• Unit 1: Conceptual Foundation Unit 2: Accounting Process and

Accounting Information
• 1.1 Business entities: Concept and features of sole proprietorship,
partnership and corporation.
• 1.2 Financial accounting; Meaning importance, scope, and limitations.
• 1.3 Accounting concepts and principles: Accounting concepts,
accounting principles and Generally Accepted Accounting Principles
(GAAP)
• 1.4 Accounting standards: Nepal Accounting Standards (NAS),
International Accounting Standards (IAS), Nepal Financial Reporting
Standard (NFRS), and International Financial Reporting Standards (IFRS)
• 1.5 Accounting ethics
 Business entities
• Definition:
• A business entity refers to an organization created by
one or more individuals to conduct commercial,
industrial, or professional activities with the goal of
earning profits.
• Purpose of Business Entities:
• To produce goods and services
• To create employment
• To generate profit for owners
• To contribute to the economy
• Key Considerations When Choosing a
Business Entity:
• Ownership structure
• Legal liability
• Tax obligations
• Capital needs
• Continuity
• Control and management
• II. Sole Proprietorship
• 1. Concept:
• A sole proprietorship is the simplest form of business organization, owned and
operated by a single individual. It has no legal distinction between the owner and the
business.
• 2. Key Features:
• Single Ownership: Owned by one person.
• Ease of Formation: Requires minimal legal formalities; often does not need to be
registered (depending on local laws).
• Unlimited Liability: The owner is personally liable for all the debts and obligations of
the business.
• Full Control: The owner has complete control over decision-making.
• Taxation: Business income is treated as personal income of the owner.
• No Separate Legal Entity: The business and the owner are legally the same.
• Lack of Continuity: The business ceases to exist upon the owner’s death or decision to
close.
• 3. Examples:
• A street food vendor
• A small salon or barbershop
• Freelancers (writers, designers, photographers)
• 4. Advantages:
• Simple and inexpensive to start
• Direct control and quick decision-making
• Owner receives all profits
• Minimal regulatory requirements
• 5. Disadvantages:
• Unlimited personal liability
• Difficulty in raising capital
• Limited life span
• Sole responsibility for losses and risks
• III. Partnership
• 1. Concept:
• A partnership is a business entity owned by two or more individuals who agree to
share profits, losses, and management responsibilities.
• 2. Key Features:
• Joint Ownership: Owned by two or more individuals.
• Agreement-Based: Governed by a partnership agreement outlining rights, duties,
and profit-sharing ratios.
• Mutual Agency: Any partner can act on behalf of the firm and bind it legally.
• Unlimited Liability: Partners are personally liable for business obligations (except in
limited partnerships).
• Profit and Loss Sharing: Shared among partners as per agreement.
• Taxation: Pass-through taxation – profits are taxed as personal income of partners.
• Lack of Continuity: May dissolve if a partner dies, retires, or leaves (unless stated
otherwise in the agreement).
• Types of Partnerships:
• General Partnership (GP): All partners have
equal responsibility and liability.
• Limited Partnership (LP): Includes general
partners (with liability) and limited partners
(with liability limited to their investment).
• Limited Liability Partnership (LLP): Offers limited
liability to all partners and is commonly used by
professionals (e.g., law or accounting firms).
Examples:
• Law firms
• Accounting partnerships
• Small-scale joint ventures (e.g., two friends running a
café)
Advantages:
• Shared responsibility and decision-making
• More capital available than sole proprietorships
• Diverse skills and expertise
• Flexibility in operations
Disadvantages:
• Unlimited liability for general partners
• Risk of conflicts and disagreements
• Profits must be shared
• Lack of continuity without proper agreements
• IV. Corporation (Company)
• 1. Concept:
• A corporation is a separate legal entity from its owners, created under statutory law.
Ownership is divided into shares held by shareholders.
• 2. Key Features:
• Separate Legal Entity: Can own property, sue, and be sued independently of
shareholders.
• Limited Liability: Shareholders are liable only up to the value of their shares.
• Perpetual Existence: Continues to exist even if shareholders change or die.
• Complex Formation: Requires legal registration, articles of incorporation, and
compliance with company law.
• Ownership by Shares: Ownership is easily transferable through the sale of shares.
• Professional Management: Managed by a board of directors elected by shareholders.
• Taxation: Subject to corporate tax; may result in double taxation (company pays tax
on profits, and shareholders pay tax on dividends).
• Types of Corporations:
• Private Corporation: Shares are held privately;
not traded publicly.
• Public Corporation: Shares are traded on a
stock exchange.
Examples:
• Apple Inc.
• Toyota Motor Corporation
• Facebook (Meta Platforms, Inc.)
Advantages:
• Limited liability protection
• Access to capital through equity markets
• Perpetual existence
• Professional management and structure
Disadvantages:
• Costly and complex to form and operate
• Heavy regulation and reporting requirements
• Double taxation (unless it's an S-Corp or similar pass-through entity)
• Less direct control by owners
Financial accounting; Meaning importance,
scope, and limitations.
• The American Accounting Association (AAA) has defined
accounting as, “the process of identifying, measuring and
communicating economic information to permit informal
judgments and decisions by users of information”.
• The Committee on Terminology of American Institute of
Certified Public Accountants gave a generally accepted
definition of accounting – “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.”
• Financial Accounting: It is the original form of
accounting. It refers to the recording of daily
business financial transaction. Recording of
the transaction is done in such a way that the
profit of the business may be ascertained after
a definite period and the picture of the
financial position of the business may be
presented.
 Characteristics of Accounting
• Accounting is the art of recording of financial
transactions of the business
• Classifying and summarizing of recorded data
is done in accounting
• Data are recorded in terms of money:
• Accounting is a science also
• Analysing and interpretation of the results is
done in accounting
 Need of Financial Accounting
• Accounting provides necessary information for decisions to be
taken initially and it facilitates the enterprise to pave way for the
implementation of actions
• It exhibits the financial track path and the position of the
organization
• Being business in the dynamic environment, it is required to face
the ever changing environment. In order to meet the needs of the
ever changing environment, the policies are to be formulated for
the smooth conduct of the business.
• It equips the management to discharge the obligations at every
moment
• Obligations to customers, investors, employees, to
renovate/restructure and so on
 Limitations of Accounting
• Recording of monetary items only:
• Effect of inflation:
• Conflict between accounting principles:
• Financial statements are affected by personal judgment
of the accountants:
• Financial statements do not reflect the right picture of
the business: Sometimes the profit and loss account of the business
does not show the accurate profit/loss and the balance sheet does not show
the true picture of the business because the assets shown in the balance
sheet are shown at the realizable (resalable) value which is wrong. Some
worthless figures are also shown in the balance sheet as preliminary
expenses, discount on issue of shares/debentures, etc.
• Accounting concepts and principles:
Accounting concepts, accounting principles
and Generally Accepted Accounting Principles
(GAAP)
• To ensure accuracy, reliability, and
comparability in financial reporting,
accounting follows certain foundational rules
and guidelines. These include:
• Accounting Concepts (basic assumptions)
• Accounting Principles (rules and guidelines)
• GAAP (Generally Accepted Accounting
Principles – the formal framework)
• II. Accounting Concepts
• Definition:
• Accounting concepts are the basic theoretical ideas, assumptions,
and conditions on which the accounting system is based.
• Key Accounting Concepts:
• Business Entity Concept
– Business is treated as separate from its owner.
– Personal and business transactions are recorded separately.
– Example: Owner’s personal car is not recorded in business books.
• Money Measurement Concept
– Only transactions that can be measured in monetary terms are recorded.
– Example: Employee satisfaction is not recorded in books.
• Going Concern Concept
– Assumes that the business will continue to operate for the foreseeable future.
– Assets are recorded based on long-term use, not liquidation value.
• Accounting Period Concept
– Financial statements are prepared for specific time periods (monthly, quarterly, annually).
– Example: A company closes books every December 31.
• Cost Concept (Historical Cost)
– Assets are recorded at their original purchase cost, not market value.
– Example: Equipment bought for $10,000 remains on books at $10,000 (subject to depreciation).
• Dual Aspect Concept
– Every transaction has two aspects: debit and credit (Assets = Liabilities + Capital).
– Forms the basis of double-entry bookkeeping.
• Matching Concept
– Revenues must be matched with related expenses in the same period.
– Example: Wages for making products sold in March are recorded as March expenses.
• Realization Concept (Revenue Recognition)
– Revenue is recognized when it is earned, not when cash is received.
– Example: Sale made in January, payment received in February – revenue is recorded in January.
• Accrual Concept
– Income and expenses are recorded when they are earned or incurred, not when cash changes hands.
– Example: Rent due in December but paid in January is recorded in December.
• Accounting Principles
• Definition:
• Accounting principles are the guidelines and rules that govern
the preparation and presentation of financial statements.
• Key Accounting Principles:
• Consistency Principle
– The same accounting methods should be applied year after year.
– Ensures comparability over periods.
• Conservatism (Prudence) Principle
– Recognize expenses and liabilities as soon as possible, but revenues
only when they are certain.
– Example: Potential losses are recorded, but potential gains are not.
• Materiality Principle
– Only information that would influence the decision of a user
should be included in the financial statements.
– Example: Small calculator cost can be expensed rather than
capitalized.
• Full Disclosure Principle
– All relevant and necessary information must be disclosed in
financial statements.
– Example: Lawsuits, contingent liabilities, accounting policies.
• Objectivity Principle
– Accounting records should be based on objective and verifiable
evidence (e.g., invoices, receipts).
 Generally Accepted Accounting Principles
(GAAP)
• Definition:
• GAAP refers to the standard framework of
guidelines and rules used by accountants to
prepare financial statements.
• Developed and maintained by standard-setting
bodies such as:
– FASB (Financial Accounting Standards Board – USA)
– IASB (International Accounting Standards Board)
– In India: ICAI (Institute of Chartered Accountants of
India)
Purpose of GAAP:
• Ensures uniformity, transparency, comparability, and
reliability in financial statements.
• Makes financial data understandable and usable for
stakeholders.
Components of GAAP:
• GAAP includes:
• Accounting concepts
• Accounting principles
• Accounting standards
• Legal regulations and disclosures
• Accounting standards: Nepal Accounting
Standards (NAS), International Accounting
Standards (IAS), Nepal Financial Reporting
Standard (NFRS), and International Financial
Reporting Standards (IFRS)
Nepal Accounting Standards (NAS),
• [Link]
s--nas--
2008
• Nepal Accounting Standards (NAS) are a set of
accounting principles and guidelines issued by the
Accounting Standards Board (ASB) Nepal, which
operates under the Institute of Chartered
Accountants of Nepal (ICAN). These standards aim
to ensure uniformity, transparency, and
accountability in the financial reporting practices of
companies and organizations operating in Nepal.
• Development and Adoption
• Nepal has adopted many of its accounting
standards based on International Financial
Reporting Standards (IFRS) and International
Accounting Standards (IAS), tailored to the
national context. Nepal follows a convergence
model, aligning its standards closely with IFRS
while allowing for local adaptation.
• Key Features of NAS
• Transparency and Comparability in financial
reporting
• Accrual-based accounting
• Consistency in reporting formats
• Periodic updates to match global best
practices (IFRS/IAS)
 International Accounting Standards (IAS)
• International Accounting Standards (IAS) are a set of
accounting principles and standards issued by the
International Accounting Standards Committee (IASC)
between 1973 and 2001. These standards aimed to
harmonize accounting practices across countries for better
transparency, comparability, and reliability of financial
statements.
• In 2001, the International Accounting Standards Board
(IASB) replaced the IASC and began issuing International
Financial Reporting Standards (IFRS). However, many IAS
standards are still in use today, having been adopted or
revised by the IASB.
Key Features of IAS
• Global consistency in financial reporting
• Accrual-based accounting
• Focus on transparency, comparability, and
fairness
• Widely adopted around the world, including
by the EU, Nepal (as NAS/NFRS), and many
other jurisdictions
Nepal Financial Reporting Standard (NFRS)
• Nepal Financial Reporting Standards (NFRS) are
accounting standards adopted by Nepal, closely aligned
with International Financial Reporting Standards (IFRS).
They were introduced to ensure that financial statements
in Nepal are prepared in accordance with international
best practices, offering greater transparency and
comparability across borders.
• The Institute of Chartered Accountants of Nepal (ICAN) is
responsible for issuing and maintaining the NFRS. NFRS is
applied mainly by larger entities, such as listed companies,
financial institutions, and other public interest entities.
Key Aspects of NFRS:
• Adoption of IFRS principles with local
adaptations
• Accrual-based accounting framework
• Presentation of financial statements in a
transparent and consistent manner
• Regular updates to remain in sync with global
financial reporting standards
International Financial Reporting Standards
(IFRS)
• International Financial Reporting Standards (IFRS)
are a set of accounting standards developed by the
International Accounting Standards Board (IASB).
• These standards are designed to bring transparency,
accountability, and efficiency to financial markets
around the world.
• IFRS provides a common global language for
business affairs so that company accounts are
understandable and comparable across
international boundaries.
• Purpose: To standardize accounting practices
and ensure that financial statements are
transparent, comparable, and reliable, thus
improving the quality of financial reporting
globally.
• Key Features of IFRS
• Principle-based framework: IFRS is not based on specific
rules but on principles that allow for professional
judgment in the preparation of financial statements.
• Transparency: Provides clear, understandable, and
relevant information to investors, creditors, and other
stakeholders.
• Comparability: Ensures consistency and comparability in
financial reporting across borders.
• Global Acceptance: IFRS is widely accepted across many
regions, making cross-border financial comparisons easier.
 Accounting Ethics
• Accounting ethics refers to the principles,
standards, and moral values that guide the
behavior of accountants and financial
professionals in the preparation, presentation,
and auditing of financial information.
• Ethical behavior is crucial in maintaining the
integrity of financial reporting, fostering trust,
and ensuring the transparency and accuracy
of financial statements.
• Core Principles of Accounting Ethics (Shortened)
• Integrity:
Be honest and straightforward in all professional relationships. Avoid misrepresentation or
deceptive practices.
• Objectivity:
Make impartial decisions based on facts, free from bias, conflicts of interest, or external
pressure.
• Professional Competence and Due Care:
Maintain professional skills and knowledge, ensuring high-quality, diligent work.
• Confidentiality:
Protect confidential information and do not disclose it without legal requirement or use it
for personal gain.
• Professional Behavior:
Comply with laws and regulations; avoid actions that harm the profession's reputation.
• Fairness and Transparency:
Present financial information clearly and accurately, avoiding deceptive practices like
"creative accounting."
 Importance of Accounting Ethics
• Trust and Confidence
• Legal Compliance:
• Investor Protection
• Reputation
• Prevention from Fraud
Promoting Ethical Behavior in Accounting

• Education and Training