ACCOUNTING FOR ALL — GRADE 11

Principles of Accounting (Accountancy, Acc. 103)

Aligned with the Secondary Level Curriculum of the Curriculum Development Centre (CDC), Government of Nepal, and the National Examinations Board (NEB)

Credit Hours: 5 | Total Working Hours: 160 (120 Theory + 40 Practical)
Full Marks: 100 (75 Written Examination + 25 Internal/Practical Assessment)

Book Overview

This Grade 11 Principles of Accounting textbook follows the secondary level syllabus prescribed by the Curriculum Development Centre (CDC), Government of Nepal for Grade XI (Subject Code: Acc. 103).

It bridges foundational bookkeeping with modern accounting practice in Nepal, including the Nepal Accounting Standards (NAS) and Nepal Financial Reporting Standards (NFRS) issued by the Accounting Standards Board (ASB) Nepal and enforced by the Institute of Chartered Accountants of Nepal (ICAN), modern banking instruments under Nepal Rastra Bank (NRB) directives, the Income Tax Act, 2058, and the New Government Accounting System prescribed by the Financial Comptroller General Office (FCGO) and approved by the Office of the Auditor General (OAG).

Every chapter contains:

1. Theory covering each topic of the CDC syllabus.
2. Standard formats for journals, ledgers, cash books, financial statements and government AGF forms.
3. Worked numerical illustrations in Nepalese Rupees (Rs.), with Bikram Sambat (BS) dates and Nepali business and government office examples.
4. NEB board exam practice questions: Very Short Answer (1 mark), Short Answer and Numerical (5 marks), and Long Numerical (8 marks).

NEB Grade XI Written Examination Specification Grid (75 Marks, 3 Hours)

The remaining 25 marks are for internal assessment and practical work (see Appendix F).

Chapters

Solutions

Worked answers to the exercises at the end of every chapter, and to the whole model question paper, are in the Solutions section at the end of the book, starting with Chapter 1 Solutions. Try each exercise on your own first.

Chapter 1: Theoretical Concepts of Book-Keeping and Accounting

1.1 Book-Keeping and Accounting

1.1.1 Meaning and Definition of Book-Keeping

Book-keeping is the foundational phase of accounting concerned with the systematic identification, classification, and recording of financial transactions in the books of original entry (Journals) and posting them into secondary books (Ledgers) in chronological order.

• J.R. Batliboi: “Book-keeping is the art of recording business dealings in a set of books.”
• R.N. Carter: “Book-keeping is the science and art of correctly recording in books of account all those business transactions that result in the transfer of money or money’s worth.”

Objectives of Book-Keeping:

1. Permanent & Systematic Record: To maintain a chronological, permanent record of monetary transactions for future reference.
2. Ascertainment of Financial Effect: To show the cumulative effect of transactions on individual accounts (assets, liabilities, incomes, and expenses).
3. Detection of Errors and Frauds: To provide verifiable documentary trails that minimize clerical errors and misappropriation.
4. Determination of Debtors and Creditors: To track exact receivables from customers and payables to suppliers at any date.

1.1.2 Meaning and Definition of Accounting

Accounting is a broader discipline that begins where book-keeping ends. It encompasses designing the accounting system, recording, classifying, summarizing financial transactions via Trial Balance and Financial Statements (Income Statement and Balance Sheet), analyzing and interpreting financial results, and communicating them to internal and external users for informed decision-making.

• American Institute of Certified Public Accountants (AICPA): “Accounting is the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of a financial character, and interpreting the results thereof.”
• American Accounting Association (AAA): “Accounting is the process of identifying, measuring, and communicating economic information to permit informed judgments and decisions by users of the information.”

1.1.3 Evolution of Accounting

1. Ancient Period: Early records of taxes, grain, and trade existed in Babylonia, Egypt, Greece, and during the Kautilya (Arthashastra) era in South Asia.
2. Emergence of Double Entry (1494 AD): Luca Pacioli, an Italian Franciscan friar and mathematician, published “Summa de Arithmetica, Geometria, Proportioni et Proportionalita” in Venice in 1494 AD, which formally documented the Double Entry System (De Computis et Scripturis), earning him the title “Father of Modern Accounting.”
3. Industrial Revolution & Corporate Era (18th–20th Century): Growth of joint-stock companies separated ownership from management, giving rise to statutory auditing, cost accounting, and management accounting.
4. Harmonization & Digital Era (21st Century): Adoption of International Financial Reporting Standards (IFRS) globally and Nepal Financial Reporting Standards (NFRS) in Nepal, alongside computerized ERP and cloud accounting.

1.1.4 Objectives, Functions, Scope, Advantages, and Limitations of Accounting

1.1.5 The Accounting Process (Accounting Cycle)

The Accounting Cycle is the complete sequence of accounting procedures repeated during each accounting period (in Nepal, typically 1 Shrawan to the last day of Ashadh):

1. Identification of Financial Transactions (from source documents: invoices, receipts, vouchers)
2. Journalizing (recording in primary books: Journal and Subsidiary Books)
3. Posting to Ledger (classifying into individual ledger accounts and balancing them)
4. Preparation of Unadjusted Trial Balance (testing arithmetical accuracy)
5. Passing Adjustment Entries (recording accruals, prepayments, depreciation)
6. Preparation of Adjusted Trial Balance
7. Preparation of Financial Statements (Trading, P&L / Income Statement, and Balance Sheet)
8. Closing Entries & Post-Closing Trial Balance

1.1.6 Difference Between Book-Keeping and Accounting

1.1.7 Branches of Accounting and Ethical Considerations

1. Financial Accounting: Focuses on recording historical transactions and preparing general-purpose financial statements (Income Statement, Balance Sheet, Cash Flow Statement) primarily for external users (investors, creditors, tax authorities, banks).
2. Cost Accounting: Focuses on ascertaining, analyzing, and controlling the per-unit and total cost of manufacturing goods or rendering services (material, labor, and overhead costs).
3. Management Accounting: Focuses on providing tailored financial and operating information (budgets, CVP analysis, ratio analysis, cash flow projections) to internal management for planning, controlling, and decision-making.

Ethical Considerations in Accounting:
Accountants must uphold five core ethical principles (aligned with the ICAN Code of Ethics):

• Integrity: Being straightforward, honest, and truthful in all financial reporting; refusing to falsify records or evade taxes.
• Objectivity: Remaining impartial and free from conflict of interest or undue bias.
• Professional Competence and Due Care: Maintaining up-to-date knowledge of NAS, NFRS, and tax laws.
• Confidentiality: Respecting the privacy of client/employer financial information unless legally required to disclose.
• Professional Behavior: Complying with relevant laws and avoiding any action that discredits the accounting profession.

1.2 Generally Accepted Accounting Principles (GAAP), NAS, and NFRS

1.2.1 Meaning of GAAP

Generally Accepted Accounting Principles (GAAP) refer to the common set of accounting concepts, conventions, standards, and rules that govern how financial transactions are measured, recorded, and reported so that financial statements are uniform, reliable, and comparable across organizations.

1.2.2 Fundamental Accounting Concepts

1.2.3 Accounting Conventions

1.2.4 Nepal Accounting Standards (NAS) and Nepal Financial Reporting Standards (NFRS)

• Accounting Standards Board (ASB) Nepal: Formed by the Government of Nepal in 2002 AD through an amendment to the Nepal Chartered Accountants Act, 1997, ASB formulates accounting standards in line with IAS/IFRS.
• Institute of Chartered Accountants of Nepal (ICAN): Regulates the accounting profession and pronounces mandatory compliance with NAS and NFRS.
• Nepal Accounting Standards (NAS) & NFRS: Establish mandatory rules for recognition, measurement, presentation, and disclosure of financial elements. For instance, NAS 01 (Presentation of Financial Statements) prescribes the structure of the Statement of Financial Position (Balance Sheet) and Statement of Profit or Loss, NAS 02 governs Inventories, and NAS 16 governs Property, Plant and Equipment (Fixed Assets).

1.3 Basic Accounting Terminologies

1.4 Double Entry System and Bases of Accounting

1.4.1 Double Entry Book-Keeping System

The Double Entry System is a scientific and complete system of recording financial transactions based on the principle that every business transaction affects at least two accounts in opposite directions—one account receives the benefit (Debited / Dr.) and another account yields the benefit (Credited / Cr.) of an equal monetary amount.

Features of Double Entry System:

1. Dual Effect: Every transaction affects two sides—Debit and Credit—with equal amounts.
2. Scientific Rule-Based Recording: Governed by explicit rules of debit and credit rather than arbitrary entries.
3. Complete Record: Records Personal, Real, and Nominal accounts comprehensively.
4. Arithmetical Verification: Total Debits always equal Total Credits, verified through a Trial Balance.

1.4.2 Bases of Accounting: Cash Basis vs. Accrual Basis

1.5 Accounting Equation

1.5.1 Meaning and Formula

The Accounting Equation is a mathematical expression of the Dual Aspect Concept showing that the total economic resources (Assets) of a business are always equal to the total claims against those resources by outsiders (Liabilities) and the owner (Capital).

Assets (A) = Capital (C) + Liabilities (L)

Derived relationships:

• Capital (C) = Assets (A) - Liabilities (L)
• Liabilities (L) = Assets (A) - Capital (C)
• Effect of Revenue & Expenses on Capital:
  • Incomes / Revenues / Profits → Increase Capital (+)
  • Expenses / Losses / Drawings → Decrease Capital (-)

1.5.2 Summary of Transaction Effects on the Accounting Equation

1.5.3 Worked Numerical Example (NEB 5-Mark / 8-Mark Standard)

Illustration 1.1:
Prepare an Accounting Equation from the following transactions of Bagmati Traders, Kathmandu:

1. Started business with cash Rs. 2,50,000 and furniture Rs. 50,000.
2. Purchased goods on credit from Pokhara Suppliers Rs. 80,000 and for cash Rs. 40,000.
3. Sold goods costing Rs. 50,000 on credit to Janakpur Store for Rs. 65,000.
4. Paid house rent Rs. 15,000 and salary Rs. 20,000; a further Rs. 5,000 of salary is still outstanding.
5. Settled the account of Pokhara Suppliers of Rs. 80,000 by paying Rs. 78,000 in cash.
6. Goods costing Rs. 8,000 were withdrawn by the proprietor for personal use.

Solution:

In the Books of Bagmati Traders, Kathmandu
Accounting Equation

Verification of Final Balances:

• Total Assets: Cash (Rs. 97,000) + Furniture (Rs. 50,000) + Stock (Rs. 62,000) + Debtors (Rs. 65,000) = Rs. 2,74,000
• Capital + Liabilities: Capital (Rs. 2,69,000) + Outstanding Salary (Rs. 5,000) = Rs. 2,74,000 (Verified).

1.6 NEB Board Exam Practice Questions

Group A: Very Short Answer Questions (1 Mark Each)

1. Define book-keeping in one sentence.
2. Who propounded the Double Entry System of book-keeping and in which year?
3. State any two limitations of financial accounting.
4. Under which accounting concept is Capital treated as a liability of the business?
5. Mention the full form of NFRS and NAS.
6. What is meant by the Matching Concept in accounting?
7. Distinguish between Trade Discount and Cash Discount in one point.
8. If total assets of a business are Rs. 4,50,000 and external liabilities are Rs. 1,20,000, what is the amount of Owner’s Equity?

Group B: Short Answer & Numerical Questions (5 Marks Each)

1. Define accounting and explain any four primary objectives of accounting.
2. Differentiate between Book-keeping and Accounting on any five bases.
3. Explain the Business Entity Concept, Going Concern Concept, and Money Measurement Concept with suitable examples.
4. Differentiate between Cash Basis and Accrual Basis of accounting.
5. Numerical Problem: Prepare an Accounting Equation from the following transactions of Everest Enterprise:
   • (a) Commenced business with cash Rs. 1,80,000 and stock of goods Rs. 70,000.
   • (b) Sold goods costing Rs. 30,000 for Rs. 38,000 in cash.
   • (c) Purchased machinery for Rs. 60,000 paying Rs. 20,000 in cash and the balance on credit.
   • (d) Paid wages Rs. 12,000 and wages still outstanding Rs. 3,000.
   • (e) Received commission Rs. 5,000 (including Rs. 1,000 received in advance for next year). (Ans: Total Assets = Rs. 2,91,000 [Cash Rs. 1,91,000 + Stock Rs. 40,000 + Machinery Rs. 60,000]; Capital = Rs. 2,47,000; Liabilities = Rs. 44,000 [Creditors for Machinery Rs. 40,000 + O/S Wages Rs. 3,000 + Advance Commission Rs. 1,000])

Worked answers to these exercises are in Chapter 1 Solutions.

Chapter 2: Recording of Transactions

2.1 Rules of Debit and Credit

In Double Entry Book-keeping, transactions are recorded by applying either the Traditional Approach (Classification of Accounts) or the Modern Approach (Accounting Equation Approach).

2.1.1 Traditional Approach (Golden Rules of Accounting)

2.1.2 Modern Approach (Accounting Equation / DEALER Rule)

2.2 Source Documents and Primary Recording Through Journal

2.2.1 Source Documents of Accounting

Every journal entry must be supported by an authentic source document:

1. Cash Memo: Issued by seller for cash sales; acts as evidence of cash purchase/sale.
2. Invoice / Tax Invoice (VAT Bill): Issued by seller for credit sales (showing quantity, rate, trade discount, and 13% VAT in Nepal).
3. Receipt: Issued when cash or cheque is received from a customer/debtor.
4. Debit Note: Prepared by a buyer when returning goods to a supplier (informing the supplier that their account has been debited).
5. Credit Note: Prepared by a seller when goods are returned by a customer (informing the customer that their account has been credited).
6. Pay-in-Slip (Deposit Slip): Counterfoil evidencing deposit of cash or cheques into a bank account.
7. Cheque: Written unconditional order directing a bank to pay a specified sum to a named person or bearer.

2.2.2 Specimen Format of Journal

The Journal is the book of original entry where transactions are recorded chronologically along with a brief explanation called Narration.

2.2.3 Standard Journal Entries for Important Transactions

2.3 Accounting for Bills of Exchange

2.3.1 Meaning and Parties

A Bill of Exchange is an unconditional written order signed by the maker (Drawer/Creditor), directing a certain person (Drawee/Debtor) to pay a certain sum of money only to, or to the order of, a certain person or to the bearer of the instrument at a fixed future date.

• Three Parties: (1) Drawer: Seller/Creditor who writes the bill; (2) Drawee (Acceptor): Buyer/Debtor who accepts to pay; (3) Payee: Party who receives payment (Drawer himself, a Bank, or an Endorsee).
• Days of Grace: In computing the maturity date of a time bill, 3 extra days (Days of Grace) are added to the nominal period of the bill.

2.3.2 Comparative Journal Entries in the Books of Drawer and Drawee

2.4 Subsidiary Books (Special Purpose Books)

When transactions are voluminous, the Journal is subdivided into Subsidiary Books.

2.4.1 Golden Rules for Preparing Subsidiary Books

1. Only Credit Transactions of Goods (Merchandise): Only credit purchases and credit sales of goods meant for resale are recorded in Purchase Book and Sales Book.
2. Strict Exclusions (What is NEVER recorded in Purchase/Sales Book):
   • Cash Purchases or Cash Sales → Recorded in Cash Book (ignored in Purchase/Sales Book).
   • Purchase or Sale of Fixed Assets (Furniture, Machinery, Computers) on credit → Recorded in Journal Proper (ignored in Purchase/Sales Book unless the business is a dealer in that item).
3. Treatment of Trade Discount & Delivery/Packing Charges:
   • Deduct Trade Discount directly in the inner column.
   • Add Carriage/Packing charged on the invoice to get the final invoice total.
   • VAT charged on the invoice is not part of the cost of the goods: it is kept in a separate VAT column and posted to the VAT A/c, not to Purchase A/c.

2.4.2 Summary of Subsidiary Books

2.4.3 Worked Numerical Example: Purchase Book & Purchase Account

Illustration 2.1:
Prepare a Purchase Book of Kathmandu Electronics Store from the following transactions for Magh 2082:

• Magh 2: Purchased from Pashupati Electric Co. on credit: 10 Refrigerators @ Rs. 25,000 each and 20 Heaters @ Rs. 3,000 each, less 10% Trade Discount.
• Magh 9: Purchased from Lumbini Traders for cash: 5 Washing Machines @ Rs. 35,000 each.
• Magh 16: Purchased Office Furniture on credit from Heritage Furniture Works for Rs. 45,000.
• Magh 24: Purchased from Bagmati Appliances on credit: 15 Microwave Ovens @ Rs. 12,000 each and 10 Induction Stoves @ Rs. 4,000 each; Trade Discount 5% and Carriage charges Rs. 2,000 added in bill.

Solution:

In the Books of Kathmandu Electronics Store
Purchase Book

Notes:

1. Transaction of Magh 9 is omitted because it is a cash purchase (recorded in Cash Book).
2. Transaction of Magh 16 is omitted because Office Furniture is a fixed asset, not trading merchandise for an electronics store (recorded in Journal Proper).

2.5 Ledger Accounts and Cash Books

2.5.1 Ledger Accounts

A Ledger is the principal book of accounts containing classified and summarized records of all individual accounts (Personal, Real, and Nominal).

• T-Shape Format: Divided into Debit (left side: Date, Particulars To …, J.F., Amount) and Credit (right side: Date, Particulars By …, J.F., Amount).
• Continuous / Running Balance Format: Used in banks and computerized accounting (Date, Particulars, L.F., Debit Rs., Credit Rs., Dr./Cr., Balance Rs.).

2.5.2 Cash Books (Single, Double, and Triple Column)

A Cash Book serves as both a Book of Original Entry (Subsidiary Book) and a Principal Ledger Account (when a Cash Book is maintained, no separate Cash Account or Bank Account is opened in the Ledger).

• Single Column Cash Book: Records only cash receipts (Dr.) and cash payments (Cr.). Cash column can never have a credit balance because one cannot pay out more physical cash than is available.
• Double Column Cash Book: Contains either (a) Cash & Discount Columns, or (b) Cash & Bank Columns.
• Triple Column Cash Book: Contains Discount, Cash, and Bank columns on both Debit and Credit sides.
  • Discount Columns (Discount Allowed on Dr. side; Discount Received on Cr. side) are merely totaled and NEVER balanced.

2.5.3 Contra Entries (C) in Double/Triple Column Cash Book

A Contra Entry is a transaction that affects both Cash and Bank accounts simultaneously within the business. It is denoted by writing C in the Ledger Folio (L.F.) column on both sides.

Warning: Cash withdrawn from bank for personal/domestic use (Drawings A/c Dr. To Bank A/c) is NOT a Contra Entry; it is recorded only on the Credit side (By Drawings A/c in Bank column).

2.5.4 Worked Numerical Example: Triple Column Cash Book

Illustration 2.2:
Prepare a Triple Column Cash Book from the following transactions for Chaitra 2082:

• Chaitra 1: Cash in hand Rs. 45,000 and Bank Overdraft Rs. 20,000.
• Chaitra 5: Sold goods for cash Rs. 60,000 and deposited Rs. 40,000 into the bank on the same day.
• Chaitra 10: Received a cheque of Rs. 28,500 from Ramesh in full settlement of his account of Rs. 30,000 and deposited into bank immediately.
• Chaitra 15: Paid to creditor Suman by cheque Rs. 19,200 after deducting 4% cash discount (Full debt = Rs. 19,200 / 0.96 = Rs. 20,000; Discount = Rs. 800).
• Chaitra 22: Withdrew Rs. 10,000 from bank for office use and Rs. 5,000 from bank for personal use.
• Chaitra 30: Paid office salary Rs. 15,000 in cash.

Solution:

Triple Column Cash Book

2.5.5 Petty Cash Book (Imprest System)

To relieve the main cashier from recording numerous small daily expenses (tea, postage, bus fare, stationery), a Petty Cashier is given a fixed advance called the Imprest Amount (Float) at the beginning of each period. At the end of the period, the exact amount spent is reimbursed so the Petty Cashier starts the next period with the original Imprest Amount again.

2.6 Trial Balance

2.6.1 Meaning and Objectives

A Trial Balance is a statement of all debit and credit balances extracted from the Ledger accounts and Cash Book on a particular date to verify the arithmetical accuracy of posting and balancing.

Quick Rule for Placing Ledger Balances in Trial Balance:

• Debit Column (Dr.): All Assets (Cash, Bank, Debtors, Stock, Furniture, Machinery, Goodwill, Bills Receivable, Prepaid Expenses), Expenses/Losses (Opening Stock, Purchases, Wages, Carriage Inward, Carriage Outward, Salary, Rent, Bad Debts, Depreciation, Discount Allowed, Sales Return / Return Inward), and Drawings.
• Credit Column (Cr.): All Liabilities (Creditors, Bills Payable, Bank Overdraft, Bank Loan, Outstanding Expenses), Capital, Reserves/Provisions (General Reserve, Provision for Bad Debts), and Incomes/Revenues (Sales, Purchase Return / Return Outward, Discount Received, Interest/Commission Received, Bad Debts Recovered).

Note on Closing Stock: Closing Stock is generally NOT included inside the Trial Balance because it is already part of Purchases/Opening Stock (it appears as an adjustment outside the Trial Balance). It appears inside the Trial Balance only if Purchases have already been adjusted (Adjusted Purchases = Opening Stock + Net Purchases - Closing Stock).

2.7 NEB Board Exam Practice Questions

Group A: Very Short Answer Questions (1 Mark Each)

1. State the Golden Rules of debit and credit for Real and Nominal Accounts.
2. What is a Contra Entry? Give two examples.
3. Differentiate between a Debit Note and a Credit Note.
4. Why is the Cash Book called both a Subsidiary Book and a Principal Book?
5. What is meant by the Imprest System of Petty Cash Book?
6. Why is Closing Stock generally excluded from the Trial Balance?

Group B & C: Short and Long Numerical Questions (5 / 8 Marks)

1. Journal, Ledger & Trial Balance (8 Marks): From the following transactions of Annapurna Traders, prepare (a) Journal Entries, (b) Ledger Accounts, and (c) a Trial Balance:
   • Shrawan 1: Commenced business with cash Rs. 3,00,000 and bank balance Rs. 2,00,000.
   • Shrawan 4: Purchased goods on credit from Everest Suppliers Rs. 1,20,000 at 10% trade discount.
   • Shrawan 10: Sold goods on credit to Manakamana Store for Rs. 90,000.
   • Shrawan 15: Paid Rs. 1,05,000 by cheque to Everest Suppliers in full settlement of their account.
   • Shrawan 22: Received Rs. 88,000 in cash from Manakamana Store in full settlement of their account.
   • Shrawan 30: Paid rent Rs. 15,000 and salary Rs. 25,000 in cash. (Ans: Trial Balance Total = Rs. 5,93,000 [Dr: Cash Rs. 3,48,000 + Bank Rs. 95,000 + Purchase Rs. 1,08,000 + Discount Allowed Rs. 2,000 + Rent Rs. 15,000 + Salary Rs. 25,000 = Rs. 5,93,000; Cr: Capital Rs. 5,00,000 + Sales Rs. 90,000 + Discount Received Rs. 3,000 = Rs. 5,93,000])

Worked answers to these exercises are in Chapter 2 Solutions.

Chapter 3: Modern Banking System and Bank Reconciliation Statement

3.1 Modern Banking System in Nepal

3.1.1 Concept of Modern Banking and Types of Bank Accounts

Banks in Nepal (regulated by Nepal Rastra Bank, the central bank, classified into Class A Commercial Banks, Class B Development Banks, Class C Finance Companies, and Class D Microfinance Financial Institutions) accept deposits and facilitate business payments through three primary deposit accounts:

1. Current Account: Designed for businesses with frequent daily deposits and withdrawals. No restriction on transaction frequency; generally carries zero interest and offers Bank Overdraft facility to creditworthy clients.
2. Saving Account: Designed for individuals and small savers to encourage thrift; earns moderate interest with certain withdrawal limits.
3. Fixed Deposit Account: Money deposited for a fixed tenure (e.g., 6 months to 5 years) earning the highest interest rate; premature withdrawal incurs penalties.

3.1.2 Cheques: Meaning, Parties, Types, Endorsement, and Dishonor

A Cheque is an unconditional written order signed by an account holder directing a specified banker to pay a certain sum of money to a named person, or to their order, or to the bearer on demand.

Three Parties to a Cheque:

1. Drawer: The account holder who writes and signs the cheque.
2. Drawee: The bank on which the cheque is drawn and directed to pay.
3. Payee: The person or entity named on the cheque to receive the payment.

Types of Cheques:

• Bearer Cheque: Payable across the bank counter to anyone who presents it (“Pay … or Bearer”). High risk if lost.
• Order Cheque: Payable only to the specific person named on the cheque or to someone endorsed by them (“or Bearer” is struck out). The bank verifies the payee’s identity.
• Crossed Cheque: Two parallel transverse lines (//) are drawn across the top-left corner of the cheque (with or without words like “A/c Payee Only”). It cannot be encashed over the counter; the amount must be credited directly into the payee’s bank account, ensuring maximum safety.

Endorsement and Dishonor of a Cheque:

• Endorsement: Signing on the back (or face) of a negotiable instrument (Order Cheque or Bill) by the holder/payee for the purpose of transferring the right to receive money to another person (Endorsee).
• Dishonor of a Cheque: Refusal by the bank to pay a cheque upon presentation. Common reasons include:
  1. Insufficient funds in the drawer’s account (“Refer to Drawer”).
  2. Signature of the drawer differs from the specimen signature on record.
  3. Amount in words and figures differs.
  4. Cheque is Stale (presented more than 6 months after issue date) or Post-dated (presented before the date written on it).
  5. Mutilated cheque or unauthenticated overwriting/alteration.

3.1.3 Modern Banking Vouchers and Digital Banking Services

1. ABBS (Any Branch Banking Service): Enables a customer of a bank to deposit cash, withdraw cheques, or transfer funds from any branch of the same bank across Nepal through centralized core banking software.
2. Electronic Cheque Clearing (ECC): Automated clearing system operated by Nepal Clearing House Ltd. (NCHL) where physical cheques of one bank deposited into another bank are scanned and cleared electronically.
3. Plastic Money (ATM / Debit Card & Credit Card):
   • Debit Card: Linked directly to the customer’s bank balance (“Pay Now”).
   • Credit Card: Allows the cardholder to purchase goods/services up to a pre-approved credit limit without immediate bank balance (“Buy Now, Pay Later”).
4. Internet Banking, Mobile Banking & ConnectIPS / QR Payments: Real-time electronic fund transfers (EFT) that generate instant digital transaction vouchers/advices, immediately crediting or debiting the bank statement.

3.2 Bank Reconciliation Statement (BRS)

3.2.1 Meaning and Importance of BRS

A business records its banking transactions in the Bank Column of the Cash Book, while the bank records the same customer’s transactions in the Bank Statement (or Passbook).

• In the Cash Book, deposits are Debited (Dr.) and withdrawals are Credited (Cr.).
• In the Passbook / Bank Statement, deposits are Credited (Cr.) (as customer’s money is a liability for the bank) and withdrawals are Debited (Dr.).

Often, on a given date, the bank balance shown by the Cash Book does not agree with the balance shown by the Passbook. A Bank Reconciliation Statement (BRS) is a periodic statement prepared by the account holder (business) to reconcile and explain the causes of difference between the Cash Book bank balance and the Passbook balance on a specific date.

Importance / Objectives of BRS:

1. Identifies Causes of Disagreement: Pinpoints unpresented cheques, uncredited cheques, and direct bank entries.
2. Detects Errors and Embezzlement: Uncovers clerical errors or unauthorized withdrawals in either the Cash Book or Passbook.
3. Tracks Clearance Delays: Helps management monitor cheques stuck in clearing or dishonored by customers.
4. Verifies Accuracy of Bank Balance: Ensures the true cash-at-bank figure is verified before auditing.

3.2.2 Causes of Disagreement Between Cash Book and Passbook

3.3 Rules for Preparing Bank Reconciliation Statement

Golden Principle of BRS: Start from the balance in one book (the starting book) and adjust it, item by item, until you reach the balance in the other book (the target book).

• If starting with Cash Book Balance, ask: “What happened to the Passbook?” If Passbook is higher, Add (+); if Passbook is lower, Deduct (-).
• If starting with Passbook Balance (or Cash Book Overdraft), do the opposite.

Master Rule Table (Normal Favorable Balance vs. Overdraft Balance)

3.4 Worked Numerical Examples (NEB 5-Mark / 8-Mark Standard)

Illustration 3.1: Normal Favorable Balance as per Cash Book

On the last day of Ashadh 2082, the Cash Book of Pokhara Traders showed a debit bank balance of Rs. 85,000. On comparing it with the Passbook, the following differences were noticed:

1. Cheques issued amounting to Rs. 40,000, out of which cheques of Rs. 25,000 only were presented for payment up to the last day of Ashadh (Unpresented cheque = Rs. 40,000 - Rs. 25,000 = Rs. 15,000).
2. Cheques of Rs. 30,000 were deposited into the bank, but a cheque of Rs. 12,000 was credited by the bank only on 4th Shrawan.
3. A customer directly deposited Rs. 18,000 into the bank via ConnectIPS without informing Pokhara Traders.
4. Bank credited Rs. 2,500 as interest on deposit and debited Rs. 500 as bank service charges.
5. Insurance premium of Rs. 6,000 was directly paid by the bank as per standing instruction.
6. The payment side (Cr.) of the Cash Book (Bank column) was undercast by Rs. 1,000.

Required: Prepare a Bank Reconciliation Statement as on the last day of Ashadh 2082.

Solution:

Pokhara Traders
Bank Reconciliation Statement
As on the Last Day of Ashadh 2082

Illustration 3.2: Overdraft Balance as per Cash Book

Prepare a Bank Reconciliation Statement of Biratnagar Suppliers as on 30th Chaitra 2082 from the following particulars:

1. Bank Overdraft (Cr. balance) as per Cash Book on 30th Chaitra: Rs. 60,000.
2. Cheques deposited into the bank Rs. 22,000, but only Rs. 14,000 were cleared by 30th Chaitra (Uncollected = Rs. 8,000).
3. Cheques issued for Rs. 18,000 were not presented for payment during Chaitra.
4. Interest on overdraft charged by the bank Rs. 3,200 was recorded only in the Passbook.
5. Dividend on shares collected directly by the bank Rs. 5,000.
6. A cheque of Rs. 4,000 received from a debtor and entered in the Cash Book was omitted to be sent to the bank.

Solution: (Using Overdraft Method — starting with Overdraft as per Cash Book)

Biratnagar Suppliers
Bank Reconciliation Statement
As on 30th Chaitra 2082

3.5 NEB Board Exam Practice Questions

Group A: Very Short Answer Questions (1 Mark Each)

1. What is a Crossed Cheque?
2. Name the three parties involved in a cheque.
3. Give any two reasons for the dishonor of a cheque by a bank.
4. Write the full form of ABBS and ATM.
5. Define a Bank Reconciliation Statement.
6. What is meant by Bank Overdraft?

Group B: Short Answer & Numerical Questions (5 Marks Each)

1. State any five reasons for the disagreement between the balance shown by the Cash Book and the Passbook.
2. Explain modern banking instruments (ABBS, Debit/Credit Cards, and Electronic Banking) used in Nepal.
3. Numerical Problem: On the last day of Ashadh, the Passbook of Lalitpur Enterprises showed a credit balance of Rs. 92,000. Prepare a Bank Reconciliation Statement from the following information:
   • (a) Cheques issued for Rs. 35,000 out of which cheques for Rs. 20,000 were cashed in Shrawan.
   • (b) Cheques sent to bank for collection Rs. 28,000, but cheques of Rs. 10,000 were still uncollected on the last day of Ashadh.
   • (c) A bill receivable for Rs. 6,000 previously discounted with the bank was dishonored on 30th Ashadh, and noting charges of Rs. 200 were paid by the bank.
   • (d) Bank credited interest of Rs. 1,800 and debited commission of Rs. 300.
   • (e) Debit side of the Cash Book (Bank column) was overcast by Rs. 2,000. (Ans: Starting with Passbook Balance Rs. 92,000 + Add [10,000 + 6,200 + 300 + 2,000 = 18,500] - Less [20,000 + 1,800 = 21,800] = Debit Balance as per Cash Book Rs. 88,700)

Worked answers to these exercises are in Chapter 3 Solutions.

Chapter 4: Journal Proper, Rectification of Errors, and Adjusted Trial Balance

4.1 Journal Proper (General Journal)

4.1.1 Meaning and Importance

When a business subdivides its primary records into specialized Subsidiary Books (Cash Book, Purchase Book, Sales Book, Purchase Return Book, Sales Return Book, B/R Book, B/P Book), any residual transaction that cannot be recorded in any of those specific books is recorded in the Journal Proper (General Journal / Miscellaneous Journal).

4.1.2 Types of Entries Recorded in Journal Proper

4.2 Accounting Errors and Their Rectification

4.2.1 Meaning and Classification of Accounting Errors

An Accounting Error is an unintentional clerical or conceptual mistake committed while recording, classifying, posting, casting (totaling), or balancing accounts. (Intentional manipulation is Fraud, not error).

4.2.2 Methodology for Rectifying Accounting Errors

In accounting, erasing, overwriting, or tearing pages is strictly prohibited. Errors are rectified either:

1. Before Preparing Trial Balance (or before opening Suspense Account):
   • Two-sided errors are rectified via a standard 3-step Journal Entry (Wrong Entry → Correct Entry → Rectifying Entry).
   • One-sided errors (e.g., overcasting/undercasting of a single account) are rectified via an explanatory note on the Dr. or Cr. side of that specific account.
2. After Preparing Trial Balance (Using Suspense Account):
   • When a Trial Balance fails to agree, the difference is temporarily placed in a Suspense Account (Suspense A/c).
   • Two-sided errors are rectified by debiting and crediting the two affected accounts (Suspense A/c is NOT used).
   • One-sided errors are rectified by passing a formal Journal Entry using Suspense Account as the opposite leg.

4.2.3 Three-Step Technique for Two-Sided Errors

4.2.4 Worked Numerical Example: Rectification After Trial Balance & Suspense Account

Illustration 4.1 (NEB 5-Mark / 8-Mark Standard):
The Trial Balance of Chitwan Emporium showed an excess Debit of Rs. 10,000, which was placed to the Credit of a Suspense Account. Subsequently, the following errors were located:

1. Sales of old furniture for Rs. 15,000 was credited to the Sales Account.
2. The Purchase Book was undercast by Rs. 4,000.
3. Cash received from debtor Raju Rs. 3,500 was correctly entered in the Cash Book, but was wrongly posted to the Debit side of Raju’s Account as Rs. 2,500.
4. Salary paid Rs. 8,000 was posted twice to the Salary Account.
5. Credit purchase of goods from Gita Rs. 9,400 was recorded in the Purchase Book as Rs. 4,900.

Required: (a) Rectifying Journal Entries, and (b) Suspense Account.

Solution:

(a) Rectifying Journal Entries

(b) Suspense Account

4.3 Adjusted Trial Balance (Worksheet)

4.3.1 Meaning and Objectives

An Adjusted Trial Balance is a Trial Balance prepared after incorporating all year-end adjustment entries (such as outstanding expenses, prepaid expenses, accrued incomes, unearned incomes, and depreciation) into the unadjusted ledger balances before preparing final financial statements.

4.3.2 Summary of Year-End Adjustment Entries

4.3.3 Worked Numerical Example: Six-Column Adjusted Trial Balance

Illustration 4.2 (NEB 5-Mark Standard):
Below is the Unadjusted Trial Balance of Himalayan Trading House as on the last day of Ashadh 2082:

Adjustments on the last day of Ashadh 2082:

1. Salary still outstanding: Rs. 10,000.
2. Rent paid in advance (prepaid): Rs. 6,000.
3. Provide depreciation on Furniture and Equipment @ 10% p.a. (Rs. 10,000).
4. Commission received in advance: Rs. 3,000.

Required: Prepare an Adjusted Trial Balance (Worksheet format).

Solution:

Himalayan Trading House
Adjusted Trial Balance Statement
As on the Last Day of Ashadh 2082

4.4 NEB Board Exam Practice Questions

Group A: Very Short Answer Questions (1 Mark Each)

1. What is Journal Proper?
2. Give two examples of Errors of Principle.
3. When and why is a Suspense Account opened?
4. Define Compensating Errors with an example.
5. Pass the adjustment entry for Prepaid Insurance of Rs. 4,500.

Group B: Short Answer & Numerical Questions (5 Marks Each)

1. Explain the four types of accounting errors disclosed and not disclosed by the Trial Balance.
2. Numerical Problem (Rectification of Errors): Rectify the following errors found in the books of Gorkha Traders after preparing the Trial Balance:
   • (a) Wages paid for the installation of new machinery Rs. 12,000 was debited to Wages Account.
   • (b) Sales Book was overcast by Rs. 5,000.
   • (c) Goods returned by customer Sabina Rs. 3,000 were entered in the Purchase Return Book.
   • (d) Cash paid to creditor Ramesh Rs. 7,600 was debited to his account as Rs. 6,700.
   • (e) Furniture purchased on credit from National Woodworks for Rs. 20,000 was entered in the Purchase Book.

Worked answers to these exercises are in Chapter 4 Solutions.

Chapter 5: Accounting for Fixed Assets and Depreciation

5.1 Fixed Assets (Non-Current Assets)

5.1.1 Meaning and Classification

Fixed Assets (Property, Plant, and Equipment under NAS 16) are long-lived resources acquired by an enterprise for continuous use in producing or supplying goods and services over multiple accounting periods—not for resale in the ordinary course of business.

1. Tangible Fixed Assets: Possess physical substance and can be seen and touched (e.g., Land, Buildings, Plant & Machinery, Vehicles, Furniture & Fixtures, Computers). Note: Land is a non-depreciable tangible asset because its useful life is unlimited.
2. Intangible Fixed Assets: Lack physical substance but confer long-term legal or competitive rights (e.g., Goodwill, Patents, Copyrights, Trademarks, Computer Software Licenses). Their systematic write-off over useful life is called Amortization.

5.1.2 Acquisition Cost (Capitalized Cost) of a Fixed Asset

Under the Historical Cost Concept and NAS 16, the initial cost of a fixed asset includes all expenditures necessary to bring the asset to its working location and condition for intended use:

Total Cost of Asset = Purchase Price (net of Trade Discount) + Import Duty / Custom + Carriage / Freight / Transit Insurance + Installation & Erection Wages + Brokerage / Registration Fees (or Overhauling of Second-hand Asset)

5.2 Concept of Depreciation

5.2.1 Meaning and Definition

Depreciation is the gradual, continuous, and permanent decrease in the book value (service potential) of a depreciable tangible fixed asset due to physical wear and tear, passage of time, or obsolescence, allocated systematically as an operating expense over its estimated useful life.

• R.N. Carter: “Depreciation is the gradual and permanent decrease in the value of an asset from any cause.”
• NAS 16: “Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life.”

5.2.2 Causes, Objectives, and Factors Affecting Depreciation

5.2.3 Overview of Depreciation under Nepal Income Tax Act, 2058

Under the Income Tax Act, 2058 (Schedule 2) of Nepal, depreciable assets are grouped into five pools (Block of Assets) and depreciated on a Diminishing Balance Basis (except Pool E):

• Pool A (Buildings & permanent structures): 5% p.a.
• Pool B (Computers, data handling equipment, furniture, office equipment): 25% p.a.
• Pool C (Automobiles, buses, minibuses, vehicles): 20% p.a.
• Pool D (Construction & earth-moving equipment, plant & machinery, uncategorized tangible assets): 15% p.a.
• Pool E (Intangible assets: patents, software, copyrights): Straight Line Method over useful life rounded down to nearest half-year.
  (Note: Manufacturing/Special industries registered under Industrial Enterprises Act receive an additional one-third accelerated depreciation allowance on Pools A, B, C, and D).

5.3 Methods of Depreciation (NEB Syllabus)

5.3.1 Method 1: Straight Line Method (SLM / Fixed Installment / Original Cost Method)

Under the Straight Line Method, a fixed and equal amount of depreciation is charged every year throughout the useful life of the asset as a fixed percentage of its Original Cost. The book value can be reduced to zero (or scrap value).

1. When Scrap Value and Useful Life are given:
   Annual Depreciation = (Total Cost of Asset (C) - Scrap Value (S)) ÷ Estimated Useful Life in Years (N)
   Rate of Depreciation (%) = Annual Depreciation ÷ Total Cost of Asset (C) × 100
2. When Rate of Depreciation (R%) is given:
   Annual Depreciation = Original Cost of Asset × R ÷ 100 × Months Used in That Year ÷ 12

5.3.2 Method 2: Diminishing Balance Method (DBM / Written Down Value - WDV / Reducing Installment Method)

Under the Diminishing Balance Method, depreciation is charged at a fixed percentage on the opening book value (Written Down Value) of the asset at the beginning of each year (Original Cost minus accumulated depreciation of prior years). Thus, the annual depreciation amount decreases every year, and the book value of the asset never reaches zero.

Annual Depreciation = Opening Book Value (WDV) × R ÷ 100 × Months Used ÷ 12

5.3.3 Difference Between Straight Line Method (SLM) and Diminishing Balance Method (DBM)

5.4 Accounting Treatment: Purchase, Sale, and Change of Method

5.4.1 Standard Journal Entries and Machinery Account Posting

Golden Formula for Profit or Loss on Sale of Fixed Asset:
Book Value on Date of Sale = Original Cost of Sold Part - Total Depreciation Charged on Sold Part from Purchase Date up to Sale Date

• If Selling Price > Book Value ⇒ Profit on Sale (Debited to Asset A/c: To P&L A/c)
• If Selling Price < Book Value ⇒ Loss on Sale (Credited to Asset A/c: By P&L A/c)

5.4.2 Change in Method of Depreciation (Prospective vs. Retrospective Effect)

1. Change with Prospective Effect (from the current year onward):
   • Simply take the Opening Balance (To Balance b/d) of the year in which the change takes place and apply the New Method from that year onward. No past adjustment is required.
2. Change with Retrospective Effect (from the original date of purchase):
   • Step 1: Calculate the Total Depreciation Already Charged in past years under the Old Method.
   • Step 2: Re-calculate what the Total Depreciation Should Have Been for those same past years under the New Method.
   • Step 3: Compare the two totals in the year of change:
     • If New Method Past Depr. > Old Method Past Depr. (Deficiency / Under-charged): Credit the Asset Account with By Profit & Loss A/c (Additional Depr.).
     • If New Method Past Depr. < Old Method Past Depr. (Surplus / Over-charged): Debit the Asset Account with To Profit & Loss A/c (Excess Depr. Written Back).
   • Step 4: Charge current year’s depreciation according to the New Method.

5.5 Worked Numerical Examples (NEB 8-Mark Standard)

Illustration 5.1: Diminishing Balance Method with Additional Purchase & Sale

On 1st Baishakh 2080, Butwal Textile Mills purchased a machine for Rs. 1,80,000 and spent Rs. 20,000 on its installation. On 1st Kartik 2081, it purchased another machine for Rs. 1,00,000.
On 30th Chaitra 2082, the first machine purchased on 1st Baishakh 2080 became obsolete and was sold for Rs. 1,15,000.
Depreciation is charged @ 10% per annum under the Diminishing Balance Method (WDV), and the accounts are closed on 30th Chaitra every year.

Required: Prepare the Machinery Account for three years (2080, 2081, and 2082).

Solution:

Working Notes (Calculation of Depreciation & Profit/Loss on Sale of Machine I):

1. Machine I (Purchased on 2080-01-01): Total Cost = Rs. 1,80,000 + Rs. 20,000 = Rs. 2,00,000.
   • Year 2080 Depr. (12 mos @ 10%): 10% of 2,00,000 = Rs. 20,000 ⇒ WDV on 2081-01-01 = Rs. 1,80,000.
   • Year 2081 Depr. (12 mos @ 10%): 10% of 1,80,000 = Rs. 18,000 ⇒ WDV on 2082-01-01 = Rs. 1,62,000.
   • Year 2082 Depr. up to Sale Date (2082-12-30, 12 mos @ 10%): 10% of 1,62,000 = Rs. 16,200.
   • Book Value of Machine I on Sale Date (2082-12-30): Rs. 1,62,000 - Rs. 16,200 = Rs. 1,45,800.
   • Selling Price: Rs. 1,15,000.
   • Loss on Sale of Machine I: Rs. 1,45,800 - Rs. 1,15,000 = Rs. 30,800 (Credited as By Profit & Loss A/c).
2. Machine II (Purchased on 2081-07-01 for Rs. 1,00,000):
   • Year 2081 Depr. (Kartik to Chaitra = 6 months @ 10%): 1,00,000 × 10% × 6 ÷ 12 = Rs. 5,000 ⇒ WDV on 2082-01-01 = Rs. 95,000.
   • Year 2082 Depr. (Full 12 months @ 10%): 10% of 95,000 = Rs. 9,500 ⇒ Closing WDV on 2082-12-30 = Rs. 85,500.

In the Books of Butwal Textile Mills
Machinery Account

Illustration 5.2: Change in Method of Depreciation (Retrospective Effect)

A company purchased a plant on 1st January 2023 for Rs. 1,00,000. It charged depreciation @ 10% p.a. under the Straight Line Method for 2023 and 2024. In 2025, the company decided to change the method to Diminishing Balance Method @ 15% p.a. with retrospective effect from 1st January 2023.

Required: Show the Plant Account for 2023, 2024, and 2025.

Solution:

• Step 1 (Past Depr. Charged under SLM @ 10% for 2023 & 2024): Rs. 10,000 + Rs. 10,000 = Rs. 20,000 (WDV on 1st Jan 2025 = Rs. 80,000).
• Step 2 (Past Depr. Required under DBM @ 15% for 2023 & 2024):
  • 2023: 15% of 1,00,000 = Rs. 15,000 (WDV = Rs. 85,000).
  • 2024: 15% of 85,000 = Rs. 12,750 (WDV = Rs. 72,250).
  • Total Required Past Depr. = Rs. 15,000 + Rs. 12,750 = Rs. 27,750.
• Step 3 (Deficiency / Additional Depr. charged to P&L A/c in 2025): Rs. 27,750 - Rs. 20,000 = Rs. 7,750 (Credited as By P&L A/c).
• Step 4 (2025 Current Year Depr. @ 15% on Revised WDV Rs. 72,250): 15% of 72,250 = Rs. 10,837.50 (Closing Balance = Rs. 72,250 - Rs. 10,837.50 = Rs. 61,412.50).

Plant Account

5.6 NEB Board Exam Practice Questions

Group A: Very Short Answer Questions (1 Mark Each)

1. Define depreciation.
2. Mention any four causes of depreciation.
3. State the formula for calculating annual depreciation under the Straight Line Method.
4. Distinguish between Tangible and Intangible Fixed Assets with two examples of each.
5. What is meant by Scrap Value (Residual Value) of an asset?

Group B & C: Short and Long Numerical Questions (5 / 8 Marks)

1. Distinguish between the Straight Line Method and Diminishing Balance Method of charging depreciation on any five bases.
2. Numerical Problem (8 Marks): On 1st Shrawan 2079, Hetauda Cement Co. purchased a machine for Rs. 4,00,000. On 1st Magh 2080, another machine was purchased for Rs. 2,00,000. On 1st Shrawan 2081, half of the machine purchased on 1st Shrawan 2079 was sold for Rs. 1,35,000, and a new machine costing Rs. 1,50,000 was purchased on the same date. Depreciation is charged @ 10% p.a. on the Straight Line Method, and accounts are closed on the last day of Ashadh each year. Prepare the Machinery Account from 2079/80 to 2081/82. (Ans: Loss on sale of half of M-I on 2081-04-01 = Book Value Rs. 1,60,000 [Cost 2,00,000 - 2 yrs depr. 40,000] - Sale Rs. 1,35,000 = Rs. 25,000 Loss; Total Depr. in 2081/82 = Remaining half of M-I Rs. 20,000 + M-II Rs. 20,000 + M-III Rs. 15,000 = Rs. 55,000; Closing Balance at the end of 2081/82 = Rs. 4,45,000)

Worked answers to these exercises are in Chapter 5 Solutions.

Chapter 6: Accounting for Reserves and Provisions

6.1 Concept of Reserve

6.1.1 Meaning and Characteristics

A Reserve is an appropriation of divisible net profit retained in the business to strengthen its financial position, finance future expansion, equalize dividends, or meet unknown/unexpected future contingencies.

Key Characteristics of a Reserve:

1. Appropriation of Profit: Created only when the business earns a net profit (Profit & Loss Appropriation A/c Dr. To Reserve A/c). If there is a net loss, no reserve is created.
2. Meets Unknown Contingencies: Created for unquantified future risks or internal growth rather than a known current liability.
3. Part of Owner’s Equity (Shareholders’ Fund): Shown on the Liabilities/Equity side of the Balance Sheet under Reserves and Surplus.
4. Voluntary / Discretionary: Except for statutory reserves (like mandatory bank reserves under Nepal Rastra Bank rules), creating a reserve is a matter of financial prudence.

6.1.2 Objectives / Importance of Reserves

1. Strengthening Financial Position & Working Capital: Retains liquid resources inside the business without borrowing externally.
2. Meeting Unforeseen Contingencies: Absorbs sudden future trade shocks or abnormal losses.
3. Uniformity in Dividend Distribution: Enables companies to pay steady dividends even in lean profit years (via Dividend Equalization Reserve).
4. Redemption of Long-Term Liabilities or Asset Replacement: Accumulates funds to repay debentures (Debenture Redemption Reserve) or replace obsolete plant.

6.2 Classification (Types) of Reserves

6.3 Concept of Provision

6.3.1 Meaning and Characteristics

A Provision is an amount written off or retained by way of providing for depreciation, renewals, or diminution in the value of assets, or retained by way of providing for any known liability of which the amount cannot be determined with substantial accuracy on the Balance Sheet date.

• Examples of Provisions:
  1. Provision for Bad and Doubtful Debts
  2. Provision for Discount on Debtors
  3. Provision for Depreciation
  4. Provision for Taxation
  5. Provision for Repairs and Renewals

Key Characteristics of a Provision:

1. Charge Against Profit: Must be created compulsorily whether the business earns a profit or suffers a loss (Profit & Loss A/c Dr. To Provision A/c).
2. Known Liability or Asset Diminution with Uncertain Amount: The event/loss is certain or highly probable, though the exact rupee figure is an estimate.
3. Balance Sheet Presentation: Shown either by deducting from the concerned asset on the Assets side (e.g., Provision for Doubtful Debts deducted from Sundry Debtors) or under Short-Term Provisions (Current Liabilities) (e.g., Provision for Taxation).

6.3.2 Difference Between Reserve and Provision

6.3.3 Difference Between Revenue Reserve and Capital Reserve

6.4 Accounting for Provision for Bad and Doubtful Debts (as per NAS)

6.4.1 Concept of Bad Debts vs. Doubtful Debts

• Good Debts: Debtors from whom collection is 100% certain.
• Bad Debts: Irrecoverable debts definitely lost due to insolvency, death, or disappearance of a debtor (an actual loss).
• Doubtful Debts: Debts whose recovery is uncertain at year-end; following the Convention of Conservatism and NAS, a percentage of Closing Good Debtors (Sundry Debtors - Further Bad Debts) is provided as New Provision for Bad and Doubtful Debts.

6.4.2 Standard Formula for Profit & Loss Account and Balance Sheet

In Profit & Loss Account (Dr. side):
Net Charge to P&L A/c = Bad Debts (in Trial Balance) + Further Bad Debts (in Adjustment) + New Provision Required - Old Provision (in Trial Balance)

In Balance Sheet (Assets side under Current Assets):
Net Realizable Debtors = Closing Sundry Debtors - Further Bad Debts (Adjustment) - New Provision for Doubtful Debts

6.4.3 Worked Numerical Example (NEB 5-Mark Standard)

Illustration 6.1:
On 1st Shrawan 2081, the Provision for Bad and Doubtful Debts Account of Koshi Traders had an opening credit balance of Rs. 12,000.
During the year 2081/82, Bad Debts written off amounted to Rs. 7,000. On the last day of Ashadh 2082, Sundry Debtors stood at Rs. 2,15,000, out of which Rs. 15,000 was found irrecoverable (further bad debts). The firm maintains a Provision for Doubtful Debts @ 5% on good debtors.

Required: Prepare (a) Bad Debts Account, (b) Provision for Bad and Doubtful Debts Account, and (c) Balance Sheet extract as on the last day of Ashadh 2082.

Solution:

Working Notes:

1. Total Bad Debts for 2081/82: Rs. 7,000 (during year) + Rs. 15,000 (further bad debts) = Rs. 22,000.
2. Good Debtors on the last day of Ashadh 2082: Rs. 2,15,000 - Rs. 15,000 = Rs. 2,00,000.
3. New Provision Required (@ 5% on Rs. 2,00,000): 5% of Rs. 2,00,000 = Rs. 10,000.
4. Amount to be Debited to Profit & Loss A/c: Total Bad Debts (22,000) + New Provision (10,000) - Old Provision (12,000) = Rs. 20,000.

(a) Bad Debts Account

(b) Provision for Bad and Doubtful Debts Account

(c) Balance Sheet Extract (As on the Last Day of Ashadh 2082)

• Current Assets:
  • Sundry Debtors: Rs. 2,15,000
  • Less: Further Bad Debts: (Rs. 15,000) → Rs. 2,00,000
  • Less: New Provision for Doubtful Debts @ 5%: (Rs. 10,000) = Rs. 1,90,000

6.5 NEB Board Exam Practice Questions

Group A: Very Short Answer Questions (1 Mark Each)

1. Define a Reserve in one sentence.
2. What is meant by a Reserve Fund?
3. Define Secret Reserve and state any two ways of creating it.
4. Why is a Provision called a charge against profit?
5. Give any two examples of Capital Reserve.

Group B: Short Answer & Numerical Questions (5 Marks Each)

1. Distinguish between Reserve and Provision on any five bases.
2. Differentiate between Revenue Reserve and Capital Reserve with suitable examples.
3. Numerical Problem: On 1st Baishakh 2082, the Provision for Doubtful Debts stood at Rs. 15,000. During the year 2082, bad debts written off were Rs. 6,000. On 30th Chaitra 2082, Sundry Debtors amounted to Rs. 1,64,000, out of which Rs. 4,000 were further bad debts. Prepare the Provision for Doubtful Debts Account assuming the firm maintains provision @ 10% on debtors. (Ans: Good Debtors = Rs. 1,60,000; New Provision = Rs. 16,000; Charge to P&L A/c = 6,000 + 4,000 + 16,000 - 15,000 = Rs. 11,000)

Worked answers to these exercises are in Chapter 6 Solutions.

Chapter 7: Preparation of Financial Statements of Sole Trading and Partnership Firms

7.1 Capital and Revenue Concepts

A clear distinction between Capital and Revenue items is indispensable before preparing Financial Statements: Capital items go to the Balance Sheet (Statement of Financial Position), whereas Revenue items go to the Trading & Profit and Loss Account (Income Statement). Misclassifying them commits an Error of Principle and distorts both Net Profit and Net Worth.

7.1.1 Capital Expenditure vs. Revenue Expenditure vs. Deferred Revenue Expenditure

• Deferred Revenue Expenditure: A heavy expenditure that is fundamentally revenue in nature (does not create a tangible fixed asset), but whose benefit extends over 3 to 5 years (e.g., massive initial advertising campaign to launch a new product, preliminary expenses, research & development expenditure). Only the current year’s proportionate write-off is charged to the P&L Account, and the unwritten-off balance is temporarily shown on the Assets side. (Note: Under strict NAS 38 / NFRS, heavy advertising and preliminary expenses are expensed immediately when incurred).

7.1.2 Capital Receipts vs. Revenue Receipts, and Capital Profit/Loss vs. Revenue Profit/Loss

• Capital Receipts: Non-recurring inflows from owner’s capital contribution, bank loans, debentures, or sale proceeds of fixed assets/investments → Shown in Balance Sheet (creates a liability or reduces an asset).
• Revenue Receipts: Recurring inflows from ordinary business operations such as cash/credit sales of goods, commission received, interest received, rent received → Credited to Trading or P&L Account.
• Capital Profit vs. Revenue Profit: Profit earned from selling a fixed asset above its original cost or issuing shares at a premium is Capital Profit (transferred to Capital Reserve), whereas profit earned from buying and selling merchandise is Revenue Profit (credited to P&L Account).

7.2 Traditional Final Accounts (Trading, P&L Account, and Balance Sheet)

Under the traditional British/Continental format, Final Accounts of a Sole Trading or Partnership firm consist of three statements:

7.2.1 1. Trading Account

Prepared to ascertain Gross Profit or Gross Loss (Net Sales - Cost of Goods Sold).

• Formula: Cost of Goods Sold (COGS) = Opening Stock + Net Purchases + Direct Expenses - Closing Stock
• Debit Side (Direct Costs): Opening Stock, Purchases (less Purchase Returns, Drawings of goods, Free samples, Goods lost by fire), Wages / Productive Wages, Carriage Inward / Freight on Purchases, Customs & Import Duty, Octroi, Factory Power, Fuel, Coal, Gas & Water, Factory Rent & Lighting, Royalty on Production.
• Credit Side: Sales (less Sales Returns / Return Inward), and Closing Stock.

7.2.2 2. Profit and Loss Account

Prepared to ascertain Net Profit or Net Loss by matching all indirect operating and non-operating expenses against Gross Profit and indirect incomes.

• Debit Side (Indirect Expenses & Losses):
  • Office & Administrative Expenses: Office Salaries, Rent, Rates & Taxes, Printing & Stationery, Postage & Telegram, Telephone/Internet, Audit Fees, Legal Charges, Insurance Premium, Office Lighting, General/Sundry Expenses.
  • Selling & Distribution Expenses: Carriage Outward / Freight on Sales, Advertisement, Salesmen’s Salaries & Commission, Bad Debts, Packing Expenses, Delivery Van Expenses, Godown/Warehouse Rent.
  • Financial & Non-Cash Expenses/Losses: Interest on Loan/Overdraft, Interest on Capital, Bank Charges, Discount Allowed, Depreciation on Fixed Assets, Repair & Maintenance, Loss on Sale of Fixed Assets, Uninsured Loss by Fire/Theft, Provision for Taxation.
• Credit Side (Indirect Incomes & Gains): Gross Profit b/d, Discount Received, Commission Received, Interest on Investment/Drawings, Rent Received, Bad Debts Recovered, Apprentice Premium, Profit on Sale of Fixed Assets.

7.2.3 3. Balance Sheet

A statement of Assets, Liabilities, and Owner’s/Partners’ Capital on the last day of the accounting year.

• Marshalling of Balance Sheet: Arranging assets and liabilities either in Order of Permanence (Fixed Assets/Long-term Capital first, liquid items last) or Order of Liquidity (Cash first, Fixed Assets last).
• Partnership Adjustment in Balance Sheet: In a partnership firm, Net Profit is transferred to the Profit & Loss Appropriation Account (where Partner’s Salary, Commission, Interest on Capital, and Interest on Drawings are adjusted) and the divisible profit is credited to each Partner’s Capital Account (under Fixed or Fluctuating Capital method) in their profit-sharing ratio.

7.3 Modern Financial Statements under NAS / NFRS (Mandatory NEB Topic)

Under Nepal Accounting Standards (NAS 01) and Nepal Financial Reporting Standards (NFRS), financial statements are presented in a vertical, classified Multi-Step Format accompanied by systematic Working Notes:

1. Statement of Profit or Loss (Income Statement)
2. Statement of Financial Position (Classified Balance Sheet)

7.3.1 Specimen of Multi-Step Income Statement (Under NAS / NFRS)

Name of Entity
Statement of Profit or Loss (Income Statement)
For the Year Ended on the Last Day of Ashadh 2082

7.3.2 Specimen of Statement of Financial Position (Balance Sheet under NAS / NFRS)

Name of Entity
Statement of Financial Position (Balance Sheet)
As on the Last Day of Ashadh 2082

7.4 Master Table of 18 Year-End Adjustments (Dual Effect Guide)

Every item given inside the Trial Balance is recorded only once (either in the Income Statement or in the Balance Sheet). Every item given outside the Trial Balance (in Adjustments) has a dual effect: it is recorded twice, usually once in the Trading/Income Statement and once in the Balance Sheet.

7.5 Complete Worked Numerical Example (Both Traditional & NFRS Formats)

Illustration 7.1 (NEB 8-Mark Standard):
From the following Trial Balance of Sagarmatha Enterprises as on the last day of Ashadh 2082, prepare:

• Part A: Traditional Trading Account, Profit and Loss Account, and Balance Sheet.
• Part B: Multi-Step Income Statement and Statement of Financial Position (Balance Sheet) as per NAS / NFRS.

Adjustments on the last day of Ashadh 2082:

1. Closing Stock was valued at Rs. 95,000.
2. Wages outstanding Rs. 5,000 and Salaries outstanding Rs. 10,000.
3. Prepaid Insurance amounted to Rs. 4,000.
4. Write off further Bad Debts Rs. 5,000 and maintain Provision for Doubtful Debts @ 5% on remaining good debtors.
5. Depreciate Plant & Machinery @ 10% p.a. and Office Furniture @ 15% p.a.
6. Provide for the remaining unpaid interest on 10% Bank Loan (Hidden adjustment: Total annual interest = 10% of 1,00,000 = Rs. 10,000; Paid = Rs. 6,000; Outstanding Interest = Rs. 4,000).

Solution — Part A: Traditional Final Accounts

Sagarmatha Enterprises
Trading and Profit & Loss Account
For the Year Ended on the Last Day of Ashadh 2082

Balance Sheet of Sagarmatha Enterprises (Traditional Format)
As on the Last Day of Ashadh 2082

Solution — Part B: Modern Financial Statements under NAS / NFRS

Sagarmatha Enterprises
Statement of Profit or Loss (Multi-Step Income Statement under NFRS)
For the Year Ended on the Last Day of Ashadh 2082

Sagarmatha Enterprises
Statement of Financial Position (Balance Sheet under NFRS)
As on the Last Day of Ashadh 2082

7.6 NEB Board Exam Practice Questions

Group A: Very Short Answer Questions (1 Mark Each)

1. Distinguish between Capital Expenditure and Revenue Expenditure in one sentence.
2. What is Deferred Revenue Expenditure? Give one example.
3. Give two examples of Capital Receipts.
4. How is Goods Lost by Fire (partially insured) treated in Final Accounts?
5. What is meant by Marshalling of Balance Sheet?

Group B & C: Short and Long Numerical Questions (5 / 8 Marks)

1. Distinguish between Capital Expenditure and Revenue Expenditure on any five bases.
2. State whether the following are Capital or Revenue Expenditures with reasons:
   • (a) Freight and cartage paid on purchase of a new printing machine.
   • (b) Legal expenses incurred in defending a suit for breach of contract to supply goods.
   • (c) Cost of overhauling and painting a second-hand delivery van just purchased.
   • (d) Whitewashing and routine repair of the factory building.
   • (e) Cost of constructing an additional room in the office building. (Ans: Capital: a, c, e; Revenue: b, d)

Worked answers to these exercises are in Chapter 7 Solutions.

Chapter 8: Accounting for Non-Profit Organizations (NPOs)

8.1 Concept and Features of Non-Profit Organizations

8.1.1 Meaning

Non-Profit Organizations (NPOs) / Non-Trading Concerns are institutions established solely to render social, educational, charitable, healthcare, cultural, sporting, or professional welfare services to their members and society at large, rather than earning and distributing commercial profit.

• Examples in Nepal: Hospitals (e.g., Tilganga Institute of Ophthalmology), Schools/Colleges, Sports & Youth Clubs, Libraries, Chambers of Commerce (FNCCI), Trade Unions, Professional Bodies (ICAN), Red Cross, and NGOs.

8.1.2 Specialized Terminologies in NPO Accounting and Their Treatment

8.2 Financial Statements of a Non-Profit Organization

An NPO prepares three primary statements at the end of its accounting year:

1. Receipts and Payments Account
2. Income and Expenditure Account
3. Balance Sheet (Opening Balance Sheet if Opening Capital Fund is missing, and Closing Balance Sheet)

8.2.1 Receipts and Payments Account vs. Income and Expenditure Account

8.3 Calculation of Current Year’s Subscription Income

Subscription is the adjustment most often tested in NEB Grade 11 exams. Work it out in this order:

8.4 Complete Worked Numerical Example (NEB 8-Mark Standard)

Illustration 8.1:
Following is the Receipts and Payments Account of Patan Youth Club, Lalitpur for the year ended the last day of Ashadh 2082:

Receipts and Payments Account
For the Year Ended on the Last Day of Ashadh 2082

Additional Information:

1. On 1st Shrawan 2081 (beginning of the year), the Club owned Building worth Rs. 3,00,000, Furniture worth Rs. 50,000, Sports Equipment worth Rs. 40,000, and Outstanding Subscription for 2080/81 was Rs. 10,000 (Note: Out of Rs. 10,000 opening O/S subscription, Rs. 8,000 was received this year, so Rs. 2,000 is still in arrears).
2. Subscription outstanding for the current year 2081/82 is Rs. 15,000.
3. Salaries outstanding on the last day of Ashadh 2082 amounted to Rs. 5,000.
4. 50% of Entrance Fees and the entire Life Membership Fees are to be capitalized.
5. Depreciate Building @ 5% p.a., Furniture @ 10% p.a., and Sports Equipment @ 20% p.a. (Remember: New Sports Equipment of Rs. 80,000 was bought on 1st Magh 2081, so it was used for 6 months).

Required:

1. Opening Balance Sheet (to ascertain Opening Capital Fund) as on 1st Shrawan 2081.
2. Income and Expenditure Account for the year ended the last day of Ashadh 2082.
3. Closing Balance Sheet as on the last day of Ashadh 2082.

Solution:

1. Working Note: Opening Balance Sheet of Patan Youth Club (As on 1st Shrawan 2081)

2. Income and Expenditure Account of Patan Youth Club
For the Year Ended on the Last Day of Ashadh 2082

3. Balance Sheet of Patan Youth Club
As on the Last Day of Ashadh 2082

8.5 NEB Board Exam Practice Questions

Group A: Very Short Answer Questions (1 Mark Each)

1. What is a Non-Profit Organization? Give two examples.
2. Define Receipts and Payments Account.
3. How are Life Membership Fees and Specific Donations treated in the accounts of an NPO?
4. What is Honorarium? Where is it shown in NPO accounts?
5. What is meant by Capital Fund?

Group B & C: Short and Long Numerical Questions (5 / 8 Marks)

1. Differentiate between Receipts and Payments Account and Income and Expenditure Account on any five bases.
2. Subscription Calculation (5 Marks): During 2081/82, a club received Rs. 96,000 as subscription. Calculate the subscription to be credited to the Income and Expenditure Account for 2081/82 from the following information:
   • Subscription outstanding on 1st Shrawan 2081: Rs. 9,000 (out of which Rs. 7,500 was received in 2081/82).
   • Subscription received in advance on 1st Shrawan 2081: Rs. 4,000.
   • Subscription received in advance on the last day of Ashadh 2082: Rs. 6,500.
   • Total Subscription outstanding on the last day of Ashadh 2082: Rs. 11,500 (Note: Since “Total” O/S on the last day of Ashadh is Rs. 11,500, it already includes the Rs. 1,500 still unpaid from 2080/81; so O/S for current year 2081/82 alone is Rs. 10,000). (Ans: Rs. 96,000 - Rs. 7,500 [received for last yr] + Rs. 4,000 [opening advance] - Rs. 6,500 [closing advance] + Rs. 10,000 [current yr O/S] = Rs. 96,000)

Worked answers to these exercises are in Chapter 8 Solutions.

Chapter 9: Single Entry System (Accounting from Incomplete Records)

9.1 Concept of Single Entry System

9.1.1 Meaning and Definition

The Single Entry System (Accounting from Incomplete Records) refers to any book-keeping system that does not strictly follow the dual-aspect principles of the Double Entry System. Under this system, small sole proprietors typically maintain only a Cash Book and Personal Accounts of Debtors and Creditors, while completely ignoring Real Accounts (Fixed Assets) and Nominal Accounts (Expenses and Incomes).

• R.N. Carter: “Single Entry cannot be termed as a system, as it is not based on any scientific system like Double Entry System. For this purpose, Single Entry is nowadays known as preparation of accounts from incomplete records.”
• Kohler: “A system of book-keeping in which as a rule only records of cash and of personal accounts are maintained; it is always incomplete double entry, varying with circumstances.”

9.1.2 Features, Advantages, and Limitations of Single Entry System

9.1.3 Difference Between Single Entry System and Double Entry System

9.2 Ascertainment of Profit or Loss Under Net Worth (Statement of Affairs) Method

Since Nominal Accounts are absent under the Single Entry System, profit or loss is determined by comparing the Opening Capital (at the beginning of the year) and Closing Capital (at the end of the year) after adjusting for Drawings and Additional Capital (Fresh Capital) introduced during the year.

Step-by-Step Procedure (4 Steps)

1. Step 1: Prepare Opening Statement of Affairs (as on the first day of the year) to find Opening Capital (Opening Assets - Opening Liabilities). (Skip if Opening Capital is already given in the question).
2. Step 2: Prepare Closing Statement of Affairs (as on the last day of the year, before year-end adjustments) to find Closing Capital (Closing Assets - Closing Liabilities).
3. Step 3: Prepare Statement of Profit or Loss for the year (incorporating Drawings, Additional Capital, and all Year-End Adjustments like Depreciation, Bad Debts, Provision for Doubtful Debts, Outstanding Expenses, and Prepaid Expenses).
4. Step 4: Prepare Revised (Final) Statement of Affairs / Balance Sheet (incorporating Adjusted Closing Capital and all year-end adjustments).

9.2.1 Specimen of Statement of Affairs (Opening & Closing)

Name of Proprietor / Firm
Statement of Affairs
As on [Opening Date] and [Closing Date]

9.2.2 Specimen of Statement of Profit or Loss (With Adjustments)

Name of Proprietor / Firm
Statement of Profit or Loss
For the Year Ended …

9.3 Complete Worked Numerical Example (NEB 5-Mark / 8-Mark Standard)

Illustration 9.1:
Mr. Binod Thapa keeps his books under the Single Entry System. He provides the following particulars of his assets and liabilities:

Additional Information:

1. During the year, Mr. Thapa withdrew Rs. 3,000 per month for his domestic expenses (Rs. 3,000 × 12 = Rs. 36,000).
2. He sold his personal motorbike for Rs. 50,000 and introduced Rs. 30,000 out of that into the business as additional capital on 1st Magh 2081 (Note: Additional machinery of Rs. 30,000 [1,50,000 - 1,20,000] was also purchased on 1st Magh 2081).
3. Write off Bad Debts Rs. 5,000 and create a Provision for Doubtful Debts @ 5% on remaining debtors.
4. Depreciate Furniture @ 10% p.a. and Machinery @ 10% p.a. (Old Machinery Rs. 1,20,000 for 12 mos = Rs. 12,000 + New Addition Rs. 30,000 for 6 mos = Rs. 1,500 → Total Machinery Depr. = Rs. 13,500).
5. Salary outstanding on the last day of Ashadh 2082 was Rs. 6,000, Prepaid Insurance was Rs. 2,500, and full year’s interest on 10% Bank Loan (Rs. 4,000) is still unpaid.

Required:

1. Opening and Closing Statement of Affairs.
2. Statement of Profit or Loss for the year ended the last day of Ashadh 2082.
3. Revised (Final) Statement of Affairs as on the last day of Ashadh 2082.

Solution:

1. Statement of Affairs of Mr. Binod Thapa
As on 1st Shrawan 2081 and the Last Day of Ashadh 2082

2. Statement of Profit or Loss of Mr. Binod Thapa
For the Year Ended on the Last Day of Ashadh 2082

3. Revised (Final) Statement of Affairs of Mr. Binod Thapa
As on the Last Day of Ashadh 2082

9.4 NEB Board Exam Practice Questions

Group A: Very Short Answer Questions (1 Mark Each)

1. Define the Single Entry System of book-keeping.
2. What is a Statement of Affairs?
3. Why can a Trial Balance not be prepared under the Single Entry System?
4. State the formula for finding Unadjusted Profit under the Net Worth Method.
5. If Opening Capital is Rs. 1,20,000, Closing Capital is Rs. 1,65,000, Drawings are Rs. 20,000, and Additional Capital is Rs. 35,000, find the Profit for the year.

Group B: Short Answer & Numerical Questions (5 Marks Each)

1. Differentiate between the Single Entry System and Double Entry System on any five bases.
2. Differentiate between a Statement of Affairs and a Balance Sheet.

Worked answers to these exercises are in Chapter 9 Solutions.

Chapter 10: Government Accounting in Nepal

10.1 Introduction to Government Accounting

10.1.1 Meaning and Definition

Government Accounting is the systematic process of recording, classifying, summarizing, reporting, and auditing the receipt, allocation, release, and expenditure of public funds by government ministries, departments, offices, and constitutional bodies in strict accordance with parliamentary budget appropriations and financial rules.

• Oshisami and Dean: “Government accounting is the process of recording, analyzing, classifying, summarizing, communicating, and interpreting financial information about government in aggregate and in detail, reflecting all transactions involving the receipt, transfer, and disposition of government funds and property.”

10.1.2 Objectives and Features of Government Accounting

• Features:
  1. Non-Profit Motive: Aimed at public administration, infrastructure development, and social welfare rather than earning profit.
  2. Budgetary Control: All government expenditures are governed by the annual budget passed by Parliament; no office can spend beyond its approved budget head limit.
  3. Double Entry Basis: Based on the principles of the Double Entry System.
  4. Banking Transactions via Treasury Single Account (TSA): All receipts and payments are routed through the Treasury Single Account maintained at Nepal Rastra Bank or designated commercial banks.
  5. Statutory Auditing: Government accounts are subject to internal audit by the District Treasury Comptroller Office (DTCO) and final constitutional audit by the Office of the Auditor General (OAG).
• Objectives:
  1. To record all government revenues and expenditures systematically under prescribed budget heads.
  2. To prevent misuse, embezzlement, and over-expenditure beyond parliamentary budget limits.
  3. To provide reliable financial data for preparing the next fiscal year’s national budget.
  4. To facilitate smooth internal and final constitutional auditing.

10.1.3 Difference Between Government Accounting and Commercial (Business) Accounting

10.2 Evolution and the New Accounting System of the Government of Nepal

10.2.1 Historical Evolution of Government Accounting in Nepal

1. Wasil Banki Sresta Pranali: Introduced in 1871 BS (1814 AD) for simple cash revenue and expenditure tracking.
2. Syaha Sresta Pranali: Introduced in 1936 BS (1879 AD) by Kharidar Gunawanta for larger offices using Syaha, Awarje, and Dhapot.
3. Faram Sresta Pranali: Introduced in 1968 BS (1911 AD) using 51 standardized forms primarily for land revenue (Malpot) offices in Terai and Kathmandu.
4. Bhuktani Sresta Pranali: Introduced in 2017 BS (1960 AD) to classify budget expenditures, serving as a transitional bridge to the modern system.
5. The New Accounting System:
   • An Account Committee formed on 20 Magh 2016 BS drafted the modern Double-Entry Government Accounting System, which was formally approved by King Mahendra on 2 Chaitra 2018 BS (1962 AD) and implemented from Fiscal Year 2019/20 BS.
   • Recently modernized by the Financial Comptroller General Office (FCGO) and approved by the Office of the Auditor General (OAG) through the computerized CGAS (Computerized Government Accounting System), SUTRA (Sub-national Treasury Regulatory Application), and revised 200-Series AGF Forms.

10.2.2 Levels of Accounting: Central Level vs. Operating Level

10.2.3 Important AGF Forms Used in Operating Level Government Accounting

(Both Revised OAG 200-Series AGF Numbers and Legacy Old AGF Numbers are shown below, as NEB questions may cite either)

10.3 Classification of Government Budget Expenditure Heads

These are the 5-digit Budget Expenditure Head Codes used in Nepal Government Accounting for Goswara Vouchers, Budget Sheets, and Statements of Expenditure:

10.4 Treasury Single Account (TSA)

• Meaning: The Treasury Single Account (TSA) is a unified structure of government bank accounts managed by the District Treasury Comptroller Office (DTCO) that provides a consolidated view of government cash resources.
• How TSA Works: Individual operating-level offices do NOT hold separate idle bank balances or issue cheques directly from their own independent bank accounts. Instead, whenever an operating office needs to make a payment, it prepares a Goswara Voucher (AGF 203) and sends a Payment Order Statement (AGF 204) (often electronically via CGAS/EFT) to the DTCO. The DTCO verifies the budget limit and pays the vendor/employee directly from the centralized TSA Single Fund Account (Cr. DTCO - TSA).
• Objectives of TSA:
  1. Eliminates idle cash balances scattered across thousands of government office bank accounts.
  2. Reduces government domestic borrowing costs and interest expenses.
  3. Provides real-time information on daily government revenue collection and budget expenditure.
  4. Strengthens financial discipline and prevents unauthorized spending.

10.5 Goswara Voucher (Journal Voucher — AGF No. 203 / Old AGF No. 10)

The Goswara Voucher is the primary book of original entry in Operating Level Government Accounting. Every transaction is recorded using the prefix Dr. for Debits and Cr. for Credits, and since all payments are routed through the DTCO - Treasury Single Account (TSA), the bank credit leg is written as Cr. DTCO - TSA (or Cr. Nepal Rastra Bank / Bank if traditional bank account is specified).

10.5.1 Rules and Standard Entries for All Three Types of Goswara Vouchers

Type 1: General / Budget Expenditure Goswara Voucher

When any budget expenditure (e.g., Stationery, Furniture, Rent, Water/Electricity, Machinery) is paid by Cheque / TSA Payment Order:

• Rule: Always prefix the budget head with Dr. Budget Expenditure (B.E.) — [Name of Budget Head] and write its 5-digit Budget Head No. in the Budget Head column.

Type 2: Advance Goswara Voucher

1. At the Time of Granting Advance:
   (An advance is not yet a final budget expenditure, so “B.E.” is not written when an advance is given; the intended Budget Head No. is still written, for the budget sheet.)
   • Dr. [Post] [Name of Person/Contractor] — Advance for [Item] (with Budget Head No.)
   • Cr. DTCO - TSA (or Bank)
2. At the Time of Clearing / Settling Advance:
   When the official/contractor submits bills/invoices to clear the advance, there are 3 possible cases:

Type 3: Miscellaneous Goswara Vouchers

10.5.2 Worked Numerical Example: Goswara Vouchers (NEB 5-Mark Standard)

Illustration 10.1:
Prepare Goswara Vouchers (AGF No. 203) for the following transactions of District Education Office, Kathmandu for Mangsir 2082:

1. Mangsir 3: Issued a payment order / cheque of Rs. 45,000 to Section Officer Mr. Kedar Sharma as an advance for purchasing Furniture and Fixtures.
2. Mangsir 12: Paid Rs. 8,000 for Water and Electricity and Rs. 12,000 for Office Materials (Stationery) through TSA payment order.
3. Mangsir 20: Section Officer Mr. Kedar Sharma submitted a furniture purchase bill of Rs. 42,000 and a bank voucher of Rs. 3,000 for cash deposited into the TSA/Bank to clear his advance of Mangsir 3.
4. Mangsir 29: Distributed employee salary for the month of Mangsir: Basic Salary Rs. 2,00,000; Government added 10% for Provident Fund (Rs. 20,000). While distributing salary, 20% for Provident Fund (Rs. 40,000), Rs. 15,000 for Citizen Investment Trust (CIT), and Rs. 2,000 for Social Security Tax were deducted, and the net salary was paid via TSA payment order. The deducted amounts were remitted to the EPF, CIT and the tax office through TSA on the same day.

Solution:

Government of Nepal
District Education Office, Kathmandu
Goswara Voucher (AGF No. 203)

10.6 Bank Cash Book (AGF No. 209 / Old AGF No. 5)

10.6.1 Meaning and Structure of the 5 Major Accounts in Bank Cash Book

The Bank Cash Book (AGF No. 209) is the principal ledger-cum-cash register of an operating-level government office. Every Goswara Voucher affecting cash, bank/TSA, budget expenditure, advance, or miscellaneous items is posted into this book across 5 Major Account Sections (17 Columns):

1. Cash Balance Account (Dr. / Cr.): Records only physical cash or Petty Cash movements.
2. Bank / TSA Balance Account (Dr. / Cr. / Cheque No. / Balance):
   • Any payment by Cheque/TSA is entered in Bank Cr.
   • Any cash/deposit into Bank/TSA is entered in Bank Dr.
3. Budget Expenditure Account (B.H. No. / Rs.):
   • Records actual budget expenditures (Dr. B.E.) and also records Advances Given (because in government accounting, an advance given is temporarily treated as budget spent until year-end; when the advance is cleared, the net adjustment is made).
4. Advance Account (Given Rs. / Cleared Rs.):
   • When advance is granted → Enter in Advance Given column (and also in Budget Expenditure column & Bank Cr. column).
   • When advance is cleared → Enter the original advance amount in Advance Cleared column, and in the Budget Expenditure column enter only the Difference (Actual Bill - Advance). (If Bill = Advance, enter — in Budget Expenditure column; if Bill < Advance, enter the unspent returned amount in brackets (XXX) in Budget Expenditure column and in Bank Dr. column).
5. Miscellaneous Account (Account Title / Dr. Rs. / Cr. Rs.):
   • Records Opening Bank Balance/Revolving Fund (Cr.), Budget Release (Cr.), Petty Cash Fund (Dr. when opened, Cr. when closed), and Salary Deductions if unpaid.

10.6.2 Worked Numerical Example: Bank Cash Book (NEB 5-Mark / 8-Mark Standard)

Illustration 10.2:
Prepare a Bank Cash Book (AGF No. 209) of District Agriculture Office, Chitwan from the following transactions for Poush 2082:

1. Poush 1: Received Revolving Fund / Initial Budget Release order of Rs. 5,00,000 from DTCO/NRB.
2. Poush 5: Paid Rs. 18,000 for Office Materials (22311) and Rs. 25,000 for House Rent (28142) by cheque/TSA.
3. Poush 12: Issued a cheque of Rs. 60,000 to Accountant Ms. Sita Rai as an advance for purchasing Machinery and Equipment (31122).
4. Poush 18: Opened a Petty Cash Fund of Rs. 5,000 by issuing a cheque.
5. Poush 24: Ms. Sita Rai submitted a bill of Rs. 55,000 for Machinery purchased and deposited the remaining cash of Rs. 5,000 into the bank/TSA to clear her advance of Poush 12.
6. Poush 29: Distributed employee salary for Poush: Basic Salary Rs. 1,50,000 (21111) plus 10% Government PF addition Rs. 15,000 (21212), deducting PF Rs. 30,000 and Income Tax Rs. 3,000. All net salary and deductions were remitted to the concerned accounts by cheque on the same day.

Solution:

Government of Nepal
District Agriculture Office, Chitwan
Bank Cash Book (AGF No. 209)

10.7 Budget Sheet (AGF No. 208 / Old AGF No. 8)

10.7.1 Meaning and Three Sections of a Budget Sheet

A Budget Sheet (AGF No. 208) is a columnar ledger maintained by every operating-level government office to monitor approved annual budget allocations, budget releases, and progressive expenditures across each individual 5-digit budget head, ensuring that expenditures never exceed the sanctioned budget.

It is divided into three horizontal parts:

1. Part I: Annual Appropriation / Budget Allocation: Records the approved annual budget for each budget head (plus any supplementary budget or inter-head budget transfer + / -).
2. Part II: Budget Release / Payment Order Transfer: Records cumulative and monthly budget releases received from DTCO under each budget head.
3. Part III: Budget Expenditure: Records monthly and cumulative expenditures (including uncleared advances) under each budget head. (When an advance is cleared, the previous advance is deducted (XXX) and the actual bill expenditure XXX is added in that budget head column).

10.8 Statement of Expenditure (AGF No. 210 / Old AGF No. 13)

10.8.1 Meaning and Importance

The Monthly Statement of Expenditure (AGF No. 210) is a mandatory monthly financial report prepared by every operating-level office at the end of each month and submitted to the Central Office (Ministry/Department) and DTCO. It shows the budget head-wise expenditure of the current month, cumulative expenditure up to the current month, annual budget, remaining budget balance, and the status of uncleared advances and bank balance.

10.8.2 Key Formulas for Statement of Expenditure (AGF No. 210)

1. Total Expenditure Up to Current Month:
   Total Expenditure Up to This Month = Expenditure Up to Previous Month + Current Month’s Net Expenditure
2. Remaining Budget Balance:
   Remaining Budget = Annual Sanctioned Budget - Total Expenditure Up to Current Month
3. Total Release / Total Expenditure Verification (Fund Status Box at Bottom):
   • Total Expenditure (including Advance): Sum of Total Expenditure Up to This Month column.
   • Net Expenditure (excluding Advance): Total Expenditure - Uncleared Advance.
   • Closing Bank / Petty Cash Balance: Total Fund Released - Total Expenditure (including Advance) - Loan Given (if any).

10.8.3 Worked Numerical Example: Statement of Expenditure (NEB 5-Mark / 8-Mark Standard)

Illustration 10.3:
From the following information of District Health Office, Pokhara, prepare a Statement of Expenditure (AGF No. 210) for the month of Falgun 2082:

Additional Information:

1. Total budget release received up to Falgun: Rs. 28,00,000 (including a Petty Cash Fund of Rs. 5,000).
2. Expenditure up to Magh under Machinery and Equipment (31122) includes an uncleared advance of Rs. 50,000 given to Officer Hari.

Solution:

Government of Nepal
District Health Office, Pokhara
Statement of Expenditure for the Month of Falgun 2082 (AGF No. 210)

Summary of Fund Position & Advance Status:

• Total Expenditure up to Falgun (including Advance): Rs. 27,10,000
• Less: Uncleared Advance (Machinery - Officer Hari): (Rs. 50,000)
• Net Actual Expenditure (excluding Advance): Rs. 26,60,000
• Unspent Balance of the Release: Rs. 28,00,000 - Rs. 27,10,000 = Rs. 90,000 (Petty Cash Rs. 5,000 + Bank Balance Rs. 85,000).

10.9 NEB Board Exam Practice Questions

Group A: Very Short Answer Questions (1 Mark Each)

1. Define Government Accounting.
2. When was the New Accounting System introduced in Nepal?
3. Write the Budget Head Numbers for: (a) Remuneration, (b) Office Materials, (c) House Rent, and (d) Furniture and Fixtures.
4. What is the Treasury Single Account (TSA) System?
5. Mention the AGF Form Numbers (New or Old) for: (a) Goswara Voucher, (b) Bank Cash Book, (c) Budget Sheet, and (d) Statement of Expenditure.
6. What is a Budget Sheet? State its three parts.

Group B & C: Short and Long Numerical Questions (5 / 8 Marks)

1. Differentiate between Government Accounting and Commercial Accounting on any five bases.
2. Explain the main features and objectives of the New Government Accounting System of Nepal.
3. Differentiate between Central Level Accounting and Operating Level Accounting.

Worked answers to these exercises are in Chapter 10 Solutions.

Appendix: Formulas, Standards, Budget Codes, Glossary and Model Question Paper

Subject: Accountancy (Principles of Accounting — Grade XI) | Subject Code: Acc. 103

Appendix A: Master Formula & Accounting Rules Reference Sheet

1. Accounting Equation (Unit 1.1)

• Basic Equation: Assets (A) = Capital (C) + Liabilities (L)
• Expanded Equation: Assets = [Opening Capital + Additional Capital + Revenues/Profits - Expenses/Losses - Drawings] + Liabilities

2. Rules of Debit and Credit (Unit 1.2)

• Personal Account: Debit the Receiver, Credit the Giver.
• Real Account: Debit what comes in, Credit what goes out.
• Nominal Account: Debit all expenses and losses, Credit all incomes and gains.
• Modern Approach (DEALER):
  • Drawings, Expenses, Assets → Normal Debit balance (Increase = Dr., Decrease = Cr.).
  • Liabilities, Equity (Capital), Revenues → Normal Credit balance (Increase = Cr., Decrease = Dr.).

3. Depreciation Formulas (Unit 2.3)

• Total Capitalized Cost of Asset (C): Purchase Price (net of Trade Discount) + Import Duty/Freight + Installation & Erection Wages
• Straight Line Method (SLM):
  • Annual Depreciation = (Total Cost (C) - Scrap Value (S)) ÷ Estimated Useful Life in Years (N)
  • Rate of Depreciation (%) = Annual Depreciation ÷ Total Cost (C) × 100
• Diminishing Balance Method (DBM / WDV):
  • Annual Depreciation = Opening Written Down Value (WDV) × Rate ÷ 100 × Months Used ÷ 12
• Profit or Loss on Sale of Fixed Asset:
  • Book Value on Date of Sale = Original Cost of Sold Asset - Total Depreciation Charged up to Date of Sale
  • Selling Price - Book Value = +Profit on Sale (Dr. Asset A/c) or -Loss on Sale (Cr. Asset A/c).

4. Provision for Bad and Doubtful Debts (Unit 2.4)

• Good Debtors: Closing Sundry Debtors - Further Bad Debts (in Adjustment)
• New Provision Required: Good Debtors × Rate of Provision ÷ 100
• Net Charge to Profit & Loss A/c: Bad Debts (TB) + Further Bad Debts (Adj.) + New Provision - Old Provision (TB)

5. Financial Statements Formulas (Unit 3.1)

• Net Sales = Gross Sales - Sales Return (Return Inward)
• Net Purchases = Gross Purchases - Purchase Return (Return Outward) - Goods Withdrawn/Lost/Free Samples
• Cost of Goods Sold (COGS) = Opening Stock + Net Purchases + Direct Expenses (Wages, Carriage Inward, Custom Duty) - Closing Stock
• Gross Profit = Net Sales - Cost of Goods Sold (COGS)
• Operating Profit (EBIT) = Gross Profit + Other Operating Income - Distribution/Selling Expenses - Administrative Expenses
• Net Profit = Operating Profit + Finance Income - Finance Costs (Interest on Loan) - Income Tax Expense

6. Non-Profit Organizations (Unit 3.2)

• Opening Capital Fund = Total Opening Assets (including Cash b/d & Opening O/S Subscription) - Total Opening Liabilities
• Current Year’s Subscription Income = Subscription Received in Cash + Closing O/S Subscription (for current yr) + Opening Advance Subscription - Opening O/S Subscription (received this yr) - Closing Advance Subscription

7. Single Entry System (Unit 3.3)

• Opening Capital = Opening Assets - Opening Liabilities
• Closing Capital = Closing Assets - Closing Liabilities
• Unadjusted Profit = Closing Capital + Drawings - Additional Capital - Opening Capital
• Net Profit = Unadjusted Profit + Unrecorded Incomes/Prepaid Expenses - Unrecorded Expenses/Depreciation/Bad Debts/Provisions

Appendix B: Summary of Nepal Accounting Standards (NAS) & NFRS Relevant to Grade XI

Appendix C: Quick Reference of Government Budget Heads & AGF Forms

1. Frequently Asked Government Budget Expenditure Head Codes