JAIIB / Diploma in Banking

1
JAIIB / Diploma in Banking Finance ACCOUNTING
AND FINANCE FOR BANKERS SPECIAL ACCOUNTS
- MODULE C

• M Syed Kunmir
• SPBT College

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BANK RECONCILIATION

• The bank pass book indicates the amount paid into
  the bank and the amount withdrawn there from. The
  pass book balance on any given date must be the
  same as the balance shown by the bank column of
  the cash book on the same date. But in actual
  practice the bank pass book balance seldom agrees
  with the balance shown by the bank column of the
  cash book. This happens when some of the
  transactions appear in the cash book but not in
  the pass book or in the pass book but not in the
  cashbook.

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Reasons For Difference

• 1. Cheques issued but not presented for payment.
  When cheques are issued, the entry in the cash
  book is made immediately. In the books of the
  bank, the entry is made only when the cheque is
  presented for payment..
• 2. Cheques paid into the bank but not yet
  cleared. As soon as the cheques arc deposited
  into the bank, the entry is passed on the debit
  side of the bank column in the cash book. The
  customer's account is credited by the bank only
  when the cheques are cleared.
• 3. Interest allowed by the bank. Bank might have
  credited the account of the customer with the
  interest and may have made the entry in the pass
  bk.

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Reasons For Difference

• 4. Interest and bank charges debited by bank. The
  bank debits the account of the customer by way of
  interest on overdraft. It also debits the account
  of the customers by way of incidental charges and
  collection charges.
• 5. Interest, dividend etc. collected by the bank.
  Sometimes interest on government securities or
  dividend on shares is collected by the bank and
  is credited to customer's account. If the entry
  for these do not appear in the cash book, the
  balance will differ.

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Reasons For Difference

• 6. Direct payment by the bank Sometimes under
  standing instructions from the client, certain
  payments like insurance premium, club fees etc.
  are made by the bank.
• 7. Direct payment into the bank by a customer.
  Sometimes our customers deposit money direct into
  the account in the bank, the corresponding entry
  for which may not appear in the cash book, due to
  delay in necessary instructions by the customers.

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Reasons For Difference

• 8. Dishonor of bill discounted with the bank.
  Sometimes customers get their bills discounted
  with the bank. If the bank is not able to get
  payment of these bills on the due date, it will
  debit the customers accounts with the amount of
  the bills together with the noting charges, if
  any. The customer will pass the entry in his
  books on receipt of the information from the
  bank.
• 9. Any error committed by the bank Or Customer
  Besides the above reasons if any error is
  committed either by the bank or by the customer
  himself while recording the transactions in their
  respective books it will cause disagreement
  between the two balances.

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BASICS OF ACCOUNTING

• DOUBLE ENTRY SYSTEM
• 3 TYPES OF ACCOUNTS
• -- REAL ASSETS OF BUSINESS, TANGIBLE AND
• IDENTIFIABLE.
• -- PERSONAL THEY ARE HEADED WITH THE NAME OF
• PERSON/BUSINESS/FIRM. DEBTORS OR
  CREDITORS.
• -- NOMINAL THEY RECORD TRANSACTIONS OF
• INTANGIBLES SUCH AS RENT EXPENSES.
• .

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BASIC RULES OF ACCOUNTING

• RULES
• -- REAL DEBIT THE ACCOUNT WHEN WE PURCHASE
• AN ASSET CREDIT WHEN WE SELL OR
• DEPRECIATE.
• -- PERSONAL DEBIT THE RECEIVER OF GOODS
• CREDIT THE GIVER OF GOODS.
• -- NOMINAL DEBIT LOSSES EXPENSES, CREDIT
• INCOMES GAINS.
• -- IN A LEDGER, ASSETS OR LOSSES HAVE DEBIT
• BALANCE WHILE LIABILITIES OR GAINS HAVE
• CREDIT BALANCE.

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BANK RECONCILIATION STATEMENT

• ADVANTAGES OF BANK RECONCILIATION
• . VERIFICATION OF ACCURACY OF ENTRIES
• . TIMELY CORRECTIVE ACTION
• . PREVENTS FRAUDS
• . CONTROL TOOL FOR MANAGEMENT

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EXAMPLES

• X co .was maintaining account with KRB Bank Ltd.
  On 31st December,2006, Bank column of cash book
  of company showed a debit balance of Rs. 26000.
• Cheques deposited into the bank but not credited
  before 31st December,2006 amounted to Rs.4000
• Bank charges of Rs. 500 were debited by the bank
  but no entry was made by the accountant of the
  company.
• From the above particulars, find out the balance
  as per KRB Banks books.
• A) Rs.30500
• B) Rs.25500
• C) Rs.21500
• D) Rs.22500

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Bank Reconciliation

• Debit balance in the cash book means
• a) Overdraft
• b) Favourable balance
• c) Temperory overdraft
• d) None of the above

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Bank Reconciliation

• Bank reconciliation statement is
• A) Ledger account
• B) Part of the cash book
• C) Statement containing differnece of cash book
  and bank pass book
• D) None of the above

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Bank Reconciliation

• Bank reconciliation statement is prepared by
• A) Business man
• B) Bank
• C) Debtor
• D) None of the above

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Bank Reconciliation

• To reconcile the cash book with the pass book the
  un presented cheques are
• A) added
• B) subtracted
• C) multiplied
• D) devided

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Bank Reconciliation

• To reconcile the cash book with the pass book
  when the cash book is overcast by Rs 100, Rs 100
  will be
• A) added
• B) subtracted
• C) multiplied
• D) devided

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Bank Reconciliation

• Undercasting of the credit side of Cash Book has
  the same effect as overcasting of the
• A) Debit side of the pass book.
  
• B) Credit side of the pass book.
• C) There is no relevance between the two
• D) None of the above
  

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TRIAL BALANCE

• DEFINITION
• IT IS A STATEMENT SHOWING CREDIT AND DEBIT
• BALANCES FROM THE LEDGER.
• HELPS ARITHMETICAL ACCURACY AND FACILITATES
• FINAL ACCOUNTS.

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TRIAL BALANCE

• BASIC PRINCIPLE
• SINCE IT IS DOUBLE ENTRY BOOK-KEEPING,
• HENCE ASSETS AND EXPENSES ARE DEBIT BALANCES
• LIABILITIES AND INCOMES ARE CREDIT BALANCES
• . IN CASE OF ARITHMETICAL INACCURACY IDENTIFY
• CLERICAL/PRINCIPLE ERRORS AND RECTIFY

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TRIAL BALANCE

• TYPES OF ERRORS
• A) CLERICAL ERRORS
• -- ERRORS OF OMISSION
• --- OMISSION OF TRANSACTION FROM BOOKS
• --- COMPLETE OMISSION NOT AFFECTING
  TRIAL
• BALANCE
• --- PARTIAL OMISSION AFFECTING TRIAL
• BALANCE

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TRIAL BALANCE

• -- ERRORS OF COMMISSION
• --- FIGURE POSTED ON THE WRONG SIDE OR
  WITH
• WRONG AMOUNT
• -- COMPENSATING ERRORS
• --- ONE ERROR BALANCES ANOTHER ERROR
• . B) ERRORS OF PRINCIPLE
• -- ERRORS IN CONTRAVENTION OF ACCOUNTING
• PRINCIPLES

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TRIAL BALANCE

• RECTIFICATION OF ERRORS IS A SERIES OF STEPS
• PASS THE CORRECT ENTRY
• COMPARE THE WRONG ENTRY WITH THE CORRECT ONE
• PASS THE RECTIFICATION ENTRY
• IF TRIAL BALANCE DOES NOT TALLY THEN DIFFERENCE
  IS TRANSFERRED TO SUSPENCE ACCOUNT

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TRIAL BALANCE

• TYPICAL TRIAL BALANCE
• N A M E
  DEBIT CREDIT
• CAPITAL
  X
• DRAWINGS
  X
• PURCHASES
  X
• SALES
  X
• EXPENSES
  X
• DEBTORS(CUSTOMRES) X
• CREDITORS(SUPPLIERS)
  X
• CASH
  X
• SALES RETURN
  X

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TRIAL BALANCE

• TYPICAL ERRORS
• -- CLERICAL
• A) SALARY PAID 1000/- BUT POSTED AS 10, 000/-.
• RECTIFICATION CREDIT SALARY WITH 9000/-.
• B) SALARY PAID 1000/- BUT POSTED IN RENT A/C.
• RECTIFICATION DEBIT SALARY AND CREDIT RENT
  WITH
• 1000/-.
• C) GOODS WORTH 100/- SOLD TO VIJAY WRONGLY
• RECORDED IN PURCHASE REGISTER.
• RECTIFICATION CREDIT SALES AND PURCHASE A/Cs
• WITH 100/- EACH AND DEBIT VIJAY WITH 200/-.

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TRIAL BALANCE

• AFTER TRIAL BALANCE IS PREPARED ONE FINDS
• . D) SALES OF 500/- POSTED AS 5000/- WHILE
  RENT PAID 500/- POSTED AS 5000/-.
• . RECTIFICATION DEBIT SALES WITH 4500/-,
  CREDIT SUSPENCE WITH 4500/-, CREDIT RENT WITH
  4500/-,
• DEBIT SUSPENCE WITH 4500/-.
• E) SALARY PAID AS 1000/- BUT POSTED AS 10,000/-
  IN RENT A/C.
• RECTIFICATION DEBIT SALARY WITH 1000/- SUSPENCE
  WITH 9000/- CREDIT RENT WITH 10000/-
• F) A PURCHASERS DEBIT BALANCE OF 9000/- HAS NOT
  BEEN TAKEN.
• RECTIFICATION DEBIT DEBTORS, CREDIT SUSPENCE TO
  THE EXTENT OF 9000/-.

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Rectification of Errors-Examples

• Sales to Navin of Rs.1000 is debited to Ravin
  A/c. this will be rectified by-----
• Debiting Navin a/c and Crediting Ravin A/c
• Debiting both Accounts
• Debiting Ravin a/c and Crediting Navin A/c
• Debiting Navin A/c and crediting Sales A/C

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Rectification of Errors-Examples

• sale of Rs.5000 to Suresh is posted to his
  credit, then rectification is
• Credit Suresh to the extent of Rs.10,000
• Credit Suresh to the extent of Rs.5,000
• Debit Suresh to the extent of Rs.10,000
• Debit Suresh to the extent of Rs.5000 Credit

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Trail balance Say True or false

• 1) Wrong balancing of an account will not affect
  the trial balance
• 2) Trial balance does not ensure arithmetical
  accuracy
• 3) Preparations of trial balance helps in
  locating accounting errors
• 4) Debit balance of ledger account is shown in
  debit column of trial balance
• 5) Fixed deposits with banks shows debit balance
• 6) Purchases are shown in the debit side of the
  trial balance
• 7) Banks overdraft is shown on the debit side
  of the trial balance

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CAPITAL AND REVENUE EXPENDITURE

• BASIC PRINCIPLE
• . ALL EXPENSES AND RECEIPTS OF REVENUE NATURE
• ARE TAKEN TO TRADING AND PROFIT LOSS ACCOUNT
• . ALL EXPENDITURES AND RECEIPTS OF CAPITAL
  NATURE
• ARE TAKEN TO BALANCE SHEET

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CAPITAL AND REVENUE EXPENDITURE

• REVENUE RECEIPTS/PAYMENTS
• . ARE SMALLER IN SIZE(RELATIVELY)
• . ARE RECURRING IN NATURE
• . THE BENEFITS ARE OVER A SHORTER PERIOD (1 YEAR)
• . THE PURPOSE IS TO RUN THE BUSINESS ON A DAY TO
• DAY BASIS
• . MAINTAIN ASSETS IN WORKING CONDITION

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CAPITAL REVENUE EXPENDITURE

• CAPITAL RECEIPTS/PAYMENTS
• ARE USUALLY LARGE(RELATIVELY)
• ARE NON-RECURRING IN NATURE
• THE BENEFITS ARE OVER LONGER DURATION
• THE PURPOSE IS TO ENHANCE PRODUCTIVITY OF THE
  ASSETS

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CAPITAL AND REVENUE EXPENDITURE

• THERE ARE CERTAIN EXPENDITURES WHICH ARE
• OTHERWISE REVENUE IN NATURE BUT SOMETIMES
• UNUSUALLY LARGE AND WHOSE BENEFIT TO THE
• ORGANISATION MAY ACCRUE AFTER FEW
  YEARS.THESE
• MAY BE TREATED AS DEFERRED REVENUE
  EXPENDITURE ,
• CARRIED TO THE BALANCE SHEET , AND WRITTEN
  OFF TO
• THE PROFIT LOSS ACCOUNT OVER A PERIOD OF
  TIME.

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CAPITAL AND REVENUE EXPENDITURE

• SAME IS THE CASE WITH CERTAIN RECEIPTS SUCH AS
• SALE OF ASSETS, WHERE THE RECEIPTS UPTO BOOK
• VALUE IS DEDUCTED FROM THE ASSET, AND , IF
• BETWEEN BOOK VALUE COST AS REVENUE
• RECEIPT ABOVE COST AS CAPITAL RECEIPT.
• . THERE IS A THIN LINE BETWEEN CAPITAL REVENUE
• CLASSIFICATION. FOR INSTANCE REPAIRS TO
• MACHINERY WHICH KEEPS THE ASSET IN WORKING
• CONDITION IS CHARGED TO THE P L A/C WHILE
• BETTERMENT EXPENSE IS CAPITALISED.

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CAPITAL REVENUE EXPENDITURE

• EXAMPLES OF EACH TYPE OF CLASSIFICATION
• CAPITAL NATURE
• -- PURCHASE OF ASSETS SUCH AS BUILDING,
• MACHINERY, VEHICLES.
• -- EXPENDITURE IN PURCHASE /SETTING UP OF
• CAPITAL GOODS/ASSETS
• -- EXCESS OF SALE PRICE OF ASSET OVER ITS
  COST
• PRICE
• -- FUNDS RAISED THRU BANKS/INSTITUTIONS
• -- FUNDS RAISED THRU ISSUE OF SHARES,
• DEBENTURES

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CAPITAL AND REVENUE EXPENDITURE

• REVENUE NATURE
• ALL TRANSACTIONS RELATING TO NOMINAL ACCOUNTS
• EVEN CERTAIN EXPENSES OF NON-RECURRING NATURE
  BASED ON MATERIALITY CONCEPT
• EXCESS OF SALE VALUE OF ASSET OVER W D VALUE
• UPTO COST OF ASSET

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Capital Revenue Expenditure
CAPITAL REVENUE
Large amount Relatively small
Improve or enhance earning capacity Maintain asset
Long duration benefit Short duration
Non- recurring recurring
Balance sheet item Trading /P L A/c item
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CAPITAL AND REVENUE EXPENDITURE

• DEFERRED REVENUE EXPENDITURE
• LARGE ADVERTISING EXPENDITURE FOR(SAY) LAUNCH OF
  A PRODUCT
• EXPENDITURE FOR RAISING OF FUNDS INCLUDING
• PREPARATION OF PROJECT REPORT
• INITIAL EXPENSES FOR SETTING UP OF A COMPANY

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Cap. Rev. Expenditure-Examples

• (1)Cost of replacement of defective parts of the
  machinery is -----
• Capital expenditure
• Revenue expenditure
• Deferred revenue expenditure
• (2) Loss of goods due to fire Rs.8000 is a
  revenue expenditure because----
• It is recurring
• Amount involved is small
• Loss is arising out of business operations

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Cap. Rev. Expenditure-Examples

• (3) Professional fees paid in connection with
  acquisition of leasehold premises is----
• Capital expenditure
• Deferred revenue expenditure
• Revenue expenditure

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Examples

• (4)Preliminary expenses , discount allowed on
  issue of shares are the examples of
• Capital expenditure
• Deferred revenue expenditure
• Revenue expenditure
• (5) Machinery costing Rs.10,000, whose current
  book value is Rs.7000 is sold for Rs.12000 what
  is the amount of capital revenue receipt
• Capital receipt of Rs. 2000 Rev. Receipt of
  Rs.10000
• Capital receipt of Rs. 9000 Rev. Receipt of
  Rs.3000
• Capital receipt of Rs. 12000 Rev. Receipt of
  Rs.Nil

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INVENTORY VALUATION

• VALUATION OF STOCKS IS IMPORTANT FROM THE POINT
  OF INCOME DETERMINATION.
• THE DANGER COULD BE OF EITHER OVERVALUATION OR
  UNDERVALUATION OF STOCKS RESULTING IN OVERSTATING
  OR UNDERSTATING OF PROFITS.
• METHODS OF VALUATION
• -- FIFO
• -- LIFO
• -- AVERAGE OR WEIGHTED AVERAGE COST METHOD
• -- BASE STOCK METHOD
• -- ADJUSTED SELLING PRICE METHOD

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INVENTORY VALUATION

• UNDER FIFO GOODS ISSUED TO PRODUCTION IS VALUED
  AT THE EARLIEST PRICE WHEREAS THE CLOSING STOCK
  IS AT THE LATEST PRICE.
• UNDER LIFO GOODS ISSUED TO PRODUCTION IS VALUED
  AT THE LATEST PRICE WHEREAS THE CLOSING PRICE IS
  AT THE EARLIEST PRICE.
• UNDER WEIGHTED AVERAGE COST METHOD ARITHMETIC
  MEAN OF TOTAL PRICE BY TOTAL QUANTITY RECEIVED
  IS TAKEN FOR VALUATION.

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INVENTORY VALUATION

• ADJUSTING SELLING PRICE METHOD IS GENERALLY USED
  BY SMALL BUSINESSMEN WHO ARE UNABLE TO
  DIFFERENTIATE VARIOUS COSTS.
• HENCE THEY VALUE THE STOCKS AT SELLING PRICE AND
  THEN REDUCE ITS VALUE TO THE EXTENT OF ESTIMATED
  GROSS MARGIN.

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INVENTORY VALUATION

• BASE STOCK METHOD
• IT IS ON THE ASSUMPTION THAT A MINIMUM QUANTITY
  OF INVENTORY ( BASE STOCK ) MUST BE HELD AT ALL
  TIMES IN ORDE TO CARRY ON THE BUSINESS
• PRESENTLY ACCOUNTING STANDARDS PERMIT
  FIFO(HISTORICAL PRICE) OR WEIGHTED AVERAGE COST
  METHOD.
• VALUE OF STOCK CAN BE ASCERTAINED BY
  PERIODIC(PHYSICAL VERIFICATION) OR PERPETUAL
  INVENTORY ( MAINTAINENCE OF STOCK REGISTER).

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INVENTORY VALUATION

• CHARACTERISTICS OF DIFFERENT METHODS OF INVENTORY
  VALUATION
• FIFO
• -- IN RISING MARKET FIFO RESULTS IN HIGHER
• PROFITS LOCKING UP OF SCARCE W. C.
• -- GOODS ARE SOLD AT CURRENT HIGHER PRICES
• WHILE COST OF GOODS REFLECTS LOWER THAN
• CURRENT COSTS
• -- IN FALLING MARKET FIFO RESULTS IN LOWER
• PROFITS
• .

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INVENTORY VALUATION

• -- LIFO
• -- IN FALLING MARKET THE EFFECT IS THE SAME AS
• THAT OF FIFO IN RISING MARKET
• -- IN RISING MARKET THE EFFECT IS SAME AS THAT
• OF FIFO IN FALLING MARKET.

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INVENTORY VALUATION

• IN THIS CHAPTER IT IS IMPORTANT TO DISCUSS THE
  VARIOUS ACCOUNTING CONVENTIONS
• CONSERVATISM CONCEPT RECOGNITION OF INCREASES IN
  EARNINGS REQUIRES BETTER EVIDENCE THAN DOES
  RECOGNITION OF DECREASES THAT IS EXPENSES
• REALISATION CONCEPT RECOGNITION OF AMOUNT OF
  REVENUE THAT HAS CERTAINTY OF REALISATION
• MATCHING CONCEPT RECOGNITION OF REVENUES AND
  EXPENSES FOR A CERTAIN EVENT.

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Methods of valuation of inventory
FIFO LIFO AVERAGECOST
Goods issued valued at earliest price Stock valuation at latest price Goods issued valued at latest price Stock valuation at earliest price Found out by dividing total price paid by quantity received
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INVENTORY VALUATION

• CONSISTENCY CONCEPT ONCE A CERTAIN METHOD IS
  DECIDED UPON FOR ALL SUBSEQUENT EVENTS OF THE
  SAME CHARACTER THE SAME METHOD SHOULD BE USED
  UNLESS THERE IS A SOUND REASON TO CHANGE
• MATERIALITY CONCEPT DEPENDING UPON JUDGEMENT AND
  COMMON SENSE IMMATERIAL EVENTS / TRIVIAL MATTERS
  SHOULD NOT BE GIVEN MORE IMPORTANCE THAN
  WARRANTED.
• HISTORICAL COSTS COST OF ACQUISITION
  DISCOUNTS, IF ANY, COSTS INCIDENTAL TO
  BRINGING THE ASSET/ ERECTING THE ASSET.

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Example Let's examine the inventory of Cory's
Tequila Co. (CTC) to see how the different
inventory valuation methods can affect the
financial analysis of a company.
Monthly Inventory Purchases Monthly Inventory Purchases Monthly Inventory Purchases Monthly Inventory Purchases
Month Units Purchased Cost/unit Total Value
January 1,000 Rs10 Rs10,000
February 1,000 Rs12 Rs12,000
March 1,000 Rs15 Rs15,000
Total 3,000
Beginning Inventory 1,000 units purchased at Rs8 each (a total of 4,000 units) Beginning Inventory 1,000 units purchased at Rs8 each (a total of 4,000 units) Beginning Inventory 1,000 units purchased at Rs8 each (a total of 4,000 units) Beginning Inventory 1,000 units purchased at Rs8 each (a total of 4,000 units)
Income Statement (simplified) January-March Income Statement (simplified) January-March Income Statement (simplified) January-March Income Statement (simplified) January-March
 Item  LIFO FIFO Average
Sales 3,000 units _at_ Rs20 each Rs60,000 Rs60,000 Rs60,000
Beginning Inventory 8,000 8,000 8,000
Purchases 37,000 37,000 37,000
Ending Inventory (appears on B/S) See calculation below 8,000 15,000 11,250
COGS Rs37,000 Rs30,000 Rs33,750
Expenses 10,000 10,000 10,000
Net Income Rs13,000 Rs20,000 Rs16,250
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• LIFO Ending Inventory Cost 1,000 units X Rs8
  each Rs8,000 Remember that the last units in
  are sold first therefore, we leave the oldest
  units for ending inventory.
• FIFO Ending Inventory Cost 1,000 units X Rs15
  each Rs15,000 Remember that the first units in
  (the oldest ones) are sold first therefore, we
  leave the newest units for ending inventory.
• Average Cost Ending Inventory (1,000 x 8)
  (1,000 x 10) (1,000 x 12) (1,000 x 15)/4000
  units Rs11.25 per unit 1,000 units X Rs11.25
  each Rs11,250 Remember that we take a weighted
  average of all the units in inventory

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BILLS OF EXCHANGE

• BILL OF EXCHANGE IS THE VEHICLE FOR CREDIT
• TRANSACTIONS IN BUSINESS HAS 3 PARTIES
• DRAWER WHO MAKES THE BILL/ CREDITOR
• DRAWEE ON WHOM THE BILL IS DRAWN
• PAYEE -- WHO RECEIVES THE MONEY
• SOMETIMES DRAWER PAYEE ARE THE SAME.
• ACCEPTANCE TO PAY BY THE DRAWEE IS ESSENTIAL.
• .

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BILLS OF EXCHANGE

• . PROMISSORY NOTE IS SIMILAR HAS ONLY 2
  PARTIES
• BUT SIGNED BY DEBTOR NOTING NECESSARY.
• . ACCOMODATION BILL THERE IS NO
  TRANSACTION
• THE BILL IS DISCOUNTED TO RAISE MONEYS FOR
• BOTH PARTIES, WHO SHARE THE AMOUNT.

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BILLS OF EXCHANGE

• TYPICAL ENTRIES
• . THE ENTRIES IN THE BOOKS OF DRAWER A ARE
• DIRECT BILL TRANSACTION
• BILLS RECEIVABLE a/c DR.
• TO DRAWEE B
• . CASH a/c
  DR.
• TO BILLS RECEIVABLE
• ( BILL IS MET ON DUE DATE)

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BILLS OF EXCHANGE

• BILL ENDORSED TO C
• . Cs a/c
  DR.
• TO BILLS RECEIVABLE
• ( NO ENTRY WHEN BILL IS MET)
• BILL SENT FOR COLLECTION
• . BANK FOR BILL COLLECTION a/c DR.
• TO BILLS RECEIVABLE
• . CASH a/c
  DR.
• TO BANK FOR BILL COLLECTION
• ( BILL SENT FOR COLLECTION IS MET)
• .
• .

55
BILLS OF EXCHANGE

• IN CASE OF DISCOUNTING
• CASH a/c
  DR.
• DISCOUNT a/c
  DR.
• TO BILLS RECEIVABLE
• ( NO ENTRY WHEN BILL IS MET)
• THE ENTRIES IN THE BOOKS OF DRAWEE B
• .. As a/c
  DR.
• TO BILLS PAYABLE
• . BILLS PAYABLE a/c
  DR.
• TO CASH
• ( BILL IS PAID)

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BILLS OF EXCHANGE

• THERE ARE CASES WHEN BILLS ARE DISHONOURED.
• IN THAT CASE THE ENTRIES ARE AS FOLLOWS
• IN As BOOKS
• BILL DIRECTLY SENT FOR PAYMENT
• Bs A/C
  DR.
• TO BILLS RECEIVABLE
• TO CASH
• ( CASH IS THE NOTING CHARGE)
• DISHONOUR OF DISCOUNTED BILL
• . BILLS RECEIVABLE A/C DR.
• NOTING CHARGES A/C DR.
• TO CASH
• (CASH (notary charges) IS PAID TO THE BANK)

57
BILLS OF EXCHANGE

• -- Bs a/c
  DR.
• TO BILLS RECEIVABLE
• TO NOTING CHARGES
• (BILL RETURNED TO A)
• DISHONOUR OF BILL SENT BY BANK FOR PAYMENT
• BILL RECEIVABLE a/c DR.
• NOTING CHARGE a/c DR.
• TO CASH
• TO BANK FOR BILL COLLECTION
• ( DISHONOUR OF BILL FOR COLLECTION)
• . Bs a/c
  DR.
• TO BILLS RECEIVABLE
• TO NOTING CHARGES
• (BILL RETURNED TO B)

58
BILLS OF EXCHANGE

• DISHONOUR OF ENDORSED BILL
• . BILLS RECEIVABLE a/c DR.
• NOTING CHARGES a/c DR.
• TO C
• Bs a/c
  DR.
• TO BILLS RECEIVABLE
• TO NOTING CHARGES
• (BILL RETURNED TO B)

59
CONSIGNMENT ACCOUNT

• WHEN OWNER SENDS GOODS TO HIS AGENT FOR THE
  PURPOSE OF SELLING THEN IT IS CALLED CONSIGNMENT.
• IT IS DIFFERENT FROM SALE IN THAT THE CONSIGNEE
  CANNOT DISPOSE OFF THE GOODS ACCORDING TO HIS
  CHOICE DOES NOT RECEIVE ANY RISK FROM THE
  CONSIGNOR CAN RETURN THE GOODS IF NOT
  MARKETABLE.

60
CONSIGNMENT ACCOUNT

• IN CONSIGNMENT ACCOUNTING THERE ARE 3 ACCOUNTS
• CONSIGNMENT ACCOUNT WHICH SHOWS GOODS/STOCK AT
  COST INCLUDING EXPENSES INCURRED IN SENDING THE
  GOODS.
• CONSIGNEE ACCOUNT WHICH IS NET OF HIS SELLING
  PRICE AND THE NON-RECURRING OR DIRECT EXPENSES
  INCURRED BY HIM.
• GOODS SENT ON CONSIGNMENT ACCOUNT.

61

• Consignment Inventory is inventory that is in the
  possession of the customer, but is still owned by
  the supplier.
• In other words, the supplier places some of his
  inventory in his customers possession (in their
  store or warehouse) and allows them to sell or
  consume directly from his stock. The customer
  purchases the inventory only after he has resold
  or consumed it.
• The key benefit to the customer should be
  obvious he does not have to tie up his capital
  in inventory. This does not mean that there are
  no inventory carrying costs for the customer he
  does still incur costs related to storing and
  managing the inventor

62

• For a more specific example, consider a bicycle
  manufacturer that produces a wide range of
  bicycles ranging in price from a couple hundred
  dollars to several thousand dollars. He has
  customers (local independent bicycle shops) that
  stock his low-to-mid-priced models but are
  hesitant to stock the more expensive bikes
  because they do not have the confidence that
  their customers are willing to pay that much for
  a bike. And, if they do get a customer that wants
  a high-end bike, they could always special order
  it for them. The bicycle manufacturer strongly
  believes that getting his high-end bikes in the
  shops where customers can see and touch them is
  critical in driving up sales for these models as
  well as helping to promote his brand which
  ultimately drives up sales for the lower cost
  models. The solution? Well I think you can take
  it from here.
• This is a classic consignment model because it is
  the best-case scenario for applying the
  consignment inventory model. It works well for
• New and unproven products
• The introduction of existing product lines into
  new sales channels.
• Very expensive products where sales are
  questionable.

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CONSIGNMENT ACCOUNT

• A TYPICAL CONSIGNMENT ACCOUNT WILL APPEAR AS
  FOLLOWS
• DR.
  CR
• To goods sent on by
  consignee
• consignment
  (goods sold by
• (invoice value)
  consignee)
• To bank by
  closing stock
• (all expenses incurred by
• Consignor in transporting)
• To consignee
• (all expenses incurred by
• Consignee in selling)
• To profit loss a/c

64
CONSIGNMENT ACCOUNT

• NOTES
• CLOSING STOCK IS VALUED AT COST/INVOICE PRICE
  PROPORTIONATE AMOUNT OF COST INCURRED BY
  CONSIGNOR IN TRANSPORTING.
• IF GOODS ARE LOST IN TRANSIT THE SAME METHOD OF
  COSTING IS APPLIED AND THAT AMOUNT IS CREDITED TO
  THE CONSIGNMENT ACCOUNT.
• NOMINAL LOSSES ARE PROPORTIONATELY CHARGED TO ALL
  STOCK WHETHER SOLD OR NOT. ABNORMAL LOSS IS
  DIRECTLY CHARGED TO PL A/C.
• APART FROM FIXED RATE OF COMMISSION ON THE GOODS
  SOLD AN ADDITION DEL CREDERE COMMISSION IS
  PAID TO THE CONSIGNEE FOR ENCOURAGING SALES ON
  CREDIT BASIS.
• HOWEVER THE INHERENT RISKS REMAIN WITH THE
  CONSIGNEE.

65
Joint Venture

• A joint venture (often abbreviated JV) is an
  entity formed between two or more parties to
  undertake economic activity together. The parties
  agree to create a new entity by both contributing
  equity, and they then share in the revenues,
  expenses, and control of the enterprise. The
  venture can be for one specific project only, or
  a continuing business relationship such as the
  Sony Ericsson joint venture

66
JOINT VENTURE

• JOINT VENTURE ACCOUNTS ARE TEMPORARY IN NATURE
  FOR THE AD HOC PURPOSE OF AN ASSIGNMENT
  UNDERTAKEN.
• IT IS SIMILAR TO A PARTNERSHIP EXCEPT SUCH
  ASSOCIATIONS ARE TEMPORARY IN NATURE.
• ALSO IN PARTNERSHIP THE ACCOUNTING IS ON ACCRUAL
  BASIS WHILE IN JOINT VENTURE ACCOUNTING IS ON
  CASH BASIS.

67
JOINT VENTURE

• THERE ARE 3 ACCOUNTS
• -- JOINT BANK WHICH SHOWS EACH CO-VENTURERS
• INVESTMENT
• -- CO-VENTURERS ACCOUNT
• -- JOINT VENTURE INTO WHICH THE FINAL
• PROFIT/LOSS IS TRANSFERRED.

68
Difference Between Leasing Hire Purchase
BASIS LEASE FINANCING HIRE PURCHASE
Meaning A lease transaction is a commercial arrangement, whereby an equipment owner or manufacturer conveys to the equipment user the right to use the equipment in return for a rental Hire purchase is a type of instalment credit under which the hire purchaser agrees to take the goods on hire at a stated rental, which is inclusive of the repayment of principal as well as interest, with an option to purchase
Option to user No option is provided to the lessee (user) to purchase the goods Option is provided to the hirer ( user)
Nature of expenditure Lease rentals paid by the lessee are entirely revenue expenditure of the lesse Only interest element included in the HP instalments is revenue expenditure by nature
69
LEASING

• Contract between two parties
• Owner of an asset transfers his right of use to
  other party on payment of a fixed rent
  periodically
• Types gtgt Finance or Capital Lease
• Operating Lease
• Service Lease
• Leveraged Lease

70
LEASING AND HIRE PURCHASE

• LESSOR (OWNER) GIVES HIS ASSETS TO LESSEE (USER)
  FOR USE RECEIVES LEASE RENTALS IN RETURN, AN
  AMOUNT WHICH INCLUDES COST OF DEPRECIATION, COST
  OF FINANCE, AND ADMINISTRATIVE EXPENSES OF THE
  LESSOR.
• . LEASING HELPS IN IMPROVING SALES VOLUME OF
  GOODS REDUCES CAPITAL INVESTMENT FOR LESSEE,
  INCREASES HIS BORROWING CAPACITY, REDUCES TAX
  LIABILITY AS RENTALS ARE FULLY TAX DEDUCTABLE,
  HOWEVER BURDENSOME.

71
LEASING AND HIRE PURCHASE

• FINANCIAL LEASE IS THE MOST POPULAR, LONG TERM IN
  NATURE, GENERALLY USEFUL FOR PLANT AND
  MACHINERY.
• OTHER TYPES ARE OPERATING AND SERVICE LEASES.
• LESSOR RECEIVES LEASE RENTALS, CLAIMS
• DEPRECIATION.
• LESSEE CHARGES THE LEASE RENTALS PAID TO THE P
  L ACCOUNT.

72
LEASING AND HIRE PURCHASE

• THE LESSOR BREAKS UP THE RENTALS RECEIVED
• INTO FINANCE INCOME AND ANNUAL LEASE CHARGE.
• FINANCE INCOME TOTAL RENTALS OVER THE
• LEASE PERIOD RESIDUAL VALUE OF LEASED
  ASSET
• -- COST OF LEASED ASSET ( FAIR VALUE ).

73
LEASING AND HIRE PURCHASE

• USE SUM OF DIGITS METHOD TO FIND ANNUAL FINANCE
  INCOME.
• ANNUAL LEASE CHARGE ANNUAL LEASE RENT ANNUAL
  FINANCE INCOME.
• ANNUAL LEASE CHARGE STATUTORY DEPRECIATION
  LEASE EQUALISATION CHARGE.
• LEASE EQUALISATION CHARGE IS DEDUCTED FROM THE
  LEASE RENTALS OR THE PROFIT LOSS ACCOUNT.

74
LEASING HIRE PURCHASE

• SOMETIMES THE ANNUAL LEASE IS LESS THAN STATUTORY
  DEPRECIATION THEN THE LEASE EQUALISATION CHARGE
  IS ADDED TO THE PROFIT LOSS ACCOUNT.
• THE LEASE EQUALISATION CHARGE ACCOUNTED THROUGH
  THE LEASE TERMINAL ADJ. A/C WHICH FINALLY IS
  DEDUCTED FROM THE WRITTEN DOWN VALUE OF THE
  ASSET.
• IN CASE OF OPERATING LEASE IF THE PERIOD IS LESS
  THAN 1 YEAR ( WHICH IS GENERALLY THE CASE ) THEN
  THE ENTIRE AMOUNT IS TAKEN TO THE PROFIT LOSS
  ACCOUNT.
• IF THE PERIOD IS MORE THAN 1 YEAR AND THE ENTIRE
  RENTAL IS TAKEN INTO A LEASE RENT SUSPENCE
  ACCOUNT AND YEARLY RENTALS ARE CHARGED TO IT.

75
LEASING HIRE PURCHASE

• NOTES
• FINANCE INCOME IS THE PERCEIVED RETURN ON LEASED
  ASSET.
• LEASE EQUALISATION CHARGE IS THE EXCESS OF LEASE
  RENT AFTER DUE WEIGHTAGE IS GIVEN TO THE RETURN
  ON THE LEASED ASSET AND THE EXTENT OF
  DEPRECIATION CHARGED.
• THIS AMOUNT IS CARRIED FORWARD IN THE BALANCE
  SHEET TO BE CHARGED AGAINST THE WRITTEN DOWN
  VALUE OF THE ASSET.

76
LEASING AND HIRE PURCHASE

• Explanation
• The concept of lease equalisation account is an
  equaliser between the capital recovery inherent
  in lease rentals and the depreciation chargeable
  as per Companies Act.
• 
  
• The objective of the lessor is to write-off
  an amount equal to the capital recovery inherent
  in lease rentals, so as to leave in the revenue
  statement only the financing charges

77
LEASING AND HIRE PURCHASE

• HIRE PURCHASE IS DIFFERENT IN THAT THE HIRER IS
  THE OWNER FOR THE PURPOSE OF DEPRECIATION.
  ALTHOUGH ACTUAL OWNERSHIP PASSES ON THE DATE OF
  PAYMENT OF LAST INSTALMENT.
• THE HIRE PURCHASE PRICE CONSISTS OF CASH PRICE
  AND INTEREST.
• INSTALMENT SALE IS SIMILAR EXCEPT THAT OWNERSHIP
  PASSES ON TO BUYER AS SOON AS THE 1ST INSTALMENT
  IS PAID.
• THE 1ST INSTALMENT IN BOTH CASES IS CALLED DOWN
  PAYMENT.
• THE SELLER OF THE ASSET IS CALLED VENDOR

78
LEASING AND HIRE PURCHASE

• A TYPICAL LEASE TRANSACTION IN THE BOOKS OF THE
  LESSOR
• Bank a/c dr.
• to lease rent
• (lease rent received)
• Lease rent a/c dr.
• to P L a/c
• (lease rent transferred to profit)
• Depreciation a/c dr.
• to asset
• (annual depreciation
• Of the asset)
• P L a/c dr.
• to depreciation
• (depn. Charged to P L a/c)
  
• if annual lease chargegtdepn.

79
LEASING AND HIRE PURCHASE

• IN THE BOOKS OF THE LESSEE
• Lease rent paid a/c dr.
• to bank
• (lease rent paid)
• P L a/c dr.
• to lease rent
• (lease rent charged to P L)
• IF LEASE RENT IS PAID FOR THE ENTIRE PERIOD
  THE SAME IS ACCOUNTED FOR IN BANK A/C AND AN
  ANNUAL AMOUNT IS CHARGED TO P L A/C EVERY YEAR
  

80
LEASING AND HIRE PURCHASE

• A TYPICAL TRANSACTION IN THE BOOKS OF THE HIRER
• Asset a/c dr.
• to vendor
• (purchase of asset on H P basis-
• to the extent of the amount agreed)
• . Vendor a/c dr.
• to bank
• (down payment/instalment)
• . Depreciation a/c dr.
• to asset
• (depn. Of asset)
• . P L a/c dr.
• to depreciation
  
• (depn. Charged to P L)\
• . P L a/c dr.
• to expenses
• (any other expenses charged to P L)

81
NON-TRADING ORGANISATIONS

• NON-TRADING ORGANISATIONS ARE NON PROFIT MAKING
  BODIES, RENDERING SERVICES TO PUBLIC, COLLECTING
  MONEYS BY WAY OF MEMBERSHIP FEES, SUBSCRIPTIONS,
  DONATIONS. HOWEVER TO PREVENT MISUSE OF FUNDS,
  ACCOUNTS ARE MAINTAINED.
• RECEIPTS PAYMENTS STATEMENT CONTAINS REAL
• ACCOUNTS, ACTUAL RECEIPTS AND PAYMENTS, BOTH
  CAPITAL AND REVENUE ITEMS.
• . INCOME EXPENDITURE STATEMENT CONTAINS
• NOMINAL ACCOUNTS, OF REVENUE ITEMS OF INCOME
  EXPENSES FOR A FIXED PERIOD.

82
NON-TRADING ORGANISATIONS

• A TYPICAL WAY OF CONVERTING RECEIPTS PAYMENTS
  STATEMENT INTO INCOME EXPENDITURE STATEMENT IS
  TAKE THE RECEIPTS/PAYMENTS OF THE CURRENT YEAR
  SUBTRACT THE OPENING BALANCE OF THE CURRENT YEAR
  AND ADD THE CLOSING BALANCE ( IF ANY ).
• THE CLOSING BALANCES WILL CONSTITUTE THE BALANCE
  SHEET.

83
DEPRECIATION

• DEPRECIATION IS A CHARGE ON PROFITS, TO ACCOUNT
  FOR THE FALL IN THE VALUE( NOTIONAL OR OTHERWISE
  ) OF AN ASSET DURING THE PERIOD OF USE.
• DEPRECIATION OR WRITING OFF OF A CERTAIN PORTION
  OF AN ASSET ON AN ANNUAL BASIS IS A PRUDENT WAY
  OF SAVINGS FOR REPLACEMENT OF THE ASSET AFTER ITS
  USEFUL LIFE IS OVER.
• SINCE DEPRECIATION IS AN OPERATING COST AND
  THEREFORE TAX DEDUCTIBLE, EACH YEAR THE SAVING IS
  TO THE EXTENT OF (TAX RATE) ANNUAL
  DEPRECIATION.

84
DEPRECIATION

• DEPRECIATION CAN ALSO BE LOOKED IN A DIFFERENT
  WAY.
• DEPRECIATION IS AN ACCOUNTING PROCESS FOR THE
  GRADUAL CONVERSION OF THE CAPITALIZED COST OF
  FIXED(TANGIBLE) ASSETS INTO EXPENSE.
• SIMILARLY, INTANGIBLE ASSETS ARE CONVERTED INTO
  EXPENSE BY AMORTISATION.
• WHILE ASSETS SUCH AS NATURAL RESOURCES ARE
  CONVERTED BY PROCESS CALLED DEPLETION.

85
DEPRECIATION

• WHAT CAUSES DEPRECIATION ?
• SIMPLY WEAR AND TEAR
• MISHAPS
• OBSOLESCENCE
• PASSAGE OF TIME
• FALL IN VALUE

86
DEPRECIATION

• IN ORDER TO CALCULATE DEPRECIATION THERE ARE
  BASIC ISSUES TO BE ASCERTAINED
• -- ESTIMATED USEFUL LIFE OF THE ASSET(YEARS).
• -- THE RESIDUAL VALUE OF THE ASSET.
• -- METHOD TO BE USED FOR PROVIDING
• DEPRECIATION.

87
DEPRECIATION

• METHODS OF DEPRECIATION
• . STRAIGHT LINE METHOD. EQUAL FRACTION OF THE
  NET COST(COST OF THE ASSET LESS THE RESIDUAL
  VALUE) IS CHARGED EACH YEAR.
• WRITTEN DOWN VALUE METHOD. EQUAL PERCENTAGE OF
  THE WRITTEN DOWN VALUE IN THE BOOKS OF THE
  COMPANY IS CHARGED EACH YEAR.
• SINKING FUND METHOD. IT IS STRAIGHT LINE METHOD
  BUT THE DEPRECIATION CHARGED OR A PORTION OF IT
  IS KEPT AS A RESERVE, INVESTED IN MARKETABLE
  SECURITIES. THE FUND GROWS INTO REPLACEMENT VALUE
  OF THE ASSET.

88
Straight Line Method
Cost Rs 140000
Salvage Value Rs 20000
Useful life 5 years

Straight line depreciation
Year Depreciation
2006 Rs 1 8,000 (Rs110,000 - Rs20,000) x 1/5 (Rs110,000 - Rs20,000) x 1/5 (Rs110,000 - Rs20,000) x 1/5
2007 Rs 1 8,000 (Rs110,000 - Rs20,000) x 1/5 (Rs110,000 - Rs20,000) x 1/5 (Rs110,000 - Rs20,000) x 1/5
2008 Rs 1 8,000 (Rs110,000 - Rs20,000) x 1/5 (Rs110,000 - Rs20,000) x 1/5 (Rs110,000 - Rs20,000) x 1/5
2009 Rs 1 8,000 (Rs110,000 - Rs20,000) x 1/5 (Rs110,000 - Rs20,000) x 1/5 (Rs110,000 - Rs20,000) x 1/5
2010 Rs 1 8,000 (Rs110,000 - Rs20,000) x 1/5 (Rs110,000 - Rs20,000) x 1/5 (Rs110,000 - Rs20,000) x 1/5
Total Rs 9 0,000
89
Written Down Method
Year Book value at the beginning of the year Dep Dep Expens ACC Dep ACC Dep Book Value
2006 Rs 1 10,000 40 Rs44,000 Rs44,000 Rs44,000 Rs66,000
2007 Rs 6 6,000 40 Rs26,400 Rs70,400 Rs70,400 Rs39,600
2008 Rs 3 9,600 40 Rs15,840 Rs86,240 Rs86,240 Rs23,760
2009 Rs 2 3,760 40 Rs 3,760 (1) Rs90,000 Rs90,000 Rs20,000
2010 Rs 2 0,000 40 Rs - Rs90,000 Rs90,000 Rs20,000
Total Rs90,000

(1) Depreciation stops when accumulated depreciation reaches depreciation base. (1) Depreciation stops when accumulated depreciation reaches depreciation base. (1) Depreciation stops when accumulated depreciation reaches depreciation base. (1) Depreciation stops when accumulated depreciation reaches depreciation base. (1) Depreciation stops when accumulated depreciation reaches depreciation base. (1) Depreciation stops when accumulated depreciation reaches depreciation base.
Depreciation base cost - salvage value Rs110,000 - Rs20,000 Rs90,000 Depreciation base cost - salvage value Rs110,000 - Rs20,000 Rs90,000 Depreciation base cost - salvage value Rs110,000 - Rs20,000 Rs90,000 Depreciation base cost - salvage value Rs110,000 - Rs20,000 Rs90,000 Depreciation base cost - salvage value Rs110,000 - Rs20,000 Rs90,000