury or illness that workers compensation doesn’t
cover. Employer's liability insurance can be packaged with workers compensation
insurance to further protect companies against the costs associated with workplace
injuries, illnesses and deaths that aren’t covered. An insurance policy that protects
employers from liabilities arising from disease, fatality, or injury to employees resulting
from workplace conditions or practices. Some jurisdictions make it compulsory for
employers to buy such insurance.


Employees Provident Fund

Employees Provident Fund manages provident fund in Nepal on behalf of the
Government of Nepal for government, public and private sector employees and come
under Ministry of Finance.
Employees Provident Fund (Karmachari Sanachaya Kosh ) is an approved retirement
fund of Government of Nepal and the provident fund that it manages is supposed
to help contributors financially on retirement or separation from their jobs. Besides
managing provident fund of contributors, there is practice of providing certain social
benefits to the contributors.
Membership to Employees Provident Fund is also open to private sector firms with
the only condition that such firms should have at least ten employees contributing
regularly to become a member.
The history of Provident Fund dates back to 1934 when the provident fund scheme
came into existence with the establishment of Sainik Drabya Kosh (Army Provident
Fund) during the Rana Regime. The scheme was initiated with the intentions of
removing financial hardships to the army personnel after their retirement. Under the
scheme, the army staff were required to contribute a specific percentage of their salary
to their provident fund account in Sainik Drabya Kosh. A decade later the scheme was
broadened to cover the employees of civil services as well.
A separate organization named Nijamati Provident Fund was established in 1944 to
manage the scheme for civil servants working within Kathmandu. In 1948 the scheme
was extended to provide coverage to the entire civil servants working throughout
Nepal. In 1959, Employees Provident fund Department was established under the
Ministry of Finance and Economic Affairs. This department was entrusted with the

Office Practice and Accounting 10 57

management of both Sainik Drabya Kosh and Nijamati Provident Fund. With this,
the scope of the scheme was extended to cover all government employees including
the police.
Three years after the establishment of Employees Provident fund Department, a
special Act called "Karmachari Sanchaya Kosh (KSK) Act" was legislated in the year
1962. The same year the present Karmachari Sanchaya Kosh was established under
the act as an autonomous provident fund organization.
After the establishment of Karmachari Sanchaya Kosh the previous Sainik Drabya
Kosh, Nijamati Provident Fund and Provident Fund Department were merged into
Karmachari Sanchaya Kosh. Since then Karmachari Sanchaya Kosh has grown by leaps
and bounds and today it stands as a strong social security providing organization in
Nepal.
The rate of provident fund contribution for all employees is ten percent of their
salary, which is to be supplemented by an equal amount by the employer. The total
PF contribution amount is to be sent to Emplyoyees Provident Fund on a monthly
basis when salaries are prepared.

It manages the provident fund of all Army and Police personnel, civil servants,
employees of state owned corporations, and teachers of Government Schools in
Nepal. Similarly, any private sector establishments with more than ten employees
are also eligible to become members, and it also manages the provident fund of their
employees as well. Besides provident fund management, it provides the following
social security benefits:
• Accident Indemnity
• Funeral Grant
• Employees Welfare Scheme (Insurance)
• Participation in Profit

Citizen Investment Trust

Citizen Investment Trust (Nagarik Lagani Kosh), a statutory institute under Citizen
Investment Trust Act, 2047, has ownership of Nepal Government as a public financial
organization. It was established on 4th Chaitra, 2047B.S as an autonomous body.
Formally it has been operating its activities since 1st Magh, 2048. It operates and
manages various types of retirement schemes/programs as well as various unit schemes
and mutual fund program for both domestic and foreign investors to encourage the
people for saving in order to expand fund and increase the investment opportunities
along with the dynamic development of the capital market to contribute economic
development of the nation.

Citizen Investment Trust has been providing various types of voluntary retirement
schemes (Pension funds, Gratuity funds, etc.) and mandatory insurance fund
programs on the basis of fully funded and individual account. Citizen Investment



58 Office Practice and Accounting 10

Trust, at the same time is encouraging the long-term saving mobilizations by
operating Employee Savings Growth Retirement Fund (ESGRF), Insurance Funds for
Civil Service employees, Teachers, Nepal Army Employees, Nepal Police Employees,
Armed Police Force Employees and other institute’s employees to help the depositors
for saving to expand fund and increase opportunities to investment along with the
development of the capital market.
The head office of Citizen Investment Trust is at Newbaneshor, Kathmandu and
branch offices are at Pokhara and Biratnager.


Functions of Citizen Investment Trust

A. Saving Mobilization Function :

Under this function Citizen Investment Trust operates different kinds of retirement
schemes such as Gratuity funds, Nepal Government Employees Insurance Funds,
Teacher’s Insurance Funds, Employees Saving Growth Retirement Funds, Pension
Funds. Besides this, it operates various unit and mutual fund schemes to both
domestic and foreign investors and it also operates Investor’s Account scheme.


B. Investment / Financing :
Citizen Investment Trust performs investment and financing functions for capital
mobilization. Under this, it invests in corporate shares, debentures and government
securities and provides credit for purchasing shares.

C. Capital Market Services :

In addition to its regular functions Citizen Investment Trust performs the capital
market functions which covers the trustee services and corporate finance service.
Under trustee service custodian services debenture trustee services are provided
whereas market making of corporate and government securities, public issue
management and consultancy services are rendered under corporate finance service
Objectives of Citizen Investment Trust are as follows :

1. To attract Nepali citizens residing in the country and abroad towards the
programs offered by the Citizens Investment Trust.
2. To operate Citizen Investment Trust’s additional programs related to social
security.
3. To invest in prioritized sectors. (Hydropower, infrastructure development,
productive sector, tourism and export promotion, capital market instrument)
4. To invest Citizen Investment Trust’s funds in sectors having minimum risks.
5. To play the role of market maker and sales and issue manager.
6. To make instruments of capital market service more effective.



Office Practice and Accounting 10 59

Financial Cooperative
A financial cooperative is such kind of financial institute which is owned and operated
by its members. The goal of a financial cooperative is to act on behalf of a unified
group as a traditional banking service. These institutions attempt to differentiate
themselves by offering above-average service along with competitive rates in the
areas of insurance, lending and investment dealings. Literally, the word co-operative
means working together for mutual benefits. From economic point of view, co-
operative is a voluntary association of people established by an economically weak
persons for the betterment of their economic condition through mutual help. It is
based on the concept that economic conditions of the weaker sections of the people
can be improved by co-operation, but not by competition. As such persons living in
the same locality and having common needs join together in the form of association,
known as co-operative organization for mutual benefit. As this is a co-operative
organization, profit motive is missing and it is replaced by service motive. In case
there is surplus, it is distributed among the members equitably on the basis of per
member but not per share. Every member in co-operative has the sentiment of ‘we'
instead of 'I' and let’s do work for ourselves’. Every member in co-operative has equal
voting rights. Generally the persons belonging to a certain locality, region or group
form a co-operative society for the promotion of their common economic, educational
and social needs. They join together for business with the principle of equality and
mutual help. It is a democratic organization established with equal contribution from
all its members. In co-operative organization people can enter into and exit from there
at their own wish but they cannot transfer their shares to another party.
The first co-operative organization was initiated by Robert Owen in 1844 A.D. named
as “Rochdale Society of equitable pioneers”. The main objective of this society was to
save poor people by providing goods at cheaper rates than the market by eliminating
middle man and provide better service to its members.


According to Prof. Henry Clavert, “Co-operative society is the form of
organization in which person voluntary associated together as human beings
on the basis of equality for the promotion of economic interests of themselves.”



Thus, co-operative organization is a voluntary association of people or group living
in the same region having limited means, common interests and who are willing to
improve their economic condition through mutual co-operation and investment. It is
guided by the principle of “All for each and each for all.” i. e. a democratic set up by
which the common interest of the members are served. All co-operative organizations
of Nepal must be registered in accordance with the Co-operative Act 2048 B.S. (revised
2056).








60 Office Practice and Accounting 10

Principles of Co-operatives

a. Democratic Management: The management is always a democracy. Members
can elect a body of persons to administer the day to day functions of the society.
b. Self help through mutual help: The objective is not maximization of profit but
to provide service to members.
c. Voluntary membership: Any member is at liberty to join or leave the cooperative
society. There are no restrictions on admission on the basis of religion or caste
or political party.
d. One man one vote: Irrespective of a member’s contribution to capital each
member is given only one vote. So there is no question of oppression of minority.
e. Distribution of surplus: The society can allocate a portion of the surplus towards
reserve and common welfare measures and distribute the rest in the form of
dividend.

The functions of financial co-operative organization are as follows :

i. It encourages saving by collecting deposits daily, weekly or as per convenience
of people.
ii. Co-operative organizations help to improve the living standard of their
members by encouraging saving and investment; these all result in to the
economic prosperity of people.
iii. It provides loan facility to its members at nominal rate of interest even without
collateral, on group guarantee basis.
iv. It collects products from various small producers and performs different
marketing activities like grading, packaging, advertising and also transportation,
warehousing and insurance of their products.
v. It helps to eliminate the middle men by purchasing various products in bulk
directly from producer or manufacturer and sells it to its members at fair price.
vi. It develops industrial and agricultural sectors especially in rural areas.
vii. It does not discriminate members on the basis of their age, caste, sex and
religion. It helps to develop the feeling of mutual help, hard work, saving, self
dependence, confidence, etc among the members.
viii. Co-operative organizations directly and indirectly generate various employment
opportunities in the society.















Office Practice and Accounting 10 61

EXERCISE


Answer the following questions in one sentence.

1. Which is the first central bank of the world?
2. What are the parties involved in a cheque?
3. Write the name of the central bank of Nepal.
4. What is the first commercial bank of Nepal?
5. What is crossed cheque?
6. Name any two accounts created by commercial bank to accept the deposit.
7. When was the first bank of Nepal, Nepal Bank Limited, established?
8. What was the capital of Nepal Rastra Bank at the time of its establishment.
9. Name any two types of cheque.

Give long answer to the following questions.

1. What is Central Bank? Explain its functions.
2. What is a commercial bank? Which is the first commercial bank of Nepal?
Explain its functions.
3. Introduce development bank. What are the types of development banks
operating in Nepal? Explain functions of development bank.
4. What do you mean by bank? What are the types of bank operating in Nepal?
Explain any eight functions of a bank.
5. What is insurance? What are its types? Explain the functions of insurance.
6. What is life insurance? Explain the types of life insurance.
7. Introduce Employees Provident Fund and explain the functions and roles of
central bank.
8. Introduce financial institution and explain its types.
9. What is meant by cheque? Explain the types of cheque and mention the causes
for dishonour of a cheque.
10. What is a bank? Explain the importance of bank.

One very short question of 1 mark and one long question of 10 marks will
be asked from this unit.














62 Office Practice and Accounting 10

UNIT
5 Trial Balance
























Learning objectives:

After the completion of this unit, students will be able
to understand :
• meaning and definition of trial balance.
• objectives of preparing a trial balance.
• specimen of trial balance.

• preparation of trial balance.
• accounting errors.





























Office Practice and Accounting 10 63

5 Trial Balance













The fundamental principle of double entry system of accounting is that for every
debit entry there must be a corresponding credit entry. In the preparation of journal
as well as ledger, both aspects of transaction are taken into account. Thus for every
debit there is a corresponding credit of an equal amount given to some other account
and vice versa. This implies that the total of debit amount must be equal to the total
of credit amount. If journal entries are correctly posted to different ledger accounts,
the total of all debit posting in the trial balance must be equal to the total of credit
posting in trial balance. If debit totals or balances do not tally with the credit totals or
balances, it means that some mistake has crept in.
Trial balance is the statement of debit and credit balances of ledger balances, which is
prepared to check the arithmetical accuracy of journal and ledger after certain interval
of time. Total of debit and credit side of trial balance must be equal. If it is not equal,
there is arithmetical error either in journal or ledger.


Definitions


According to R.N.Carter: "Trial balance is the list of debit and credit balances,
taken out from ledger, it also includes the balances of cash and bank taken
from cash book."



According to M.S. Gosav: Trial balance is the statement containing the
balances of all the ledger accounts at any given date, arranged in the form of
debit and credit columns, placed side by side and prepared with the objective
of checking the arithmetical accuracy of ledger posting.”



In the words of Pickles: "The statement prepared with the help of ledger
balances, at the end of financial year (or at any other date) to find out whether
debit total agrees with credit total is called trial balance."


Thus, we can say that trial balance is a statement in which the debit and credit balances
of all accounts are recorded with a view to ascertain the arithmetical accuracy of the
books of accounts.


64 Office Practice and Accounting 10

The following are the main objectives of trial balance.
a. To check arithmetical accuracy: A trial provides a good check on the accuracy
of the work done in preparing the ledger accounts. If the trial balance agrees,
it proves that books are arithmetically accurate and that both the aspects of the
transactions have been correctly recorded in the books of original entry as well
as in the ledger. But if the trial balance totals do not agree, then it shows that
there are some arithmetical errors.
b. To help to prepare the final account: Trading account, profit and loss account
and balance sheet are together known as final account. The trial balance
facilitates to prepare the trading and profit and loss account which reveals the
profitability of the firm. Similarly, it helps to prepare balance sheet to reflect the
financial status of the firm.
c. To help to locate errors: Total of debit and credit side of trial balance must be
equal. If it is not equal, there is arithmetical error either in journal or in ledger.
The trial balance helps to locate the arithmetical errors which can be rectified in
time.
d. To present the summary: Trial balance is a list or statement of ledger balances.
It gives the summarized data of assets, expenses, capital, income and liabilities,
at a glance.

Advantages/Importance of trial balance

i. It helps to check arithmetical accuracy of journal and ledger.
ii. It helps to find out and rectify the error located.
iii. It is helpful in internal audit of the organization.
iv. It helps to summarize the financial transactions.
v. It is helpful in preparation of final account.
vi. It helps to provide information of capital, income, liabilities, assets and expenses
at a glance.
SPECIMEN OF TRIAL BALANCE


Trial Balance of ..........................
As on ..........................

S.N. Particular LF Dr. (Rs.) Cr. (Rs.)
1 2 3 4 5











Office Practice and Accounting 10 65

Explanation of the columns
At the top of the trial balance, name of the company or firm is written along with the
date, on which trial balance is prepared.
1. In this column, serial number of account heads is written.
2. This column is to write the name of account heads.
3. Ledger folio (i.e. page number of ledger) is written in this column.
4. This column is to write debit amount of respective account.
5. Credit amount of corresponding account is written in this column.


Methods of preparing trial balance
There are three methods of preparing trial balance. They are :
1. Total Method: According to this method, the debit totals and credit totals of
each account of ledger are recorded in respective sides of trial balance. This
method is not popular in preparing the trial balance because final account is
prepared with the help of ledger balances but this method provides the total
amount of debit and credit of each ledger. Normally, accounting figures seem
large if total method is applied.
Trial Balance of ..........................
As on ..........................

Total Amount of Total Amount of
S.N. Particular LF
Dr. (Rs.) Cr. (Rs.)







2. Balance Method: According to this method, only the balances of the accounts
either debit or credit, are recorded against their respective accounts. Preparation
of trial balance under this method is popular and common, now a days. The
difference of the two sides of every account are found out and short amount
is added to make the ledger balances equal, if there is difference in ledger. The
added amount is brought down in opposite side. The brought down amount is
taken to respective side of trial balance. The total of debit column and total of
credit column of trial balance should be equal to prove arithmetical accuracy.
Trial Balance of ..........................
As on ..........................

S.N. Particular LF Dr. (Rs.) Cr. (Rs.)







66 Office Practice and Accounting 10

3. Mixed Method: Under mixed method total amount and balance amount both
are used for the preparation of trial balance. This is the combination of total and
balance methods.
Trial Balance of ..........................
As on ..........................

Total Method Balance Method
S.N. Particular LF
Dr. (Rs.) Cr. (Rs.) Dr. (Rs.) Cr. (Rs.)






















Considerations for preparation of trial balance:
The following points should be taken into consideration while preparing trial balance:

1. The method of trial balance should be chosen carefully.

2. All the ledger balance should be up to date and correct.
3. Serial number should be written in first column of trial balance.

4. Account heads from respective sides of ledger should be in second column
and page number of ledger is written in third column for the quick location of
account heads.

5. Debit and credit amount should be written in fourth and fifth column
respectively.

6. Debit and credit side of trial balance must be equal. If it does not agree, there is
arithmetical error which should be rectified promptly.

7. It should be noted that agreement of trial balance does not assure absolute
accuracy because only arithmetical errors are disclosed by trial balance.

8. All types of assets, expenses and losses should be recorded in debit side and
capital, incomes and liabilities in credit side.



Office Practice and Accounting 10 67

Accounts that figure in trial balance

Debit

Bank, Motor vans, Furniture and fittings, Debtors, Machinery, Opening Stock,
Cash, Premises, Goodwill, Patent, Trademarks, Investment, Prepaid expenses,
Accrued income, Bills receivable, Copyright, Purchases, Carriage in and out,
Wages, Salaries, Advertising, Rent and rates, Printing and stationery, Discount
allowed, Bad debts written off, Depreciation, lighting and heating, Other
expenses, Insurance, Commission paid, Interest paid, Electricity charges,
Telephone charges, Traveling expenses, Administrative expenses, Drawing,
Stock taken for own use, Sales return, etc.

Credit

Capital, Creditors, Loans from others, Outstanding expenses, Unearned income,
Bank overdraft, Bills payable/Account payable, Unearned income, General reserve
Provision, Sales, Commission received, Rent received, Discount received, Bad debts
recovered, Dividend received, Provision for Depreciation account, Provision for
bad debts, Purchase return, Interest received.


Accounting errors
Total of debit and credit side of trial balance must be equal. If it is not equal, there
is error somewhere in the records. The mistake can be committed while recording
financial transactions into journals and posting in ledger which is known as accounting
errors. Such errors creep in books of account either due to the lack of knowledge of
accounting principles or owing to oversight. Generally, there are two types of errors
from the point of view of trial balance which are discussed below:

1. Errors disclosed by trial balance
2. Errors not disclosed by trial balance
1. Errors disclosed by trial balance

The following are errors which can be detected by preparing trial balance. Trial
balance disagrees if the following errors occur:
i. If amount is omitted to post into ledger: If any amount of one side is not posted
from journal in to ledger, two sides of the trial balance will not be equal.
ii. If total of subsidiary books is wrong: If there is any wrong totaling in subsidiary
books, this causes the disagreement in trial balance.
iii. If wrong amount is posted in ledger: Amount is correctly recorded in journal
but wrongly posted in ledger. It is the reason for disagreement of trial balance.
For e.g., furniture purchased for Rs. 5000 correctly recorded in journal but
forgotten to record either in cash or furniture account leads to mismatch of trial
balance by Rs. 5000.


68 Office Practice and Accounting 10

iv. If balancing is wrong in ledger: While using balance method, the balancing
figure is transferred to trial balance but if balancing is wrong there will be
disagreement in trial balance.
v. If same account is posted twice: Sometimes an error occurs if any entry is
posted twice in one account which causes the disagreement of trial balance. For
e.g., furniture purchased for Rs. 5000 correctly posted in furniture account but
posted twice in cash account.
vi. If total of ledger is wrong: Due to the wrong totaling of ledger, trial balance
fails to agree.
vii. If amount is posted in wrong side of trial balance: Amount from ledger should
be transferred to respective sides of trial balance but if amount is transferred to
wrong side, trial balance does not agree.
viii. If amount is not posted in trial balance: If the amount is omitted to record in
trial balance, it does not agree.
ix. If wrong calculation is done in trial balance: Wrong totaling in trial balance is
another cause for disagreement of trial balance.


2. Errors not disclosed by trial balance
Although disagreement of trial balance always signals the presence of error, its
agreement does not assure a conclusive proof as to the absolute accuracy of the books,
there are some kinds of errors which do not affect the agreement of trial balance
known as errors not disclosed by trial balance. Following are the examples of such
errors :
i. Errors of omission: Errors of omission refer to not recording in the books of
account, either wholly or partially. When a is transaction altogether omitted
from the record, the error may be difficult to detect because it will not affect
the total of trial balance. E.g goods of Rs. 700 purchased but not recorded in
the book is called total omission. Furniture of Rs. 12,000 purchased recorded
in journal book but has not been posted in both of ledger account is partial
omission.
ii. Errors of commission: When incorrect entries are made in the books of original
entry or ledger account, either wholly or partially, the errors are known as errors
of commission. This error includes wrong entries, wrong posting of numerical
figures. E.g. goods of Rs. 700 purchased recorded as Rs. 7000.
iii. Compensating error: When one error is compensated or overlapped by another
error of same amount such error is known as compensating error. E.g. payment
of salary Rs. 6000 is recorded in debit correctly but as Rs. 600 in credit and
payment of commission Rs. 600 recorded again correctly in debit but recorded
Rs. 6000 in credit. Here in first case, credit side is less recorded by Rs. 5400
wrongly but next time again wrongly ,cash is over recorded by Rs. 5400 which
compensates the previous error.



Office Practice and Accounting 10 69

iv. Errors of duplication: An error of duplication occurs when the same transaction
has been recorded twice in the books of original entry and also posted twice in
the ledger. E.g. purchase worth Rs. 7000 may be recorded twice in the accounts.
v. Errors of principle: Errors of principle occurs due to the violation of fundamental
principles of accounting. This may be due to lack of correct knowledge of
the accounting principle on the part of the recording clerks. E.g. salary paid
recorded in wages, purchase of assets recorded in purchase book etc.


Adjustment and closing of trial balance or suspense account
When the trial balance does not agree and error still are undetected due to the limited
time, suspense account is opened to make the trial balance equal and account is closed.
Thus, suspence account is a temporary account opened to make the trial balance
equal. It is opened to rectify only those errors which affect the trial balance. Debit
balance of suspense account is taken to assets side and credit balance of suspense
account is taken to liability side of balance sheet. The amount appearing on the debit
or credit side of suspense account is result of one sided error. After locating such
errors suspense account should be closed.

Illustrations


1. The following ledger balances have been extracted from the books of
Pathivara Company as on 31st Chaitra 2072. Prepare trial balance.


Bank loan 2,50,000

Creditors 50,000
Cash in hand 40,000
Debtors 60,000
Share capital 3,00,000

Revenue 8,00,000
Fixed assets 7,00,000

Administrative expenses 2,00,000
Salaries 2,50,000
Selling expenses 1,50,000












70 Office Practice and Accounting 10

Ans:
Trial Balance
Pathivara Company
As on 31-12-2072



Particulars Debit (Rs.) Credit (Rs.)
Share capital – 3,00,000
Revenue – 8,00,000
Bank loan – 2,50,000

Creditors - 50,000
Cash in hand 40,000 –
Debtors 60,000 –

Fixed assets 7,00,000 –
Administrative expenses 2,00,000 –

Salaries 2,50,000 –
Selling expenses 1,50,000 –
Total 14,00,000 14,00,000



2. The ledger balance of X Co. Ltd. as on 31st Chaitra is given below:


Share capital 2,50,000

Sales 4,00,000
Purchases 2,95,000
Wages 20,000

Carriage 5,000
Salaries 30,000
Fixed assets 3,00,000

Creditors 50,000
Debtors 40,000
Insurance 10,000


Required: Trial Balance



Office Practice and Accounting 10 71

Ans :
Trial Balance
X Company Limited
As on 31 Chaitra

Particulars Debit (Rs.) Credit (Rs.)
Share capital – 2,50,000
Sales – 4,00,000
Purchases 2,95,000 –
Wages 20,000 –
Carriage 5,000 –
Salaries 30,000 –
Fixed assets 3,00,000 –
Creditors – 50,000
Debtors 40,000 –
Insurance 10,000 –
Total 7,00,000 7,00,000
3. The following is the ledger balance of Mr. Dipendra, as on 31st
December 2016. You are required to prepare Trial Balance.



Plant and Machinery 1,20,000
Furniture 30,000
Debtors 1,00,000
Opening stock 70,000
Capital 1,60,000
Loan 40,000
Bills payable 44,000
Purchase 2,40,000
Cash in hand 2,000
Bills receivable 40,000
Sundry creditors 48,000
Provision for bad debt 2,400
Rent and tax 20,000
Wages 32,000
Salaries 46,000
Sales 4,05,600






72 Office Practice and Accounting 10

Ans :
Trial Balance
Mr. Dipendra
As on 31-12-2016

Particulars Debit (Rs.) Credit (Rs.)
Plant and Machinery 1,20,000
Furniture 30,000
Debtors 1,00,000
Opening stock 70,000
Purchase 2,40,000
Cash in hand 2,000
Bills receivable 40,000
Rent and tax 20,000
Wages 32,000
Salaries 46,000
Capital 1,60,000
Loan 40,000
Bills payable 44,000
Sundry creditors 48,000
Provision for bad debt 2,400
Sales 4,05,600
Total 7,00,000 7,00,000

4. Bright company Limited has the following information on 31st Chaitra,
2072.

Insurance 17,200
Opening stock 1,15,000
Plant 8,60,000
Equity share capital 5,37,000
Debenture 1,61,250
Sales revenue 7,96,000
Interim dividend 5,400
Purchase 3,87,000
General expenses 53,750
Tax paid 7,500
Wages and salary 1,00,000
Retained earnings 51,600



Office Practice and Accounting 10 73

Ans :
Trial Balance
Bright Company Limited
As on 31-12-2072


Particulars Debit (Rs.) Particulars Credit (Rs.)
Insurance 17,200 Equity share capital 5,37,000
Opening stock 1,15,000 Debenture 1,61,250
Plant 8,60,000 Sales revenue 7,96,000
Interim dividend 5,400 Retained earnings 51,600
Purchase 3,87,000
General expenses 53,750
Tax paid 7,500
Wages and salary 1,00,000
Total 15,45,850 15,45,850



5. You are given the following information of XYZ Company Ltd as on
31st December 2015.

Office expenses 74,250
Machinery 1,35,000
Dividend received 15,000
Stock 1,87,500
Salary 78,000
Interest income 9,000
Bad debt recovered 6,000
Bank loan 4,50,000
Bad debt provision 15,000
Debtors 4,50,000
Creditors 3,00,000
Buildings 6,75,000
Bank 63,000
Cash 4,500
Carriage in 23,700









74 Office Practice and Accounting 10

Purchase 7,80,000
Telephone 21,300
Stationery 9,000
Advance income 1,50,000
Drawing 15,000
Insurance 26,250
Wages 60,000
Sales 10,80,000
Advertisement 37,500
Investment 1,50,000
Capital 8,25,000
Bill receivable 60,000

Ans :
Trial Balance
XYZ Company Limited
As on 31-12-2015

Particulars Debit (Rs.) Credit (Rs.)
Office expenses 74,250 –
Machinery 1,35,000 –
Dividend received – 15,000
Stock 1,87,500 –
Salary 78,000 –
Interest income – 9,000
Bad debt recovered – 6,000
Bank loan – 4,50,000
Bad debt provision – 15,000
Debtors 4,50,000 –
Creditors – 3,00,000
Buildings 6,75,000 –
Bank 63,000 –
Cash 4,500 –
Carriage in 23,700 –
Purchase 7,80,000 –
Telephone 21,300 –
Stationery 9,000 –
Advance income – 1,50,000
Drawing 15,000 –







Office Practice and Accounting 10 75

Insurance 26,250 –
Wages 60,000 –
Sales – 10,80,000
Advertisement 37,500 –
Investment 1,50,000 –
Capital – 8,25,000
Bill receivable 60,000
Total 28,50,000 28,50,000



EXERCISE

1. What is a trial balance?
2. Give any three objectives of trial balance.
3. Name various methods of preparing trial balance.
4. What are the errors disclosed by trial balance?
5. What are the errors not disclosed by trial balance?
6. Write about the error of principle.
7. What do you mean by error of commission?
8. Write in short about error of omission.
9. What do you mean by suspense account?

Practical Problems


1. Prepare Trial Balance from the following ledger balance, extracted
from the books of Laxmi Dairy as on 31-12-2015.

Particulars Amount Particulars Amount
Cash 21576 `
Capital 50,000 Drawings 2000
Bank 9900 Discount 199
Machinery 10,000 Return out 1300
Sales 25500 Furniture 5000
Purchase 28000 Telephone 500
Debtors 3150 Creditors 4700
Sales return 350 Postage 825

Ans: Total Rs. 81,500




76 Office Practice and Accounting 10

2. From the following information, prepare a Trial Balance for the year
2015.

Particulars Amount Particulars Amount
Bank 83500 Purchase 140,000
Capital 1,60,000 Advertisement 15,000
Vehicle 50,000 Rent 30,250
Equipment 30,000 Sales 64,750
Creditors 130,000 Drawing 6,000


Ans: Total Rs. 3,54,750
3. From the following balance, prepare a Trial Balance of Panchakanya
Traders as on 31 Chaitra 2071.
Particulars Amount Particulars Amount
Opening stock 40,000 Office expenses 315,000
Sales 13,50,000 Wages 225,000
Purchase 8,42,000 Debtors 4,12,500
Creditors 510,000 Land and building 13,86,000
Other income 25,000 Loan 3,16,000
Rent 24000 Vehicle 1,85,000
Bank 71,500 Capital 13,00,000

Ans: Total Rs 35,01,000
4. You are given the following information.


Bank 20,25,000
Capital 20,00,000
Purchase 6,00,000
Furniture 1,00,000
Rent 50,000
Machinery 1,00,000
Creditors 1,00,000
Debtors 2,00,000
Sales 10,00,000
Telephone bill 5,000
Salary 20,000

Required: Trial balance of Pathivara Trading House at the end of 2016.
Ans: Total Rs 31,00,000

Office Practice and Accounting 10 77

5. Prepare a Trial Balance from the given informations below:
Capital, Rs 1,35,800, Drawing, Rs 10,000, opening stock Rs 2,00,000; cash Rs
30,600, Purchase Rs. 1,00,000 sales Rs 1,60,000, Trade expenses Rs, 1,000, Carriage
out Rs. 1,000, Advertisement Rs 1,600, Discount Rs 600, Interest received Rs
1000, Copyright Rs 10,000, Loan Rs, 60,000, Carriage Rs 2,000.
Ans: Total Rs. 3,56,800

6. Prepare a Trial Balance of ABC Company for the year ended 31st Ashad
from the following particulars.
Capital 5,20,000
Purchase 4,00,000
Salary & wage 60,000
Building 5,10,000
Sales 4,80,000
Goodwill 1,00,000
Interest 20,000
Rent earned 90,000
Ans: Rs. 10,90,000
7. Prepare a Trial Balance of Peace Land Secondary for the year ended
31st Ashad from the following particulars.
Capital 3,20,000
Drawing 81,000
Purchases 9,50,000
Rent payable 50,000
Sales 11,80,000
Interest received 126000
Machine 3,50,000
Bank overdraft 96,000
Suppliers 71,000
Goodwill 462,000
Ans: Rs. 18,43,000
8. Prepare a Trial Balance as on 31st December 2010 from the following
particulars.
Particulars Amount (Rs) Particulars Amount (Rs)
Capital 5,00,000 Outstanding Expenses 10,000
Purchase 3,60,000 Salary 1,80,000
Wage 1,40,000 Bad debt 30,000
Machinery 3,10,000 Sales revenue 7,50,000
Creditors 25,000 Cash at bank 2,65,000
Ans: Rs. 12,85,000


78 Office Practice and Accounting 10

9. Prepare a Trial Balance of Ratna Emporium as on 31st Dec 2015 from
the following particulars.
Investment 3,00,000
Net profit 75,000
Capital 6,10,000
Cash in hand 55,000
Debtors 2,00,000

Drawing 60,000
Creditors 80,000
Goodwill 150,000
Ans: Rs. 7,65,500
10. Prepare a Trial Balance of ABC Concern for the year 2016 from the
following particulars:
Capital 4,25,000
Drawing 60,000
Purchases 6,60,000
Carriage outward 75,000
Opening stock 3,25,000
Bills payable 75,000
Sales 6,00,000
Discount received 20,000
Ans: Rs. 11,20,000
11. Prepare a Trial Balance of Kathmandu Stores for the year 2070/071 from
the following particulars.

Purchases 4,50,000
Loan from bank 3,35,000
Carriage inwards 40,000
Machinery 3,50,000
Bills receivables 30,000
Depreciation 20,000
Bad debt recovered 20,000
Sales 5,35,000
Ans: Rs. 8,90,000
12. Prepare a Trial Balance of X and Y Company for the year ended 31st
Ashad 2071.
Purchase 40,000
Royalty 26,789
Return outward 2,345
Power 2,000

Office Practice and Accounting 10 79

Sales 75,000
Wages and salary 13,210
Mortage loan 22,654
Goodwill 18,000
Ans: Rs. 97,654
13. Prepare a Trial Balance of Gajurmukhi Limited as at 2072 Ashar 31 on
the basis of following transactions.
Opening stock 27,000
Depreciation 35,000
Purchase 2,46,000
Sales 3,32,000
Purchase return 15,000
Insurance 40,000

Bank loan 23,000
Wages 22,000
Ans: Rs. 3,70,000
14. Prepare a Trial Balance of Medini Traders for the fiscal your 2071/2072
based on the following particulars.
Particulars Amount Particulars Amount
Capital Rs.3,50,000 Opening stock Rs. 2,00,000
Purchases Rs. 2,00,000 Bank overdraft Rs. 55,000
Insurance Rs.20,000 Bills payable Rs. 50,000

Sales Rs.2,50,000 Furniture Rs. 2,85,000
Ans: Rs. 7,05,000
15. Prepare a Trial Balance of Binay Kagaj Udhyog, Pokhara as on 31st
Chaitra 2072 from the following particulars:

Capital Rs. 1,00,000
Customer Rs. 50,000
Due wages Rs. 30,000

Furniture Rs. 90,000
Bad debts recovered Rs. 10,000

Goodwill Rs, 20,000
Rent Rs. 20,000
Account payable Rs. 40,000
Ans: Rs. 1,80,000


80 Office Practice and Accounting 10

16. Prepare a Trial Balance of 'Pawan Hardware' as on 31 Ashadh 2072 from
the following particulars:
Particulars Amount Rs.
Capital 2,50,000

Purchase 3,00,000
Discount 5,000

Sales 4,60,000
Rent 70,000
Stationery 30,000

Furnitures 3,23,000
Loan 18,000
Ans: Rs. 7,28,000
17. Prepare a Trial Balance of ABC Company on last of Chaitra 2073 from
the following transactions:
Particulars Amount Rs. Particulars Amount Rs.

Capital 35,000 Purchase 50,000
Sales 1,65,000 Wages 20,000
Salary 15,000 Machine 25,000

Land and Building 70,000 Debtors 20,000
Ans: Rs. 200000
18. Prepare a Trial Balance of ABC Traders for the fiscal year end of Asar
2071/072 from the following particulars.
Capital 600,000

Machine 580,000
Bank overdraft 40,000
Purchase 800,000

Bills payable 60,000
Sales 750,000

Sales return 20,000
Office expenses 50,000
Ans: Rs. 14,50,000


One short numerical question of 5 marks will be asked from this unit.

Office Practice and Accounting 10 81

UNIT
6 Final Account




















Learning objectives:


After the completion of this unit, students will be able
to understand:
• the meaning of final accounts.
• the objectives of preparing final account.
• trading account.
• direct expenses.
• the explanation of items appearing in trading
account.

• the items to be shown on the credit side of trading
account.
• profit and loss account.
• indirect expenses.
• the difference between trial balance and balance
sheet.
• the preparation of balance sheet.
• the types of assets and liabilities.
• the adjustments in final accounts.
• the objectives of adjustments.













82 Office Practice and Accounting 10

6 Final Account

















A trial balance makes a definite stage in the preparation of accounts. It indicates
that all the transactions for a particular period have been duly entered, posted and
balanced. But this is not the end of book-keeping work. A firm or businessman wants
to know the profit or loss made by business in a given period and to understand the
financial position of the business in a given date. A firm or businessman can ascertain
these by preparing final accounts, which is prepared on the basis of trial balance.
The final account includes Manufacturing account, Trading account, Profit and loss
account and Balance sheet. Final account is also known as financial statement and
includes two statements namely-income statement (Trading and Profit and loss
account) and statement of financial position (Balance Sheet). Even though Balance
sheet is a statement, for all practical purpose, it is treated as a part of Final Account.


O. P. Gupta, “Final Account consists of trading account, profit and loss account
and balance sheet. Trading Account shows gross profit or loss, net profit or
loss is calculated from profit and loss account and balance sheet is prepared to
know the position of assets and liabilities. ”




Objectives of preparing final accounts
The objectives of final account are as follows:
1. To find out the net profit or net loss by preparing the profit and loss account.
2. To find out the financial position of a business firm by preparing the balance
sheet.
3. To provide the necessary data and information for financial analysis
4. To control financial activities of the business firm
5. To summarize the recorded financial transactions
6. To prepare plans and policy to guide the business ahead
7. To compare the performance internally and externally
8. To help management for right decision making



Office Practice and Accounting 10 83

Trading account


Meaning
Trading account is the first step in final account. It is prepared mainly to know the
profitability of goods bought or manufactured and sold by a firm or business man.
The difference between the selling price and the cost price of the goods is the gross
result. Here good means the things/goods bought for resale purpose in which assets
should not be included. It includes all those direct and factory expenses on the debit
side, and sales and closing stock on the credit side. If sale proceeds are more than the
cost of goods sold, gross profit is made and if sale proceeds are less than cost of goods
sold, gross loss is incurred. In other words, if total amount of credit side (sales and
closing stock) is greater than amount of debit side (all direct expenses), gross profit
is made and if total amount of debit side is greater than amount of credit side, gross
loss is incurred.

Objectives
Trading account is prepared with the following objectives:
i. To ascertain gross profit made or gross loss incurred during an accounting
period
ii. To know the information about direct expenses and direct income
iii. To determine the cost of goods sold
iv. To facilitate the preparation of profit and loss account
v. To know the efficiency of the firm in respect to direct expenses

Advantages
Advantages or importance of trading account are as follows:
i. It helps to ascertain gross profit made or gross loss incurred during an accounting
period.
ii. It helps to know the efficiency of the firm in respect to direct expenses.
iii. It helps to prepare plan and policies to control the cost.
iv. It provides information to the manager for decision making purpose.
vi. It facilitates the preparation of profit and loss account.

Items to be debited to trading account
1. Opening stock: The value of goods which remains unsold at the end of previous
accounting period.
2. Purchases and return outward: Amount of purchase is direct expenses and it
refers to purchases of raw materials. Net purchase is to be recorded for which
return of purchase is deducted.
3. Carriage or carriage inward: These are the expenses incurred while bringing
goods or raw materials.
4. Labor/Direct wages: Wages paid to workers, who are directly engaged and
contribute of production.


84 Office Practice and Accounting 10

5. All manufacturing expenses: All direct expenses that are incurred during the
production of goods such as octroi, import duty, excise duty, consumable goods,
motive power, coal, gas and water, factory expenses, dock charges, royalty, etc.

Items to be credited to trading account
1. Sales: Sales are the main source of revenue of business. Both cash and credit
sales should be recorded as revenue. It refers to the sales of those things/goods
which have been bought for resale purpose. It implies that sales of assets are not
treated to trading account. Sales returns or returns inwards, should be deducted
from the total sales as amount of net sale should be recorded.
2. Closings stock: Closing stock is the value of unsold goods at the end of current
period. In manufacturing company, three types of goods may remain as closing
stock :
i. closing stock of raw materials
ii. closing stock of work–in–progress and
iii. closing stock of finished goods.
Closing stock is treated to the credit side of the trading account.


Specimen of Trading Account

Trading A/C

.................. Co. Ltd.
For the year ending ............
Dr. Cr.

Particulars Amount Particulars Amount
To opening stock: By Sales: xxx
raw materials xxx less: return inwards xxx
work-in-progress xxx By Closing stock: xxx
finished goods xxx xxx
To purchases raw material xxx
less: return outwards xxx work-in-progress xxx
less: drawing in goods xxx finished goods xxx xxx
less: free sample xxx xxx By goods lost xxx
To carriage inwards xxx By gross loss c/d xxx
To duty and clearing charges xxx
To wages xxx
To power, fuel and lighting xxx
To store consumed xxx
To factory rent and insurance xxx
To royalties for production xxx
To Factory expenses xxx
To other manufacturing expenses xxx
To gross profit c/d xxx
Total xxx Total xxx




Office Practice and Accounting 10 85

Illustrations

1. Prepare a Trading Account of XYZ Company Pvt. Ltd., Kathmandu for
32nd Ashadh 2072 from the following transactions:

Opening stock 3,56,000 Purchases 14,80,000
Coal 2,48,000 Sales 25,25,000
Sales return 50,000 Factory rent 3,000,00
Wages 2,000,00 Closing stock 6,75,000
Purchase return 90,000 Production expenses 3,56,000


Trading Account
XYZ Company Pvt. Ltd.
for the year ended 32 Ashadh, 2072

Dr. Cr.
Particulars Amount Particulars Amount
To Opening stock 3,56,000 By Sales 25,25,000
To Purchase 14,80,000 Less: Sales return (50,000) 24,75,000

Less:- Purchase return 90,000 13,90,000 By Closing stock 6,75,000
To Coal 2,48,000

To Factory rent 3,00,000
To Wages 2,00,000
To Production expenses 3,56,000

To Gross profit 3,00,000
Total 31,50,000 Total 31,50,000


2. Prepare Trading Account from the information that is given to you:
Opening stock 70,000
Carriage inwards 10,000

Motive power 8,000
Wages 9,000

Net sales 2,70,000
Purchases 1,40,000
Factory expenses 18,000

Closing stock 90,000



86 Office Practice and Accounting 10

Solution :


Trading Account of ............
for the year ended ............

Dr. Cr.
Particulars Amount Particulars Amount
To Opening stock 70,000 By Sales 270,000

To Purchases 1,40,000 By Closing stock 90,000

To Factory expenses 18,000
To Carriage inwards 10,000

To Motive power 8,000

To Wages 9,000

To Gross profit c/d 105,000
3,60,000 3,60,000



3. You are given the following ledger balances:
Opening stock Rs. 25,000

Purchase Rs. 63,000
Purchase return Rs. 3,000

Sales Rs. 122,000
Sales returns Rs. 2,000
Fuel and power Rs. 7,000
Factory expenses Rs. 12,000

Wages Rs. 10,000
Carriage inwards Rs. 3,000

Excise duty Rs. 1,500
Closing stock Rs. 25,000
Required: Trading Account of Arya Enterprises for the year ending Chaitra 2072.









Office Practice and Accounting 10 87

Solution :


Trading Account
Arya Enterprises
For the year ended 30/12/2072

Dr. Cr.
Particulars Amount Particulars Amount
To Opening stock 25000 By Sales 112,000
To Purchase 63,000 Less sales return 2,000 120,000
Less: Purchase return 3,000 60,000 By Closing stock 25,000
To Wages 10,000

To Carriage inwards 3,000
To Fuel and power 7,000
To Factory expenses 12,000
To Excise duty 1,500
To Gross profit 26500
1,45,000 1,45,000


4. Prepare Trading Account of Acharya Trade Concern for the year 2015.

Opening stock 4500
Purchases 85, 290
Wages 9870

Sales 98,000
Carriage on purchase 600
Cartage and freight 700

Sales returns 1000
Purchase returns 290

Royalty 8760
Octrie 7500
Closing stock 12000










88 Office Practice and Accounting 10

Acharya Trade Concern

Trading Account
For the year ended 30-12-2015

Dr. Cr.
Particulars Amount Particulars Amount
To Opening stock 4500 By Sales 98000
To Purchase 85290 Less sales return 1,000 97,000
Less: Purchase return 290 85000 By Closing stock 12000
To Wages 9870 By Gross loss 7930
To Carriage on purchase 600
To Cartage and freight 700

To Royalty 8760
To Octrie 7,500

116930 116930



5. You are given the following balance;



Opening stock 16,000
Purchases 2,00,950
Sales 351200
Carriage in 3, 500
Sales return 1200
Returns out 950
Factory rent 3,000
Wages 4,500
Coal and gas 10,500


Required: Trading Account














Office Practice and Accounting 10 89

Trading A/C

For the years ending … … …
Dr. Cr.

Particulars Amount Rs. Particulars Amount Rs
To Ppening stock 16000 By Sales 351200

Less: return 1200 350000
To Purchases 200950

Less returns 950 200000

To Carriage in 3500

To Wages 4500
To Coal and gas 10,500

To Factory rent 3000

To Grass profit 1,12,500
350000 350000



Profit and loss account

Profit and loss account is prepared to ascertain net profit earned or net loss suffered
by the business during a given period of time. There are certain items of incomes and
expenses of the business which must be taken into consideration for calculation of net
profit of a business. The balance of trading account is taken to profit and loss account.
Then profit and loss account is credited with all indirect incomes and debited with all
indirect expenses.

The profit and loss account measures profitability of a firm or business by matching
revenues and expenses according to the accounting principles. Net income is the
excess of income over expenditure and if expenses exceed income, that is termed as
loss.

When net profit or net loss is ascertained, it is transferred to balance sheet. If net profit
is made, it is added to capital and if net loss occurs, it is deducted from capital in the
liabilities side of the balance sheet.
Objective/Purpose

The objectives of profit and loss account are as follows:

1. To determine the net profit or net loss made during the year by a business


90 Office Practice and Accounting 10

2. To know efficiency of a business
3. To know the amount of indirect expenses during a year

4. To determine the relationship between net profit/loss and indirect expenses
5. To determine the relationship between net profit and gross profit
6. To prepare a basis for balance sheet
7. To compare the result within and out of the business for improvement

8. To provide the ground for financial analysis
Advantages and Importance

The advantages of profit and loss account are as follows:

1. Helps to ascertain net profit or net loss for the given period
2. Helps to find out total amount of indirect expenses and income for the period

3. Helps to determine relations between gross profit/loss and net profit/ loss
4. Helps to control the cost

5. Helps to prepare plans and policies
6. Helps to take the decisions on the basis of result

7. Provides data for comparative study
8. Helps to analyze the financial data and to make decision


Items to be debited to profit and loss account

i. Gross loss: If trading account shows a gross loss, it is debited to the profit and
loss account.

ii. Office and administrative expenses: These are also known as operating
expenses. The expenses incurred in course of daily administration of a business
firm in office are known as office and administrative expenses. These include
office salary, depreciation, telephone charge, legal charges, lighting, printing
and stationery, general expenses, audit fees, postage and stamp, bank charge,
tax, internet, insurance, repair and renewal, etc.

iii. Selling and distribution expenses: The expenses incurred for selling and
promotion of goods are known as selling and distribution expenses. These
are also known as operating expenses. Commission to agents, advertisement,
salesmen's salary, warehouse expenses, carriage outwards, free sample, bad



Office Practice and Accounting 10 91

debt, sales tax, carriage on sales, warehouse rent, delivery van expenses, packing
and packaging expense, delivery charge, etc.

iii. Financial expenses: Expenses spent for the use of finance are called financial
expenses. These include interest on capital, discount allowed, bank charges,
charges on bills discounted, etc.

v. Other indirect expenses: The expenses such as loss on assets by accident,
provision for bad and doubtful debt, discount on debtors, loss on sale of fixed
assets etc.


Items to be created to profit and loss account

1. Gross profit: If trading account shows a gross profit, it is credited to the profit

and loss account
2. Indirect income and gains: All the incomes that are generated are shown in the
credit side of profit and loss account, such as commission received, discount
received, interest received, bad debt recovered, rent received and any other
income received.


Difference between trading and profit and loss account


Trading Account Profit and Loss Account
• It is prepared to find out gross • It is prepared to ascertain net profit
profit or gross loss. or net loss
• It is prepared to make the basis for • It is prepared after trading account.
profit and loss account. • It includes indirect expenses,
• It includes direct expenses and incomes and gross profit or loss.
income. • It reflects the efficiency in respect to
• It measures the efficiency in respect all indirect incomes and expenses.
to purchase and sales. • Its result (net profit/loss) is
• Its result(gross profit/loss) is transferred to balance sheet.
transferred to profit and loss
account.











92 Office Practice and Accounting 10

Specimen of Profit and Loss Account


Profit and Loss Account of ...............

Dr. for the year ended ............ Cr.

Particulars Amount Particulars Amount
To Gross loss b/d xxx By Gross profit b/d xxx
To Salary xxx By Commission received xxx
To Rent, rates and taxes xxx By Discount received xxx
To Stationery and printing xxx By Rent received xxx
To Audit fees xxx By Dividend received xxx
To Postage and telegram xxx By Bad debt recovered xxx
To Telephone charges xxx By Gain on sale of assets xxx
To Legal charges xxx By Interest on investment xxx
To Insurance premium xxx By Interest on Deposits xxx
To Repairs and xxx By Apprenticeship
maintenances xxx premium xxx
To Depreciation xxx By Transfer fees received xxx
To Interest on loan xxx By Sundry incomes xxx
To Bank charges xxx By Net loss c/d xxx
To Office expenses xxx
To Trade expenses xxx
To License fees xxx
To Office lighting xxx
To Commission paid xxx
To Discount allowed xxx
To Tax paid xxx
To Packing charges xxx
To Traveling expenses xxx
To Bad debts
To Provision for bad debt xxx
To Warehouse rent xxx
To Carriage outwards xxx
To Carriage on sales xxx
To Marketing expenses xxx
To Loss on sale of assets. xxx
To Loss by accident xxx
To Net profit c/d xxx
Total xxx Total xxx








Office Practice and Accounting 10 93

Illustrations


6. From the following information, prepare the profit and loss account of
Panchakanya Trading House for the year ending 31st Chaitra 2072.


Capital Rs. 25,000 Rent received Rs. 600
Sundry creditors Rs. 9,000 Cash at bank Rs. 5,600

Rent Rs. 200 Bills payable Rs. 4,000
Trade expenses Rs. 500 Furniture Rs. 1,500

Repairs Rs. 300 Depreciation Rs. 1,000
Salaries and wages Rs.3,000 Tax paid Rs. 400
Rs. 700
Carriage outward Rs. 500 Interest received
Rs. 5,700
Discount Rs. 200 Machinery
Rs. 10,000
General expenses Rs. 2,500 Gross profit


Solution



Panchakanya Trading House
Profit and Loss Account
For the year ended 31 Chaitra 2072
Dr. Cr.
Particulars Amount Particulars Amount
To Rent 200 By Gross profit b/d 10,000

To Trade expenses 500 By Rent received 600
To Repairs 300 By Interest received 700
To Salaries and wages 3,000

To Carriage outward 500
To Discount 200
To General expenses 2,500

To Depreciation 1,000
To Tax paid 400
To Net profit c/d 2,700
11,300 11,300




94 Office Practice and Accounting 10