Class 10 Account

Introduction to Business Accounting:
The overall process of entering daily financial transactions that occur during the course of running a business into accounts according to established rules and principles, classifying them, and then preparing financial statements at the end of the year to determine outcomes — is called Business Accounting.

Its importance and objectives are as follows:

• 1. Systematic Record of Transactions: Since human memory is limited, all financial transactions are recorded in a scientific and systematic manner so that they can be referred to whenever needed in the future.
• 2. Determining Operating Results: At the end of each fiscal year, the Income Statement is used to determine how much profit was earned or how much loss was incurred by the business.
• 3. Depicting Financial Position: A Balance Sheet is prepared to show the true position of the business — how many assets it holds and how many liabilities remain to be paid.
• 4. Information Flow to Stakeholders: Necessary financial information is made available to the owners, investors, banks, and the government in a form that facilitates decision-making.
• 5. Determining Tax Liability: Business Accounting helps in the accurate assessment of the income tax to be paid to the government based on the actual profit earned by the business.

Introduction to Accounting Standards:
The collection of policies, rules, principles, and guidelines issued by relevant authoritative bodies in order to make the accounting process systematic, scientific, and universally acceptable is called an Accounting Standard. It sets the criteria for how accounts should be maintained and how reports should be prepared.

Advantages of Accounting Standards:

• 1. Since all business organisations follow the same rules, uniformity and consistency are achieved in financial statements.
• 2. Their use minimises the possibility of errors and fraudulent practices that may occur while keeping accounts.
• 3. It becomes easier to compare the financial statements of one organisation with those of another, or with those of the previous year.
• 4. Since the accounting process is transparent, the credibility of financial statements increases in the eyes of investors and other stakeholders.

Nepal Accounting Standard (NAS): The accounting policies and benchmarks prepared by the Nepal Accounting Standards Board — which organisations operating in Nepal must mandatorily follow when maintaining accounts and preparing financial statements — are called Nepal Accounting Standards (NAS).

Objectives of Nepal Financial Reporting Standards (NFRS):

• 1. To bring uniformity in the format and presentation of financial statements prepared by various business organisations in Nepal.
• 2. To provide stakeholders with clear, simple, and factual information about the profit/loss and financial position of the business.
• 3. To make the financial statements of Nepali companies internationally comparable — enabling comparisons between different companies.
• 4. To encourage accountants to adopt modern and scientific accounting systems.

A Chart of Accounts is used in Business Accounting to easily identify transactions and enter them in an organised manner. Under it, accounts are mainly divided into the following five headings:

• 1. Assets Account: Records of visible and invisible resources owned by the business — such as cash, bank balance, machinery, furniture, and land and buildings — are kept here.
• 2. Liabilities Account: Records of amounts the business owes to external parties or institutions — such as loans, bank debts, outstanding expenses, and creditors — are kept here.
• 3. Shareholders’ Equity Account: Capital invested by the owner or shareholders, ordinary shares, and retained earnings (profit earned but not yet distributed) fall under this account.
• 4. Revenue Account: Sources of income earned during the course of business operations — such as sales proceeds from goods and services, interest received, and commissions received — are recorded here.
• 5. Expenses Account: Daily expenses incurred to run the business — such as employee salaries, rent, advertising costs, and electricity charges — fall under this account.

Business organisations use various types of accounting methods according to their objectives and needs. The three main types of accounting methods can be explained as follows:

• 1. Financial Accounting:
  This is the oldest and most widely used branch of accounting. It involves the systematic recording of all daily financial transactions of a business, classifying them, and preparing a Profit and Loss Account and Balance Sheet at the end of the year. Its main objective is to determine the true financial position of the business and to provide information to external users (investors, banks, the government). The results it produces are primarily intended for parties outside the organisation.
• 2. Cost Accounting:
  The method used to determine the cost (expenditure) incurred in producing a product or delivering a service is called Cost Accounting. It keeps a detailed record of raw materials, labour wages, and other expenses. Its main objectives are to find total cost and cost per unit, to cut (control) unnecessary expenditure, and to help management set an appropriate selling price for goods.
• 3. Management Accounting:
  The method of collecting and analysing financial information and preparing reports — in a form that makes it convenient for management to make day-to-day and long-term decisions — is called Management Accounting. It uses data obtained from both financial and cost accounting. It plays a crucial role in formulating future plans, preparing budgets, and evaluating whether progress matches set targets. It is prepared specifically for internal users (managers) of the organisation.

Necessity of Accounting Standards: When different organisations maintain accounts in their own individual ways, it becomes difficult to understand and compare those accounts. Therefore, Accounting Standards are necessary to ensure everyone follows the same rules and format. They play an extremely important role in bringing uniformity to accounting, controlling errors and fraud, giving legal recognition to financial statements, and making them internationally acceptable.

1. Nepal Accounting Standards (NAS):
In 2003, the ‘Nepal Accounting Standards Board’ was established as an independent body to systematise the accounting system in Nepal. This board has prepared the rules and benchmarks that business and public organisations operating within Nepal must mandatorily adopt when maintaining accounts — and these are called Nepal Accounting Standards (NAS). They provide a clear framework for which policies to select, how to maintain records, and how to present reports — thereby making financial statements credible and reliable.

2. Nepal Financial Reporting Standards (NFRS):
To make the financial statements of Nepali companies understandable and comparable at the international level, the Nepal Accounting Standards Board has been implementing Nepal Financial Reporting Standards (NFRS) since 2013. NFRS is fully based on the International Financial Reporting Standards (IFRS). It acts as a common language for the measurement, preparation, and presentation of financial statements. NFRS encompasses approximately 40 different individual standards. Full compliance with NFRS increases the transparency of Nepali businesses and helps attract foreign investors.

The main differences between Financial Accounting and Cost Accounting are as follows: