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JAIIB / Diploma in Banking & Finance

ACCOUNTING AND FINANCE


FOR BANKERS

SPECIAL ACCOUNTS - MODULE C

M Syed Kunmir
SPBT College
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into the bank and the amount withdrawn there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.
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.
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.
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.
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.
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.
.
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.
BANK RECONCILIATION STATEMENT

ADVANTAGES OF BANK RECONCILIATION

. VERIFICATION OF ACCURACY OF ENTRIES

. TIMELY CORRECTIVE ACTION

. PREVENTS FRAUDS

. CONTROL TOOL FOR MANAGEMENT


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 Bank’s books.
• A) Rs.30500
• B) Rs.25500
• C) Rs.21500
• D) Rs.22500
Bank Reconciliation
• Debit balance in the cash book
means
• a) Overdraft
• b) Favourable balance
• c) Temperory overdraft
• d) None of the above
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
Bank Reconciliation
• Bank reconciliation statement is
prepared by
– A) Business man
– B) Bank
– C) Debtor
– D) None of the above
Bank Reconciliation
• To reconcile the cash book with the
pass book the un presented cheques
are
– A) added
– B) subtracted
– C) multiplied
– D) devided
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
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
TRIAL BALANCE

• DEFINITION

• IT IS A STATEMENT SHOWING CREDIT AND DEBIT

BALANCES FROM THE LEDGER.

• HELPS ARITHMETICAL ACCURACY AND FACILITATES

FINAL ACCOUNTS.
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


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
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
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
TRIAL BALANCE

TYPICAL TRIAL BALANCE


NAME DEBIT CREDIT
• CAPITAL X
• DRAWINGS X
• PURCHASES X
• SALES X
• EXPENSES X
• DEBTORS(CUSTOMRES) X
• CREDITORS(SUPPLIERS) X
• CASH X
• SALES RETURN X
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/-.
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 PURCHASER’S DEBIT BALANCE OF 9000/- HAS NOT


BEEN TAKEN.
• RECTIFICATION: DEBIT DEBTORS, CREDIT SUSPENCE TO
THE EXTENT OF 9000/-.
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
Rectification of Errors-Examples
• sale of Rs.5000 to Suresh is posted to his credit, then
rectification is
i. Credit Suresh to the extent of Rs.10,000
ii. Credit Suresh to the extent of Rs.5,000
iii. Debit Suresh to the extent of Rs.10,000
iv. Debit Suresh to the extent of Rs.5000 Credit
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) Bank’s overdraft is shown on the debit side of
the trial balance
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


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


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


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.


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.
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
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
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


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


Cap. & Rev. Expenditure-
Examples
(1)Cost of replacement of defective parts of the
machinery is -----
a. Capital expenditure
b. Revenue expenditure
c. Deferred revenue expenditure
(2) Loss of goods due to fire Rs.8000 is a revenue
expenditure because----
a. It is recurring
b. Amount involved is small
c. Loss is arising out of business operations
Cap. & Rev. Expenditure-
Examples
(3) Professional fees paid in connection with
acquisition of leasehold premises is----
a. Capital expenditure
b. Deferred revenue expenditure
c. Revenue expenditure
Examples

(4)Preliminary expenses , discount allowed on issue


of shares are the examples of
a. Capital expenditure
b. Deferred revenue expenditure
c. 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
a. Capital receipt of Rs. 2000 & Rev. Receipt of Rs.10000
b. Capital receipt of Rs. 9000 & Rev. Receipt of Rs.3000
c. Capital receipt of Rs. 12000 & Rev. Receipt of Rs.Nil
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
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.
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.
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).
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
.
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.
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.
Methods of valuation of
inventory
FIFO LIFO AVERAGECOST

•Goods issued •Goods issued Found out by


valued at valued at latest dividing total
earliest price price price paid by
•Stock •Stock quantity
valuation at valuation at received
latest price earliest price
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.
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
Monthly Inventory Purchases*
company.
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)

Income Statement (simplified): January-March*

 Item  LIFO FIFO Average

Sales = 3,000 units @ Rs60,000 Rs60,000 Rs60,000


Rs20 each
Beginning Inventory 8,000 8,000 8,000
Purchases 37,000 37,000 37,000

Ending Inventory (appears 8,000 15,000 11,250


on B/S)
*See calculation below
COGS Rs37,000 Rs30,000 Rs33,750

Expenses 10,000 10,000 10,000

Net Income Rs13,000 Rs20,000 Rs16,250


• 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
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.

.
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.


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)
BILLS OF EXCHANGE

BILL ENDORSED TO C
. C’s 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)
.
.
.
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’:


.. A’s a/c DR.
TO BILLS PAYABLE

. BILLS PAYABLE a/c DR.


TO CASH
( BILL IS PAID)
BILLS OF EXCHANGE

• THERE ARE CASES WHEN BILLS ARE DISHONOURED.


• IN THAT CASE THE ENTRIES ARE AS FOLLOWS:
IN A’s BOOKS:
BILL DIRECTLY SENT FOR PAYMENT
B’s 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)
BILLS OF EXCHANGE

• -- B’s 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)

. B’s a/c DR.


TO BILLS RECEIVABLE
TO NOTING CHARGES
(BILL RETURNED TO B)
BILLS OF EXCHANGE

• DISHONOUR OF ENDORSED BILL

. BILLS RECEIVABLE a/c DR.


• NOTING CHARGES a/c DR.
• TO C

• B’s a/c DR.


• TO BILLS RECEIVABLE
• TO NOTING CHARGES
(BILL RETURNED TO B)
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.
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.


• 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 customer’s 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
• 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.
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
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 P&L 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.
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
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.
JOINT VENTURE

• THERE ARE 3 ACCOUNTS:

• -- JOINT BANK WHICH SHOWS EACH CO-VENTURER’S


INVESTMENT;

-- CO-VENTURER’S ACCOUNT

-- JOINT VENTURE INTO WHICH THE FINAL


PROFIT/LOSS IS TRANSFERRED.
Difference Between Leasing
& Hire Purchase
BASIS LEASE FINANCING HIRE PURCHASE
Meaning A lease transaction is a Hire purchase is a type of
commercial arrangement, instalment credit under
whereby an equipment which the hire purchaser
owner or manufacturer agrees to take the goods on
conveys to the equipment hire at a stated rental,
user the right to use the which is inclusive of the
equipment in return for a rental repayment of principal as
well as interest, with an option to
purchase

Option to user No option is provided to Option is provided to the hirer


the lessee (user) to ( user)
purchase the goods
Nature of expenditure Lease rentals paid by the Only interest element
lessee are entirely revenue included in the HP
expenditure of the lesse instalments is revenue
expenditure by nature
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 >> Finance or Capital Lease

» Operating Lease
» Service Lease
» Leveraged Lease
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.
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.
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 ).


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.
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.
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.
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
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


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 charge>depn.
Lease equalisation a/c dr.
to lease terminal adj.
P & L a/c dr.
to lease equalisation
if annual lease charge<depn
• Lease terminal adj. a/c dr.
to lease equalisation charge.
. P&L a/c dr.
to other expenses
(all other expenses debited)

.
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
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)

IN THE BOOKS OF LESSEE:

. Hirer a/c dr.


to sales
(sale of asset on H P basis)
Bank a/c dr.
to hirer
(instalment received)
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.
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.
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.
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.
DEPRECIATION

• WHAT CAUSES DEPRECIATION ?

• SIMPLY WEAR AND TEAR

• MISHAPS

• OBSOLESCENCE

• PASSAGE OF TIME

• FALL IN VALUE
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.
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.
Straight Line Method
Cost Rs 140000

Salvage Value Rs 20000


Useful life 5 years

Straight line depreciation


Year Depreciation

2006Rs 1 8,000 =(Rs110,000 - Rs20,000) x 1/5


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

2010 Rs 2 0,000 40% Rs - Rs90,000 Rs20,000


Total Rs90,000

(*1) Depreciation stops when accumulated depreciation reaches depreciation


base.
Depreciation base = cost - salvage value = Rs110,000 - Rs20,000 =
Rs90,000