Accounting, Financial Management and Statistics
Accounting fundamentals
Double entry means equal debits and credits for every transaction. The equation Assets = Liabilities + Equity must hold after every posting. Accrual accounting recognises revenue when earned and expense when incurred; cash accounting recognises only cash movement. NFRS governs presentation in Nepal.
- Depreciation: straight line spreads cost evenly; reducing balance charges more early. It is a non-cash expense that lowers profit and book value, not cash flow.
- Inventory: FIFO and weighted average are permitted; LIFO is not.
- Statements: financial position, profit or loss and other comprehensive income, changes in equity, cash flows, and notes.
Financial management
FV = PV(1 + r)^n. NPV discounts cash flows at the cost of capital; accept when NPV > 0. IRR is the rate at which NPV = 0. Ratios: liquidity (current, quick), leverage (debt/equity), profitability (net margin, ROA, ROE), efficiency (asset turnover).
Statistics
Mean is sensitive to outliers, median is not. Standard deviation measures dispersion. Correlation measures linear association, not causation. Sampling error falls as sample size rises.
Worked example
Equipment costs NPR 500,000 with residual value NPR 50,000 and a five-year life. Straight-line depreciation = (500,000 − 50,000)/5 = NPR 90,000 per year. Under 20 percent reducing balance, year 1 = 500,000 × 20% = NPR 100,000 and year 2 = 400,000 × 20% = NPR 80,000. Reducing balance front-loads expense and lowers early profit, but total depreciation over the life is identical.
Traps
Treating depreciation as a cash outflow. Adding the residual value instead of deducting it. Reading correlation as causation. Discounting nominal cash flows at a real rate.