Final Accounts Prescribed by Company Act and Accounting Standard
All the limited company or LLC business organizations need to prepare financial statements on prescribed format of the company account and accounting standard.
Nepal Accounting Standard (NAS) has prescribed the formats for financial statements.
Nepal Financial Reporting Standards (NFRS) follows rules and regulation of NAS.
All the business organizations need to consider the prescribed format of the accounting standard for preparation and submission of final accounts.
Final accounts involve the following statements:
· Income Statement (Profit or Loss Statement)
· Balance sheet (Statement of Financial Position)
An income statement shows the net result of the business operations during an accounting period.
It may include manufacturing account, trading account, profit and loss account, profit and loss appropriation account.
Income statement presents the summary of revenues, expenses and net income or net loss of a firm.
It serves as a profitability measure of the firm.
The amount received from operating activities is known as revenue income.
It is the income earned from goods selling or services provide.
It also includes received of discount, commission, interest, transfer fees etc.
Expenditure is incurred for the running productivity or earning capacity of a business.
Such expenditure yields benefits in current accounting period.
It involves all the accounting transactions of trading account, profit and loss account and profit and loss appropriation account.
It considers a vertical format of income statement (profit or loss statement) the specimen of which is shown below:
Profit or Loss Statement under NFRS
For the year ended 31st March 20XX
Particulars |
Notes |
Amount CY |
Amount LY |
|
Sales revenue (net) |
|
xxxx |
xxxx |
|
Less: |
Cost of goods sold* |
|
(xxx) |
(xxx) |
|
Gross profit |
|
xxxx |
xxxx |
Add: |
Other income |
|
xxxx |
xxxx |
Less: |
Operating expenses: |
|
|
|
|
Office, general and administrative expenses |
|
xxxx |
xxxx |
|
Selling and distribution expenses |
|
xxxx |
xxxx |
|
Depreciation expenses |
|
xxxx |
xxxx |
|
Written off or amortization |
|
xxxx |
xxxx |
|
Profit from operation |
|
xxxx |
xxxx |
Less: |
Financial expenses: |
|
|
|
|
Interest |
|
(xxx) |
(xxx) |
|
Profit before tax |
|
xxxx |
xxxx |
Less: |
Income tax |
|
(xxx) |
(xxx) |
|
Profit from continuing operations |
|
xxxx |
xxxx |
|
Profit or loss from discontinued operation (net after tax) |
|
± xxx |
± xxx |
|
Net profit after tax |
|
xxxx |
xxxx |
|
Basic earnings per share |
|
|
|
|
Diluted Earnings per share |
|
|
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Accounting Equation |
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Basic Journal Entries in Nepali |
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Basic Journal Entries |
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Journal Entry and Ledger |
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Ledger |
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Subsidiary Book |
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Cash Book |
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Trial Balance & Adjusted Trial Balance |
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Bank Reconciliation Statement (BRS) |
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Depreciation |
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Final Accounts: Class 11 |
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Adjustment in Final Accounts |
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Capital and Revenue |
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Single Entry System |
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Non-Trading Concern |
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Government Accounting |
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Goswara Voucher (Journal Voucher) |
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Sales revenue, turnover or service revenue
Sales revenue is the major incomes of the goods selling company.
The sales amount must include only sale of goods not sales of fixed assets.
Sales include both the cash and credit sales made during an accounting period.
Sales returns or return inward is deducted from sales.
Service revenue is the major incomes of the service providing company.
Both sales and service revenues include cash and credit sales and service.
Some electronics manufacturing companies sell the goods and provide the services.
Other incomes and gains
Company earns some incomes other than sales revenue or service revenue.
Company can sell tangible assets and investment at profit; this profit is also other income.
Some incomes and gains are given below:
Rent received |
Appreciation on assets |
Commission received |
Apprentice/trainee premium |
Interest received |
Profit on assets |
Discount received |
Unearned commission earned |
Dividend received |
Profit on sales of asset |
Compensation received |
Profit on sales of investment |
Bad debts recovered |
|
Cost of goods sold
Cost of goods sold includes the direct costs of producing the goods sold by a company.
This amount includes direct materials and direct labour directly used to produce the good.
It excludes indirect expenses, distribution expenses and sales commission.
Cost of goods sold = Beginning inventory + Net purchase – Ending inventory
Or
Cost of goods sold (COGS):
Opening stock |
×××× |
|
Purchase |
×××× |
|
Less: Purchase return |
(×××) |
|
Add: Carriage or freight on purchase |
×××× |
|
Add: Wages for loading and unloading |
×××× |
|
Less: Closing stock |
(×××) |
|
Cost of goods sold* |
×××× |
|
Operating expenses
Operating expenses mean daily, weekly, fortnightly, monthly, quarterly, half-yearly and annually expenses.
These expenses are recurring in nature.
These expenses are related to general office, administrative and selling expenses.
Non-cash expenses like depreciation and amortization are also included in operating expenses.
Some operating incomes are given below:
General and administrative expenses: |
Selling and distribution expenses: |
Salary and wages |
Carriage or freight outward |
Director’s fees |
Carriage or freight on sales |
Office rent, rates and tax |
Travelling expenses |
Printing and stationery of office |
Advertisement and publicity |
Postage and courier expenses |
Free sample |
Insurance |
Sales expenses |
Phone, mobile, internet expenses |
Packing expenses |
Bank charge |
Salary to sales girl/man/woman/agent |
Legal charge |
Commission to sales agent |
License fees |
Rent of warehouse or godown |
Audit fee |
Stationery, postage expenses of warehouse |
Staff benefits |
Phone, mobile, internet expenses |
Bonus to staff |
Insurance of warehouse |
Office lighting and power |
Trade or trading expenses |
Entertainment expenses |
Delivery expenses |
General expenses |
Bad debts |
Establishment expenses |
Discount allowed |
Commission paid |
Depreciation on warehouse assets etc. |
Manager’s commission |
|
Depreciation on office assets |
|
Written-off or amortization etc. |
|
Financial expenses
Financial expenses are related to loan obligation or borrowings.
Generally, the company takes loan from outsiders.
These outsiders are investors or creditors.
The company takes loan in the forms of debentures, bonds, bank loan, long-term debt, short-term loan etc.
The company has to pay interest on these loans according to their nature and terms.
Some financial expenses are given below:
Interest on loan |
Loss on sales of investment |
Interest on debentures or bonds |
Amortization of bonds redemption premium |
Loss on foreign exchange |
Commission and fees related to loan |
Expenses on disposal of marketable security |
Expenses related to letter of credit |
Income tax expenses
Every business firm has to pay tax to the state and central government.
Some taxes are given below:
Sales tax |
Value added tax (VAT) |
Income tax |
Goods and service tax (GST) |
Profit or loss from discontinued operation segment
Sometimes a company can stop the business of the one of its segment.
There may be different reasons for discontinued the business but major reason is bearing losses.
The company sells entire assets and settles liabilities of that discontinued segment.
While selling, there may be profit or loss.
Profit or loss from discontinued operations is distinguished from income from continuing operations.
The company has to adjust taxes on discontinued segment of the business.
It is shown after tax on income statement (profit or loss statement)
Example
ABC Company has following extracted data:
Net profit before tax from continuing operations $325,650
Net profit before tax from discontinuing operations $28,000
Book value of the discontinued segment of the business $125,000
Disposal value of the discontinued segment $132,350
Tax rate applicable 30%
Required: (1) Net profit or loss from discontinued operation after tax; (2) Net profit after tax
[Answer: NPAT = $252,700]
SOLUTION
Net profit or loss from discontinued operation after tax
Here, 30% tax means 70% profit
Net profit after tax from discontinuing operations |
$28,000 × 70% |
19,600 |
Profit on discontinuing operations |
($132,350 CSV – $125,000 BSV) × 70% |
5,145 |
Net profit from discontinued operation after tax |
$24,745 |
Extracted Income Statement
|
Particulars |
Notes |
Amount |
Amount |
|
Profit before tax |
|
|
325,650 |
Less: |
Income tax expenses (325,650 @ 30%) |
|
|
(97,695) |
|
Profit from continuing operations |
|
|
227,955 |
Add: |
Profit from discontinued operation after net tax |
|
|
24,745 |
|
Net profit after tax |
|
|
252,700 |
Basic Earnings Per Share
It measures the profit available to common stockholders on per share basis.
This ratio expresses the earning power of the company based equity shareholder viz how much amount can be paid as dividend.
More value per share is better for company.
Formula of basic earnings per share (Basic EPS)
= [(NPAT – Preference dividend) ÷ No. of outstanding common stocks]
Or
= (Earnings available to common stockholders ÷ No. of outstanding common stocks)
Diluted Earnings Per Share
Here, diluted means reduce the value of stock or share.
Diluted EPS shows the quality of earnings per share.
While calculating earnings per share, we ignore the diluted securities.
This ignorance increases the value of earnings per share.
Diluted securities are not common stocks but they can be converted to common stocks.
Diluted securities are convertible preferred stocks, convertible debentures, stock option and warrants.
By converting these securities into common stocks, they increase number of outstanding common stocks but decrease the value of basic EPS.
Thus, diluted EPS is generally lower than basic EPS.
Keep in Mind
Dilutive EPS is considered a conservative metric because it indicates a worst-case scenario in terms of EPS. |
In the rare case if there are anti-dilutive securities viz the value of diluted EPS may be higher than EPS. |
Formula of Diluted EPS
= (NPAT – PD ÷ (No. of outstanding common stocks + No. of conversion of dilutive securities)
Example
ABC Company Ltd has following extracted information:
50,000 outstanding common stocks of $10 par value at the market value of $12.
Net income after tax of the current year $200,000
30,000 convertible debentures; they can be converted into common stocks of $10 each.
Required: (a) Basic earnings per share; (b) Number of new common stocks; (c) Diluted earnings per share
[Answer: (a) $4; (b) $300,000; (c) $2.67]
SOLUTION:
(a) Basic earnings per share
= NIAT ÷ No. of common stocks
= $200,000 ÷ 50,000
= $4
(b) Number of new common stocks
Value of convertible debentures
= 30,000 x $10 face value
= $300,000
No. of new common stocks
= $300,000 ÷ $12 market value
= 25,000
(c) Diluted earnings per share
= (NPAT – PD) ÷ (No. of outstanding common stocks + No. of conversion of dilutive securities)
= ($200,000 – Nil) ÷ (50,000 + 25,000)
= $200,000 ÷ 75,000
= $2.67
Retained earnings statement is similar to profit and loss adjustment account.
Statement of retained earnings is prepared after preparation of income statement.
It is prepared for distribution of net profit amount into different purposes.
This statement is prepared to show the decision made by the board of directors regarding distribution of dividend to stockholders, stock dividend issued to stockholders.
Board of directors keeps certain part of net profit amount to different reserve funds.
This statement is also prepared to adjust provisions and expenses of previous accounting year.
These expenses are readjustment of reserve fund amount, proposed dividend etc.
Company Act does NOT specify for the preparation of retained earnings statement
Statement of Retained Earrings
Particulars |
Notes |
Year 2023 |
Year 2022 |
|
Opening retained earnings |
|
×××× |
×××× |
|
Add: |
Net profit after tax |
|
×××× |
×××× |
|
Total profit available |
|
×××× |
×××× |
Less: |
Interim dividend paid |
|
(×××) |
(×××) |
|
Dividend paid or payable on common stocks |
|
(×××) |
(×××) |
|
Dividend paid or payable on preferred stocks |
|
(×××) |
(×××) |
|
General reserve |
|
(×××) |
(×××) |
|
Capital reserve |
|
(×××) |
(×××) |
|
Dividend equalization fund |
|
(×××) |
(×××) |
|
Sinking fund |
|
(×××) |
(×××) |
|
Assets replacement fund |
|
(×××) |
(×××) |
|
Bonus shares |
|
(×××) |
(×××) |
Closing retaining earnings |
|
×××× |
×××× |
Balance sheet is not an account; it is a statement of assets and liabilities of a business organization.
It is a statement summarizing the financial position of an organization.
The balance sheet is prepared at the end or accounting period.
It is prepared after preparation income statement (manufacturing account, trading, profit and loss account).
It is the statement of balances of ledger account, which are not included in income statement.
Therefore, it is called the balance sheet.
The balance sheet contains assets and liabilities.
Liabilities refer to the financial obligation of an organisation.
Assets refer to tangible or intangible rights owned by an organisation.
Here, organisation is a firm, traders, enterprises, company etc.
Statement of Financial Position under NFRS
ABC Company Ltd
For the year ended ………………………..
Particulars |
Notes |
Year 2023 |
Year 2022 |
|
ASSETS |
|
|
|
|
Non-Current Assets: |
|
|
|
|
|
Property, plant and equipment |
|
×××× |
×××× |
|
Intangible assets |
|
×××× |
×××× |
|
Biological assets (long-term) |
|
×××× |
×××× |
|
Investment property |
|
×××× |
×××× |
|
Investment in associates* |
|
×××× |
×××× |
|
Other investment |
|
×××× |
×××× |
|
Long-term receivable (notes receivable) |
|
×××× |
×××× |
|
Deferred tax assets |
|
×××× |
×××× |
|
Total non-current assets (A) |
|
×××× |
×××× |
Current Assets: |
|
|
|
|
|
Inventories |
|
×××× |
×××× |
|
Trade receivable (debtor, B/R, A/R) |
|
×××× |
×××× |
|
Cash and cash equivalent |
|
×××× |
×××× |
|
Marketable securities |
|
×××× |
×××× |
|
Income tax receivable (refund of tax) |
|
×××× |
×××× |
|
Other receivables |
|
×××× |
×××× |
|
Asset held for sale (sell this year) |
|
×××× |
×××× |
|
Total current assets (B) |
|
×××× |
×××× |
|
TOTAL ASSETS (A+B) |
|
××××× |
××××× |
|
|
|
|
|
EQUITY |
|
|
|
|
|
Equity share capital |
|
×××× |
×××× |
|
Reserve and funds |
|
×××× |
×××× |
|
Retained earnings |
|
×××× |
×××× |
|
Preference share capital |
|
×××× |
×××× |
|
Non-controlling interest (minority interest) |
|
×××× |
×××× |
|
Total Equity |
|
×××× |
×××× |
|
|
|
|
|
LIABILITIES |
|
|
|
|
Non-Current Liabilities: |
|
|
|
|
|
Loan and borrowings (long-term) |
|
×××× |
×××× |
|
Employees benefits |
|
×××× |
×××× |
|
Government grants |
|
×××× |
×××× |
|
Derivative financial liabilities |
|
×××× |
×××× |
|
Provisions (long-term) |
|
×××× |
×××× |
|
Deferred tax liabilities |
|
×××× |
×××× |
|
Total non-current liabilities (a) |
|
×××× |
×××× |
Current Liabilities: |
|
|
|
|
|
Loan and borrowings (short term) |
|
×××× |
×××× |
|
Trade payables (creditor, B/P, A/P) |
|
×××× |
×××× |
|
Income tax liability |
|
×××× |
×××× |
|
Employees benefits |
|
×××× |
×××× |
|
Provisions (short-term) |
|
×××× |
×××× |
|
Other payables |
|
×××× |
×××× |
|
Liability of asset held for sale |
|
×××× |
×××× |
|
Total current liabilities (b) |
|
×××× |
×××× |
|
Total Liabilities (a+b) |
|
×××× |
×××× |
|
TOTAL EQUITY AND LIABILITIES |
|
××××× |
××××× |
The assets side of the balance sheet contents different types of assets; they are explained below:
ASSETS
Non-current assets
Non-current assets are also known as fixed assets or tangible assets.
These assets have life more than one year and higher value.
These assets are depreciated according to their working life or value.
Non-current assets include:
Property, plant and equipment |
Intellectual assets (patents, copyrights, trademark) |
Land and building |
Biological assets (plants, trees, animals) |
Plant and machinery |
Investment property |
Vehicles |
Investment in associates* |
Furniture and fitting |
Other investment |
Equipment |
Long-term receivable (notes receivable) |
Intangible assets (goodwill) |
Deferred tax assets |
Keep in Mind
Depreciation or accumulated depreciation is deducted from related tangible asset. |
Amortization or written off is deducted from related intangible asset. |
When a company takes 20% to 50% equity shares of other company, it is known as investment in associates* |
Current assets
Current asset means asset can be converted into cash within one year.
Cash is receivable within one year.
Expense limit expires within one year.
Current assets include:
Cash and cash equivalent |
Account receivable |
Inventories |
Bank balance |
Bills receivable |
Merchandise |
Advance expenses |
Notes receivable |
Closing stock |
Prepaid expenses |
Debtors and customers |
Other current assets |
Short-term investment |
|
|
Click on the photo for FREE eBooks
#####
Click on link for YouTube videos |
|
Accounting Equation |
|
Journal Entries in Nepali |
|
Journal Entries |
|
Journal Entry and Ledger |
|
Ledger |
|
Subsidiary Book |
|
Cashbook |
|
Trial Balance and Adjusted Trial Balance |
|
Bank Reconciliation Statement (BRS) |
|
Depreciation |
|
|
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Financial Accounting and Analysis (All videos) |
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Accounting Process |
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Accounting for Long Lived Assets |
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Analysis of Financial Statement |
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Equity or shareholders’ equity
Shareholders’ equity or stockholders’ equity is one of the major sections of a corporation’s balance sheet.
It is the difference between the reported amounts of an organization’s assets and liabilities.
Stockholders’ equity includes:
Common stocks |
Capital reserve |
Preferred stocks |
General reserve |
Additional paid-in capital (share premium or security premium) |
Treasury stock, if any |
Retained earnings |
|
Non-current liabilities (long-term liabilities)
Non-current liabilities are the long-term debt.
These liabilities are paid in more than one year.
Sometime, this time may be thirty years.
Non-current liabilities include:
Debentures |
Deferred tax liabilities |
Bonds |
Long-term lease and obligations |
Bonds payable |
Pension benefits obligations |
Long-term loans |
Other non-current assets |
Long-term debt |
|
Note: if the portion of a bond payable matures within an accounting period, that portion becomes current liability.
Current liabilities
Current liabilities mean a liability should be paid or settled within one year.
Current liabilities include:
Account payable, bills payable |
Advance incomes, advance received |
Creditors, suppliers, vendors |
Advance on sales |
Notes payable |
Income tax payable |
Bank overdraft |
Dividend payable |
Short-term loan |
Interest payable |
Outstanding expenses |
Calls in advance |
Expenses payable, expenses due |
Unclaimed dividend |
|
Other current liabilities |
Arjun EP
EP Online Study
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