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Accounting & Finance For Bankers
Accounting & Finance For Bankers
Accounting
&
Finance for
Bankers
( As per NEW UPDATED SYALLABUS For
JAIIB/ Diploma in Banking & Finance
Examination)
An attempt has been made to cover fully the syllabus prescribed for each
module/subject and the presentation of topics may not always be in the same
sequence as given in the syllabus. Candidates are also expected to take note of all
the latest developments relating to the subjects covered in the syllabus by referring
to RBI circulars, financial papers, economic journals, latest books and publications in
the subjects concerned.
Although due care has been taken in publishing this study material, yet the possibility
of errors, omissions and/or discrepancies cannot be ruled out.
We welcome suggestion for improving the book and its contents. You may write back
to us at admin@jaiibcaiib.co.in
Vaibhav Awasthi, has experience of 10 years in Banking. He has done his graduation
from Kanpur University and MBA (Finance) from Delhi. He also holds the distinction of
being part of maiden batch of “Certified Banking Compliance Professional” conducted
by IIBF.
He has been mentoring students for JAIIB/CAIIB since last 8 years and presently
works in middle management of leading Public Sector Bank.
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manner whatsoever.
To the thought
“Jodi Tor Dak Shune Keu Na Ashe Tobe Ekla Cholo Re”
Module A
Business Mathematics
& Finance
Unit -1 Calculation of Interest and annuities
Money has time value. As time passes it earns interest. First amongst it is simple
interest
SI = 𝑃 ∗ 𝑅 ∗ 𝑇
Another concept is compound interest; Compound interest means you start earning
interest on the interest portion also.
A= ∗ (1 + 𝑟)𝑛 ; where r is rate of interest and n is the time period. Please note that
this formula is used if compounding is done annually, if compounding is to be done
semiannually or quarterly for any period rate would be divided by that period and
time be multiplied. Let us understand this through an example
Calculation of annuities
Annuity means series of equal payments. Suppose you start a RD and deposit and
Rs2000 monthly that is a form of annuity where series of amount i.e. Rs2000 is
involved.
Another example is you pay Rs 50000 per year in the form of rent for next 10 years.
This is another type of annuity.
What you need to keep in mind that series of equal should be involved to qualify it as
an annuity.
Now there are two concepts- Ordinary annuity and Annuity due. If cash flows occur
at the end of the period it is called ordinary annuity and if they occur at the start of
the period it is called annuity due. So if you pay 50,000 at the end of every year it will
be ordinary annuity but if you pay 50,000 at the beginning of every year it will be
annuity due.
Future Value of ordinary annuity:
Understand the concept of future value and present value. For example, if you are
investing Rs 50,000 each year, at the end of every year, for next 5 years at 10 %
rate of interest what amount you will get at the end of the 5th year?
Using the above formula we will get the answer of above questions
(𝟏+.𝟏𝟎)𝟓 −𝟏
FV = 50,000 ⌊ ⌋ = Rs3,05,255
𝟎.𝟏𝟎
So if you invest Rs50, 000 total amount invested will be Rs50, 000 and interest
earned on that will be Rs 55,255.
Question 1: If you deposit Rs16, 000 per year for 12 years (each deposit is made at
the end of each year) in an account that pays an annual interest rate of 14%, what
will your account be worth at the end of 12 years?
Question 2. How much will an ordinary annuity of Rs 650 per year be worth in eight
years at an annual interest rate of 8 percent?
Question 3: How much must you deposit at the end of each year in an account that
pays an annual interest rate of 20 percent, if at the end of 5 years you want
Rs10,000 in the account?
Bonds are debt instruments. They show indebtedness. To understand it simply let’s
say a company ABC Limited wants to borrow Rs 1 lakh for 3 years from the market
i.e. from common public. One way to do is by issuing bonds of Rs 1000 each. In this
way 100 bonds will be floated in the market. But why will someone pay Rs 1000 and
get it blocked for 3 years? Simple he must be paid something for it i.e. interest. The
interest paid on these bonds is called coupon. ABC decides coupon will be 8 %. So
by investing in this bond what will an investor get? He will get Rs 80 during first year
(coupon payment) Rs 80 during second year (coupon payment of next year) and Rs
1080 during third and last year (coupon payment along with repayment of principal
amount). Thus an investor would get total Rs 1240 in 3 years.
So would you invest in this bond? Answer lies in many things one of the most
important being what is the rate of interest in market offered by other such bonds.
And this market rate of interest is called market yield. How this market yield affects
bond prices is the most important learning outcome of this chapter.
Suppose market yield is 7 %. This means if you invest your money it will grow at 7 %
but if you invest your money in this bond it will grow at 8 % i.e. more than market rate
of interest. From this we can start finding the price of a bond. A bond which is giving
more than others how much should it be valued?
Value of bond or for that matter any financial instrument depends upon its cash flow.
How much it is paying back. From above we saw that it was paying back Rs 1240.
But those 1240 will come in 3 years, how much that money is valued now should be
the price of the bond. For seeing how much bond is valued, the cash flow should be
discounted. Discounted means their present value which is simply the cash flow
divided by market rate of interest.
80 80 1080
So value of bond will be + (1.07)2 +
1.07 (1.07)3
In the above question we need to find this r. Remember there is no direct formula to
solve this. Only procedure for calculating YTM is trial and error. Assume a rate of
interest and find the value. If value comes less than market value increase discount
rate, if it is more than market value reduce rate of interest.
( Note for candidates: During examination if question is asked to find YTM, avoid
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Module – B
Principles of Book
Keeping
Unit 7 Basic accounting Procedures
(iii) Going concern: The concept of going concern assumes that a business firm
would continue to carry out its operations indefinitely, i.e. for a fairly long period
of time and would not be liquidated in the foreseeable future. This is an important
assumption of accounting as it provides the very basis for showing the value of
assets in the balance sheet.
(iv) Accounting period: Accounting period refers to the span of time at the end of
which the financial statements of an enterprise are prepared, to know whether
it has earned profits or incurred losses during that period and what exactly is
the position of its assets and liabilities at the end of that period.
(v) Cost concept: The cost concept requires that all assets are recorded in the
book of accounts at their purchase price, which includes cost of acquisition,
transportation, installation and making the asset ready to use.
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Practice Questions -1
2)Using "lower of cost and net realisable value" for the purpose of inventory
valuation is the implementation of which of the following concepts?
A) The going concern concept
B) The septate entity concept
C) The prudence concept
D) Matching concept
A) Sole proprietorship
B) Corporation
C) Partnership
D) All of them
A) Yes
B) No
C) To some extent
D) It depends on the type of business
In this unit we will see how business records various transactions which it makes.
So if Kaynat is doing this business, daily she will be involved in many transactions.
On a typical day her transactions may look like this
So how will she keep tab of all these transactions? One way is to maintain a diary,
this diary known as Journal (a French word means a diary recording events). So
Kaynat will record all these transactions in a diary. Now suppose daily she indulges
in all these transactions, how she will keep record of how much TVs have been sold,
how much purchased, how much rent paid or wages paid?
So to ease this process she will make a register for all the heads (e.g. salary,
electricity, XYZ a/c, ZZZ a/c) this register is what it is called Ledger.
Now you understand the concept of Journal and Ledger? While journal is the original
book of entry, ledger is made for each and every account and after posting an entry
into a ledger same is transferred to a ledger.
However, there are rules for how to write entry into the ledger. Foremost amongst is
to classify all the accounts.
(i) Real account- includes things which can be seen and touched examples.
Land, building ,machinery, stocks, cash etc
(ii) Nominal account- includes all expenses and gains. For e.g. discount
paid, rent paid, commission received
(iii) Personal account- includes all accounts dealing with person. For e.g.
Debtors, creditors, capital a/c.
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Let’s understand through example
Here goods are purchased. Remember one thing Furniture was an asset.
Assets are always represented in their name in the books of account. Goods
are something which a traders deal in and thus they are represented by
goods. Here we need to remember these goods are either purchased or sold
and thus purchase and sales accounts are shown in the book. For this entry it
means goods are coming in and cash has been paid. Goods are real account,
cash also real account so entry is
Purchases a/c …. Dr Rs 2000
To cash a/c Rs 2000
Practice Set - I
1)The closing balance of petty cash book is considered as
A) Liability
B) Asset
C) Expenses
D) Income
A) Receipts
B) Payments
C) Income
D) Expense
Module C
Final Accounts
Unit 14 Preparation of final accounts
The transactions of a business enterprise for the accounting period are first recorded
in the books of original entry, then posted therefrom into the ledger and lastly tested
as to their arithmetical accuracy with the help of trial balance. After the preparation of
the trial balance, every businessman is interested in knowing about two more facts.
They are : (i) Whether he
has earned a profit or suffered a loss during the period covered by the trial balance,
and (ii) Where does he stand now? In other words, what is his financial position?
For the above said purposes, the businessman prepares financial statements for his
business i.e. he prepares the Trading and Profit and Loss Account and Balance
Sheet at the end of the accounting period. These financial statements are popularly
known as final accounts.
The preparation of financial statements depends upon whether the business concern
is a trading concern or manufacturing concern. If the business concern is a trading
concern, it has to prepare the following accounts along with the
Balance Sheet:
(i) Trading Account; and
(ii) Profit and Loss Account.
But, if the business concern is a manufacturing concern, it has to Prepare the
following accounts along with the Balance Sheet:
(i) Manufacturing Account;
(ii) Trading Account ; and
(iii) Profit and Loss Account.
Basically, two types of statements are prepared namely "Income Statement" and
'Position Statement". The Income Statement is generally known as Profit and Loss
Account. This Profit and Loss Account is further sub-divided either into three parts or
two parts according to the nature of the business. As stated above, if the concern is
a manufacturing one, the
Profit and Loss Account is divided into three sub-sections viz, Manufacturing
Account, Trading Account and Profit and Loss Account.
On the other hand, if it is a trading concern, then this account is divided into two sub-
sections, namely Trading Account and Profit and Loss Account. The second
statement i.e. the "Position Statement" which is popularly known as the "Balance
Sheet" is prepared by every type of business concern.
The Balance Sheet is a statement which shows the position of the assets, liabilities
and capital in money terms, of an accounting entity as on a given date. A Balance
Sheet is a formal representation of the accounting equation indicating that the assets
are always equal, in value, to the liabilities plus capital.
Trading Account is prepared to know the Gross Profit or Gross Loss. Profit and Loss
Account discloses net profit or net loss of the business. Balance sheet shows the
financial position of the business on a given date.
For preparing final accounts, certain accounts representing incomes or expenses are
closed either by transferring to Trading Account or Profit and Loss Account. Any
Account which cannot find a place in any of these two accounts goes to the Balance
Sheet.
TRADING ACCOUNT
After the preparation of trial balance, the next step is to prepare Trading Account.
Trading Account is one of the financial statements which shows the result of buying
and selling of goods and/or services during an accounting period. The main objective
of preparing the Trading Account is to ascertain gross profit or gross loss during the
accounting period. Gross Profit is said to have been made when the sale proceeds
exceed the cost of goods sold. Conversely, when sale proceeds are less than the
cost of goods sold, gross loss is incurred.
For the purpose of calculating cost of goods sold, we have to take into consideration
opening stock, purchases, direct expenses on purchasing or manufacturing the
goods and closing stock. The balance of this account i.e. gross profit or gross loss is
transferred to the Profit and Loss Account.
CLASSIFICATION OF RATIOS
Ratios can be classified into five broad groups : (i) Liquidity ratios (ii) Activity ratios
(iii) Leverage/Capital structure ratios (iv) Coverage ratios (v) Profitability ratios.
Liquidity Ratios : Liquidity refers to the ability of a firm to meet its current
obligations as and when they become due. The importance of adequate liquidity in
the sense of the ability of a firm to meet current/short-term obligations when they
become due for payment can hardly be overstressed. The ratios which indicate the
liquidity of a firm are (i) net working capital, (ii) current ratio, (iii) acid test/quick ratio
1. Net Working Capital : The first measurement of liquidity of a firm is to compute its
Net Working capital (NWC). NWC is really not a ratio, it is frequently employed as a
measure of a company's liquidity position. NWC represents the excess of current
assets over current liabilities. A firm should have sufficient NWC in order to be able
to meet the claims of the creditors and the day-to-day needs of business.
2. Current Ratio : Current ratio is the most common ratio for measuring liquidity.
Being related to working capital analysis, it is also called the working capital ratio.
The current ratio is the ratio of total current assets to total current liabilities.
Current Ratio = Current Assets
Current Liabilities
If the result is greater than 1, the firm presumably has sufficient current assets to
meet its current liabilities. A ratio of 2:1 (two times current assets of current liabilities)
is considered satisfactory as a rule of thumb. Thus, a good current ratio, in a way,
provides a margin of safety to the creditors.
3. Acid-Test/Quick Ratio: The term quick assets refers to current assets which can
be converted into cash immediately or at a short notice without diminution of value.
Included in this category of current assets are (i) cash and bank balances; (ii) short-
term marketable securities and (iii) debtors/receivables. Thus, the current assets
which are excluded are: prepaid expenses and inventory. The exclusion of inventory
is based on the reasoning that it is not easily and readily convertible into cash.
Prepaid expenses by their very nature are not available to pay off current debts. An
acid-test ratio of 1:1 or greater is recommended.
Illustration 1 : From the following information regarding current assets and current
liabilities of a firm, comment upon the liquidity of the concern :
Current Assets: Rs.
Cash 50,000
Debtors 20,000
Bills Receivables 15,000
Stock 35,000
Investment in Govt. Securities 25,000
Prepaid Expenses 10,000
Current Liabilities:
Trade Creditors 27,000
Bills Payable 12,000
Outstanding Expenses 5,000
Provision for Taxation 18,000
Bank Overdraft 10,000
Solution :
(1) Current Ratio = 2.15 : 1 (2) Quick Ratio = 1.53: 1
Illustration 2
The current ratio is 2:1. State giving reasons which of the following
transactions would improve, reduce and not change the current ratio:
( a ) Repayment of current liability;
( b ) Purchased goods on credit;
( c ) Sale of an office typewriter (Book value – Rs. 4,000) for Rs. 3,000 only;
( d ) Sale of merchandise (goods) costing Rs. 10,000 for Rs. 11,000;
( e ) Payment of dividend.
Solution
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The term banking is defined as per Sec 5(i) (b), as acceptance of deposits of money
from the public for the purpose of lending and/or investment. Such deposits can be
repayable on demand or otherwise and withdrawable by means of cheque, drafts,
order or otherwise.
Sec 5 (i)(c) defines a banking company as any company which handles the
business ofbanking. Licence to bank is granted under Sec 22 of the BR act by RBI.
The forms of business permissible under Section 6(1) of the Banking Regulation
Act, apart from banking
(i) borrowing raising money (ii) lending (iii) bill discounting negotiating (iv) L/C
(v)Foreign Exchange (vi) buying and selling bonds (vii) safe deposit va ults (viii)
banker to govt. (ix) Guarantee business (x) acquire and manage building for its
own use (xi) undertake the administration of estates as executor, trustee (xii)
any other business specified by central govt.
Banks have also been permitted to undertake para banking activities. and can
undertake certain eligible financial services or para-banking activities either
departmentally or by setting up subsidiaries. Banks may form a subsidiary
company for undertaking the types of businesses which a banking company is
otherwise permitted to undertake, with prior approval of Reserve Bank of India.
Need for clear operating instructions in Bank: Banks are engaged in complex
transactions involving huge cash handling and transfers. Often these
transactions take place at varied branch locations and through electronic mode
and with use of new technologies. All this require presence of clear
instructions and rules for smooth operations
Manuals are in nature of guide based on same legal framework and bring in
one place important aspects of banking functions at one place for reference. It
should be updated regularly to keep it relevant. It contains details about
opening of accounts, handling cash, clearing ,loans and advances,
remittances, KYC etc.
Unit 21 Operational Aspects of KYC Customer service
Cash transaction of Rs. 10.00 lac and above: Branches are required to record
and report all individual cash deposits and withdrawals of Rs. 10.00 lac and
above in deposits, cash credit and overdraft accounts etc.
Customers that are likely to pose a higher than average risk to the bank may be
categorized as medium or high risk depending on customer’s background, nature
and location of activity, country of origin, sources of funds and his client profile etc;
such as:
a) Persons in business/industry or trading activity where the area of his residence
or place of business has a scope or history of unlawful trading/business activity.
b) Where the client profile of the person/s opening the account, according to the
perception of the branch is uncertain and/or doubtful/dubious.
The branches may apply enhanced due diligence measures based on the risk
assessment, thereby requiring intensive ‘due diligence’ for higher risk customers,
especially those for whom the sources of funds are not clear. The examples of
customers requiring higher due diligence may include
The persons requiring very high level of monitoring may be categorized as Level
IV.
Officially valid documents (OVDs) for KYC purpose include: Passport, driving
licence, voters’ ID card, PAN card, Aadhaar letter issued by UIDAI and Job Card
issued by NREGA signed by a State Government official.
To further ease the process, the information containing personal details like name,
address, age, gender, etc., and photographs made available from UIDAI as a result
of e-KYC process can also be treated as an ‘Officially Valid Document’.
This was a sample preview. The book has been prepared keeping in
view the updated syllabus of JAIIB from May 2015 onwards and efforts
have been made to incorporate all the new topics which have been
added in the revised syllabus.