What is the financial statement? वित्तीय विवरण भनेको के हो?
- The accounting output of the bank or organization is called a financial statement.
- It is reporting part of account cycle which is used to provide information to the concern authorities.
- It is prepared by using unique techniques.
- It is also called the final account.
Core elements of financial statements /Major heading os Financial Statement
- Balance Sheet
- Profit and Loss Account (PL A/C) or Income Statement
- Cash Flow Statement (CFS)
[Trading account + PL account = Income statement. But in case of B&FIs PL account is income statement]
तर B&FIS in Nepal prepare a financial statement as per the unified directory no. 4 (एकिकृत निर्देशिका नं. ४) of Nepal Rastra Bank including change in equity ( equity मा भएको परिवर्तन) and Notes to account (लेखाको टिप्पणी).
Financial Statement, Balance Sheet, Cash Flow Statement
Meaning of financial statement
- The accounting output of the bank or organization is called a financial statement.
- It is reporting part of account cycle which is used to provide information to the concern authorities.
- It is prepared by using unique techniques.
- It is also called the final account.
Main elements of the final account
- Balance sheet
- Income statement/PL Account
- Cash flow Account
तर B&FIs in Nepal prepare a financial statement as per the unified directory no. 4 (एकिकृत निर्देशिका नं. ४) of Nepal Rastra Bank including change in equity ( equity मा भएको परिवर्तन) and Notes to account (लेखाको टिप्पणी).
Cash Flow Statement (नगद प्रवाह विवरण)
- It is a financial statement which shows the present cash inflow and outflow of the organization in a given period of time.
- It shows the change in financial position (it takes two balance sheets while preparing CFS). [balance sheets only shows financial position].
- It is prepared on a cash basis transaction.
- It is accounting the output of accounting cycle. It involves three activities they are operating activities, investing activities and financing activities.
Operating Activities
जुन उदेश्यले सस्था दर्ता गरिएको हो सोहि काम गर्ने क्रममा आएको र गएको रकमलाई Operating Activities भनिन्छ। जस्तै एउटा Institute को उदेश्य विद्यार्थी बोलाउनु र पैसा लिनु, शिक्षक बोलाउनु र तलब दिनु हो। Operating Activities सधै positive भएको राम्रो मानिन्छ।
- Sell/purchase of assets
- Tax/Interest Paid.
Investing Activities
सस्थाको मुख्य उदेश्यको काम नभई सम्पति जोड्ने क्रममा भएको Financial activities लाई Investing Activities भनिन्छ। Investing Activities सधै positive भएको राम्रो मानिन्छ। किनकि भविष्यमा लगानीले नाफा दिन्छ।
- Dividend/Interest received
- Purchase sell of Fixed assets
Financing Activities
यसले Operating Activities and Investing Activities लाई balance गरि दिन्छ। Less the operating income less the investment. More the operating income, more the investment. It is the activities of managing the source of fund.
- Issue of share/ debenture
- Redemption of share/ debenture
Method of preparing Cash Flow Statement
- Cash flow statement is prepared after two balance sheet of two points of time and one income statement of a single period of time.
- If there is a provision of a regulator then it is mandatory to use the format provided by NRB otherwise follow the accounting standard.
- It can be prepared by direct and indirect. In the direct method, CFS starts from sales, and in indirect method, CFS starts from the net profit of the year. Direct and Indirect method only affect on operating activities.
- It always follows a vertical format.
- Both capital and revenue nature of transaction but credit and non-cash transactions are not included.
- B&FIs follow the unified directive no. 4 by NRB by using the vertical format with the direct method.
Balance sheet
- A balance sheet is a financial statement which able to present the assets, capital, and liabilities of the organization of any point of time.
- It is not a ledger but statement only.
- It shows the financial position/status of the firm. So, it is also known as a financial indicator of the firm.
- It shows the information about capital nature transaction.
Methods of Making Balance Sheet
- We have to prepare an income statement in order to find out the net profit and loss or surplus or deficit before preparing a balance sheet.
- If there is a provision of a regulator then it is mandatory to use the format provided by NRB otherwise follow the accounting standard.
- All the capital nature transactions should be classified as per liquidity base for the preparation of the balance sheet.
- The organization can use a traditional “T” format or modern vertical format.
- Capital nature transactions are included.
- B&FIs follow the unified directive no. 4 by NRB by using vertical format with liquidity marshaling.
Example of Balance Sheet [Normal]
| Capital & Liabilities | A.N. | Amount | Assets | A.N | Amount |
|---|---|---|---|---|---|
| Share capital | 5,00,000 | Fixed Assets | 12,00,000 | ||
| Reserve & Surplus | 7,00,000 | Investment | 2,00,000 | ||
| Long term debt | 8,00,000 | Current Assets | 8,00,000 | ||
| Current Liabilities | 4,00,000 | Fictitious Assets | 2,00,000 |
Share capital = Amount invested by promotors
Reserve and Surplus = Not distributed profit
Current liabilities = Debt to be paid within 1 year period
Long term debt = Debt to be paid after 1 year of time
Current Assets = Assets which can be converted into money within 1 year period
Fictitious Assets = Heavy loss
Example of Balance Sheet [Bank Format]
| Particulars | ||
|---|---|---|
| Assets | Note No | Amount |
| Cash and Cash Equivalent | ****** | |
| Due from NRB | ****** | |
| Placement with B&FIs | ****** | |
| Derivative financial instrument | ****** | |
| Other trading assets | ****** | |
| Lean and Advance to B&FIs | ****** | |
| Investment securities | ****** | |
| Current tax assets | ****** | |
| Investment in subsidiries | ****** | |
| Investment in associates | ****** | |
| Investment in properties | ****** | |
| Property and equipment | ****** | |
| Goodwill & intangible assets | ****** | |
| Differed tax assets | ****** | |
| Other assets | ****** | |
| Total assets | ****** |
What is Profit and Loss Account? | के हो नाफा नोक्सान खाता ?
What is Profit and Loss Account?
- Profit and loss account is a financial statement which presents the income, gain, losses, and expenses of the firm on a given period of time.
- It shows the financial performance of the firm because the PL account presents the net profit and net loss.
- It is the presentation of revenue nature transactions debit side holds the expenses and losses and credit side records income and gain.
- It is a ledger of nominal account.
- It discloses the profit and loss of the organization so it is also called financial performance indicator.
Methods of preparing PL account
- Before making the PL account, we have to prepare a trading account in order to find gross profit and loss.
- If there is a provision of a regulator then it is mandatory to use the format provided by NRB otherwise follow the accounting standard.
- All expenses and losses are charged on the debit side and income and gain should be on the credit side.
- The organization can use a traditional “T” format or modern vertical format.
- Revenue nature transactions are included.
- B&FIs follow the unified directive no. 4 by NRB by using vertical format.
- Interest income is recorded on a cash basis and other transactions are recorded in accrual basis. [There is no trading account in the bank]
Example of PL account
PL account normal format (Traditional T format)
Profit and loss account of ABC firm for the period of Shrawan 1, 2075 to Ashad 31, 2076
| Particulars | Amount | Particulars | Amount |
|---|---|---|---|
| To gross loss b/d | 0 | By gross profit | 10,00,000 |
| To office and administrative expenses | 7,00,000 | By revenue income | 12,00,000 |
| To selling and distribution expenses | 4,00,000 | By revenue gain | 1,00,000 |
| To interest expenses | 2,00,000 | By net loss c/d | 0 |
| To revenue losses | 1,00,000 | ||
| To tax expenses | 2,00,000 | ||
| To net profit c/d | 7,00,000 | ||
| Total | 23,00,000 | Total | 23,00,000 |
PL account banking format (Vertical format)
| Particulars | Note No | Amount in Crore |
|---|---|---|
| Interest income | 600 | |
| Interest expense | 250 | |
| Net interest income | 350 | |
| Fee & Commission income | 150 | |
| Fee & Commission expense | 70 | |
| Net fee & commission income | 80 | |
| Net interest, fee and commission income | 430 | |
| Net trading income | 50 | |
| Other operating income | 100 | |
| Total operating income | 580 | |
| Loan loss provision | 90 | |
| Net operating income | 490 | |
| Personnel expenses | 280 | |
| Other operating expense | 20 | |
| Depreciation & Amortization | 50 | |
| Operating profit | 140 | |
| Non-operating income | 60 | |
| Non-operating expense | 50 | |
| Profit before income tax | 150 | |
| Income tax expense | ||
| Current tax | 80 | |
| Deferred tax | 10 | |
| Profit of the year | 60 |
Importance of Balance Sheet, Profit & Loss Account and Cash Flow Statement
| Balance Sheet | Profit & Loss Account | Cash Flow Statement |
|---|---|---|
| To show financial position | To show financial performance | To show statement of change in financial position |
| To provide info about capital nature transaction | To provide info about revenue nature transaction | To present all activities systematically via operating, investing and financing activities – To provide capital and revenue nature cash related transation |
| To create transparency | To create transparency | To create transparency |
| To maintain financial discipline | To maintain financial discipline | To maintain financial discipline |
| To support for auditing | To support for auditing | To support for auditing |
| To create culture of accountability | To create culture of accountability | To create culture of accountability |
| To complete financial statement | To complete financial statement | To complete financial statement |
| To analyze strength and weakness of the firm | To analyze strength and weakness of the firm | To analyze strength and weakness of the firm |
| To support corporate good governance | To support corporate good governance | To support corporate good governance |
| It is statement only not ledger | It is ledger of nominal account | |
| It is prepared in point of time | It is prepared in period of time | |
| Elements- Capital, Assets, Liabilities | Elements – income, gain, losses, expenses |
Similarities Between Balance Sheet and PL Account
- Both are the quantitative expression of historical data
- Both are prepared by trial balance
- Both follow accounting cycle i.e input, process, and output
- Both support to show a financial statement
- Both support corporate governance
- Both show transparency
Interdependency between balance sheet and PL account
Balance sheet and PL account are supplementary to each other
- Net profit and loss of the PL account should be charged on the capital side of the balance sheet.
- Depreciation which is deducted from respective assets on balance sheet must be recorded on the debit side of PL account.
- Outstanding expenses which are added on the respective heading of expenses of PL account must be charged on the liability side of the balance sheet.
- Provision for bad debt which is deducted from the debtor on balance sheet must be recorded on the debit side of PL account.
By observing the above facts about the balance sheet and PL account, we can conclude that balance sheet and PL account are not only competitive but also supplementary to each other.
Q) What are balance sheet and PL account? How they are interdependent to each other?