General Accounting Principles P R UPADHYAY Outline 2

General Accounting Principles P R UPADHYAY

Outline 2 • Trial Balance • Depreciation • Balance Sheet • Budgeting • Income Statement • Subsidy • Revenue Expenditure • Procurement Procedures • Capital Expenditure • Terms used in • Capitalization Procurement Procedures 3/5/2021

Accounting Process 3 Basically, there are four phases of accounting process: 1. Journalisation of financial 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) 3/5/2021

Accounting Process 4 • 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. 3/5/2021

Trial Balance 5 It is a statement of ledger account balances. This statement shows separately the debit and credit balances of each account. The total of debit and credit balance of all the accounts as listed in the trial balance should agree. When both debit and credit balances agree, it indicates reasonable accuracy of the accounting work. 3/5/2021

Trial Balance 6 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. 3/5/2021

Objective of Trial Balance 7 To establish arithmetical accuracy of the books of accounts. To help in preparing financial statements. To grasp the summary of the contents of ledger accounts. 3/5/2021

Limitation of Trial Balance 8 Agreed Trial Balance is not a conclusive proof of accuracy because some errors of principle and compensating errors may still remain. 3/5/2021

Preparation of Trial Balance 9 Trial Balance may be prepared in the following format: L. F. Dr. Amt. Particulars Total = Cr. Amt. = 3/5/2021

Preparation of Trial Balance 10 1. Account head is mentioned in Particulars column. 2. L. F. is used for writing ledger folio number from which the balance is brought to Trial Balance. 3. The debit balance (only the balance) of account is kept in the Debit Amount column. 4. The credit balance (only the balance) of account is kept in the column of Credit Amount. 3/5/2021

Financial Statements 11 Financial Statements includes (Components): a) balance sheet; b) income statement; c) a statement showing changes in equity; d) cash flow statement; and e) accounting policies and explanatory notes. Elements of financial statements are the various items of income, expenses, assets and liabilities. 3/5/2021

Balance Sheet 12 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. Total of assets always equals to liabilities and capital. Therefore, Assets side and Liabilities side of Balance Sheet should always be equal. 3/5/2021

Structure and Contents of Balance Sheet 13 3/5/2021

Income Statement 14 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. 3/5/2021

Income Statement 15 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 3/5/2021

Income Statement 16 3/5/2021

Income Statement 17 3/5/2021

Revenue Expenditures 18 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. 3/5/2021

Capital Expenditures 19 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. 3/5/2021

Budgeting 20 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. 3/5/2021

Budgeting 21 Regardless of commercial environment, budgeting co-ordinates diverse activities, helps planning, promotes employee motivation and provides a benchmark (Financial and Physical) against which to measure actual performance. It is a management process of predicting accounting numbers which gives direction for future plan of action. 3/5/2021

Budgeting 22 Budgeting covers preparation of: Purchase Budget Production Budget Sales Budget Cash 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 3/5/2021

Budgeting 23 Generally, two process are followed for budgeting: Flexible Budgeting Base of level of operation is taken. Has flexibility of modification as per requirement. Capable of presenting different level of activities at the same time. Zero Base Budgeting Has no base, prepared from scratch level. Every aspects of operation and level of activity are to be estimated. 3/5/2021

Capitalization 24 It is the process of identifying capital expenditures into related fixed assets. Until and unless relevant expenditures are capitalized, they cannot be used for charging depreciation. Different accounting policies are used by different organizations for capitalization of capital expenditures. 3/5/2021

Depreciation 25 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. It 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. 3/5/2021

Depreciation 26 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. 3/5/2021

Depreciation 27 Tangible assets except land are depreciated but intangible assets are amortized or written off over their useful life. 3/5/2021

Subsidy 28 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. 3/5/2021

Procurement Procedures 29 Procurement is the process by which goods and services are acquired. In procurement, two (or more) different contractual parties, who have different aims and objectives, interact and agree 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. 3/5/2021

Procurement Procedures 30 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 rules. 3/5/2021

Procurement Procedures 31 There are two types of procurement procedures: Direct Purchase 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) 3/5/2021

Procurement Procedures 32 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. 3/5/2021

Terms used in Procurement Procedures 33 FOB (Free on Board): It means that the supplier delivers the goods when the goods pass on 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. 3/5/2021

Terms used in Procurement Procedures 34 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 destination. 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. 3/5/2021

Terms used in Procurement Procedures 35 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. 3/5/2021

Terms used in Procurement Procedures 36 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. 3/5/2021

Terms used in Procurement Procedures 37 Letter of Credit (LC): 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. 3/5/2021

Terms used in Procurement Procedures 38 Letter of Credit (LC): Parties to LC : 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. 3/5/2021

Terms used in Procurement Procedures 39 Letter of Credit (LC): 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. 3/5/2021

Terms used in Procurement Procedures 40 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. 3/5/2021

Terms used in Procurement Procedures 41 Invoice In procurement process, there are two types of invoice: Pro-forma Invoice, and Commercial Invoice. 3/5/2021

Terms used in Procurement Procedures 42 Invoice Pro-forma Invoice is used at the time of opening of LC. The supplier shall submit the pro-forma 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. Pro-forma 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. 3/5/2021

Terms used in Procurement Procedures 43 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. 3/5/2021

Terms used in Procurement Procedures 44 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. 3/5/2021

Terms used in Procurement Procedures 45 Bid Security 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. 3/5/2021

Terms used in Procurement Procedures 46 Performance Bond It is the amount of security deposit asked by the buyer with the successful bidder before or at the time of 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. 3/5/2021

Terms used in Procurement Procedures 47 Performance Bond 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 3/5/2021

48 Thank You 3/5/2021