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into the bank and the amount withdrawn there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 Banks 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)
B)
C)
D)

Business man
Bank
Debtor
None of the above

Bank Reconciliation
To reconcile the cash book with the
pass book the un presented cheques
are
A)
B)
C)
D)

added
subtracted
multiplied
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)
B)
C)
D)

added
subtracted
multiplied
devided

Bank Reconciliation
Undercasting of the credit side of Cash Book has the same
effect as overcasting of the

A)
B)
C)
D)

Debit side of the pass book.

Credit side of the pass book.
There is no relevance between the two
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
CAPITAL
DRAWINGS
PURCHASES
SALES
EXPENSES
DEBTORS(CUSTOMRES)
CREDITORS(SUPPLIERS)
CASH
SALES RETURN

DEBIT

CREDIT
X

X
X
X
X
X
X
X
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 PURCHASERS 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

i.
ii.
iii.
iv.

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

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

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. ExpenditureExamples

(1)Cost of replacement of defective parts of the
a.
b.
c.
(2)
a.
b.
c.

machinery is ----Capital expenditure

Revenue expenditure
Deferred revenue expenditure
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

Cap. & Rev. ExpenditureExamples

(3)
a.
b.
c.

Professional fees paid in connection with

acquisition of leasehold premises is---Capital expenditure
Deferred revenue expenditure
Revenue expenditure

Examples
(4)Preliminary expenses , discount allowed on issue
of shares are the examples of
a.
b.
c.

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
a.
b.
c.

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

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
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

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 examinethe 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*

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 @

Rs20 each
Beginning Inventory

Rs60,000

Rs60,000

Rs60,000

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

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
TO BILLS RECEIVABLE
( BILL IS MET ON DUE DATE)

DR.

BILLS OF EXCHANGE
BILL ENDORSED TO C
.
Cs a/c
TO BILLS RECEIVABLE

DR.

( NO ENTRY WHEN BILL IS MET)

BILL SENT FOR COLLECTION
.

BANK FOR BILL COLLECTION a/c

TO BILLS RECEIVABLE

CASH a/c
TO BANK FOR BILL COLLECTION
( BILL SENT FOR COLLECTION IS MET)

.
.
.

DR.
DR.

BILLS OF EXCHANGE
IN CASE OF DISCOUNTING
CASH a/c
DISCOUNT a/c
TO BILLS RECEIVABLE
( NO ENTRY WHEN BILL IS MET)

DR.
DR.

THE ENTRIES IN THE BOOKS OF DRAWEE B:

.. As a/c
DR.
TO BILLS PAYABLE
. BILLS PAYABLE a/c
TO CASH
( BILL IS PAID)

DR.

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)

BILLS OF EXCHANGE

-- Bs a/c
TO BILLS RECEIVABLE
TO NOTING CHARGES
(BILL RETURNED TO A)

DR.

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

DR.

BILLS OF EXCHANGE

DISHONOUR OF ENDORSED BILL

. BILLS RECEIVABLE a/c

NOTING CHARGES a/c

TO C

Bs a/c
TO BILLS RECEIVABLE
TO NOTING CHARGES
(BILL RETURNED TO B)

DR.
DR.

DR.

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 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

 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-VENTURERS

INVESTMENT;
-- CO-VENTURERS 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
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

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
to asset
(annual depreciation
Of the asset)

P&L
a/c
dr.
to depreciation
(depn. Charged to P & L a/c)

dr.

if annual lease charge>depn.

Lease equalisation a/c
dr.
to lease terminal adj.
P & L a/c
to lease equalisation

dr.

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
to bank
(lease rent paid)

a/c

dr.

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 basisto 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
the year

Dep Expens

ACC Dep

Book Value

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