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;

Accounting Practice in RBBGenerally, 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 Account1. Recording of business transactions of economic and financial events2. Maintaining different types of books of accounts such as journal, ledger, subsidiary books, day books, cash book etc3. 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 SystemDouble entry system is a method of accounting which is based on double effect and equal effect principle.

AuditingAuditing 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 auditingAlthough, 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. Trading, Profit and Loss account (Income Statement)2. Statement of Retained Earnings (Profit and loss Appropriation Account)3. Balance Sheet 4. Cash Flow StatementFinancial 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. It indicates real financial position of a firm2. It provides basic and important financial information3. Financial statements are required to fulfill legal obligations4. Financial statements help to determine tax, as well as net profit/net loss, and other information required for different stakeholders5. Financial statements are important for researcher, analyst and academician6. Financial statements are basic inputs (documents) for financial analysis7. 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. Ratio analysis2. Comparative statements or horizontal analysis3. Common size statement or vertical analysis4. Trend analysis5. DuPont analysisFigures 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 organization2. To find out liquidity, solvency, efficiency, and profitability of organization3. To estimate, measure, judge, guess over all financial position of firm4. To find out corporate failures5. To forecast financial sickness and financial progress in future6. To get answer of different issue of financial matter7. Express financial trends8. Shows changes9. Useful in planning10. Facilitate in comparison11. Communicates strengths and weaknesses12. Develop control mechanism13. Helpful in decision making

Ratio analysis