Bookkeeping and Accounting
Principles of Accounting — Grade 11 | Unit 1 | NEB Nepal
Table Of Contents
- 1 Introduction
- 2 1. Introduction to Accounting
- 3 2. Generally Accepted Accounting Principles (GAAP)
- 4 3. Basic Accounting Terminologies
- 5 4. Double Entry Bookkeeping System
- 6 5. Accounting Equation
- 7 6. Journal
- 8 7. Subsidiary Books
- 9 8. Ledger
- 10 9. Cash Book
- 11 10. Trial Balance
- 12 11. Bank Reconciliation Statement (BRS)
- 13 12. Accounting in the Nepali Context
- 14 Conclusion
Introduction
Every business — from a small tea shop in Boudha to a large commercial bank in New Road — generates financial transactions daily. Money is received, money is spent, goods are bought and sold, debts are incurred and repaid. Without a systematic method of recording, classifying, and summarizing these transactions, it would be impossible to know whether the business is profitable, how much it owes or is owed, or whether its resources are being used effectively. Accounting is that systematic method — the language of business through which financial information is captured, organized, and communicated.
Unit 1 of NEB Grade 11 Principles of Accounting covers the entire bookkeeping cycle: from the conceptual foundations of accounting (definitions, principles, conventions, standards), through the mechanics of recording (accounting equation, journal, subsidiary books), to summarizing and verifying (ledger, trial balance, bank reconciliation). These are the foundational skills that every accountant, manager, and business owner in Nepal must master.
1. Introduction to Accounting
1.1 Meaning and Definition of Accounting
According to the American Accounting Association (AAA), “Accounting is the process of identifying, measuring, and communicating economic information to permit informed judgments and decisions by users of the information.”
According to the American Institute of Certified Public Accountants (AICPA), “Accounting is the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of a financial character, and interpreting the results thereof.”
According to R.N. Anthony and J.S. Reece, “Accounting is a system that collects, processes, and communicates financial information about an identifiable economic entity.”
According to Smith and Ashburne, “Accounting is the science of recording and classifying business transactions and events, primarily of a financial character, and the art of making significant summaries, analysis, and interpretation of those transactions and events, and communicating the results to persons who must make decisions or form judgments.”
According to A.W. Johnson, “Accounting may be defined as the collection, compilation, and systematic recording of business transactions in terms of money, the preparation of financial reports, the analysis and interpretation of these reports, and the use of these reports for the information and guidance of management.”
From these definitions, accounting involves five essential activities:
- Identifying financial transactions and events
- Recording them in monetary terms
- Classifying transactions into meaningful categories
- Summarizing in financial statements
- Communicating to decision-makers
1.2 Meaning and Definition of Bookkeeping
According to J.R. Batliboi, “Bookkeeping is the art of recording business dealings in a set of books.”
According to R.N. Carter, “Bookkeeping is the science and art of correctly recording in the books of account all those business transactions that result in the transfer of money or money’s worth.”
According to North Cott, “Bookkeeping is the recording of business financial data in a prescribed manner.”
Bookkeeping is the mechanical aspect of accounting — the systematic recording of financial transactions in books of original entry (journals) and books of secondary entry (ledgers). It is the foundation on which accounting is built.
1.3 Difference Between Bookkeeping and Accounting
| Basis | Bookkeeping | Accounting |
|---|---|---|
| Scope | Narrow — only recording | Broad — recording, analysis, interpretation |
| Nature | Clerical and mechanical | Analytical and judgmental |
| Stage | Preliminary stage | Higher stage |
| Purpose | Maintaining records | Decision-making information |
| Performed by | Bookkeeper (clerk) | Accountant (professional) |
| Output | Day books, ledger | Financial statements, reports |
| Knowledge required | Basic arithmetic, rules | Accounting principles, business law, analysis |
1.4 Objectives of Accounting
i. Systematic recording: To record all financial transactions in a systematic and orderly manner.
ii. Determination of profit or loss: To calculate the net profit or net loss of the business over a given period through the preparation of a profit and loss account (income statement).
iii. Determination of financial position: To ascertain the assets, liabilities, and owner’s capital of the business at a given date through the preparation of a balance sheet.
iv. Providing information for decision-making: To provide financial information to management, investors, creditors, and other stakeholders for informed decision-making.
v. Legal compliance: To maintain accounts as required by law — including the Companies Act, Income Tax Act, VAT Act, and Labour Act in Nepal — and to provide data for tax computation and regulatory reporting.
vi. Facilitating comparisons: To enable comparison of financial performance over time (trend analysis) and between businesses.
vii. Control over assets: To provide information that enables management to safeguard assets against theft, fraud, and misuse.
1.5 Importance of Accounting
According to Robert Anthony, “Accounting is the language of business — just as language is the medium of human communication, accounting is the medium through which businesses communicate their financial performance and position.”
i. For owners and management: Accounting provides the financial data needed to evaluate business performance, make investment decisions, control costs, and plan future operations.
ii. For investors and shareholders: Accounting reports enable investors to evaluate the return on their investment, assess the risk of their holding, and decide whether to buy, hold, or sell shares.
iii. For creditors and lenders: Banks and suppliers use accounting information to assess the creditworthiness of borrowers and the security of their loans.
iv. For the government: The government uses accounting information for tax assessment (Inland Revenue Department), regulatory oversight (Securities Board of Nepal), and national income calculation (Central Bureau of Statistics).
v. For employees: Workers use accounting information to assess the financial health of their employer and the security of their employment.
vi. For Nepal’s economy: Nepal’s transition to a formalized economy depends on the spread of accounting literacy — without proper accounts, businesses cannot access formal credit, comply with tax obligations, or attract investment.
2. Generally Accepted Accounting Principles (GAAP)
2.1 Accounting Concepts (Assumptions)
Accounting concepts are the fundamental assumptions that underlie the preparation of financial statements — they are so basic that they are assumed without being explicitly stated.
According to the Institute of Chartered Accountants of England and Wales (ICAEW), “Accounting concepts are the basic assumptions, conditions, or postulates upon which the science of accounting is based.”
i. Business Entity Concept The business is treated as a separate legal and accounting entity from its owner(s). The owner’s personal finances are kept entirely separate from the business finances.
According to L.C. Cropper, “The entity concept is the cornerstone of accounting — without treating the business as distinct from its owner, no meaningful accounting is possible.”
Example in Nepal: A sole trader in Lalitpur must keep their personal bank account separate from the business bank account. The owner’s home mortgage is not a business liability; the business’s loan is not the owner’s personal debt.
ii. Money Measurement Concept Only transactions that can be expressed in monetary terms are recorded in accounting. Non-monetary events — employee morale, brand reputation, management quality, social relationships — are not recorded.
According to A.W. Johnson, “Money is the only practical common denominator for expressing and comparing diverse economic activities — the money measurement concept makes comparability possible.”
iii. Going Concern Concept The business is assumed to continue operating indefinitely into the future — it is not about to be wound up or liquidated. This justifies recording assets at historical cost rather than liquidation value.
According to L.C. Cropper, “The going concern concept allows assets to be valued at cost rather than immediate sale value — if liquidation were assumed, assets would need to be written down to forced-sale prices.”
iv. Accounting Period Concept (Periodicity) The life of a business is divided into regular, equal time periods (typically one year) for which financial statements are prepared. This allows regular assessment of performance.
In Nepal, the accounting period is the fiscal year: 1 Shrawan to 31 Ashadh (mid-July to mid-July).
v. Historical Cost Concept Assets are recorded at their original purchase price (historical cost) — not at current market value. This provides an objective, verifiable basis for valuation.
vi. Dual Aspect Concept (Duality) Every financial transaction has two aspects — a debit effect and a credit effect of equal value. This is the foundation of double entry bookkeeping.
According to L.C. Cropper, “The dual aspect concept is the bedrock of double entry bookkeeping — every transaction has at least two effects on the accounting equation: Assets = Liabilities + Capital.”
vii. Accrual Concept Revenue is recognized when it is earned (not necessarily when cash is received); expenses are recognized when they are incurred (not necessarily when cash is paid). This gives a more accurate picture of financial performance than cash-based accounting.
viii. Matching Concept Expenses should be matched against the revenues they helped to generate in the same accounting period. This ensures that profit is measured accurately.
2.2 Accounting Conventions
Conventions are generally agreed-upon practices that have evolved over time to make financial reporting more useful and consistent.
i. Convention of Consistency Once an accounting method is chosen, it should be applied consistently from one period to the next — so that financial statements are comparable over time. Changes in method must be disclosed and justified.
ii. Convention of Full Disclosure All material information that would affect the decisions of users of financial statements must be disclosed — whether in the statements themselves or in the accompanying notes.
iii. Convention of Materiality Only material (significant) items need to be individually disclosed or treated with full accounting rigor. Immaterial items can be treated more simply. According to the AICPA, “An item is material if its omission or misstatement could influence the decisions of users of the financial statements.”
iv. Convention of Conservatism (Prudence) When in doubt, accounting should anticipate possible losses but not unearned gains. Assets should not be overvalued; liabilities should not be undervalued. According to Smith and Ashburne, “The conservatism convention requires that accountants choose the alternative that results in lower profit or lower asset values when two equally plausible options exist.”
2.3 Nepal Accounting Standards (NAS) and Nepal Financial Reporting Standards (NFRS)
Nepal Accounting Standards (NAS): Issued by the Accounting Standards Board (ASB) of Nepal under the Nepal Chartered Accountants Act, 2053 BS, NAS provide detailed guidance on the accounting treatment of specific transactions and items — ensuring consistency across Nepali enterprises.
Nepal Financial Reporting Standards (NFRS): Nepal’s framework for financial reporting aligned with International Financial Reporting Standards (IFRS). NFRS apply to listed companies, banks, and other entities of public interest — requiring higher disclosure standards and fair value measurement in some cases.
According to the Institute of Chartered Accountants of Nepal (ICAN), “The purpose of NAS and NFRS is to ensure that financial statements prepared by Nepali entities are reliable, comparable, and understandable — meeting the needs of investors, creditors, regulators, and the public.”
3. Basic Accounting Terminologies
Understanding accounting requires mastery of a standard set of terms. The following are the key terms in the NEB Grade 11 syllabus:
Capital: The amount invested by the owner(s) in the business. Capital = Assets − Liabilities.
Drawings: Amount of cash or goods taken by the owner from the business for personal use. Drawings reduce capital.
Liabilities: Amounts owed by the business to outside parties — creditors, banks, suppliers, employees. Classified as current liabilities (payable within one year) and long-term liabilities.
Assets: Economic resources owned or controlled by the business that have future economic benefit. Classified as current assets (cash, debtors, stock — convertible to cash within one year) and fixed/non-current assets (land, buildings, machinery — used over many years).
Tangible assets: Physical assets that can be touched — land, buildings, machinery, vehicles, stock.
Intangible assets: Non-physical assets with economic value — goodwill, patents, trademarks, copyrights.
Receipts: Cash received by the business — from customers, banks, investors.
Payments: Cash paid by the business — to suppliers, employees, lenders.
Expenses: Costs incurred in earning revenue during an accounting period — wages, rent, electricity, depreciation.
Income (Revenue): Money earned by the business from its normal activities — sales revenue, service fees, commission received.
Purchases: Goods bought by the business for resale or for use in production.
Sales: Goods sold by the business to customers.
Stock (Inventory/Merchandise): Goods held by the business for sale in the ordinary course of business.
Debtors (Accounts Receivable): Persons or entities who owe money to the business — customers who have bought on credit.
Creditors (Accounts Payable): Persons or entities to whom the business owes money — suppliers who have provided goods on credit.
Bills Receivable: Written promises received from debtors to pay a specified amount on a specified date — a formal credit instrument.
Bills Payable: Written promises made by the business to creditors to pay a specified amount on a specified date.
Discount: A reduction in price. Trade discount is a reduction given at the time of purchase; cash discount is a reduction given for prompt payment.
Profit and Loss Account: A financial statement showing the revenues earned and expenses incurred during an accounting period — resulting in net profit or net loss.
Balance Sheet: A financial statement showing the financial position of the business at a specific date — listing assets, liabilities, and owner’s capital.
4. Double Entry Bookkeeping System
4.1 Meaning and Definition
According to J.R. Batliboi, “Double entry bookkeeping is a system of bookkeeping in which every business transaction is recorded in two accounts — one account is debited and another is credited for the same amount.”
According to R.N. Carter, “The double entry system is a complete, accurate, and scientific system of bookkeeping — every transaction involves two parties (giver and receiver) and both must be recorded.”
According to L.C. Cropper, “Double entry bookkeeping is based on the principle that every transaction has two aspects — receiving and giving — and both aspects must be recorded to maintain the balance of the accounting equation.”
4.2 Characteristics of Double Entry System
i. Two accounts affected: Every transaction is recorded in at least two accounts — one debited and one credited.
ii. Equal debit and credit: The total amount debited always equals the total amount credited — preserving the balance of the accounting equation.
iii. Complete record: All transactions are recorded in their entirety — no partial recording.
iv. Scientific basis: Based on the accounting equation (Assets = Liabilities + Capital), which always holds true.
v. Arithmetic accuracy: The trial balance (which totals all debits and all credits) can verify arithmetic accuracy — debits must equal credits.
4.3 Advantages of Double Entry System
i. Complete record of transactions: All financial transactions are fully recorded, preventing omissions.
ii. Arithmetic accuracy: The trial balance checks that debits equal credits — detecting many recording errors.
iii. Determination of profit/loss: The profit and loss account can be prepared from the double entry records.
iv. Determination of financial position: The balance sheet can be prepared, showing assets, liabilities, and capital.
v. Detection of fraud: Complete records make it harder to conceal fraud — any unauthorized alteration affects the balance of the books.
vi. Legal compliance: Double entry records satisfy legal requirements for accounts under Nepal’s Companies Act, Income Tax Act, and VAT Act.
vii. Facilitates audit: Complete, systematic records make external audit efficient and reliable.
4.4 Bases of Accounting
i. Cash Basis of Accounting: Revenue is recognized when cash is actually received; expenses are recognized when cash is actually paid. Simple to operate but gives an incomplete picture of financial performance.
ii. Accrual Basis of Accounting: Revenue is recognized when earned (regardless of when cash is received); expenses are recognized when incurred (regardless of when cash is paid). Provides a more accurate picture of financial performance — required by NAS and NFRS for most entities.
Nepal’s Income Tax Act, 2058 BS allows small businesses to use the cash basis; larger businesses must use the accrual basis.
5. Accounting Equation
5.1 Meaning
The accounting equation expresses the fundamental relationship between a business’s assets, liabilities, and owner’s equity (capital):
Assets = Liabilities + Capital
Or equivalently: Capital = Assets − Liabilities
According to L.C. Cropper, “The accounting equation is the mathematical expression of the dual aspect concept — it always holds true because every transaction has two equal and opposite effects.”
According to Smith and Ashburne, “The accounting equation represents the balance sheet in equation form — it is the foundation on which the entire structure of double entry bookkeeping is built.”
5.2 Extended Accounting Equation
When income and expenses are included:
Assets = Liabilities + Capital + Income − Expenses − Drawings
Or: Assets + Expenses + Drawings = Liabilities + Capital + Income
5.3 Analysis of Transactions Using the Accounting Equation
Every transaction affects the accounting equation — but always maintains its balance:
| Transaction | Effect on A = L + C |
|---|---|
| Owner invests Rs. 5,00,000 cash | Assets ↑ (Cash +500,000); Capital ↑ (+500,000) |
| Buy furniture for Rs. 50,000 cash | Assets ↑ (Furniture +50,000); Assets ↓ (Cash −50,000) |
| Buy goods on credit Rs. 30,000 | Assets ↑ (Stock +30,000); Liabilities ↑ (Creditors +30,000) |
| Sell goods for Rs. 20,000 cash (cost Rs. 15,000) | Assets ↑ (Cash +20,000); Assets ↓ (Stock −15,000); Capital ↑ (Profit +5,000) |
| Pay creditors Rs. 30,000 | Assets ↓ (Cash −30,000); Liabilities ↓ (Creditors −30,000) |
| Owner withdraws Rs. 10,000 | Assets ↓ (Cash −10,000); Capital ↓ (Drawings −10,000) |
6. Journal
6.1 Meaning and Definition
According to J.R. Batliboi, “A journal is a book of original entry in which transactions are recorded for the first time from source documents in a chronological order.”
According to R.N. Carter, “The journal is the book in which a businessman records his business transactions in a systematic manner showing the accounts to be debited and credited.”
The journal is the first point of entry in the bookkeeping cycle — sometimes called the “book of original entry” or “day book.”
6.2 Format of Journal
| Date | Particulars | L.F. | Dr. Amount (Rs.) | Cr. Amount (Rs.) |
|---|---|---|---|---|
| Date | Name of account debited Dr. | Page no. | Amount | |
| To Name of account credited | Amount | |||
| (Narration — brief explanation of transaction) |
6.3 Rules for Debit and Credit
Traditional (Personal, Real, Nominal) Approach:
i. Personal Accounts (accounts of persons, firms, companies):
- Debit the receiver
- Credit the giver
ii. Real Accounts (accounts of tangible and intangible assets — Cash, Building, Stock, Goodwill):
- Debit what comes in
- Credit what goes out
iii. Nominal Accounts (accounts of income, expenses, gains, losses — Wages, Rent, Sales, Commission):
- Debit all expenses and losses
- Credit all incomes and gains
Modern (Accounting Equation Based) Approach:
| Account Type | Increase → | Decrease → |
|---|---|---|
| Assets | Debit | Credit |
| Liabilities | Credit | Debit |
| Capital/Equity | Credit | Debit |
| Income/Revenue | Credit | Debit |
| Expenses/Losses | Debit | Credit |
6.4 Source Documents
Source documents are the original records from which journal entries are made:
- Invoice/Bill: Document from supplier showing goods sold on credit
- Receipt: Document confirming cash received
- Payment receipt/Voucher: Document confirming cash paid
- Cheque: Written order to bank to pay a specified amount
- Credit note: Document issued to reduce a buyer’s debt (for returned goods)
- Debit note: Document issued to increase a seller’s receivable (for goods returned)
6.5 Bills of Exchange
A bill of exchange is a written, unconditional order signed by the drawer (creditor), directing the drawee (debtor) to pay a specified sum of money to the payee on demand or on a specified future date.
According to the Negotiable Instruments Act, 2034 BS of Nepal, “A bill of exchange is an instrument in writing containing an unconditional order signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person or to the bearer of the instrument.”
Parties to a bill of exchange:
- Drawer: The person who draws (creates) the bill — the creditor
- Drawee: The person on whom the bill is drawn — the debtor (becomes the acceptor when they sign)
- Payee: The person to whom payment is to be made (may be the drawer or a third party)
Accounting for bills of exchange:
- When bill is drawn by drawer: Debit Bills Receivable A/c; Credit Debtor A/c
- When bill is accepted by drawee: Debit Creditor A/c; Credit Bills Payable A/c
- On maturity and payment: Debit Cash/Bank A/c; Credit Bills Receivable A/c
7. Subsidiary Books
7.1 Meaning
A subsidiary book (also called a special journal or special purpose book) is a book of original entry used to record a specific type of frequently recurring transaction — reducing the work of the main journal.
According to J.R. Batliboi, “Subsidiary books are special books of original entry designed to record specific types of transactions — they divide the work of the journal and make recording more efficient.”
7.2 Types of Subsidiary Books
i. Purchase Book (Purchase Day Book) Records all credit purchases of goods (merchandise) — only credit purchases, not cash purchases.
Format: Date | Supplier Name | Invoice No. | L.F. | Amount (Rs.)
Posting: Total is posted to the debit of Purchases Account; individual entries posted to the credit of each creditor’s account.
ii. Sales Book (Sales Day Book) Records all credit sales of goods — only credit sales, not cash sales.
Posting: Total posted to credit of Sales Account; individual entries to the debit of each debtor’s account.
iii. Purchase Returns Book (Returns Outward Book) Records goods returned to suppliers — reduces purchases and creditors.
iv. Sales Returns Book (Returns Inward Book) Records goods returned by customers — reduces sales and debtors.
v. Bills Receivable Book Records all bills of exchange received from debtors — providing a register of amounts owed.
vi. Bills Payable Book Records all bills of exchange accepted by the business — providing a register of amounts payable.
vii. Cash Book Records all cash and bank transactions — both receipts and payments. The cash book serves as both a book of original entry and a ledger account for Cash. (Covered in detail in Section 9.)
viii. Journal Proper (General Journal) Records transactions that cannot be entered in any other subsidiary book — opening entries, closing entries, rectification entries, purchase/sale of fixed assets on credit, depreciation entries.
8. Ledger
8.1 Meaning and Definition
According to J.R. Batliboi, “The ledger is the principal book of accounts in which all accounts relating to persons, properties, expenses, and incomes are opened and maintained.”
According to R.N. Carter, “The ledger is the book of final entry — it is the book which contains a permanent summary of all amounts entered in supporting journals and which enables to draw up a trial balance.”
The ledger is the book of secondary entry — it contains individual accounts to which all journal entries are posted. Each account in the ledger shows the debit and credit entries affecting it, and the running balance.
8.2 Format of Ledger Account (T-Account)
Account Name
Dr. Cr.
Date | Particulars | J.F. | Amount Date | Particulars | J.F. | Amount
8.3 Posting from Journal to Ledger
Posting is the process of transferring journal entries to the respective accounts in the ledger:
- For the debit entry in the journal → enter on the debit side of the relevant ledger account
- For the credit entry in the journal → enter on the credit side of the relevant ledger account
- Write the name of the opposite account as the “Particulars”
- Enter the journal page reference in the “J.F.” (Journal Folio) column
8.4 Balancing Ledger Accounts
At the end of the accounting period, ledger accounts are balanced:
- Total the debit side and credit side
- The difference is the balance (debit balance if debit > credit; credit balance if credit > debit)
- Enter the balance on the smaller side as “Balance c/d” (carried down)
- Bring forward the balance on the opposite side as “Balance b/d” (brought down)
9. Cash Book
9.1 Meaning and Types
The cash book is a special subsidiary book that records all cash receipts and cash payments — serving simultaneously as a book of original entry AND a ledger account for Cash (and Bank).
According to J.R. Batliboi, “The cash book is the most important of all subsidiary books — it records every receipt and payment of cash and acts as both a journal and a ledger for cash transactions.”
Types of Cash Book:
i. Simple (Single Column) Cash Book: Records only cash transactions — one column on each side (debit for receipts; credit for payments).
ii. Two-Column Cash Book: Records cash transactions and cash discount — two columns on each side (Cash and Discount).
iii. Three-Column Cash Book: Records cash, bank, and discount transactions — three columns on each side (Discount, Cash, Bank). This is the most commonly used format in Nepali businesses.
9.2 Format of Three-Column Cash Book
| Date | Particulars | L.F. | Discount (Dr.) | Cash (Dr.) | Bank (Dr.) | | Date | Particulars | L.F. | Discount (Cr.) | Cash (Cr.) | Bank (Cr.) | |——|————-|——|—————–|———–|———–||-|——|————-|——|—————–|———–|———–|
9.3 Contra Entries
A contra entry is a transaction that affects both the cash and bank columns of the cash book simultaneously — cash deposited into bank (debit bank, credit cash) or cash withdrawn from bank (debit cash, credit bank). Contra entries are marked with “C” in the L.F. column and do not require posting to any other ledger account.
10. Trial Balance
10.1 Meaning and Definition
According to J.R. Batliboi, “A trial balance is a statement prepared with the debit and credit balances of all ledger accounts on a particular date, to verify the arithmetical accuracy of the books.”
According to R.N. Carter, “A trial balance is a list of all the debit and credit balances extracted from the ledger — if the two totals agree, the books are arithmetically correct.”
According to Cropper and Pears, “The trial balance is a statement of all open accounts in the ledger — arranged in two columns, debit and credit — to test whether the books are in balance.”
10.2 Purpose of Trial Balance
i. Arithmetic check: The most important purpose — if total debits equal total credits, the books are arithmetically correct (subject to compensating errors).
ii. Basis for financial statements: The trial balance provides the data from which the profit and loss account and balance sheet are prepared.
iii. Summary of ledger: Provides a convenient summary of all ledger account balances in one place.
10.3 Limitations of Trial Balance
A trial balance that balances does not guarantee that all entries are correct. It will not detect:
i. Errors of omission: A transaction that was completely omitted — both debit and credit were not recorded.
ii. Errors of commission: A transaction recorded in the wrong account (but of the correct type — e.g., debit to wrong debtor’s account).
iii. Errors of principle: Treating a capital expenditure as a revenue expenditure (or vice versa) — the accounting principle is violated but debits still equal credits.
iv. Compensating errors: Two errors that cancel each other out — one debited too much, another credited too much by the same amount.
v. Complete reversal of entries: Debiting an account that should be credited, and crediting an account that should be debited — the totals still balance.
11. Bank Reconciliation Statement (BRS)
11.1 Meaning and Definition
According to J.R. Batliboi, “A bank reconciliation statement is a statement prepared to reconcile the difference between the balance as per the cash book (bank column) and the balance as per the bank statement (pass book) on a particular date.”
According to R.N. Carter, “A bank reconciliation statement is a memorandum statement that is prepared to bring to agreement the cash book balance and the pass book balance by explaining the causes of their difference.”
11.2 Causes of Difference Between Cash Book and Pass Book
Transactions in Cash Book but not yet in Pass Book:
i. Unpresented (Outstanding) Cheques: Cheques issued by the business and recorded in the cash book (credit side) but not yet presented to the bank for payment — so not yet in the pass book.
ii. Deposits not yet credited: Cheques deposited into the bank and recorded in the cash book (debit side) but not yet cleared by the bank — so not yet appearing in the pass book.
Transactions in Pass Book but not yet in Cash Book:
iii. Bank charges: Interest charged or service fees debited directly by the bank — appearing in the pass book but not yet recorded in the cash book.
iv. Direct deposits: Payments received directly into the bank account (e.g., direct debit from customers) — appearing in the pass book but not yet entered in the cash book.
v. Interest credited by bank: Interest added directly by the bank to the account — appearing in the pass book but not in the cash book.
vi. Standing orders/Direct debits: Regular payments instructed directly to the bank — appearing in the pass book but not yet in the cash book.
Errors:
vii. Errors in cash book: Incorrect entries in the cash book not yet corrected.
viii. Errors in pass book: Incorrect entries made by the bank not yet corrected.
11.3 Format and Preparation of BRS
Method 1: Starting from Cash Book Balance
Bank Reconciliation Statement as at [Date]
Balance as per Cash Book (Dr. balance) Rs. XXXXX
Add: Deposits not yet credited by bank Rs. XXXXX
Direct deposits not recorded in Cash Book Rs. XXXXX
─────────
Rs. XXXXX
Less: Unpresented cheques Rs. XXXXX
Bank charges not recorded in Cash Book Rs. XXXXX
─────────
Balance as per Pass Book Rs. XXXXX
═════════
Method 2: Starting from Pass Book Balance
Balance as per Pass Book Rs. XXXXX
Add: Unpresented cheques Rs. XXXXX
Bank charges not in Cash Book Rs. XXXXX
─────────
Less: Deposits not credited by bank Rs. XXXXX
Direct deposits not in Cash Book Rs. XXXXX
─────────
Balance as per Cash Book Rs. XXXXX
═════════
11.4 Importance of Bank Reconciliation Statement
i. Detection of errors: Identifies errors in both the cash book and the bank statement.
ii. Detection of fraud: Unexplained differences may indicate unauthorized withdrawals, forged cheques, or embezzlement.
iii. Accurate cash balance: Provides the true and verified cash position for financial planning.
iv. Control mechanism: Regular preparation (monthly) establishes strong internal control over cash — the most liquid and vulnerable asset.
v. Legal compliance: Nepal’s Companies Act and tax regulations require proper maintenance of bank accounts and reconciliation of records.
12. Accounting in the Nepali Context
i. Nepal Accounting Standards: Nepal’s Institute of Chartered Accountants (ICAN) has issued Nepal Accounting Standards (NAS) and is progressively implementing Nepal Financial Reporting Standards (NFRS) aligned with IFRS. Companies listed on NEPSE and banks are required to follow NFRS.
ii. Fiscal year: Nepal’s accounting period follows the Bikram Sambat calendar — Shrawan to Ashadh (mid-July to mid-July) — rather than the January–December year used internationally. This affects all accounting period concepts.
iii. VAT accounting: Nepal’s 13% VAT requires registered businesses to maintain detailed records of input tax and output tax — creating specific accounting requirements under the VAT Act, 2052 BS.
iv. Tax accounting: Nepal’s Income Tax Act, 2058 BS requires businesses to maintain accounts and file annual tax returns based on proper accounting records. The IRD conducts audits of tax accounts.
v. Accounting profession in Nepal: ICAN (Institute of Chartered Accountants of Nepal), established under the Nepal Chartered Accountants Act, 2053 BS, regulates the accounting profession in Nepal — setting standards, conducting examinations, and licensing chartered accountants.
Conclusion
Bookkeeping and accounting are the foundation of all business management — the systematic means through which the financial life of an organization is recorded, understood, and communicated. From the simplest tea shop in Baneshwor to the most complex commercial bank in Kathmandu, the principles covered in Unit 1 — dual aspect, accounting equation, journal, ledger, trial balance, and bank reconciliation — apply universally.
As the AICPA observed, “Accounting is the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are of a financial character, and interpreting the results thereof.” For NEB Grade 11 students in Nepal, mastering this art is the essential foundation for every subsequent unit in the course — and for the professional accounting career that many will pursue.
Prepared for NEB Grade 11 Principles of Accounting — Unit 1: Bookkeeping and Accounting Aligned with the National Curriculum Framework 2076, Curriculum Development Centre, Sanothimi, Bhaktapur
