General Accounting Principles

P R UPADHYAY
Outline
2

• Trial Balance • Procurement Procedures

• Balance Sheet (Knowledge of FOB, CIF,
• Income Statement
CIP, Liquidated damage,
Letter of credit,
• Revenue Expenditure
Insurance, Invoice, Bid
• Capital Expenditure Security, Performance
• Capitalization Bond, Competitive
• Depreciation Bidding)
• Budgeting
• Subsidy

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Accounting Process
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 Basically, there are four phases of accounting

process:
1. Journalisation of transaction and events,
2. Ledger posting and balancing,
3. Preparation of Trial Balance, and
4. Preparation of Final Accounts (i.e. Income
Statement, Balance Sheet, Cash Flow Statement)

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Trial Balance
4

 It is a statement of ledger balances.

 After posting the accounts in the ledger, this
statement is prepared to show separately the debit
and credit balances.
 The total of debit and credit balance as listed in the
trial balance should agree.
 When both balances agree, it indicates reasonable
accuracy of the accounting work.

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Trial Balance
5

 If trial balance does not agree, then this is simply an

arithmetic error; because in double entry system, the
amount written on the debit side of various accounts
is always equal to the amounts entered on the credit
side of other accounts and vice versa.

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Objective of Trial Balance
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 To establish arithmetical accuracy of the books of

accounts.
 To help in preparing financial statements.
 To grasp the summary of content of ledger.

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Limitation of Trial Balance
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 Agreed Trial Balance is not a conclusive proof of

accuracy because some errors of principle and
compensating errors may still remain.

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 Preparation of Trial Balance
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 Trial Balance may be prepared in the following format:

Particulars L.F. Dr. Amt. Cr. Amt.

Total = =
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Preparation of Trial Balance
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1. Particulars column is used for stating accounts

head.
2. L.F. is used for writing the folio number of
ledger from which the balance is brought to
Trial Balance.
3. The debit balance (only the balance) of account
is kept in the column of Debit Amount.
4. The credit balance (only the balance) of account
is kept in the column of Credit Amount.
5. Generally, the following rules can be applied:
All assets are debit. All liabilities (Including capital) are
credit.
All expenses are debit. All incomes are credit.
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Financial Statements
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 Financial Statements includes:
a) balance sheet;
b) income statement;
c) a statement showing changes in equity;
d) cash flow statement; and
e) accounting policies and explanatory notes.

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Balance Sheet
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 It is a component of Financial Statements.

 It shows the financial position of the business
enterprise setting out its Assets and Liabilities
with their amount in specified currency.
 It is prepared at a particular date; such as year
end.
 It is prepared only after preparation of Income
Statement.

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Balance Sheet
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 As per accounting equation, assets always equal

to liabilities and capital. Therefore, Assets side
and Liabilities side of Balance Sheet should
always be equal.

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Structure and Contents of Balance Sheet
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……………….. (Name of the Enterprise)
Balance Sheet as at……….. (date)
Liabilities Amount Assets Amount
Share Capital Intangible Assets:
Reserve & Surplus Goodwill
Long Term Loans or Borrowings Patents
Current Liabilities & Provisions: Fixed Assets:
Short Term Loans or Borrowings Land & Buildings
Sundry Creditors Plant & Machinery
Accounts & Bills Payable Office Equipments
Outstanding Expenses Furniture & Fixture
Advance Income Investments (in shares, debentures,
bonds and other real assets)
Provision for income taxes Current Assets, Loans & Advances:
Inventories (Closing Stock of
goods)
Sundry Debtors
Accounts & Bills Receivable
Pre-paid Expenses
Income Accrued and Receivable
Advances
Cash & Bank Balance
Fictitious Assets (to the extent not
written off)
═ ═
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Income Statement
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 It is a component of Financial Statement.

 It shows the financial performance of the
business enterprise setting out its Income and
Expenditures and profit or loss arising there
from with their amount in specified currency.
 It is prepared for a time period of business
operation.
 It is prepared before balance sheet.

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Income Statement
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 It may be divided into:

 Manufacturing & Trading Account; results in Gross
Profit or Gross Loss
 Profit & Loss Account; results in Net Profit or Net Loss

 Profit & Loss Appropriation Account; results in

appropriation of profit or loss

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Income Statement
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Manufacturing and Trading Account of ……….for the year ended………..
Dr. Cr.
Particulars Amount Particulars Amount
To Opening Stock By Sales
less sales returns
To Purchases By Closing Stock
less purchase returns
To Customs Duty By Gross Loss c/d
To Carriage or Freight Inwards (If Debit side is more than Credit
To Manufacturing Wages side)
To Power and Fuel
To Factory Lighting
To Factory Rent and Rates
To Other Direct Expenses related
to production or purchase of
goods
To Gross Profit c/d
(If Credit side is more than Debit
side)
═ ═
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Income Statement
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Profit & Loss Account of ……….for the year ended………..
Dr. Cr.
Particulars Amount Particulars Amount
To Opening Stock By Gross Profit b/d
To Selling & Distribution Expenses By Interest and Dividend Received
(Individual Items)
To Administrative Expenses By Rent Received
(Individual Items)
To Other Indirect Expenses By Comm. and Discount Received
To Net Profit (If Credit side is more By Net Loss (If Debit side is more
than Debit side) than Credit side)
═ ═

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Revenue Expenditures
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 Amount spent for generating revenue is revenue

expenditure.
 They maintain the earning capacity or standard
of performance of an asset.
 The benefit of these expenditures are received or
exhausted in the same accounting period.
 They help in determination of profit or loss of an
organization.
 They can be identified as manufacturing
expenses, administrative expenses, selling and
distribution expenses.
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Capital Expenditures
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 An item of expenditure that brings into existence

an asset of lasting value or benefit or a valuable
right is Capital Expenditure.
 This increases the earning capacity or standard
of performance of an asset.
 The benefit of these expenditures are received in
more than one accounting period.
 They are not used in determination of profit or
loss of an organization.
 They can be identified as expenditure for
purchasing or acquiring fixed assets.
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Budgeting
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 Budget is a COMPREHENSIVE and

COORDINATED PLAN expressed in FINANCIAL
TERMS for the OPERATION & RESOURCES of an
enterprises for some SPECIFIED FUTURE
PERIOD.
 It reflects the INTENTION & EXPECTATION of
management
 It is an important tool of management for financial
planning and control.

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Budgeting
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 Regardless of commercial environment,

budgeting co-ordinates diverse activities, helps
planning, promotes employee motivation and
provides a benchmark against which to measure
actual performance.
 It is a management process of predicting
accounting numbers which gives direction for
future plan of action.

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Budgeting
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 Budgeting covers preparation of:

 Purchase Budget
 Production Budget
 Sales Budget
 Cash Budget

 Budgeting process should have flexibility to

modify as and when required during the
budgeted period.
 Generally, two process are followed for
budgeting:
 Flexible Budgeting
 Zero Base Budgeting
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Capitalization
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 It is the process of identifying capital

expenditures into related fixed assets.
 Different accounting policies are used by
different organizations for capitalization of
capital expenditures.
 Until and unless expenditures are capitalized,
they cannot be used for charging depreciation.

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Depreciation
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 Depreciation is the diminution in the value of

assets used in business due to their use or
passage of time or change in technology etc.
 Depreciation is the systematic allocation of the
depreciable amount of an asset over its useful
life.
 The depreciation charge for each period should
be recognized as an expense unless it is included
in the carrying amount of another asset.
 Tangible assets except land are depreciated but
intangible assets are amortized or written off
over their useful life.
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Depreciation
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 The amount of depreciation can be calculated

using various methods; basically, Straight Line
Method and Diminishing Balance or Written
Down Value Method are in practice.
 In SLM, the amount of depreciation will be same
over the life of the assets. It may differ at the
beginning or end of the life.
 In WDV method, the amount of depreciation
goes on decreasing over the life of the assets
because it is calculated on the basis of
diminishing balance of the assets.

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Subsidy
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 Subsidy are the assistance by an organization in

the form of transfers of resources to another in
return for past or future compliance with certain
conditions relating to the operating activities of
the enterprise.

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Procurement Procedures
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 Procurement is the process by which goods and

services are acquired.
 It is the process of the two (or more) different
contractual parties, who have different aims and
objectives, interacting and agreeing on a contract
within a given market sector.
 It is the process by which the organization can attract
and contract good quality services or goods.
 This is important because good procurement leads to
good suppliers and this in turn leads to increased
performance and improved profitability.
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Procurement Procedures
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 There are two types of procurement:

 Local, and
 Global
 Organizations can make their own rules and
procedures for procurement.
 In Nepal, government organizations are guided
and bounded by the Public Procurement Act.
And, Procurement Rules are made on the basis of
the cost of procurement.

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Procurement Procedures
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 There are two types of procurement procedures:

 Direct Purchase
 Competitive Bidding
 Competitive Bidding can be in the form of:
 Sealed Quotation (Used generally for locally available
items within certain monetary limit)
 Tender (Used for large procurement including
international competitive bidding)

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Procurement Procedures
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 Procurement generally includes a number of
phases:
 Objective Phase- Objective of procurement are
established.
 Exposure Phase- Sources of procurement are identified.
 Alternative Phase- Alternative sources are scrutinized.
 Documentation Phase- Bid/ contract documents are
prepared.
 Tendering Phase- Bids are invited.
 Evaluation Phase- Submitted bids are evaluated on
established bases.
 Award Phase- Bid selected from evaluation is awarded
the contract of procurement.
 Contract Administration Phase- Implementation and
control.

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Meaning of Some Terms used in Procurement
Procedures 31

 FOB (Free on Board):

 It means that the supplier delivers the goods when the
goods pass the ship’s rail at the named port of
shipment.
 This term specifies that the goods or services which are
intended to be supplied under a contract should be
boarded in ship or land transport at the named port of
shipment free of any cost to the buyer; i.e. the cost of
boarding shall be borne by the supplier.
 But, the buyer has to bear all costs and risks of loss or
damage to the goods from that point.
 Supplier clears the goods for export.
 This term is used only for sea or inland waterway
transport. For all modes of transport FCA (Free
Carrier) should be used.
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Meaning of Some Terms used in Procurement
Procedures 32

 CIF (Cost Insurance and Freight)

 This means that the seller delivers the goods when the
goods pass the ship’s rail in the port of shipment.
 The supplier must pay costs, freight and insurance to
bring the goods to the named port of destination.
 The supplier clears the goods for export.
 The term can be used only for sea and inland waterway
transport. For all modes of transport, the CIP (Carriage
and Insurance Paid) term should be used.

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Meaning of Some Terms used in Procurement
Procedures 33

 Liquidated Damage (LQD):

 This is the penalty intended to be charged to the
supplier under the contract for late supply or delayed
performance of the contract.
 The amount of LQD is mutually defined in the
commercial clause of the contract.
 It is charged at a fixed rate (say 0.5%) on the amount of
delayed work calculating the period of delay. Beyond
fixed limit (say 10% of contract value), it may lead to
termination of contract.

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Meaning of Some Terms used in Procurement
Procedures 34

 Letter of Credit (LC):

 This is also known as Documentary Credit.
 It is an undertaking issued by a bank or financial
institution for the account of the buyer (the applicant,
who applies for opening of the LC) or for its own
account, to pay the Beneficiary the value of the
documents provided that the terms and conditions of
the LC are complied with.
 There exists contractual agreements:
 Between buyer and seller as sales/ buy contract.
 Between the buyer and the issuing bank as Application and
Security Agreement/ Reimbursing Agreement.
 Between the issuing bank and the beneficiary as documentary
credit.

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Meaning of Some Terms used in Procurement
Procedures 35

 Letter of Credit (LC):

 Parties to LC are:
 The applicant (buyer); who instructs his bank to issue credit in
favour of the seller.
 The issuing Bank, provides documentary credit in favour of
beneficiary.
 The advising bank (confirming bank), informs the seller about
the LC issuance.
 The seller (beneficiary), who receives payment.
 Two types of LC:
 Revocable LC: may be amended or cancelled by the issuing bank
at any time and without prior notice to the beneficiary.
 Irrevocable LC: definite undertaking by issuing bank for
payment when stipulated terms and conditions are complied
with.
 If not clearly stated, it is irrevocable.

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Meaning of Some Terms used in Procurement
Procedures 36

 Insurance:
 This clause is put in the contract document to
safeguard both the buyer and the seller against any loss
or damage incidental to manufacture or acquisition,
transportation, storage and delivery.
 Both party generally agree that the goods to be supplied
under the contract shall be insured by the supplier.
 The insurance shall cover the total price of goods and
generally it is of more than 100% value (minimum
110% of invoice value) of the goods.
 The insurance policy is intended to be valid for some
period even after the completion of the delivery.

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Meaning of Some Terms used in Procurement
Procedures 37

 Invoice
 In procurement process, there are two types of invoice:
 Proforma Invoice, and
 Commercial Invoice.
 Proforma Invoice is used at the time of opening of LC.
 The supplier shall submit the proforma invoice to the
buyer after signing of the contract. The buyer shall
submit the same to the issuing bank along with other
documents to open LC.
 Proforma invoice contains the total value of goods to be
supplied under the contract, showing the name of the
buyer, the name of the goods, total quantity of goods
and the unit price.

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Meaning of Some Terms used in Procurement
Procedures 38

 Invoice
 Commercial invoice is used at the time of payment for
the goods supplied under the contract.
 If all goods are not supplied at one time (or supplied
lot-wise), the commercial invoice contains the value of
goods supplied showing the name of the goods, the unit
price, quantity supplied and the invoice value of the
same.
 Beneficiary (supplier) shall issue the commercial
invoice in the name of the buyer; and it comes along
with the supplied goods.
 It need not be signed.

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Meaning of Some Terms used in Procurement
Procedures 39

 Bid Security
 It is the amount of security deposit asked by the buyer
from the intended suppliers at the time of submitting
the competitive bid for the supply of the goods or
services.
 It is generally fixed by the buyer as the percentage of
the bid amount. In Nepal, it is generally stated to be at
2.5% of the bid amount.
 It is often submitted in the form of bank guarantee. The
amount of bid security shall be valid for the period of
validity of bid.
 The submitted bid shall not be valid without the Bid
Security.
 The bid security of all the bidders, including successful
bidder, shall be released after award and signing of the
contract with successful bidder.

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Meaning of Some Terms used in Procurement
Procedures 40

 Performance Bond
 It is the amount of security deposit asked by the buyer
with the successful bidder before signing of the
contract.
 It is generally fixed by the buyer as the percentage of
the contract amount. In Nepal, it is generally stated to
be at 10% of the contract amount.
 It is submitted in the form of bank guarantee. The
amount of performance security shall be valid for the
period of validity of the contract and may extend to the
warranty period.
 The performance bond of the contractor shall be
released after satisfactory performance of the contract
and on completion of the warranty period.

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Thank You

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