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Accounting and Auditing

Concept of Accounting:
Accounting, as an information system is the process of identifying, recording,
classifying, summarizing, analyzing, interpreting and communicating of economic
and financial transactions and events of an organization in a systematic manner for
planning and decision making purpose to its users. Accounting performs a basic
function of language of business which is expressed in terms of money.
Ethical and professional accounting forms a clear financial image of a business, and
allows managers to make informed decisions, keeps investors abreast of
developments in the business and keeps the business profitable.
As an information system accounting is viewed as under;

Inputs
Business
Transactio
ns and
events

Processing
Accounting
principles
and
procedures

Accounting Practice in RBB

Outputs
Financial
Statments
and
Reports

Users
Investers,
Lenders,
Managers

Generally, account is maintained as per Generally Accepted Accounting Principles


(GAAP). Similarly, account is prepared in double entry book keeping system.
Account follows debit credit rules in RBB and generally account is maintained in
accrual basis. It follows double entry principle, GAAP principle and as per Nepal
Accounting Standard (NAS).
Gradually, accounting is improving towards International Financial Reporting
System (IFRS). Nepal Rastra Bank (NRB), Bank and Financial Institutions Acts
(BAFIA), Corporate Governance Principles prescribe for Nepal Accounting Standard
(NAS) to maintain account in bank and financial institutions.

Features and Characteristics of Account


1. Recording of business transactions of economic and financial events
2. Maintaining different types of books of accounts such as journal, ledger,
subsidiary books, day books, cash book etc

3. Preparation of financial statements such as Balance Sheet, Profit and loss


account, cash flow statement.
4. Two parties (giver and receiver)
5. It provides different types of information and facts in monetary terms.
Double Entry Book Keeping System
Double entry system is a method of accounting which is based on double effect and
equal effect principle.

Auditing
Auditing can be defined as check, verification and examination of books of account.
It is a systematic, independent and neutral examination of business transactions or
an organization. Auditing usually checks and verifies whether the account present
true and fair picture of business or not? Auditing is a task of finding mistakes,
frauds, embezzlement of cash, irregularities, undue activities, and other negligence
made in business transactions and events. After examination, it provides comments,
suggestions and recommendations for the improvement and action.

Basically, auditing is defined in two types;


1. Internal auditing
2. External auditing
Although, audit can be classified as pre-audit, post-audit, technical audit,
operational audit, management audit, full audit, sample audit, continuous audit,
final audit, statutory audit and so on.

Internal audit: It is usually concern with finding procedural mistakes, fraud and
other irregular activities happening in transaction. Internal audit is conducted either
by internal audit department or through independent auditors.

Financial Statement Analysis


What is / what are financial Statements?
Financial Statements are organized summaries of detailed information about the
financial position and performance of an organization. These are official records that
document the financial activities of a business and provide a view into the financial
condition as well as the profitability of the business. Financial statements are
prepared as a part of the accounting cycle.
Generally, financial statements includes;

1.
2.
3.
4.

Trading, Profit and Loss account (Income Statement)


Statement of Retained Earnings (Profit and loss Appropriation Account)
Balance Sheet
Cash Flow Statement

Financial statements provide real financial situation of a particular period and are
prepared at the end of each fiscal year. These statements shows profit and loss
situation, position of assets and liabilities, position of capital, loan, borrowing and
assets situation.
Importance of financial statements/ Statement of financial reporting:
1.
2.
3.
4.

It indicates real financial position of a firm


It provides basic and important financial information
Financial statements are required to fulfill legal obligations
Financial statements help to determine tax, as well as net profit/net loss, and
other information required for different stakeholders
5. Financial statements are important for researcher, analyst and academician
6. Financial statements are basic inputs (documents) for financial analysis
7. Financial statements shows the uses and sources of funds
What do you mean by financial analysis?
Financial statement analysis is defined as the process of identifying financial
strengths and weaknesses of the firm by properly establishing relationship between
the items of the balance sheet and profit and loss account.
In another word, financial statement analysis is an act of selecting, relating and
interpreting the information contained in the financial statements with specific
purpose and tool. It extracts meaningful information about the liquidity, efficiency,
profitability, leverage position, growth position of an organization, from which user
can understand about the health, strength, weaknesses, progress and survival of
that particular organization.
For financial statement analysis various tools are used;
1.
2.
3.
4.
5.

Ratio analysis
Comparative statements or horizontal analysis
Common size statement or vertical analysis
Trend analysis
DuPont analysis

Figures or amounts contained in financial statements do have their individual


significance. But meaningful references or conclusions can be drawn when their
relationship is established with other figures or when their changes over the years
are identified. They play a dominant role in setting the framework of managerial
decisions.

Need / Importance of Financial Analysis

1. To test financial health of organization


2. To find out liquidity, solvency, efficiency, and profitability of organization
3. To estimate, measure, judge, guess over all financial position of firm
4. To find out corporate failures
5. To forecast financial sickness and financial progress in future
6. To get answer of different issue of financial matter
7. Express financial trends
8. Shows changes
9. Useful in planning
10.Facilitate in comparison
11.Communicates strengths and weaknesses
12.Develop control mechanism
13.Helpful in decision making

Ratio analysis