Accountancy · Chapter 7
Study notes aligned to the official NEB syllabus.
The traditional trading and profit and loss account is being replaced worldwide by a modern, vertical form of reporting that follows the Nepal Accounting Standards (NAS) and Nepal Financial Reporting Standards (NFRS). Instead of two sided T accounts, the modern method presents results in running (vertical) statements that are easier to read and to compare across years. This chapter studies the three modern statements: the income statement, the statement of retained earnings, and the classified balance sheet.
The modern statements are prepared to communicate with a wide range of users, from investors and banks to regulators, in a standard format that is comparable across companies. Presenting information vertically, with clear subtotals, makes it easy to see how sales become net income and how each class of asset and liability contributes to the financial position. The classification and disclosure requirements come from the accounting standards in force in Nepal.
The income statement shows the results of operations for the year in a single downward flowing column. It begins with net sales, deducts the cost of goods sold to give the gross profit, then deducts operating expenses (administrative, and selling and distribution) to give the operating income. To operating income it adds non operating incomes and deducts non operating expenses and interest to reach income before tax, and finally it deducts income tax to give the net income after tax.
$$ \begin{aligned} \text{Gross profit} &= \text{Net sales} - \text{Cost of goods sold} \ \text{Operating income} &= \text{Gross profit} - \text{Operating expenses} \ \text{Net income} &= \text{Operating income} + \text{Non operating income} - \text{Non operating expenses} - \text{Tax} \end{aligned} $$
The traditional trading and profit and loss account is being replaced worldwide by a modern, vertical form of reporting that follows the Nepal Accounting Standards (NAS) and Nepal Financial Reporting Standards (NFRS). Instead of two sided T accounts, the modern method presents results in running (vertical) statements that are easier to read and to compare across years. This chapter studies the three modern statements: the income statement, the statement of retained earnings, and the classified balance sheet.
The modern statements are prepared to communicate with a wide range of users, from investors and banks to regulators, in a standard format that is comparable across companies. Presenting information vertically, with clear subtotals, makes it easy to see how sales become net income and how each class of asset and liability contributes to the financial position. The classification and disclosure requirements come from the accounting standards in force in Nepal.
The income statement shows the results of operations for the year in a single downward flowing column. It begins with net sales, deducts the cost of goods sold to give the gross profit, then deducts operating expenses (administrative, and selling and distribution) to give the operating income. To operating income it adds non operating incomes and deducts non operating expenses and interest to reach income before tax, and finally it deducts income tax to give the net income after tax.