ACCOUNTING

AND FINANCE
INDIAN ACADEMY
SCHOOL OF MANAGEMENT STUDIES
 INDIAN
ACADEMY
SCHOOL OF MANAGEMENT
STUDIES

WELCOMES
YOU ALL
 TOPICS
 BANK RECONCILIATION
 TRIAL BALANCE
 CAPITAL & REVENUE EXPENDITURE
 INVENTORY VALUATION
 BILLS OF EXCHANGE
 CONSIGNMENT ACCOUNT
 JOINT VENTURE
 LEASING & HIRE PURCHASE
 NON-TRADING ORGANISATIONS
 DEPRECIATION
 MODEL QUESTIONS
 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

 BANK RECONCILIATION( B. R. ) IS BASED ON THE

PRINCIPLE OF DOUBLE ENTRY.

 CREDIT THE GIVER AND DEBIT THE RECEIVER

 B. R. SHOWS CAUSES OF DIFFERENCES BETWEEN CASH

BOOK AND PASS BOOK BALANCE

 DEBIT BALANCE AS PER CASH BOOK IS CREDIT BALANCE

AS PER PASS BOOK = POSITIVE BALANCE

 CREDIT BALANCE IN CASH BOOK IS DEBIT BALANCE IN

PASS BOOK = NEGATIVE BALANCE/OVERDRAFT

 WHETHER WE START WITH CASH OR PASS BOOK

RECONCILIATION ENTRIES WILL REMAIN SAME AS PER
PRINCIPLES
 BANK RECONCILIATION STATEMENT

 CAUSES OF DIFFERENCES TREATMENT

CASH/PASS BOOK
DT. CR.
.
 CHEQUES ISSUED BUT NOT PRESENTED √

 CHEQUES DEPOSITED BUT NOT COLLECTED √

 BANK CHARGES √

 INTEREST ON SAVINGS BANK √

 INTEREST ON LOAN √

 AMOUNT PAID BY BANK AS PER √

STANDING INSTRUCTIONS

. DIRECT PAYMENTS MADE BY CUSTOMERS √

. DISHONOUR OF CHEQUES RECEIVED √

 BANK RECONCILIATION STATEMENT

 CAUSES OF DIFFERENCES TREATMENT

CASH/PASS BOOK
DT. CR.
. PAYMENTS SIDE OF CASH BOOK
UNDERCAST √

. DEPOSIT SIDE OF CASH BOOK

OVERCAST √

. CHEQUE ISSUED BUT NOT TAKEN

IN BANK COLUMN √

. DEBIT BALANCE X BROUGHT

FORWARD AS CREDIT BALANCE 2X

. CHEQUE ISSUED BUT RECORDED

TWICE √
 BANK RECONCILIATION STATEMENT

IMPORTANT : WHETHER WE ARE RECONCILING PASS BOOK OR CASH

BOOK , EACH OF THE RECTIFICATION ENTRIES WILL

APPEAR ON THE SAME SIDE . ADDITION OR SUBRACTION

OF ENTRIES FROM THE OPENING OR GIVEN BALANCE

DEPENDS UPON WHICH SIDE OF THE LEDGER THEY ARE

CAST OR TO BE CAST. THUS WHAT WE SIMPLY NEED TO

KNOW IS WHETHER EACH FIGURE GIVEN IN THE

PROBLEM IS A DEBIT OR CREDIT ENTRY. I WILL EXPLAIN

WITH THE HELP OF A PROBLEM LATER.

 BANK RECONCILIATION STATEMENT

SIMPLY PUT, IF AN ENTRY IS ALREADY THERE BUT EITHER

THE WHOLE OR PART IT HAS TO BE RECTIFIED THEN THAT

PORTION IS POSTED ON THE OPPOSITE SIDE OF THE

ORIGINAL ENTRY.
 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.
 Rs.30500
 Rs.25500
 Rs.21500
 Rs.22500
 EXAMPLES

When overdraft as per cash book and a Cheque of Rs.1000 directly

deposited in the bank, but not recorded in cash book----
a) Add Rs.1000 in CB
b) Deduct Rs.1000 in CB
c) Add Rs.2000 in cash book
d) Deduct Rs.2000 in CB
Undercasting of the credit side of Cash Book has the same effect as
overcasting of the–
• Debit side of the pass book.
• Credit side of the pass book.
• There is no relevance between the two
 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

(1) Rs. 5000 paid as wages for installing the machinery should be
debited to-----
 Wages A/c
 Machinery a/c
 Capital A/c
 None of the above
(2) 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

(1) Rs. 5000 paid as wages for installing the machinery should be
debited to-----
 Wages A/c
 Machinery a/c
 Capital A/c
 None of the above
(2) 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
 Credit 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
 Freight expenses for carrying New Machinery is carried to
Traveling Exp. a/c. Choose the correct rectification entry
i. Debit machinery a/c and credit Traveling Exp a/c.
ii. Credit machinery a/c and debit Freight Exp a/c
iii. Credit profit and loss account and debit Freight Exp a/c.
iv. Debit profit and loss a/c( P&L a/c) and credit Traveling Exp
a/c.
 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 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) Expenditure incurred in acquiring the patents rights

for the business is an example of ----
a. Capital expenditure
b. Deferred revenue expenditure
c. Revenue expenditure
(4) Professional fees paid in connection with acquisition of
leasehold premises is----
a. Capital expenditure
b. Deferred revenue expenditure
c. Revenue expenditure
 Examples

(5)Preliminary expenses , discount allowed on

issue of shares are the examples of
a. Capital expenditure
b. Deferred revenue expenditure
c. Revenue expenditure
(6) 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 IS SIMILAR TO LIFO. CLOSING

STOCK IS ALWAYS AT COST AT THE BEGINNING OF
BUSINESS. IN TIMES OF INFLATION VERY LOW VALUE
OF STOCK MAKES FOR EXCELLENT ACCOUNTING.
IT HOWEVER REQUIRES A MINIMUM STOCK TO BE
MAINTAINED.

 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.
 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.
 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 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

 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.
 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) (scroll down)

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 scroll down
(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.
 FINAL LEG
THANK YOU VERY MUCH
 END
ANY QUERIES MAY BE ADDRESSED
TO

lalithambiga@rediffmail.com