1.

INTRODUCTION TO ACCOUNTING

Contents
1.0 Aims and Objectives
1.1 Introduction
1.2 Book- Keeping
1.2.1 Meaning
1.2.2 Definition
1.2.3 Objectives
1.3 Accounting
1.3.1 Meaning
1.3.2 Definition
1.3.3 Objectives
1.3.4 Importance
1.3.5 Functions
1.3.6 Advantages
1.3.7 Limitations
1.4 Methods of Accounting
1.4.1 Single Entry
1.4.2 Double Entry
1.4.3 Steps involved in double entry system
1.4.4 Advantages of double entry system
1.5 Meaning of Debit and Credit
1.6 Types of Accounts and its rules
1.6.1 Personal Accounts
1.6.2 Real Accounts
1.6.3 Nominal Accounts
1.7 Distinction between Book Keeping and Accounting
1.8 Branches of Accounting
1.8.1 Financial Accounting
1.8.2 Cost Accounting
1.8.3 Management Accounting
1.9 Let us Sum Up
1.10 References

1.0 AIMS AND OBJECTIVES

i) To know the Meaning, Definition and objective of Book- Keeping
ii) To study the objectives, functions, importance and limitations of Accounting
iii) To understand the methods of Accounting, kinds of Accounts and Accounting
rules.
iv) To study the difference between Book- keeping and Accounting
v) To study the various branches of Accounting

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1.1 INTRODUCTION
In all activities (whether business activities or non-business activities) and in all
organizations (whether business organizations like a manufacturing entity or trading entity
or non-business organizations like schools, colleges, hospitals, libraries, clubs, temples,
political parties) which require money and other economic resources, accounting is
required to account for these resources. In other words, wherever money is involved,
accounting is required to account for it. Accounting is often called the language of business.
The basic function of any language is to serve as a means of communication. Accounting
also serves this function.

1.2. MEANING AND DEFINITION OF BOOK- KEEPING

1.2.1 Meaning
Book- keeping includes recording of journal, posting in ledgers and balancing of accounts. All
the records before the preparation of trial balance is the whole subject matter of book-
keeping. Thus, book- keeping may be defined as the science and art of recording
transactions in money or money‟s worth so accurately and systematically, in a certain set of
books, regularly to ascertain the true state of businessman‟s affairs. Here it is important to
note that only those transactions related to business are recorded which can be expressed in
terms of money.

1.2.2 Definition
“Book- keeping is the art of recording business transactions in a systematic manner”. A.H.Rosen
Kempff.

“Book- keeping is the science and art of correctly recording in books of account all those
business transactions that result in the transfer of money or money‟s worth”. R.N.Carter

1.2.3 Objectives of Book- keeping

i) Book- keeping provides a permanent record of each transactions.
ii) Soundness of a firm can be assessed from the records of assets and abilities on a
particular date.
iii) Entries related to incomes and expenditures of a concern facilitate to know the
profit and loss for a given period.
iv) It enables to prepare a list of customers and suppliers to ascertain the amount to be
received or paid.
v) It is a method gives opportunities to review the business policies in the light of the
past records.
vi) Amendment of business laws, provision of licenses, assessment of taxes etc., are
based on records.

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1.3 ACCOUNTING
1.3.1 Meaning of Accounting
Accounting is a wider term and includes recording, classifying and summarizing of
business transactions in terms of money, preparation of financial report and analysis and
interpretation of these reports for the information and guidance of the Management. Book
keeping is the elementary stage and accounting is its advanced state. Book keeping is
concerned only with the recording, classifying and summarizing of business transactions.
Accounting includes analysis and interpretation of records maintained in book-keeping.
So the scope of accounting is broad and book keeping is also a part of it.

1.3.2 Definition of Accounting

American Institute of Certified Public Accountants (AICPA) which defines accounting as
“the art of recording, classifying and summarizing in a significant manner and in terms of
money, transactions and events, which are, in part at least of a financial character and
interpreting the results thereof”.

1.3.3 Objective of Accounting

Objective of accounting may differ from business to business depending upon their specific
requirements. However, the following are the general objectives of accounting.
i) To maintain systematic record: It is very difficult to remember all the business
transactions that take place. Accounting serves this purpose of record keeping by
promptly recording all the business transactions in the books of account.

ii) To ascertain the results of the operation: Accounting helps in ascertaining

result i.e., profit earned or loss suffered in business during a particular period. For this
purpose, a business entity prepares either a Trading and Profit and Loss account or an
Income and Expenditure account which shows the profit or loss of the business by
matching the items of revenue and expenditure of the same period.

iii) To ascertain the financial position of the business: In addition to profit, a

businessman must know his financial position i.e., availability of cash, position of assets
and liabilities etc. This helps the businessman to know his financial strength. Financial
statements are barometers of health of a business entity.

iv) To portray the liquidity position: Financial reporting should provide

information about how an enterprise obtains and spends cash, about its borrowing and
repayment of borrowing, about its capital transactions, cash dividends and other
distributions of resources by the enterprise to owners and about other factors that may affect
an enterprise’s liquidity and solvency.

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v) To protect business properties: Accounting provides upto date information
about the various assets that the firm possesses and the liabilities the firm owes, so that
nobody can claim a payment which is not due to him.

vi) To facilitate rational decision making: Accounting records and financial

statements provide financial information which help the business in making rational
decisions about the steps to be taken in respect of various aspects of business.

vii) To satisfy the requirements of law: Entities such as companies, societies,

public trusts are compulsorily required to maintain accounts as per the law governing their
operations such as the Companies Act, Societies Act, and Public Trust Act etc. Maintenance
of accounts is also compulsoryunder the Sales Tax Act and Income Tax Act.

1.3.4 Importance of Accounting

Accounting as an information system, is very helpful to parties interested in it, such as owners,
Management, Creditors, Investors, Employees, Government, Research Scholars etc.

i) Owners: The owners provide funds or capital for the organization. They possess
curiosity in knowing whether the business is being conducted on sound lines or not and
whether the capital is being deployed properly or not. Owners, being businessmen, always
keep an eye on the returns from the investment. Comparing the accounts of various years
helps in getting good pieces of information.

ii) Management: The management of the business is greatly interested in knowing the
position of the firm. The accounts are the basis and the management can study the merits
and demerits of the business activity. Thus, the management is interested in financial
accounting to find whether the business carried on is profitable or not. The financial
accounting is the “eyes and ears of management and facilitates in drawing future course of
action, further expansion etc.”

iii) Creditors: Creditors are the persons who supply goods on credit, or bankers or
lenders of money. It is usual that these groups are interested to know the financial
soundness before granting credit. The progress and prosperity of the firm to which credits
are extended, are largely watched by creditors from the point of view of security and further
credit. Profit and Loss Account and Balance Sheet are nerve centres to know the soundness
of the firm.
iv) Employees: Payment of bonus depends upon the size of profit earned by the firm.
The more important point is that the workers expect regular income for the bread. The
demand for wage rise, bonus, better working conditions etc., depend upon the profitability of
the firm and in turn depends upon financial position. For these reasons, this group is interested in
accounting.
v) Investors: The prospective investors, who want to invest their money in a firm, of
course wish to see the progress and prosperity of the firm, before investing their amount,
by going through the financial statements of the firm. This is to safeguard the investment. For
this, this group is eager to go through the accounting which enables them to know the safety
of investment.
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vi) Government: Government keeps a close watch on the firms which yield good
amount of profits. The State and Central Governments are interested in the financial
statements to know the earnings for the purpose of taxation. To compute national income,
frame business policies and to assess tax liability, accounting is essential.

vii) Consumers: These groups are interested in getting the goods at reduced price.
Therefore, they wish to know the establishment of a proper accounting control, which in
turn will reduce to cost of production, in turn less price to be paid by the consumers.
Researchers are also interested in accounting for interpretation.

viii) Research Scholars: Accounting information, being a mirror of the financial

performance of a business organization, is of immense value to the research scholar who
wants to make a study into the financial operations of a particular firm. To make a study
into the financial operations of a particular firm, the research scholar needs detailed
accounting information relating to purchases, sales, expenses, cost of materials used,
current assets, current liabilities, fixed assets, long-term liabilities and share-holders funds
which is available in the accounting records maintained by the firm.

1.3.5 Functions of Accounting

i) Record Keeping: The primary function of accounting relates to recording,
classification and summary of financial transactions - journalization, posting, and
preparation of final statements. These facilitate to know operating results and financial
positions. The purpose of this function is to report regularly to the interested parties by
means of financial statements. Thus accounting performs historical function i.e., attention
on the past performance of a business; and this facilitates decision making programme for
future activities.
ii) Managerial Function: Decision making programme is greatly assisted by
accounting. The managerial function and decision making programmes, without
accounting, may mislead. The day-to-day operations are compared with some
predetermined standard. The variations of actual operations with pre-determined
standards and their analysis is possible only with the help of accounting.
iii) Legal Requirement function: Auditing is compulsory in case of registered firms.
Auditing is not possible without accounting. Thus accounting becomes compulsory to comply
with legal requirements. Accounting is a base and with its help various returns, documents,
statements etc., are prepared.

iv) Language of Business: Accounting is the language of business. Various

transactions are communicated through accounting. There are many parties- owners,
creditors, government, employees etc., who are interested in knowing the results of the firm
and this can be communicated only through accounting. The accounting shows a real and
true position of the firm or the business.

1.3.6 Advantages of Accounting

The following are the advantages of accounting to a business:
i) It helps in having complete record of business transactions.
ii) It gives information about the profit or loss made by the business at the close of a
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 year and its financial conditions. The basic function of accounting is to supply
meaningful information about the financial activities of the business to the
owners and the managers.
iii) It provides useful information form making economic decisions,
iv) It facilitates comparative study of current year’s profit, sales, expenses etc., with
those of the previous years.
v) It supplies information useful in judging the management’s ability to utilise
enterprise resources effectively in achieving primary enterprise goals.
vi) It provides users with factual and interpretive information about transactions
and other events which are useful for predicting, comparing and evaluating the
enterprise’s earning power.
vii) It helps in complying with certain legal formalities like filing of income tax and sales-
tax returns. If the accounts are properly maintained, the assessment of taxes is
greatly facilitated.

1.3.7 Limitations of Accounting

i) Accounting is historical in nature: It does not reflect the current financial position
or worth of a business.
ii) Transactions of non-monetary nature do not find place in accounting. Accounting is
limited to monetary transactions only. It excludes qualitative elements like
management, reputation, employee morale, labour strike etc.
iii) Facts recorded in financial statements are greatly influenced by accounting
conventions and personal judgements of the Accountant or Management. Valuation
of inventory, provision for doubtful debts and assumption about useful life of an
asset may, therefore, differ from one business house to another.
iv) Accounting principles are not static or unchanging-alternative accounting
procedures are often equally acceptable. Therefore, accounting statements do not
always present comparable data
v) Cost concept is found in accounting. Price changes are not considered. Money value is
bound to change often from time to time. This is a strong limitation of accounting.
vi) Accounting statements do not show the impact of inflation.
vii) The accounting statements do not reflect those increase in net asset values that are
not considered realized.

1.4 Methods of Accounting

Business transactions are recorded in two different ways.
1.4.1 Single Entry
1.4.2 Double Entry
1.4.1. Single Entry: It is incomplete system of recording business transactions. The
business organization maintains only cash book and personal accounts of debtors and
creditors. So the complete recording of transactions cannot be made and trial balance
cannot be prepared.

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1.4.2 Double Entry: In this system every business transaction is having a two fold
effect of benefits giving and benefit receiving aspects. The recording is made on the basis of
both these aspects. Double Entry is an accounting system that records the effects of
transactions and other events in at least two accounts with equal debits and credits.

1.4.3 Steps involved in Double entry system

(a) Preparation of Journal: Journal is called the book of original entry. It records the
effect of all transactions for the first time. Here the job of recording takes place.
(b) Preparation of Ledger: Ledger is the collection of all accounts used by a business.
Here the grouping of accounts is performed. Journal is posted to ledger.

(c) Trial Balance preparation: Summarizing. It is a summary of ledger balances

prepared in the form of a list.
(d) Preparation of Final Account: At the end of the accounting period to know the
achievements of the organization and its financial state of affairs, the final accounts are
prepared.

1.4.4 Advantages of Double Entry System

i) Scientific system: This system is the only scientific system of recording business
transactions in a set of accounting records. It helps to attain the objectives of accounting.

ii) Complete record of transactions: This system maintains a complete record of

all business transactions.
iii) A check on the accuracy of accounts: By use of this system the accuracy of
accounting book can be established through the device called a Trial balance.
iv) Ascertainment of profit or loss: The profit earned or loss suffered during a
period can be ascertained together with details by the preparation of Profit and Loss
Account.
v) Knowledge of the financial position of the business: The financial position
of the firm can be ascertained at the end of each period, through the preparation of balance
sheet.

vi) Full details for purposes of control: This system permits accounts to be
prepared or kept in as much detail as necessary and, therefore, affords significant
information for purposes of control etc.

vii) Comparative study is possible: Results of one year may be compared with
those of the previous year and reasons for the change may be ascertained.
viii) Helps management in decision making: it facilitates the management to
obtain good information for its work, especially for making decisions.

ix) No scope for fraud: The firm is saved from frauds and misappropriations since full
information about all assets and liabilities will be available.

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1.5 Meaning of Debit and Credit
The term “debit‟ is supposed to have derived from “debit‟ and the term “credit‟ from
“creditable‟. For convenience “Dr‟ is used for debit and “Cr‟ is used for credit. Recording of
transactions require a thorough understanding of the rules of debit and credit relating to
accounts. Both debit and credit may represent either increase or decrease, depending upon
the nature of account.

1.6 Types of Accounting

Types of Accounts
The object of book-keeping is to keep a complete record of all the transactions that took place
in the business. To achieve this object, business transactions have been classified into three
categories:
i) Transactions relating to persons.
ii) Transactions relating to properties and assets
iii) Transactions relating to incomes and expenses.
The accounts falling under the first heading are known as “personal Accounts‟. The accounts
falling under the second heading are known as “Real Accounts‟, The accounts falling under
the third heading are called “Nominal Accounts‟.

The accounts can also be classified as personal and impersonal. The following chart will
show the various types of accounts:

1.6.1 Personal Accounts: Accounts recording transactions with a person or group of

persons are known as personal accounts. These accounts are necessary, in particular, to
record credit transactions. Personal accounts are of the following types:
(a) Natural persons: An account recording transactions with an individual human
being is termed as a natural persons‟ personal account. eg., Kamal’s account, Mala’s
account, Sharma’s accounts. Both males and females are included in it

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(b) Artificial or legal persons: An account recording financial transactions with an
artificial person created by law or otherwise is termed as an artificial person, personal
account, e.g. “Firms accounts, limited companies accounts, educational institutions accounts,
Co-operative society account.
(c) Groups/Representative personal Accounts: An account indirectly
representing a person or persons is known as representative personal account. When
accounts are of a similar nature and their number is large, it is better to group them under
one head and open a representative personal accounts. e.g., prepaid insurance, outstanding
salaries, rent, wages etc. When a person starts a business, he is known as proprietor. This
proprietor is represented by capital account for all that he invests in business and by
drawings accounts for all that which he withdraws from business. So, capital accounts and
drawings account are also personalaccounts.
The rule for personal accounts is: Debit the receiver
Credit the giver

1.6.2 Real Accounts

Accounts relating to properties or assets are known as ”Real Accounts‟, A separate
account is maintained for each asset e.g., Cash, Machinery, Building, etc., Real accounts can be
further classified into tangible and intangible.

(a) Tangible Real Accounts: These accounts represent assets and properties which
can be seen, touched, felt, measured, purchased and sold. e.g. Machinery account, Cash
account, Furniture account, stock account etc.

(b) Intangible Real Accounts: These accounts represent assets and properties
which cannot be seen, touched or felt but they can be measured in terms of money. e.g.,
Goodwill accounts, patents account, Trademarks account, Copyrights account, etc.
The rule for Real accounts is: Debit what comes in
Credit what goes out
1.6.3 Nominal Accounts
Accounts relating to income, revenue, gain expenses and losses are termed as nominal
accounts. These accounts are also known as fictitious accounts as they do not represent any
tangible asset. A separate account is maintained for each head or expense or loss and gain or
income. Wages account, Rent account Commission account, Interest received account are
some examples of nominal account
The rule for Nominal accounts is: Debit all expenses and losses
Credit all incomes and gains

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1.7 DISTINCTION BETWEEN BOOK-KEEPING AND ACCOUNTING

The difference between book-keeping and accounting can be summarized in a tabular from as
under:
Basis of difference Book-keeping Accounting Transactions
Basis of Book-keeping Accounting
difference
Transactions Recording of To examine these recorded
transactions in books of transactions in order to
original entry find out their accuracy
Posting To make posting in ledger To examine this posting in
order to ascertain its
accuracy
Total and Balance To make total of the amount To prepare trial balance
in journal and accounts of with the help of balances
ledger. To ascertain balance of ledger accounts.
in all the
accounts
Income Statement Preparation of trading, Preparation of
and Balance Profit & loss account and trading, profits and
Sheet balance sheet is not book loss account
keeping. and balance sheet is
included
in it.
Rectification of These are not included in These are included in
errors book- accounting.
keeping
Special skill It does not require any It requires special
and knowledge special skill and knowledge skill and knowledge
as in advanced countries this
work is
done by Machines
Liability A book-keeper is not liable for An accountant is liable
accountancy work. for the work of
bookkeeper

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1.8 BRANCHES OF ACCOUNTING
The changing business scenario over the centuries gave rise to specialized branches of
accounting which could cater to the changing requirements. The branches of accounting
are;
i) Financial accounting;
ii) Costaccounting; and
iii) Management accounting. Now, let
us understand these terms.

1.8.1 Financial Accounting

The accounting system concerned only with the financial state of affairs and financial
results of operations is known as Financial Accounting. It is the original form of
accounting. It is mainly concerned with the preparation of financial statements for the use
of outsiders like creditors, debenture holders, investors and financial institutions. The
financial statements i.e., the profit and loss account and the balance sheet, shows the
manner in which operations of the business have been conducted during a specified period.

1.8.2 Cost Accounting

In view of the limitations of financial accounting in respect of information relating to the
cost of individual products, cost accounting was developed. It is that branch of accounting
which is concerned with the accumulation and assignment of historical costs to units of
product and department, primarily for the purpose of valuation of stock and measurement
of profits. Cost accounting seeks to ascertain the cost of unit produced and sold or the
services rendered by the business unit with a view to exercising control over these costs to
assess profitability and efficiency of the enterprise. It generally relates to the future and
involves an estimation of future costs to be incurred. The process of cost accounting based
on the data provided by the financial accounting.

1.8.3 Management Accounting

It is an accounting for the management, i.e., accounting which provides necessary
information to the management for discharging its functions. According to the Anglo-
American Council on productivity, “Management accounting is the presentation of
accounting information is such a way as to assist management in the creation of policy and
the day-to-day operation of an undertaking.” It covers all arrangements and combinations or
adjustments of the orthodox information to provide the Chief Executive with the
information from which he can control the business, e.g. Information about funds, costs,
profits etc. Management accounting is not only confined to the area of cost accounting but
also covers other areas (such as capital expenditure decisions, capital structure decisions,
and dividend decisions) as well.

1.9 Let us Sum Up

Accounting plays a vital role in the field of commerce and business. One should know the
basic purpose of accounting, its merits, kinds of accounting and rules of accounting. By
studying this lesson one can understand the above said things and need of double entry
system. The next lesson will deal with principles of accounting.

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1.10 References
1. Grewal, T.B, Double Entry Book Keeping.
2. Jain & Narang, Advanced Accountancy.
3. R.L. Gupta, Advanced Accountancy.

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 2. CONCEPT OF ACCOUNTING – BASIS AND ACCOUNTING
TERMINOLOGY

Contents:
2.0 Aims and Objectives
2.1 Introduction
2.2 Accounting concepts and Conventions
2.2.1 Accounting concepts
2.2.2. Accounting Conventions
2.3 Basis of Accounting
2.3.1 Accounting on Cash basis
2.3.2 Accrual Basis of Accounting or Mercantile System
2.3.3 Mixed or Hybrid Basis of Accounting
2.4 Accounting Terminology
2.4.1 Transaction
2.4.2 Debtor
2.4.3 Creditor
2.4.4 Capital
2.4.5 Liability
2.4.6 Asset
2.4.7 Goods
2.4.8 Revenue
2.4.9 Expense
2.4.10 Expenditure
2.4.11 Purchases
2.4.12 Sales
2.4.13 Stock
2.4.14 Drawings
2.4.15 Losses
2.4.16 Account
2.4.17 Invoice
2.4.18 Voucher
2.4.19 Proprietor
2.4.20 Discount
2.4.21 Solvent
2.4.22 Insolvent
2.5 Accounting equation
2.5.1 Rules of Accounting
2.6 Let us Sum Up
2.7 References

2.0 AIMS AND OBJECTIVES

1. To understand the meaning and definition of Accounting
2. To study the basic accounting principles
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3. To know the basis of accounting
4. To understand the accounting terminology and equation

2.1 INTRODUCTION
The word “Principle‟ has been differently viewed by different schools of thought. The
American Institute of Certified Public Accountants (AICPA) has viewed the word “principle‟
as a general law of rule adopted or professed as a guide to action; a settled ground or basis of
conduct of practice. Accounting principles refer to certain rules, procedures and
conventions which represent a consensus view by those indulging in good accounting
practices and procedures. Canadian Institute of Chartered Accountants defined accounting
principle as “the body of doctrines commonly associated with the theory and procedure of
accounting, serving as an explanation of current practices as a guide for the selection of
conventions or procedures where alternatives exist. Rules governing the formation of
accounting axioms and the principles derived from them have arisen from common
experiences, historical precedent, statements by individuals and professional bodies and
regulations of Governmental agencies”. To be more reliable, accounting statements are
prepared in conformity with these principles. If not, chaotic conditions would result. But in
reality as all the businesses are not alike, each one has its own method of accounting.
However, to be more acceptable, the accounting principles should satisfy the following
three basic qualities, viz., relevance, objectivity and feasibility. The accounting principle is
considered to be relevant and useful to the extent that it increases the utility of the records
to its readers. It is said to be objective to the extent that it is supported by the facts and
free from personal bias. It is considered to be feasible to the extent that it is practicable with
the least complication or cost. Though accounting principles are denoted by various terms
such as concepts, conventions, doctrines, tenets, assumptions, axioms, postulates, etc., it
can be classified into two groups, viz., accounting concepts and accounting conventions.

2.2 ACCOUNTING CONCEPTS AND CONVENTIONS

2.2.1 Accounting concepts:
The term “concept‟ is used to denote accounting postulates, i.e., basic assumptions
or conditions upon the edifice of which the accounting super-structure is based. The
following are the common accounting concepts adopted by many business concerns.

i Business Entity Concept

ii Money Measurement Concept
iii Going Concern Concept
iv Dual Aspect Concept
v Periodicity Concept
vi Historical Cost Concept
vii Matching Concept
viii Realization Concept
ix Accrual Concept
x Objective Evidence Concept

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i. Business Entity Concept: A business unit is an organization of persons established
to accomplish an economic goal. Business entity concept implies that the business unit is
separate and distinct from the persons who provide the required capital to it. This concept
can be expressed through an accounting equation, viz., Assets = Liabilities + Capital. The
equation clearly shows that the business itself owns the assets and in turn owes to various
claimants. It is worth mentioning here that the business entity concept as applied in
accounting for sole trading units is different from the legal concept. The expenses, income,
assets and liabilities not related to the sole proprietorship business are excluded from
accounting. However, a sole proprietor is personally liable and required to utilize non-
business assets or private assets also to settle the business creditors as per law. Thus, in
the case of sole proprietorship, business and non-business assets and liabilities are
treated alike in the eyes of law. In the case of a partnership, firm, for paying the business
liabilities the business assets are used first and if any surplus remains thereafter, it can be
used for paying off the private liabilities of each partner. Similarly, the private assets are
first used to pay off the private liabilities of partners and if any surplus remains, it is
treated as part of the firm‟s property and is used for paying the firm‟s liabilities. In the case of
a company, its existence does not depend on the life span of any shareholder.

ii. Money Measurement Concept:

In accounting all events and transactions are recorded in terms of money. Money is
considered as a common denominator, by means of which various facts, events and
transactions about a business can be expressed in terms of numbers. In other words, facts,
events and transactions which cannot be expressed in monetary terms are not recorded in
accounting. Hence, the accounting does not give a complete picture of all the transactions of a
business unit. This concept does not also take care of the effects of inflation because it
assumes a stable value formeasuring.

iii. Going Concern Concept:

Under this concept, the transactions are recorded assuming that the business will
exist for a longer period of time, i.e., a business unit is considered to be a going concern
and not a liquidated one. Keeping this in view, the suppliers and other companies enter into
business transactions with the business unit. This assumption supports the concept of
valuing the assets at historical cost or replacement cost. This concept also supports the
treatment of prepaid expenses as assets, although they may be practically unsaleable.

iv.Dual Aspect Concept:

According to this basic concept of accounting, every transaction has a two-fold
aspect, Viz., 1.giving certain benefits and 2. Receiving certain benefits. The basic principle
of double entry system is that every debit has a corresponding and equal amount of credit.
This is the underlying assumption of this concept. The accounting equation viz., Assets =
Capital + Liabilities or Capital = Assets – Liabilities, will further clarify this concept, i.e., at any
point of time the total assets of the business unit are equal to its total liabilities. Liabilities
here relate both to the outsiders and the owners. Liabilities to the owners are considered
as capital.

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V. Periodicity Concept:
Under this concept, the life of the business is segmented into different periods and
accordingly the result of each period is ascertained. Though the business is assumed to be
continuing in future (as per going concern concept), the measurement of income and
studying the financial position of the business for a shorter and definite period will help in
taking corrective steps at the appropriate time. Each segmented period is called
“accounting period” and the same is normally a year. The businessman has to analyse and
evaluate the results ascertained periodically. At the end of an accounting period, an
Income Statement is prepared to ascertain the profit or loss made during that accounting
period and Balance Sheet is prepared which depicts the financial position of the business
as on the last day of that period. During the course of preparation of these statements capital
revenue items are to be necessarily distinguished.

vi.Historical Cost Concept:

According to this concept, the transactions are recorded in the books of account with
the respective amounts involved. For example, if an asset is purchased, it is entered in the
accounting record at the price paid to acquire the same and that cost is considered to be the
base for all future accounting. It means that the asset is recorded at cost at the time of
purchase but it may be methodically reduced in its value by way of charging depreciation.
However, in the light of inflationary conditions, the application of this concept is considered
highly irrelevant for judging the financial position of the business.

vii.Matching Concept:
The essence of the matching concept lies in the view that all costs which are associated
to a particular period should be compared with the revenues associated to the same period
to obtain the net income of the business. Under this concept, the accounting period concept
is relevant and it is this concept (matching concept) which necessitated the provisions of
different adjustments for recording outstanding expenses, prepaid expenses, outstanding
incomes, incomes received in advance, etc., during the course of preparing the financial
statements at the end of the accounting period.

viii.Realisation Concept:
This concept assumes or recognizes revenue when a sale is made. Sale is considered
to be complete when the ownership and property are transferred from the seller to the buyer
and the consideration is paid in full. However, there are two exceptions to this concept, viz.,
1. Hire purchase system where the ownership is transferred to the buyer when the last
instalment is paid, and 2. Contract accounts, in which the contractor is liable to pay only
when the whole contract is completed, the profit is calculated on the basis of work certified
each year.

ix.Accrual Concept:
According to this concept the revenue is recognized on its realization and not on its
actual receipt. Similarly the costs are recognized when they are incurred and not when
payment is made. This assumption makes it necessary to give certain adjustments in the
preparation of income statement regarding revenues and costs. But under cash accounting
system, the revenues and costs are recognized only when they are actually received or paid.
:: 16 ::
Hence, the combination of both cash and accrual system is preferable to get rid of the
limitations of each system.

x.Objective Evidence Concept:

This concept ensures that all accounting must be based on objective evidence, i.e.,
every transaction recorded in the books of account must have a verifiable document in
support of its existence. Only then, the transactions can be verified by the auditors and
declared as true or otherwise. The verifiable evidence for the transactions should be free
from the personal bias, i.e., it should be objective in nature and not subjective. However, in
reality, the subjectivity cannot be avoided in the aspects like provision for bad and
doubtful debts, provision for depreciation, valuation of inventory, etc., and the accountants
are required to disclose the regulations followed.

2.2.2 Accounting Conventions

The following conventions are to be followed to have a clear and meaningful information
and data in accounting:

i) Consistency:
The convention of consistency refers to the state of accounting rules, concepts,
principles, practices and conventions being observed and applied constantly, i.e., from one
year to another there should not be any change. If consistency is there, the results and
performance of one period can be compared easily and meaningfully with the other. It also
prevents personal bias as the persons involved have to follow the consistent rules,
principles, concepts and conventions. This convention, however, does not completely
ignore changes. It admits changes wherever indispensable and adds to the improved and
modern techniques of accounting.

ii) Disclosure:
The convention of disclosure stresses the importance of providing accurate, full
and reliable information and data in the financial statements which is of material interest
to the users and readers of such statements. This convention is given due legal emphasis by
the Companies Act, 1956 by prescribing formats for the preparation of financial statements.
However, the term disclosure does not mean all information that one desires to get should
be included in accounting statements. It is enough if sufficient information, which is of
material interest to the users, is included.

iii) Conservatism:
In the prevailing present day uncertainties, the convention of conservatism has its
own importance. This convention follows the policy of caution or playing safe. It takes into
account all possible losses but not the possible profits or gains. A view opposed to this
convention is that there is the possibility of creation of secret reserves when conservatism
is excessively applied, which is directly opposed to the convention of full disclosure. Thus,
the convention of conservatism should be applied very cautiously.

2.3 BASIS OF ACCOUNTING

There are three basis of accounting in common usage. Any one of the following basis may be
used to finalise accounts.
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1. Cash basis
2. Accrual or Mercantile basis
3. Mixed or Hybrid basis.

2.3.1 Accounting on Cash basis

Under cash basis accounting, entries are recorded only when cash is received or
paid. No entry is passed when a payment or receipt becomes due. Income under cash basis
of accounting, therefore, represents excess of receipts over payments during an
accounting period. Government system of accounting is mostly on cash basis. Certain
professional people record their income on cash basis, but while recording expenses they
take into account the outstanding expenses also. In such a case, the financial statements
prepared by them for determination of their income are termed as Receipts and
Expenditure Account.

2.3.2 Accrual Basis of Accounting or Mercantile System

Under accrual basis of accounting, accounting entries are made on the basis of
amounts having become due for payment or receipt. Incomes are credited to the period in
which they are earned whether cash is received or not. Similarly, expenses and losses are
detailed to the period in which, they are incurred, whether cash is paid or not. The profit or
loss of any accounting period is the difference between incomes earned and expenses
incurred, irrespective of cash payment or receipt. All outstanding expenses and prepaid
expenses, accrued incomes and incomes received in advance are adjusted while finalising
the accounts. Under the Companies Act 1956, all companies are required to maintain the
books of accounts according to accrual basis of accounting.

2.3.3 Mixed or Hybrid Basis of Accounting

When certain items of revenue or expenditure are recorded in the books of account on
cash basis and certain items on mercantile basis, the basis of accounting so employed is
called „hybrid basis of accounting‟. For example, a company may follow mercantile system of
accounting in respect of its export business. However, government subsidies and duty
drawbacks on exports to be received from government are recorded only when they are
actually received i.e., on cash basis. Such a method could be adopted because of
uncertainty with respect of quantum, amount and time of receipt of such incentives and
drawbacks. Such a method of accounting followed by the company is called the hybrid basis
of accounting. In practice, the profit or loss shown under this basis will not be realistic.
Conservative people who prefer recognising income when received but cautious to
provide for all expenses, whether paid or not prefer this system. It is not widely practised
due to the inconsistency.

2.4 ACCOUNTING TERMINOLOGY

It is necessary to understand some basic accounting terms which are used daily in
business world. These terms are called accounting terminology.

2.4.1 Transaction
“An event, the recognition of which gives rise to an entry in accounting records. It is
an event which results in change in the balance sheet equation. That is, which changes the
value of assets and equity. In a simple statement, transaction means the exchange of money
:: 18 ::
or money’s worth from one account to another account. Events like purchase and sale of
goods, receipt and payment of cash for services or on personal accounts, loss or profit in
dealings etc., are the transactions. Cash transaction is one where cash receipt or payment
is involved in the exchange. Credit transaction, on the other hand, will not have „cash‟
either received or paid, for something given or received respectively, but gives rise to
debtor and creditor relationship. Non-cash transaction is one where the question of receipt
or payment of cash does not at all arise, e.g. Depreciation, return of goods etc.,

2.4.2 Debtor
A person who owes money to the firm mostly on account of credit sales of goods is called a
debtor. For example, when goods are sold to a person on credit that person pays the price
in future, he is called a debtor because he owes the amount to the firm.

2.4.3 Creditor
A person to whom money is owing by the firm is called creditor. For example, Madan is a creditor of
the firm when goods are purchased on credit from him.
2.4.4 Capital
It means the amount (in terms of money or assets having money value) which the proprietor
has invested in the firm or can claim from the firm. It is also known as owner’s equity or
net worth. Owner’s equity means owner’s claim against the assets. It will always be equal to
assets less liabilities, say: Capital = Assets - Liabilities.

2.4.5 Liability
It means the amount which the firm owes to outsiders that is, excepting the proprietors. In
the words of Finny and Miller, “Liabilities are debts; they are amounts owed to creditors;
thus the claims of those who are not owners are called liabilities”. In simple terms, debts
repayable to outsiders by the business are known as liabilities.

2.4.6 Asset
Any physical thing or right owned that has a money value is an asset. In other words, an asset
is that expenditure which results in acquiring of some property or benefits of a lasting
nature.

2.4.7 Goods
It is a general term used for the articles in which the business deals; that is, only those
articles which are bought for resale for profit are known as Goods.

2.4.8 Revenue
It means the amount which, as a result of operations, is added to the capital. It is defined as
the inflow of assets which result in an increase in the owner’s equity. It includes all incomes
like sales receipts, interest, commission, brokerage etc., However, receipts of capital nature
like additional capital, sale of assets etc., are not a part of revenue.

2.4.9 Expense
The terms “expense‟ refers to the amount incurred in the process of earning revenue. If the
benefit of an expenditure is limited to one year, it is treated as an expense (also know is as
revenue expenditure) such as payment of salaries and rent.
:: 19 ::
2.4.10 Expenditure
Expenditure takes place when an asset or service is acquired. The purchase of goods is
expenditure, whereas cost of goods sold is an expense. Similarly, if an asset is acquired during
the year, it is expenditure, if it is consumed during the same year, it is also an expense of
the year.

2.4.11 Purchases
Buying of goods by the trader for selling them to his customers is known as purchases. As
the trade is buying and selling of commodities purchase is the main function of a trade.
Here, the trader gets possession of the goods which are not for own use but for resale.
Purchases can be of two types. viz, cash purchases and credit purchases. If cash is paid
immediately for the purchase, it is cash purchases, if the payment is postponed, it is credit
purchases.

2.4.12 Sales
When the goods purchased are sold out, it is known as sales. Here, the possession and the
ownership right over the goods are transferred to the buyer. It is known as. “Business
Turnover‟ or sales proceeds. It can be of two types, viz.,, cash sales and credit sales. If the
sale is for immediate cash payment, it is cash sales. If payment for sales is postponed, it is
credit sales.

2.4.13 Stock
The goods purchased are for selling, if the goods are not sold out fully, a part of the total
goods purchased is kept with the trader until it is sold out, it is said to be a stock. If there is
stock at the end of the accounting year, it is said to be a closing stock. This closing stock at
the year end will be the opening stock for the subsequent year.

2.4.14 Drawings
It is the amount of money or the value of goods which the proprietor takes for his domestic
or personal use. It is usually subtracted from capital.

2.4.15 Losses
Loss really means something against which the firm receives no benefit. It represents
money given up without any return. It may be noted that expense leads to revenue but
losses do not. (e.g.) loss due to fire, theft and damages payable to others.

2.4.16 Account
It is a statement of the various dealings which occur between a customer and the firm. It can
also be expressed as a clear and concise record of the transaction relating to a person or a
firm or a property (or assets) or a liability or an expense or an income.

2.4.17 Invoice
While making a sale, the seller prepares a statement giving the particulars such as the
quantity, price per unit, the total amount payable, any deductions made and shows the net
amount payable by the buyer. Such a statement is called an invoice.

2.4.18 Voucher
A voucher is a written document in support of a transaction. It is a proof that a particular
:: 20 ::
transaction has taken place for the value stated in the voucher. Voucher is necessary to
audit the accounts.

2.4.19 Proprietor
The person who makes the investment and bears all the risks connected with the business is
known as proprietor.

2.4.20 Discount
When customers are allowed any type of deduction in the prices of goods by the
businessman that is called discount. When some discount is allowed in prices of goods on
the basis of sales of the items, that is termed as trade discount, but when debtors are
allowed some discount in prices of the goods for quick payment, that is termed as cash
discount.

2.4.21 Solvent
A person who has assets with realizable values which exceeds his liabilities is solvent.

2.4.22 Insolvent
A person whose liabilities are more than the realizable values of his assets is called an insolvent.

2.5 ACCOUNTING EQUATION

As indicated earlier, every business transaction has two aspects. One aspect is debited other
aspect is credited. Both the aspects have to be recorded in accounts appropriately.
American Accountants have derived the rules of debit and credit through a “novel‟ medium,
i.e., accounting equation. The equation is as follows:
Assets = Equities
The equation is based on the principle that accounting deals with property and rights to
property and the sum of the properties owned is equal to the sum of the rights to the
properties. The properties owned by a business are called assets and the rights to
properties are known as liabilities or equities of the business. Equities can be subdivided
into equity of the owners which is known as capital and equity of creditors who represent
the debts of the business know as liabilities. These equities may also be called internal
equity and external equity. Internal equity represents the owner’s equity in the assets and
external represents the outsider’s interest in the asset. Based on the bifurcation of equity,
the accounting equation can be restated as follows:
Assets = Liabilities + Capital (Or)
Capital = Assets – Liabilities (Or)
Liabilities = Assets – Capital.
The equation is fundamental in the sense that it gives a foundation to the double entry
book-keeping system. This equation holds good for all transactions and events and at all
periods of time since every transaction and events has two aspects.

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2.5.1 Rules for accounting equation:
Following rules help in making the accounting equation:
(i) Assets: If there is increase in assets, this increase is debited in assets account. If there
is decrease in assets, this decrease is credited in assets account.
(ii) Liabilities: When liabilities are increase, outsider’s equities are credited and when
liabilities are decreased, outsider’s equities are debited.
(iii) Capital: When capital is increased, it is credited and when capital is withdrawn, it
is debited.
(iv) Expenses: Owner’s equity is decreased by the amount of revenue expenses.
(v) Income or profits: Owner’s equity is increased by the amount of revenue income.

2.6 LET US SUM UP

While recording business transaction, one should know the principles of accounting,
concepts and conventions. This chapter elaborately explains the principles which are
needed for consistency in accounting throughout the lifetime of the concern. Accounting
terminologies needed for preparing accounts that also explained clearly.

2.7 REFERENCES
1. Greval, T.B. Double Entry Book Keeping.
2. Jain & Navang – Advanced Accountancy.

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 3. JOURNAL AND LEDGER

Contents:
3.0 Aims and objectives
3.1 Introductions
3.2 Advantages of Journal
3.3 Sub division of journal
3.4 Ledger
3.4.1 Ruling of ledger account
3.4.2 Sub-division of ledger
3.4.3 Distinction between journal and ledger
3.5 Illustrations
3.6 Let us Sum Up
3.7 References

3.0 AIMS AND OBJECTIVES

(i) To understand the meaning of journal and ledger
(ii) To study the advantages and important points of journal
(iii) To know the rules and sub-division of ledger
(iv) To study the distinguishing features between journal and ledger

3.1 INTRODUCTION
When the business transactions take place, the first step is to record the same in the books of
original entry or subsidiary books or books of prime or journal. Thus journal is a simple
book of accounts in which all the business transactions are originally recorded in
chronological order and from which they are posted to the ledger accounts at any
convenient time. Journalizing refers to the act of recording each transaction in the journal
and the form in which it is recorded, is known as a journal entry.

3.2 ADVANTAGES OF JOURNAL

The following are the inherent advantages of using journal, though the transactions can also be
directly recorded in the respective ledger accounts;
1. As all the transactions are entered in the journal chronologically, a date wise record
can easily be maintained;
2. All the necessary information and the required explanations regarding all transactions
can be obtained from the journal; and
3. Errors can be easily located and prevented by the use of journal or book of prime entry.
The specimen journal is as follows:
Debit Credit
Date Particulars L.F.
Rs. Rs.
1 2 3 4 5
- -

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The journal has five columns, viz. (1) Date; (2) Particulars; (3) Ledger Folio;
4) Amount (Debit); and (5) Amount (Credit) and a brief explanation of the transaction by
way of narration is given after passing the journal entry.
(1) Date: In each page of the journal at the top of the date column, the year is written and in
the next line, month and date of the first entry are written. The year and month need not be
repeated until a new page is begun or the month or the year changes. Thus, in this column,
the date on which the transaction takes place is alone written.

(2) Particulars: In this column, the details regarding account titles and description are
recorded. The name of the account to be debited is entered first at the extreme left of the
particulars column next to the date and the abbreviation „Dr.‟ is written at the right
extreme of the same column in the same line. The name of the account to be credited is
entered in the next line preceded by the word “To” leaving a few spaces away from the
extreme left of the particulars column. In the next line immediately to the account credited, a
short description about the transaction is given which is known as “Narration”.
“Narration” may include particulars required to identify and understand the transaction
and should be adequate enough to explain the transaction. It usually starts with the word
“Being” which means what it is and is written within parentheses. The use of the word
“Being” is completely dispense with, in modern parlance. To indicate the completion of the
entry for a transaction, a line is usually drawn all through the particulars column.

(3) Ledger Folio: This column is meant to record the reference of the main book, i.e.,
ledger and is not filled in when the transactions are recorded in the journal. The page number
of the ledger in which the accounts are appearing is indicated in this column, while the debits
and credits are posted to the ledger accounts.
(4) Amount (Debit): The amount to be debited along with its unit of measurement at
the top of this column on each page is written against the account debited.

(5) Amount (Credit): The amount to be credited along with its unit of measurement
at the top of this column on each page is written against the account credited.

3.3 SUB-DIVISION OF JOURNAL

When innumerable number of transactions takes place, the journal, as the sole book of the
original entry becomes inadequate. Thus, the number and the number and type of journals
required are determined by the nature of operations and the volume of transactions in a
particular business. There are many types of journals and the following are the important
ones:
1. Sales Day Book- to record all credit sales.
2. Purchases Day Book- to record all credit purchases.
3. Cash Book- to record all cash transactions of receipts as well as payments.
4. Sales Returns Day Book- to record the return of goods sold to customers
on credit.
5. Purchases Returns Day Book- to record the return of goods purchased from
suppliers on credit.
6. Bills Receivable Book- to record the details of all the bills received.
7. Bills Payable Book- to record the details of all the bills accepted.
:: 24 ::
 8. Journal Proper-to record all residual transactions which do not find place in any
of the aforementioned books of original entry.

3.4 LEDGER

Ledger is a main book of account in which various accounts of personal, real and nominal
nature, are opened and maintained. In journal, as all the business transactions are recorded
chronologically, it is very difficult to obtain all the transactions pertaining to one head of
account together at one place. But, the preparation of different ledger accounts helps to get
a consolidated picture of the transactions pertaining to one ledger account at a time. Thus, a
ledger account may be defined as a summary statement of all the transactions relating to a
person, asset, expense, or income or gain or loss which have taken place during a specified
period and shows their net effect ultimately. From the above definition, it is clear that
when transactions take place, they are first entered in the journal and subsequently posted
to the concerned accounts in the ledger. Posting refers to the process of entering in the
ledger the information given in the journal. In the past, the ledgers were kept in bound
books. But with the passage of time, they became loose-leaf ones and the advantages of the
same lie in the removal of completed accounts, insertion of new accounts and arrangement of
accounts in any required manner.

3.4.1 Ruling of ledger account

The ruling of a ledger account is as follows:

Type- 1
Dr. Cr.
Date Particulars J.F. Rs. Date Particulars J.F. Rs.
To name of the By name of
account to be the account
credited to bedebited

Type- 2

Dr. Cr. Balance

Date Particulars J.F. Dr. / Cr.
Rs. Rs. Rs.
To name of the By name of the
account to be account to be
credited debited

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Ledger Account Type 1 is followed in almost all the business concerns, whereas Type 2 is
followed only in banking institutions to save space, time and clerical work involved.

3.4.2 Sub-division of ledger

In a big business concern, the number of accounts is numerous and it is found necessary to
maintain a separate ledger for customers, suppliers and for others. Usually, the following
three types of ledgers are maintained in such big business concerns.

(i) Debtors’ Ledger: It contains accounts of all customers to whom goods have been sold
on credit. From the Sales Day Book, Sales Returns Book and Cash Book, the entries are
made in this ledger. This ledger is also known as sales ledger.

(ii) Creditors’ Ledger: It contains accounts of all suppliers from whom goods have been
bought on credit. From the Purchases Day Book, Purchases Returns Book and Cash Book,
the entries are made in this ledger. This ledger is also known as Purchase Ledger.
(iii) General Ledger: It contains all the residual accounts of real and nominal nature. It
is also known as Nominal Ledger.

3.4.3 Distinction between journal and ledger

i) Journal is a book of prime entry, whereas ledger is a book of final entry.
ii) Transactions are recorded daily in the journal, whereas posting in the ledger is
made periodically.
iii) In the journal, information about a particular account is not found at one place,
whereas in the ledger information about a particular account is found at one place
only.
iv) Recording of transactions in the journal is called journalising and recording of
transactions in the ledger is called posting.
v) A journal entry shows both the aspects debit as well as credit but each entry in the
ledger shows only one aspect.
vi) Narration is written after each entry in the journal but no narration is given in the
ledger.
vii) Vouchers, receipts, debit notes, credit notes etc., from the basic documents form
journal entry, whereas journal constitutes basic record for ledger entries.

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3.5. ILLUSTRATION
1. Journalise the following transactions in the books of Shankar & Co.

2013 Rs.
June 1 Started business with a capital of 60,000
June 2 Paid into bank 30,000
June 4 Purchased goods from Kamal on credit 10,000
June 6 Paid to Shiram 4,920
June 6 Discount allowed by him 80
June 8 Cash Sales 20,000
June 12 Sold to Hameed 5,000
June 15 Purchased goods from Bharat on credit 7,500
June 18 Paid Salaries 4,000
June 20 Received from Prem 2,480
June 20 Allowed him discount 20
June 25 Withdrew from bank for office use 5,000
June 28 Withdraw for personal use 1,000
June 30 Paid Hanifby cheque 3,000

3.6 LET US SUM UP

Business transactions are first entered in the records in the form of Journal. As per the
double entry system of accounting we have to classify the accounts and apply the double
accounting rule accordingly. Then in order to summarize the accounts, posting should be
done through ledger.

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 4. TRIAL BALANCE

Contents:
4.0 Aims and objectives
4.1 Introduction
4.2 Meaning and Definition of Trial balance
4.2.1 Meaning
4.2.2 Definition
4.3 Objectives of preparing Trial balance
4.4 Features of Trial balance
4.5 Limitations of Trial balance
4.6 Methods of preparing trial balance
4.6.1 Total method
4.6.2 Balance method
4.7 Illustrations
4.8 Let us Sum Up
4.9 References

4.0 AIMS AND OBJECTIVES

i) To study the meaning and definition of Trial balance
ii) To know the objectives, features and limitations of Trial balance
iii) To understand the methods of preparing Trial balance

4.1 INTRODUCTION
According to the dual aspect concept, the total of debit balance must be equal to the credit
balance. It is a must that the correctness of posting to the ledger accounts and their balances
be verified. This is done by preparing a trial balance.

4.2 MEANING AND DEFINITION

4.2.1 Meaning
Trial balance is a statement prepared with the balances or total of debits and credits of all the
accounts in the ledger to test the arithmetical accuracy of the ledger accounts. As the name
indicates it is prepared to check the ledger balances. If the total of the debit and credit
amount columns of the trial balance are equal, it is assumed that the posting to the ledger
in terms of debit and credit amounts is accurate. The agreement of a trial balance ensure
arithmetical accuracy only. A concern can prepare trial balance at any time, but its
preparation as on the closing date of an accounting year is compulsory.

4.2.2 Definition
According to M.S. Gosav “Trial balance is a statement containing the balances of all ledger
accounts, as at any given date, arranged in the form of debit and credit columns placed side
by side and prepared with the object of checking the arithmetical accuracy of ledger
postings”.

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4.3 OBJECTIVES OF PREPARING A TRIAL BALANCE
(i) It gives the balances of all the accounts of the ledger. The balance of any account can be
found from a glance from the trial balance without going through the pages of the ledger.
(ii) It is a check on the accuracy of posting. If the trial balance agrees, it proves:
(a) That both the aspects of each transaction are recorded and
(b) That the books are arithmetically accurate.
(iii) It facilitates the preparation of profit and loss account and the balance sheet.
(iv) Important conclusions can be derived by comparing the balances of two or more than
two years with the help of trial balances of those years.

4.4 FEATURES OF TRIAL BALANCE

The following are the important features of a trial balance:
i. A trial balance is prepared as on a specifieddate.
ii. It contains a list of all ledger accounts including cash account.
iii. It may be prepared with the balances or totals of Ledger accounts.
iv. Total of the debit and credit amount columns of the trial balance must tally.
v. If the debit and credit amounts are equal, we assume that ledger accounts are
arithmetically accurate.
vi. Difference in the debit and credit columns points out that some mistakes have been
committed.
vii. Tallying of trial balance is not a conclusive proof of accuracy of accounts.

4.5 LIMITATIONS OF TRIAL BALANCE

The following are the important limitations of trial balance:
i. The trial balance can be prepared only in those concerns where double entry system
of book- keeping is adopted. This system is too costly.
ii. A trial balance is not a conclusive proof of the arithmetical accuracy of the books of
account. It the trial balance agrees, it does not mean that now there are absolutely
no errors in books. On the other hand, some errors are not disclosed by the trial
balance.
iii. If the trial balance is wrong, the subsequent preparation of Trading, P&L Account
and Balance Sheet will not reflect the true picture of the concern.

4.6 METHODS OF PREPARING TRIAL BALANCE

A trial balance refers to a list of the ledger balances as on a particular date. It can be prepared
in the following manner:
4.6.1. Total Method
According to this method, debit total and credit total of each account of ledger are recorded in
the trial balance.

4.6.2. Balance Method

According to this method, only balance of each account of ledger is recorded in trial balance.
Some accounts may have debit balance and the other may have credit balance. All these
debit and credit balances are recorded in it. This method is widely used.

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Ruling of a Trial balance:
The following is the form of a trial balance
Method I: Total Method

Trial Balance as on……..

Sl. Name of the L.F Debit Total Credit Total
No account balance balance
Rs. Rs.

Method II: Balance Method:

Trial Balance as on……..
Debit Credit
Sl. Nameofthe L.F
balance balance
No account
Rs. Rs.

Note: Accounts of all assets, expenses, losses and drawings are debit balances. Accounts
of incomes, gains, liabilities and capital are credit balances. Trial balance disclose some of
the errors and does not disclose some other errors. They are given below.
A) Trial Balance disclosed by the Errors
i. Wrong totaling of subsidiary books
ii. Posting of an amount on the wrong side
iii. Omission to post an amount into ledger
iv. Double posting or omission of posting
v. Posting wrong amount
vi. Error in balancing
B) Trial Balance not disclosed by the Errors
i. Error of principle
ii. Errorofomission
iii. Errors of Commission
iv. Recording wrong amount in the books of original entry
v. Compensating errors

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4.7 ILLUSTRATION
Fromthe followingtransactions,passjournal entries, prepareledger accounts and also
prepare Trial Balance under (i) Balance method (ii) Total method.

Rs.
1. Anil started business with 8,000
2. Purchased furniture 1,000
3. Purchased goods 6,000
4. Sold goods 7,000
5. Purchased from Raja 4,000
6. Sold to Somu 5,000
7. Paid to Raja 2,500
8. Received from Somu 3,000
9. Paid rent 200
10. Received commission 100

4.8 LET US SUM UP

In business, monetary transaction is prepared on the basis of double entry
system. In double entry system, we find two aspects (Debit and Credit) in each and every
business transaction. After preparing the ledger account, in order to know the arithmetical
accuracy trial balance will be prepared. Ledger accounts balances will be transferred and
finally it should be totaled. The debit and credit balances should be equal. If it is equal our
accounting is correct. If not, some mistake has been made. With the help of trial balance we
can find the arithmetical accuracy of accounts preparation.
4.9 References
1. Grewal T.B. – Double Entry Book Keeping
2. Jain & Navamy – Advanced Accountancy

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 5. PROFIT AND LOSS ACCOUNT

Contents:
5.0 Aims and objectives
5.1 Introduction
5.2 Definition
5.3 Preparation of profit and loss account
5.3.1 Debit side
5.3.2 Credit side
5.4 Closing entries for profit and loss account
5.5 Specimen of profit and loss account
5.6 Principles for preparing profit and loss Account
5.7 Illustrations
5.8 Let us Sum Up
5.9 References

5.0 AIMS AND OBJECTIVES

i) To study the definition of profit and loss account.
ii) To learn how to prepare the profit and lossaccount.
iii) To understand the Principles for preparing profit and loss Account

5.1 INTRODUCTION
Profit and loss account is prepared to ascertain the net profit of the business concern for an
accounting period

5.2 DEFINITION
In the words of Prof. Carter “Profit and loss account is an account into which all gains and
losses are collected in order to ascertain the excess of gains over the losses or vice versa.”

5.3 PREPARATION OF PROFIT AND LOSS ACCOUNT

Profit and loss account starts with gross profit brought down from trading account on the
credit side. (If gross loss, on the debit side). All the indirect expenses are debited and all
the revenue incomes are credited to the profit and loss account and then net profit or loss is
calculated. If incomes or credit is more, than the expenses or debit, the difference is net
profit. On the other hand if the expenses or debit side is more, the difference is net loss.

5.3.1 Debit side:

Expenses shown on the debit side of profit and loss account are classified into two categories
1. Operating expenses and 2. Non operating expenses
(1) Operating expenses: These expenses are incurred to operate the business
efficiently. They are incurred in running the organisation. Operating expenses include
administration, selling, distribution, finance, depreciation and maintenance expenses.

(2) Non operating expenses: These expenses are not directly associate with day
today operations of the business concern. They include loss on sale of assets,
extraordinary losses, etc.
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5.3.2 Credit side
Gross profit is the first item appearing on the credit side of profit and loss account if
trading activity is also involved in the business. Other revenue incomes also appear on the
credit side of profit and loss account. The other incomes are classified as operating
incomes and non operating incomes.
(1) Operating incomes: These incomes are incidental to business and earned from
usual business carried on by the concern. Examples: discount received, commission earned,
interest received etc.

(2) Non operating incomes: These incomes are not related to the business carried on
by the firm. Examples are profit on sale of fixed assets, refund of tax etc.
5.4 CLOSING ENTRIES FOR PROFIT AND LOSS ACCOUNT
1. For transferring expenses to profit and loss account:

Profit and Loss A/c Dr xxx

To expenses A/c xxx
[Being transfer of all P&L A/c debit side
items]

2. For transfer of incomes to profit and loss account

Incomes A/c Dr xxx

To Profit and Loss A/c xxx
[Being transfer of Incomes to P&L A/c]

3. For net profit:

P&L A/c Dr xxx

To Capital A/ C xxx
[Beingnet profit credited tocapital]

4. For transfer of Net Loss

Capital A/c To Dr xxx

P&L A/c xxx
[Being net loss transferred to capital]
Note: In case of partnership, the profit or loss is divided between partners in their profit
sharing ratio and credited or debited to the individual partners. In case of Limited
Companies, Net profit or loss is transferred to the P&L Appropriation A/c for disposal.

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5.5 THE SPECIMEN OF PROFIT AND LOSS ACCOUNT IS SHOWN BELOW

Profit and Loss Account

for the year ended 31st March 2019
Particulars Rs. Particulars Rs.
To Gross loss b/d xxx By Gross profit b/d xxx
To Administration expenses By Dividends received xxx
Salaries xxx By Interest received xxx
Rent rates & taxes xxx By Discount received xxx
Printing & Stationery xxx By commission received xxx
PostageandTelegrams xxx By Rent received xxx
Telephoneexpenses xxx By Profit on sale of assets xxx
Legalcharges xxx By Sundry revenue receipts xxx
Insurance xxx By Net loss transferred to XXX
capital A/c (Bal. Fig)*
Audit fees xxx
Directors fees xxx
General expenses xxx
To Selling & Distribution Expenses
Showroom expenses xxx
Advertising xxx
Commission paid to salesmen xxx
Bad debts xxx
Provision for doubtful debts xxx
Godown rent xxx
Carriage outward xxx
Upkeep of delivery vans xxx
To Depreciation and maintenance
Depreciation xxx
Repairs xxx
To Financial expenses
Interest on borrowings xxx
Discount allowed xxx
To abnormal losses
Loss on sale of assets xxx
To Net profit transferred to
capital A/c (bal.fig) XXX
xxx xxx

Note: *Either net profit or net loss is the balancing figure in P & L A/c. The purpose and
importance of preparing profit and loss account:
 To determine the future line of action
 To know the net profit or loss of business
 To calculate different ratios
 To compare the actual performance of the business with the desired one.

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5.6 PRINCIPLES FOR PREPARING PROFIT AND LOSS ACCOUNT
1. Only revenue receipts should be entered
2. Only revenue expenses together with losses should be taken into account.
3. Expenses and incomes relating only to the period for which the accounts are being
prepared should be considered.
4. All expenses and income relating to the period concerned should be considered even if
the expense has not yet been paid in cash or the income has not yet been received in
cash.
5. All personal expenses of the proprietor and partners must be debited to the capital or
drawings accounts and must not be debited to the profit and loss account. Similarly any
income has been earned from the private assets of the proprietor which is received by
firm, it must be credited to the capital or drawings account.

5.7 ILLUSTRATION

From the following particulars, prepare profit and loss account for the year ended
31-3-2019

Rs.
Gross Profit 9,50,000
Commission received 5,000
Interest received 4,000
Sundry income 7,000
Depreciation 10,000
Salaries 15,000
Discount (Dr) 8,000
Discount (Cr) 12,000
Bank charges 4,000
Audit fees 2,000
Stationery 400

5.8 LET US SUM UP

Net results of an organisation can be known by preparing profit and loss
account. All the revenue expenses related to the year whatever it is paid or not and all revenue
income related to the current year, whatever it is received are not must be taken into
consideration in order to know the exact net result.

5.9 References
1. Gupta R.L. – Advanced Accountancy

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 6. BALANCE SHEET

Contents:
6.1 Aims and objectives
6.2 Introduction
6.3 Title
6.4 Definition of Balance sheet
6.5 Classification of assets and liabilities
6.5.1 Assets
6.5.2 Liabilities
6.6 Proforma of Balance Sheet
6.7 Illustrations
6.8 Adjustments
6.9 Preparation of Final Accounts
6.10 Let us Sum Up
6.11 References

6.1 AIMS AND OBJECTIVES

i. To study the meaning and definition of Balance sheet
ii. To study the Classification of assets and liabilities
iii. To know the process of adjustment entries while preparing a Balance sheet
iv. To learn how to prepare the Balance sheet

6.2 INTRODUCTION
The Balance sheet comprises of lists of assets, liabilities and capital fund on a given date. It
presents the financial position of a concern as revealed by the accounting records. It
reflects the assets owned by the concern and the sources of funds used in the acquisition of
those assets. In simple language it is prepared in such a way that true financial position is
revealed in a form easily readable and more rapidly understandable than would be possible
from a view of the detailed information contained in the accounting records prepared
during the currency of the accounting period. Balance sheet may be called a „statement of
equality‟ in which equality is established by representing values of assets on one side and
values of liabilities and owners' funds on the other side.

6.3 TITLE
A Balance sheet is called by different names probably due to lack of uniformity in
accounting systems. Generally, the following titles are used in respect of balance sheet:
i. Balance sheet or General Balance sheet;
ii. Statement of Financial position or condition;
iii. Statement of assets and liabilities;
iv. Statement of assets and liabilities and owners‟ fund etc.
Of the above, the title 'Balance sheet" is mostly used. The use of this title implies that data
presented in it have been taken from the balances of accounts,

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6.4 DEFINITION OF BALANCE SHEET:
“Balance sheet is a „Classified summary‟ of the ledger balances remaining after closing all
revenue items into the profit and loss account.” - Cropper.
“Balance sheet is a screen picture of the financial position of a going business concern at a
certain moment” - Francis.
6.5 CLASSIFICATION OF ASSETS AND LIABILITIES
A clear and correct understanding of the basic divisions of the assets and liabilities and the
meanings which they signify and the amounts which they represent is very essential for a
proper perspective of financial position of a business concern. Assets and liabilities are
classified under the following major headings.

6.5.1 Assets:
Assets are properties of business. They are classified on the basis of their nature. Different
types of assets are as under:
(i) Fixed assets: Fixed assets are the assets which are acquired and held permanently
and used in the business with the objective of making profits. Land and building, Plant and
machinery, Furniture and Fixtures are examples of fixed assets.

(ii) Current assets: The assets of the business in the form of cash, debtors, bank
balances, bill receivable and stock are called current assets as they can be realised within an
operating cycle of one year to discharge liabilities.

(iii) Tangible assets: Tangible assets have definite physical shape or identity and
existence; they can be seen, felt and have volume such as land, cash, stock etc. Thus
tangible assets can be both fixed assets and current assets.

(iv) Intangible assets: The assets which have no physical shape which cannot be seen or
felt but have value are called intangible assets. Goodwill, patents, trade marks and licenses
are examples of intangible assets. They are usually classified under fixed assets.
(v) Fictitious assets: Fictitious assets are not real assets. Past accumulated losses or
expenses which are capitalized for the time being, expenses for promotion of
organizations (preliminary expenses), discount on issue of shares, debit balance of profit
and loss account etc, are the examples of fictitious assets.
(vi) Wasting assets: These assets are also called depleting assets. Assets such as mines,
Timber forests, quarries etc., which become exhausted in value by way of excavation of the
minerals, cutting of wood etc., are known as wasting assets. Such assets are usually natural resources
with physical limitations.

(vii) Contingent assets: Contingent assets are assets, the existence, value, possession
of which is based on happening or otherwise of specific events. For example, if a business firm
has filed a suit for a particular property now in possession of other persons, the firm will get
the property if the suit is decided in its favour. Till the suit is decided, it is a contingent asset.

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6.5.2 Liabilities
A liability is an amount which a business firm is „liable to pay‟ legally. All the amounts which
are claimed by outsiders on the assets of the business are known as liabilities. They are
credit balances in the ledger. Liabilities are classified into four categories as given below.
(1) Owner's capital: Capital is the amount contributed by the owners of the business.
In addition to initial capital introduced, proprietors may introduce additional capital and
withdraw some amounts from business over a period of time. Owner’s capital is also called
“net worth‟. Net worth is the total fund of proprietors on a particulars date. It consists of
capital, profits and interest on capital subject to reduction of drawings and interest on
drawings. In case of limited companies, capital refers to capital subscribed by
shareholders. Net worth refers to paid up equity capital plus reserves and profits, minus
losses.
(2) Long term Liabilities: Liabilities repayable after specific duration of long period of
time are called long term liabilities. They do not become due for payment in the ordinary
„operating cycle‟ of business or within a short period of time. Examples are long term loans
and debentures. Long term liabilities may be secured or unsecured, though usually they
are secured.
(3) Current liabilities: Liabilities which are repayable during the operating cycle of
business, usually within a year, are called short term liabilities or current liabilities. They
are paid out of current assets or by the creation of other current liabilities. Examples of
current liabilities are trade creditors, bills payable, outstanding expenses, bank overdraft,
taxes payable and dividends payable.
(4) Contingent liabilities: Contingent liabilities will result into liabilities only if certain
events happen. Examples are: Bills discounted and endorsed which may be dishonoured,
unpaid calls on investments.

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6.6 PRFORMA OF BALANCE SHEET

Balance Sheet as on ………

Liabilities Rs. Assets. Rs.
Capital Xxx Fixed assets xxx
Add: Net profit Xxx Land & Buildings xxx
Add: Interest on capital Xxx Loose tools xxx
------ Furniture & fixtures xxx
Less: Drawing Xxx Vehicles xxx
Less: Int. on drawings Xxx Intangible assets
Goodwill xxx
Less: Loss if any Xxx Patents xxx
------- xxx Trade marks xxx
Long term liabilities Long term loans xxx
(advances )
Investments xxx
Loan on mortgage xxx Current assets
Bank loan xxx Closing stock xxx
Current liabilities Sundry debtors xxx
Sundry creditors xxx Bills receivable xxx
Bills payable xxx Prepaid expenses xxx
Bank overdraft xxx Accrued incomes xxx
Creditors foroutstanding xxx Cash at bank xxx
exp.
Income received in xxx Cash in hand Xxx
advance
Fictitious assets
Preliminary expenses Xxx
Advertisement Xxx
expenses
Underwriting Xxx
commission
Discount on issue of Xxx
Shares
Discount on issue of Xxx
debentures
xxx Xxx

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6.7 ILLUSTRATIONS
Illustration 1
From the following adjustment Trial Balance, Prepare Balance Sheet of Saravanan Traders as at
31st December 2019.
Trial balance
Dr. (Rs). Cr. (Rs.)
Capital - 2,50,000
Cash in hand 40,000 -
Cash at bank 30,000 -
Closing stock 20,000 -
Fixed assets less 1,80,000 -
depreciation (Rs.20,000)
Bills receivable 21,000 -
Bills payable 2,000
Sundry debtors 52,000 -
Sundry creditors - 25,000
Liabilities forexpenses - 10,000
Drawings 12,000 -
Investments 15,000 -
P&L A/c - 70,000
Bank overdraft - 13,000
Total 3,70,000 3,70,000

6.8 ADJUSTMENTS
On preparing Trading and profit and Loss Account, adjustments re necessary when accrual
basis of accounting is followed. The following are the items for which adjustments are
usually required.
1. Closing Stock
This is the stock which remained unsold in the preceding accounting period.
Closing stock A/c Dr.
To Trading A/c
Trading A/c Balance Sheet
By closing stock Closing Stock

2. Outstanding Expenses
Outstanding expenses refer to those expenses which have become due during the accounting
period for which the final accounts have been prepared, but have not yet been paid.

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Expenses A/c Dr
To Outstanding expenses A/c
Trading A/c Balance Sheet
To Wages O/S wages
(+) O/s wages

P & L A/c Balance Sheet

To Salary O/S wages
(+) O/s wages

3. Prepaid Expenses
Prepaid expenses are the expenses the benefit of which has not been fully enjoyed before
the end of the accounting year. They are expenses paid in advance or unexpired expenses.

Prepaid expense A/c Dr

To Expenses A/c

P & L A/c Balance Sheet

To Insurance Prepaid
(-) Prepaid Ins insurance

4. Income Earned but not received (Outstanding or accrued income)

It may often happen that certain items of income such s interest on investments,
commission etc. are earned during the current accounting year, but have not been actually
received by the end of the same year. Such incomes are known as outstanding or accrued
incomes.
Accrued Income A/c Dr
To Income A/c

P&L A/c Balance Sheet

By interest
(+) Accrued int. AccruedInterest

5. Income received in advance

Sometimes a portion of income received during the current year relate to the future period.
Such portion of the income which belong to the next accounting period is income received in
advance and is known as unexpired income.
Income A/c Dr
To Income received in advance A/c
P & L A/c Balance Sheet
By Rent received (-) Rent received in advance
Received in
advance

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6. Depreciation
Depreciation is the decrease in the value of an asset due to wear and tear passage of time,
obsolescence etc. It is a business expense, though it is not paid in cash every year. It is to be
debited to profit and loss account and the amount be deducted from the relevant asset in
the Balance Sheet. If depreciation is given in the Trial Balance, it is taken only on the debit
side of Profit and Loss Account as its adjustment is over.
Depreciation A/c Dr.
To Concerned Assets A/c

P&L A/c Balance Sheet

To Dep. On Machinery
machinery (-) Depreciation

7. Bad Debts
Any irrecoverable portion of sundry debtors is termed as bad debt. Bad debt is a loss to the
business. If it is given in the Trial Balance, it should be shown on the debit side of Profit and
Loss Account. Bad debts given in the adjustment is to be deducted from sundry debtors in
the Balance Sheet and the same is debited to the Profit and Loss Account.
Bad debts A/c Dr.
To Sundry Debtors A/c
P&L A/c Balance Sheet
To Bad debts Debtors
(-) Bad debts

8. Provision for doubtful debts

It is a provision created to meet any loss, if the debtors fail to pay the whole or part of the debt
owed by them. The amount required for doubtful debt is kept by changing the amount to
the profit and lossaccount.

Profit and Loss A/c Dr

To Provision for doubtful debts A/c

P&L A/c Balance Sheet

To Provision for Debtors
doubtful debts (-) Bad debts
Debtors (-) Provision for
doubtful debts

9. Provision for discount on debtors

Sometimes the goods are sold on credit to customers in one accounting period whereas the
payment of the same is received in the next accounting period and discount is to be
allowed.

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 Profit and Loss A/c Dr.
To Provision for discount on debtors A/c

P&L A/c Balance Sheet

To Provision for Debtors
Discount on (-) Bad debts
Debtors (-) Provision for
doubtful debts (-
)Discount on
debtors

10. Reserve for discount on creditors

Prompt payment, if made, enables a business man to receive discount. So on last day of
accounting period if some amount is still payable to creditors, a provision should be
created for such probable income and the amount should be credited to the profit and loss
account of that year in which purchases are made.
Reserve for discount on creditors A/c Dr.
To Profit and Loss A/c
P & L A/c Balance Sheet
To Provision for Creditors (-)
Discount on provision for
Creditors discount on
creditors

11. Interest on capital

Sometimes interest is paid on the proprietor’s capital. Such interest is an expense to the
business and is debited to profit and Loss Account.

Interest on capital A/c Dr

To Capital A/c
P&L A/c Balance Sheet
ToInterest on Capital
capital (+) interest on
capital

12. Interest on Drawings

Often, interest is charged on drawings made by the proprietor. It is a gain to the business.
Drawings A/c Dr
To Interest on drawings A/c
P&L A/c Balance sheet
Capital
To Interest on
(+) interest on Capital
drawings
(-) interest on drawings

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13. Transfer to Reserve
Reserves save a business from future losses and meet the losses without reduction
in capital. The reserves are appropriation of profits and are created only in the year when
there are profits.
Profit and A/c Dr
To Reserve A/c
P&L A/c Balance Sheet
To Newreserve Reserve (+)
New
reserve

14. Commission on Profit

The Commission as a percentage of the net profit may be “before‟ or
“after‟ charging such commission. In the absence of any special instruction, it is assumed that
commission is allowed as a percentage of the net profit before charging such commission.

a) If the commission is on the net profit before charging such

commission, the formula is.
Profit before x Rate of Commission
100
For example, if profit is Rs.22,000 and rate of commission is 10% on the profit before
charging such commission, the calculation is as follow:

Commission = 22,000 x10/100 = 2,200

b) If the commission is on the net profit after charging such commission, the amount is
calculated as follows:
Commission = Profit x Rate
(100+rate)

Commission as per above example = 22,000 x10= Rs.2,000

110

Manager’s Commission A/c Dr.

To Outstanding commission A/c
P & L A/c Balance Sheet
To outstanding Outstanding
commission commission

15. Loss of goods by fire or accidents

a) Such losses are abnormal losses. Stock destroyed by fire or accidents is credited to
the Trading Account.

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 Loss of stock A/c Dr
To Trading A/c
Trading A/c Balance Sheet
By loss by Insurance claims
fire
The loss of stock is closed by transferring the amount to Profit and Loss Account.

b) If the loss is fully covered by insurance, no portion of the loss is debited to the
Profit and Loss Account. The amount due by Insurance Company is shown as an asset in
the Balance Sheet.
Insurance Company A/c Dr
To Loss of Stock A/c
c) If the Insurance Company agrees to pay only a part of the loss, the position of
loss not covered by insurance is debited to Profit and Loss Account and the amount due by
the Insurance Company is shown as an asset in the Balance Sheet.

Insurance Company A/c Dr

Profit and Loss A/c Dr
To Loss of stock A/c

16. Goods drawn for personal use

If goods are drawn by the proprietor for the personal use or domestic purpose, the
cost of such goods drawn is deducted from purchase account and the same is added to his
drawings.

Drawing A/c Dr
To Purchase A/c
Trading A/c Balance Sheet
To purchases (-) Capital (-)
Drawings Drawings

The amount of such drawings cannot be treated as sales, as the goods are not drawn
at selling price.

17. Goods used in office from purchases

In certain trading concern, good bought for trading purpose are used in the office. The cost
of such goods used is to be deducted from purchases and added to printing and stationery
or office expense.
Printing and Stationery A/c Dr
or
Office expenses A/c Dr
To Purchases A/c

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18. Goods sent on sale or return basis
The sales value of such goods if included in the total sales should be deducted from sales
and debtors. The entry for the same is:
Sale Return A/c Dr
or
Sale A/c Dr
To Debtors

19. Goods distributed as free samples

It may be debited in the goods sent as free samples or Advertisement account and credited to
Purchases Account.
Goods sent as free sample A/c Dr
To Purchases A/c

6.9 Preparation of Final Accounts

(Trading and Profit & loss a/c and Balance sheet)

Illustration :
The following balances are drawn from the books of M/s Arvind Mills as on 31-03-2019.

Account Amount(Rs) Account Amount(Rs)

Land 1,00,000 Sales 3,00,000
Building 2,00,000 Purchases 1,75,000
Sales returns 10,000 Stock (1-4-2013) 25,000
Purchase returns 5,000 Debtors 50,000
Bank overdraft 15,000 Cash in hand 5,000
Creditors 20,000 Salaries 10,000
Wages 12,000 Goodwill 15,000
General expenses 5,000 Selling expenses 12,000
Bad debts 1,000 Insurance 1,000
Capital 2,81,000

Adjustments:
a) Closing stock is Rs.30,000
b) Provide for depreciation @ 10 % on buildings.
c) Write off further bad debts – Rs. 1,000
d) Salaries yet to be paid- Rs. 3,000
You are required to prepare a trading and profit & loss account and balance sheet of M/s
Arvind Mills.

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6.10 LET US SUM UP
Balance sheet is the last financial statement. It helps to know the financial position
of an organisation. Not only that one can find the different kinds of assets and liabilities. By
seeing the balance sheet we can say the concern solvent are not.

6.11 REFERENCES
1. Gupta & Radhaswamy – Advanced Accountancy.
2. Jain & Naway – Advanced Accountancy.
3. Shukla & Grewal – Advanced Accountancy.

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 7. PREPARATION OF PROFIT & LOSS ACCOUNT AND
BALANCE SHEET OF A DCCB

1. Trial Balance
A book-keeping worksheet, in which the balances of all ledgers are compiled into credit and
debit columns. A bank prepares a trial balance periodically, usually at the end of every
reporting period. The general purpose of producing a trial balance is to ensure that the
entries in the bookkeeping system are arithmetically correct. Preparing a trial balance for a
bank serves to detect any arithmetical errors that have crept in the double-entry
accounting system. If the total debits equal to total credits, the trial balance is considered to
be tallied and there should be no arithmetical errors in the ledgers. This, however, does
not mean that there are no errors in the accounting system. For example, transactions
classified improperly or those simply missing from the system could still be „material
accounting errors‟ that would not be detected by the trial balance procedure. Profit &
Loss account and Balance sheet are drawn from the trial balance. All the heads of account
relating to “liabilities and income” appear on the credit side whereas “assets and
expenditure” items appear on the debit side of the trial balance.

2. Profit & Loss account

A financial statement that summarizes the revenues, costs and expenses incurred during
a specific period of time, say for a financial year. These records provide information that
shows the ability of any financial institution to generate profit by increasing revenue and
reducing costs. The bottom line (literally and figuratively) is net income (profit).

3. Balance sheet
A record of the assets and liabilities of a bank as at a given point of time. Assets are what
a bank owns. Liabilities are what a bank owes. By definition, a “Balance Sheet‟ must
balance. The assets on one side are equal to the liabilities on the other. All the credit
balances in the trial balance (including the credit balance in the P & L account, i.e.,
profit) appear on “Liabilities” side and all the debit balances in the Trial balance
(including the losses) appear on “Assets” side of the “Balance Sheet‟.

4. Contra items
The contra account is neither an asset nor liability in itself, but an account used to adjust
the carrying amount of the related asset or liability account, e.g., bills receivable/payable
in respect of bills sent for collection on behalf of the customers, etc.

5. Contingent liabilities
The possibility of an obligation to pay certain sums dependent on future events, (e.g.,
guarantees, issued by the bank, invoked in case of default by the guarantee), are known as
“contingent liabilities” and shall be shown as off-balance sheet items.

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 Case Exercise:
Given below is the trial balance of Model DCCB as on 31 March 2019. Prepare P & L
account for the year ended 31 March 2019 and the balance sheet as on that date [without
schedules], by incorporating the adjusting entries given at the end.
(Rs.lakh)
Cr. Dr.
Particulars LF Amount Particulars LF Amount
Paid up capital 3450.16 Cash on hand 3008.57
Reserves 1593.23 Bank balances 867.96
Provision for standard assets 90.00 Investments 15291.56
Other provisions 8148.42 Loans & advances 52445.83
Deposits 45852.91 Fixed Assets 332.62
Borrowings 13268.59 Prepaid expenses 198.56
Branch adjustments (cr.) 54.72 Sundry debtors 52.68
Interest payable 251.91 Br. Adjustments (dr.) 278.63
Unclaimed dividend 2.09 Interest receivable 325.64
Share suspense 23.98 Accumulated losses 1813.40
DDs & Pay Orders payable 31.13 Interest on deposits 3522.22
Estimated liability for Staff Interest on
gratuity 1299.84 borrowings 977.90
Interest on loans & advances 4763.02 Salaries & allowances 1146.00
Interest & dividend on
investments 1530.37 Rent, rates & taxes 22.93
Commission 74.22 Directors' allowances 0.76
Income from non-banking
assets 1.40 Law charges 2.88
Postage & telephone
Other receipts 27.31 charges 16.73
Bills payable as per contra 36.70 Audit fees 12.28
Stationery, printing &
advt. 34.34
Provision for int.
receivable - Govt. 45.38
Provision for NPAs 4.64
Travelling &
conveyance charges 38.23
Depreciation 23.56
Bills receivable as per contra 36.70
Total 80500.00 Total 80500.00

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 Adjusting entries:
 Provision for “standard assets‟ to be raised to Rs 100.00 lakh
 Depreciation on “fixed assets‟ to the extent of Rs 16.44 lakh to be made
 Unrealized ‟ interest on loans‟ to the extent of Rs 12.64 lakh to be reversed
 The claim of the Bank for Rs 25.38 lakh from the State Government towards
“interest receivable under ARDRS, 1990‟ to be reversed as the same was finally
rejected.

Profit & Loss account of Model DCCB for the year ended 31 March 2019
(Rs.lakh)
EXPENDITURE Amount Amount INCOME Amount Amount

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 Profit & loss appropriation account for the year ended 31.3.2019
(Rs.lakh)

Particulars Amount Amount

Balance Sheet of Model DCCB as on 31 March 2019

(Rs.lakh)
LIABILITIES Amount Amount ASSETS Amount Amount

Total Total

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 8. ACCOUNTING STANDARDS APPLICABLE TO
COOPERATIVES

As compared to other areas of the practice of Auditors, Audit of Co- operative societies
has been the domain of few professional brothers. It has also received comparatively less
attention in the wake of recent developments that has taken place in the field of auditing.
The reason is obvious. The co- operative sector is largely regulated by the respective
states and the regulators of this sector have shown less dynamism vis-à-vis the corporate
and other sectors. Another reason that could be is the co-existence of co- operation
departments own auditors and the members of ICAI. The members of ICAI are bound by the
stipulations and guidance announced by the Institute, whereas the Departments auditors
are not bound by such things as announced by the ICAI. There is definitely a gap between
the conceptual understandings between both these auditors though the object of both of
them is one and the same. But never the less the fact remains that, there appears to be
less concern about actual following of accountings standards in a co- operative audit and
if at all these are followed the extent of it.
Before taking up the subject relating to accounting standards as such, first the Auditors
have to examine the issue of applicability of accounting standards to co-operative
societies. For this the Auditors have to refer to the Preface to the statement of Accounting
Standards. The exact wordings of the preface are ….

Accounting Standards are designed to apply to the general purpose

financial statements and other financial reporting, which are subject
to the attest function of the members of the ICAI. Accounting
Standards apply in respect of any enterprise (whether organised in
corporate, co- operative or other forms) engaged in commercial,
industrial or business activities, irrespective of whether it is profit
oriented or it is established for charitable or religious purposes.
Accounting Standards will not, however, apply to enterprises only
carrying on the activities which are not of commercial, industrial or
business nature, (e.g., an activity of collecting donations and giving
them to flood affected people). Exclusion of an enterprise from the
applicability of the Accounting Standards would be permissible only if
no part of the activity of such enterprise is commercial, industrial or
business in nature. Even if a very small proportion of the activities
of an enterprise are considered to be commercial, industrial or
business in nature, the Accounting Standards would apply to all its
activities including those which are not commercial, industrial or
business in nature.

:: 52 ::
Thus it is amply clear that co-operative societies are not an exception to the applicability of
accounting standards. The financial statements prepared by co-operative societies are
General Purpose Financial Statements.

The term ‘General Purpose Financial Statements’ includes balance sheet,

statement of profit and loss, a cash flow statement (wherever
applicable) and statements and explanatory notes which form part
thereof, issued for the use of various stakeholders, Governments and
their agencies and the public.

The financial statements prepared by the co-operative society includes balance sheet,
statement of profit and loss, statements and explanatory notes which form part of financial
statements. Thus it is amply clear that Accounting Standards pronounced by ICAI are
squarely applicable to the Co- operative societies.

Now the question arises that who is to ensure that Accounting Standards are followed in its
proper spirit while making the financial statements?
Obviously it is the responsibility of the management of the society who has to ensure that
relevant accounting standards are followed while recoding the transactions in the books of
account of the society and the spirit is followed at the time of making the financial
statements.

What is the role of Auditors?

At the time of expressing the opinion by the Auditor on the financial statements of the
society, auditors have to see that the management has followed the relevant accounting
standards applicable to the society. If in case such standards are not followed then a
suitable expression should be included in the opinion expressed by the auditors. There is
one more angle to this and that is regarding the audit report to be given by the auditor.
The Institute in the year 2002 changed the body of the audit report to be given by the
members while expressing their opinion. In the present text of the body of the audit
report in paragraph number 2 which reads as . . .

An audit includes examining, on a test basis, evidence supporting the

amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
When the Auditors state the above matter in to their expression of opinion it is
presupposed that the accounting standards are taken in to consideration while assessing
the financial statements. Thus it is crystal clear that the Auditors have to ensure that
accounting standards are followed by the co-operative society.

:: 53 ::
In majority of the cases the auditor of the co-operative society is changed every year and
it is every likely that the previous year‟s audit may not have been conducted by the fellow
member of the institute. In such situation it is all the more necessary for the auditor to
see whether earlier years financial statements comply with the accounting standards
before giving the audit report.

Mandatory Accounting Standards

Accounting Title of the Applicability Applicabilit y Applicability

Sr. to Level II
Standard (AS) Accounting to Level to Level III
No. Enterprises
No. Standard I Enterprises Enterprises

Disclosure of
1 AS-1 Accounting Yes Yes Yes
Policies
Valuation of
2 AS-2 Yes Yes Yes
Inventories
Not required, Not required,
Cash Flow
3 AS-3 Yes But encouraged But
Statements
encouraged
Contingencies
and Events
4 AS-4 occurring after Yes Yes Yes
the Balance
Sheet Date
Net Profit or Loss
for the period,
prior period items
5 AS-5 and changes in Yes Yes Yes
Accounting
policies

Depreciation
6 AS-6 Yes Yes Yes
Accounting
Construction
7 AS-7 Yes Yes Yes
Contracts
Revenue
8 AS-9 Yes Yes Yes
Recognition
Accounting for
8 AS-10 Yes Yes Yes
Fixed Assets
TheEffectsof
Changes in
10 AS-11 Foreign Yes Yes Yes
Exchange
Rates
Accounting for
11 AS-12 Government Yes Yes Yes
Grants

:: 54 ::
 Accounting for
12 AS-13 Yes Yes Yes
Investments
Accounting for
12 AS-14 Yes Yes Yes
Amalgamations
Yes(With Yes(With
Employee Benefits
13 AS-15 Yes Permitted Permitted
deviation) deviation)
Borrowing
14 AS-16 Yes Yes Yes
Costs
Segment
15 AS-17 Yes N.A N.A
Reporting
Related Party
16 AS-18 Yes N.A N.A
Disclosures
Yes {Except
Yes
paragraphs
{Except
22(c), (e)and
paragraphs
(f); 25(a), (b)
22(c), (e)and
and (e); 37(a),
17 AS-19 Leases Yes (f); 25(a), (b)
(f) and (g); and
and (e);37(a),
46(b), (d)
(f) and (g);
and
and 46(b),(d)
(e)}
and (e)}

Earnings per
18 AS-20 See Note 2 See Note 2 See Note 2
Share
Consolidated
19 AS-21 Financial See Note 1 See Note 1 See Note 1
Statements
Accounting for
20 AS-22 Taxes on Yes Yes Yes
Income
Accounting for
Investments in
Associates in
21 AS-23 See Note 1 See Note 1 See Note 1
Consolidated
Financial
Statements
Discontinuing
22 AS-24 Yes N.A N.A
Operations
Interim
23 AS – 25 Financial Reporting Yes N.A. N.A.

Intangible
24 AS-26 Yes Yes Yes
Assets
Financial
Reporting of
25 AS-27 See Note 1 See Note 1 See Note 1
Interests in
Joint Ventures

:: 55 ::
 Yes Yes
w.e.f.1.4.200 w.e.f.1.4.2008
Impairment of
26 AS-28 Yes 6 with with
Assets
permitted permitted
deviation deviation
Provisions,
Contingent
Yes(Except Yes(Except
27 AS-29 Liabilities and Yes
Para 67) Para 66 & 67)
Contingent
Assets
Recommen-
Financial
datory
Instruments:
from 1-4-2009.
28 AS-30 Recognition and N.A. N.A.
Mandatory
Measurement
from
1-4-2011.
Recommen-
datory
Financial
from 1-4-2009.
29 As-31 Instruments N.A. N.A.
Mandatory
Presentation
from
1-4-2011.

Notes:
1. For the purpose of applicability of Accounting Standards, enterprises are classified into
three categories, viz., Level I, Level II and Level III. Level II and Level III enterprises are
considered as SMEs. The criteria for different levels are given below.

Level I Enterprises
Enterprises which fall in any one or more of the following categories, at any time during
the accounting period, are classified as Level I enterprises:

i). Enterprises whose equity or debt securities are listed whether in India or outside
India.
ii). Enterprises which are in the process of listing their equity or debt securities as
evidenced by the board of directors‟ resolution in this regard.
iii). Banks including co-operative banks.
iv). Financialinstitutions.
v). Enterprises carrying on insurance business.
vi). All commercial, industrial and business reporting enterprises, whose turnover for
the immediately preceding accounting period on the basis of audited financial
statements exceeds Rs. 50 crore. Turnover does not include „other income‟.
vii). All commercial, industrial and business reporting enterprises having borrowings,
including public deposits, in excess of Rs.10 crore at any time during the accounting
period.
viii). Holding and subsidiary enterprises of any one of the above at any time during the
accounting period.

:: 56 ::
 [As Level II and Level III Enterprises are not relevant, not covered in this Chapter]
Following are some of the accounting standards along with some of the essential points
that must be considered while conducting audit of a co- operative society.

AS 1 Disclosure of Significant Accounting policies:

 Attention to fundamental accounting assumptions Going concern, Consistency and
Accrual should be very carefully exercised. Some of the areas where the accounting
policy may not be there with a particular society careful disclosures are needed. The
accounting method which the society is following should be clearly ascertained. Special
attention is required in case of Co-op Banks to whom NPA provisioning applies. How
the issue of recognition of revenue is handled vis-à-vis RBI norms. Does the society
recognizes the interest on Fixed Deposits, Locker Rent, Commission exchange and
brokerage as per the method of accounting usually you find most of the above items are
accounted for as and when it is paid/received in spite of accrual system of
accounting. No leave encashment is provided for. No retirement benefits are provided
for.
Some of the gray areas...
 Valuation of Inventory
 Valuation of Investments
 Treatment of retirement benefits
 Treatment of contingent liabilities.
 Fixed Assets
 Deferred Tax
 Intangible Assets such as computer software.
 Impairment of assets.
 Prior Period Items.

Valuation of Inventories AS 2:
ExamplesoftheSocietiesare
• Dairy societies.
• Sugar factories.
• Spinning mills
• Consumers‟ societies.
• Agricultural process societies. etc.
• Special attentions from the standard should be to: Cost of
purchase, Cost of conversion, other costs.

“Lower of the cost or net realisable value” difficulty in arriving at such valuation for
paucity of detailed accounting records.

In most of the cases it is found the auditors find difficulty in application of FIFO or
Weighted average method.

:: 57 ::
Depreciation Accounting AS 6:
True method of following Accounting Standard is to arrive at ascertaining Useful life and
Depreciable amount. Experience is such that, in almost all the cases rates as per Income
Tax Act are taken. Co-operative Act itself is silent on rates.

Charging depreciation for all purchase of fixed assets in first six months at full rate and
subsequent purchases half rate is the practice usually found but the disclosure
requirements state that following should be disclosed. . .
Historical cost or other amounts substituted for historical costs should be disclosed.
Total depreciation for each class of asset must be clearly shown.
Related Accumulated Depreciation also needs to be shown
Are we disclosing the depreciation schedule correctly? All these details are to be given as per
the standard.
Revenue Recognition AS 9
• Clear cut statement on how the interest portion on Substandard, Doubtful and loss
assets are recognised needs to be given wherever application of RBI norms are
mandatory.

• In most of the other cases such as co-operative credit societies this issue is dealt by
treating it income as and when earned. A suitable comment is necessary in this case
when interest as per AS9 is to be recognised on time proportion basis taking in to
account outstanding balance and rate of interest.

Accounting for Fixed Assets AS 10

• Non-monetary Consideration
When a fixed asset is acquired in exchange for another asset, its cost is usually determined
by reference to the fair market value of the consideration given. It may be appropriate to
consider also the fair market value of the asset acquired if this is more clearly evident.
An alternative accounting treatment that is sometimes used for an exchange of assets,
particularly when the assets exchanged are similar, is to record the asset acquired at the net
book value of the asset given up; in each case an adjustment is made for any balancing
receipt or payment of cash or other consideration.
Examples: UPS/Computers & its peripherals, Generator Sets etc.

Revaluation of Fixed Assets:

An increase in net book value arising on revaluation of fixed assets is normally credited
directly to owner‟s interests under the heading of revaluation reserves and is regarded as not
available for distribution of dividend. A decrease in net book value arising on revaluation of
fixed assets is charged to profit and loss statement except that, to the extent that such a
decrease is considered to be related to a previous increase on revaluation that is included
in revaluation reserve, it is sometimes charged against that earlier increase. It sometimes
happens that an increase to be recorded is a reversal of a previous decrease arising on
revaluation which has been charged to profit and loss statement in which case the increase
is credited to profit and loss statement to the extent that it offsets the previously recorded
decrease.
:: 58 ::
• Disclosure:
The following information should be disclosed in the financial statements:
(i) gross and net book values of fixed assets at the beginning and end of an accounting
period showing additions, disposals, acquisitions and other movements;
(ii) expenditure incurred on account of fixed assets in the course of
construction or acquisition; and
(iii) Revalued amounts substituted for historical costs of fixed assets, the method adopted
to compute the revalued amounts, the nature of indices used, the year of any appraisal
made and whether an external valuer was involved, in case where fixed assets are
stated at revalued amounts.

Accounting for Amalgamation AS 14:

This situation is more likely to happen in case of a multi-state co-op bank as has been
experienced in the recent past. Like Cosmos Bank and Annapurna Mahila Sahakari bank,
Manasa Co-op Urban, Co-op bank of Ahmedabad, Unnati Co-op Vadodara. Multi state Co-op
banks are level I category, hence it is more important for them to observe AS 14 carefully.
Only important points to be kept in mind are . . .
(a) The pooling of interests method:
Under the pooling of interests method, the assets, liabilities and reserves of the transferor
society are recorded by the transferee society at their existing carrying amounts (after
making the adjustments required in paragraph 11).
Para 11 says. . .
If, at the time of the amalgamation, the transferor and the transferee societies have
conflicting accounting policies, a uniform set of accounting policies is adopted following
the amalgamation. The effects on the financial statements of any changes in accounting
policies are reported in accordance with Accounting Standard (AS) 5, „Prior Period and
Extraordinary Items and Changes in Accounting Policies‟

(b) The purchase method:

Under the purchase method, the transferee society accounts for the amalgamation either
by incorporating the assets and liabilities at their existing carrying amounts or by
allocating the consideration to individual identifiable assets and liabilities of the transferor
society on the basis of their fair values at the date of amalgamation. The identifiable assets
and liabilities may include assets and liabilities not recorded in the financial statements of
the transferor society.
In addition to above the reference to Merger order issued by the appropriate authority will
also have to be referred to for stipulations given in the order and its impact on the
treatment as suggested in the standard.
Employee Benefits AS 15:
Employee benefits are all forms of consideration given by an enterprise in exchange for
service rendered by employees.

Post-employment benefits include:

:: 59 ::
Retirement benefits – e.g.. Gratuity and pension
Other benefits – e.g. post-employment life insurance and post-employment medical care
Post- employment benefit plans are formal or informal arrangements under which an
enterprise provides post-employment benefits for one or more employees
• Defined contribution plans are post-employment benefit plans under which an
enterprise pays fixed contributions into a separate entity (a fund) and will have no
obligation to pay further contributions if the fund does not hold sufficient assets to pay
all employee benefits relating to employee service in the current and prior periods
• Defined benefit plans are post-employment benefit plans other than defined contribution
plans.

Defined Contribution Plans Defined Benefit Plans

 The enterprise's obligation is limited to 
the amount that it agrees to contribute to
the fund.
 Thus, the amount of the post-
employment benefits received by the
employee = amount of contributions
paid by an enterprise (and also by the
employee) + investment returns arising
fromthe
contributions
 Actuarial risk (that benefits will be less 
than expected) and investment risk (that
assets invested will be insufficient to
meet expected benefits) fall on the
employee.
The enterprise's obligation is to provide
the agreed benefits to current and
former employees
Actuarial risk (that benefits will be less
than expected) and investment risk
(that assets invested will be insufficient
to meet expected benefits) fall on the
enterprise. If actuarial or investment
experience are worse than expected,
the enterprise's
obligation may be increased

This means that every co-operative society we conduct audit of, we should ensure that
employees‟ benefits are provided for and that too as explained in AS 15. Very rarely such as
some of the multistate co-op Banks and some sugar factories cognizance of AS 15 is very
well taken. If the impact is material it is likely to vitiate the picture of the society and a
suitable comment is required in the audit report.
Segment Reporting AS 17:
The question of segment reporting to my mind would come in to play with respect to
multistate Co-op Banks, milk and milk product societies having bigger scale of operations
such as Amul (Gujarat Cooperative Milk Marketing Federation Ltd.) where the issue of
reporting as per primary and secondary segments needs to be looked into. Rest of the
societies caters to local market.
:: 60 ::
Accounting for Taxes on Incomes AS 22:
Applicability of AS 22 to Tax Paying Societies was there ever since AS 22 became
mandatory.
Now with the introduction of 80 P (4) the co-operative banks also have been roped in as
tax paying entities hence it is all the more necessary for us to see whether financial
statements disclose the current tax and deferred tax provisions.

Discontinuing Operations AS 24:

The situation of discontinuing operations can arise in case of a Co-operative society such as
Sugar Factory, Dairy or Co-operative Bank having operations geographically spread.
Question of disposal or spin off appears remote in case of Co-operatives. Piecemeal disposal
off could be possible, termination also is possible in case of a co-operative society. The
necessary permissions and stipulations needs to be looked into. Deciding initial disclosure
event needs to be identified on the basis of available documents, what is the point at which
the discontinuing operations trigger? Pre Tax Gains and losses on disposal of assets or
liabilities how they are arrived at and tax expense be considered carefully. Subsequent
changes in timing of cash flows needs to be reported in updated disclosures.
Impairment of Assets AS 28:
The objective of this Statement is to prescribe the procedures that an enterprise applies
to ensure that its assets are carried at no more than their recoverable amount. An asset is
carried at more than its recoverable amount if its carrying amount exceeds the amount to
be recovered through use or sale of the asset. If this is the case, the asset is described as
impaired and the society is required to recognise an impairment loss. It is also essential to
know when a society should reverse an impairment loss and make certain disclosures for
impaired assets.
Recognition and Measurement:
1. If the recoverable amount of an asset is less than its carrying amount, the carrying
amount of the asset should be reduced to its recoverable amount. That reduction is an
impairment loss.
2. An impairment loss should be recognised as an expense in the statement of profit and
loss immediately, unless the asset is carried at revalued amount in accordance with another
Accounting Standard (see Accounting Standard (AS) 10, Accounting for Fixed Assets), in
which case any impairment loss of a revalued asset should be treated as a revaluation
decrease under that Accounting Standard.
Situations of Impairment losses in Co-operatives:
• Plant or Machinery/ Equipment‟s of Dairy or Sugar Factory.
• Buildings and others assets.
• At each Balance Sheet date it should be assessed whether any indication that any
asset may be impaired. If such indication exist then method through which the
recoverable amount is arrived at.

:: 61 ::
Recognition of Revenue
• Co-operative Banks are governed by RBI and liable to follow the
stipulations.
• Preface to the accounting Standard specifies that Accounting Standards by their very
nature cannot and do not override the local regulations which govern the preparation
and presentation of financial statements. However ICAI will determine extent of disclosure to be
made in financial statements and auditors report. Such disclosures may be by way of
appropriate notes explaining the treatment of a particular item.
• Hence as per the prudential norms of classification and provisioning of advances the
non- consideration of interest unrealised on Substandard, doubtful and loss assets be
clarified in the notes to account vis-à-vis requirements of AS 9.

• Interest on overdue deposits its method of recognition and its impact of profit also
must be explained by way of notes.

• Co-operative credit societies which are controlled by registrar of co- operation

consider the interest on advances only on realisation, if this fact is noticed then
accordingly the necessary comment in the notes becomes imperative.

:: 62 ::
 9. CAPITAL AND REVENUE EXPENDITURE

Capital Expenditure:
Capital expenditure occurs when a business gets a long term advantage due to that
expenditure. It is usually incurred for acquisition of an asset. These expenditures do not
occur in the regular day to day transactions of the business.
Common examples:
Purchase of furniture, office building etc Purchase of
additional furniture or machinery Carriage paid of
machinery purchased Purchase of patent right, copy
rights etc

Revenue expenditure:
Expenditure which is not for increasing the value of fixed assets, but for running the
business on a day to day basis, is known as revenue expenditure.

Examples:

Wages or salaries paid tofactory workers

Machine oil to lubricate
Electricity or power required to run machinery ormotor
Expenditure incurred in the ordinary conduct and administration of business, i.e., rent,
carriage on saleable goods, legal expenses, printing charges, postage etc.

Difference between Capital Expenditure and Revenue Expenditure:

Revenue Expenditure
1. Its effect is temporary, i.e. the
benefit is receivedwithin
the accounting year.
2. Neither an asset is acquired nor the
value of an asset is increased.
3. It has no physical existence
because it is incurred on items
which are used by the business.
4. It is recurring and regular and it
occurs repeatedly.
5. This expenditure helps to
maintain the business.
6. The whole amount of this
expenditure is shown in trading,
Capital Expenditure
1. Its effect is long-term, i.e. it is not
exhausted within the current accounting
year-its benefit is received for a number of
years in future.
2. An asset is acquired or the value of an
existing asset isincreased.
3. Generally it has physical existence except
intangible assets.
4. It does not occur again and again. It is
nonrecurring and irregular.
5. This expenditure improves the position of
the business.
6. A portion of this expenditure
(depreciation on assets) is shown in

:: 63 ::
 P & L A/c or income statement. trading & P & L A/c and the balance is
shown in the balance sheet on asset side.

7. It does not appear in the balance sheet.
8. It reduces revenue (profit) of the
business.
7. It appears in the balance sheet until its
benefit is fully exhausted.
8. It does not reduce the revenue of the
concern. Purchase of fixed asset does
not affect revenue.

Example:
State with reasons whether the following items of expenditure are capital or
revenue.
(i) Wages paid on the purchase of goods.
(ii) Carriage paid on goods purchased.
(iii) Transportation paid on machinery purchased.
(iv) Octroi duty paid on machinery.
(v) Octroi duty paid on goods.
(vi) A second-hand car was purchased for Rs. 7,000 and Rs. 5,000 were spent for its
repairs and overhauling.
(vii) Office building was whitewashed at a cost of Rs. 3,000.
(viii) A new machinery was purchased for Rs.80,000 and a sum of Rs.1,000 was spent on
its installation and erection.
(ix) Books were purchased for Rs 50,000 and Rs 1,000 were paid for carrying
books to the library.
(x) Land was purchased for Rs 1,00,000 and Rs 5,000 were paid for legal expenses.
(xi) Rs 50,000 paid for customs duty and freight on machinery purchased from Japan.
(xii) Old furniture was repaired at a cost of Rs.500.
(xiii) An additional room was constructed at a cost of Rs.15,000.
(xiv) Damages paid on account of the breach of contract to supply certain goods.
(xv) Cost of replacement of an old and worn out part of machinery.
(xvi) Repairs to a motor car met with an accident.
(xvii) Rs 10,000 paid for improving a machinery. (xviii)Cost of
removing plant and machinery to a new site.
(xix) Cost of acquiring the goodwill of an old firm.
(xx) Cost of redecorating a cinema hall.

:: 64 ::
 10. FORMAT OF A BALANCE SHEET AND PROFIT AND LOSS ACCOUNT
OF A BANKING INSTITUTION AS PER SCHEDULE III

THE THIRD SCHEDULE

(See section 29)

Form A - Form of Balance Sheet

Balance Sheet of (here enter name of the Banking
Company)
Balance Sheet as on 31st March (Year)
(000' omitted)
Capital and Liabilities Schedule As on 31-3-.... As on 31-....
(current year) (previous year)
Capital 1
Reserves and surplus 2

Deposits 3

Borrowings 4

Otherliabilitiesand 5
provisions

Total
ASSETS
Cash and Balances with 6
Reserve Bank ofIndia
Balances with Banksand
money at call and short 7
notice
Investments 8

Advances 9

Fixed Assets 10

Other Assets 11

Total

Contingent liabilities 12

Bills for collection

:: 65 ::
 SCHEDULE I
Capital

As on 31-3.... As on 31-3....
(current year) (previous year)
Authorized Capital
(Shares of Rs..... each)
Issued Capital (Shares of Rs..... each)
SubscribedCapital(SharesofRs.....each)
Paid-up Capital (Shares of Rs..... each)

SCHEDULE 2
Reserves and Surplus
As on 31-3.... As on 31-3....
(current year) (previous year)
I. Statutory Reserves
Opening Balance
Additions during the year
Deductions during the year
II. Capital Reserves
Opening Balance
Additions during the year
Deductions during the year
III. Share premium
Opening Balance
Additions during the year
Deductions during the year
IV. Revenue and otherReserves
Opening Balance
Additions during the year
Deductions during the year
V. Balance of Profit and Loss Account

Total

:: 66 ::
 SCHEDULE 3
Deposits
As on 31-3.... As on 31-3....
(current year) (previous year)

I. Demand Deposits
(i) From Banks
(ii) From others
II. Savings Bank Deposits

III. Term Deposits

(i) From Banks
(ii) From others

Total

SCHEDULE 4
Borrowings
As on 31-3... As on 31-3....
(current year) (previous year)
I. Borrowing in India
(i) From NABARD
(ii) From Central Government
(iii) From State Government
(iv) Other Banks
(v) Other institutions and agencies

Total: (I and II)

:: 67 ::
 SCHEDULE 5

Other Liabilities and Provisions

As on31-3.... As on 31-3....
(current year) (previous year)
I. Bills payable
II. Inter-office adjustments (net)
III. Interests accrued
IV. Others (Including provisions)

Total:

SCHEDULE 6

Cash and Balances with Reserve Bank of India

As on 31-3.... As on 31.3....
(current year) (previous year)
I. Cash on hand
(Including foreign currency notes)
II. Balance with Reserve Bank of India
(i) in Current Account
(ii) in other Accounts

Total:

:: 68 ::
 SCHEDULE 7

Balances with banks and Money at Call and short Notice

As on 31-3.... As on 31-3....
(current year) (previous year)
I. In India
(i) Balances with banks
(a) In Current Accounts
(b) In Other Deposit Accounts
(ii) Money at call and short notice
(a) With banks
(b) With other institutions

Total:

SCHEDULE 8

Investments

As on 31-3.... As on 31-3....
(current year) (previousyear)
I. Investments in India in
(i) Government Securities & T. Bills
(ii) Trustee Securities approved
(iii) Trustee Securities not approved
(iv) Shares
(v) Debentures and Bonds
(vi) Subsidiaries and/or joint ventures
(v) Others (to be specified)
Total
Grand Total

:: 69 ::
 SCHEDULE 9

Advances

A. (i) Bills purchased and discounted

(ii) Cash credits, overdrafts and loans
repayable on demand
(iii) Term loans

Total:
B. (i) Secured by tangible assets
(ii) Covered by Bank/Government
Guarantees
(iii) Unsecured

Total:
C.I. Advances Classification
(i) DCCBs
(ii) Public sector/Government
(iii) Societies
(iv) individuals & Institutions

Total:

:: 70 ::
 SCHEDULE 10
Fixed Assets

As on 31-3.... As on 31-3....
(currentyear) (previous year)
I. Premises
At cost as on 31st March of the preceding
year
Additions during the year
Deductions during the year
Depreciation to date
Total
II.OtherFixedAssets (including
furniture and fixtures)
At cost as on 31st March of the
preceding year
Additions during the year
Deductions during the year
Depreciation to date

Total

SCHEDULE 11
Other Assets

As on 31-3.... As on 31-3....
(current year) (previous year)
I. Inter-office adjustment (net)
II. Interest accrued
III. Tax paid in advance/tax deducted
at source
IV. Stationery and stamps
V. Non-banking assets acquired
in satisfaction of claims
VI. Others*

Total:

:: 71 ::
 SCHEDULE 12

Contingent Liabilities

As on 31-3.... As on 31-3....
(current year) (previousyear)
I. Claims against the bank not
acknowledged as debts
II. Guarantees given on behalf of
constituents
III. Acceptances, endorsements and
other obligations
IV. Other items for which the bank is
contingently Liable

Total:

:: 72 ::
 FORM 'B'

Form of Profit and Loss Account for the year ended 31st March
(year)
Schedule Year ended 31-3 ..... Year ended 31-3 .....
No. (current year) (previous year)
I. Income
Interest earned 13
Other Income 14

Total:

II. Expenditure
Interest expended 15
Operating expenses 16 A
Provisions and contingencies 16 B

Total:
III. Profit/Loss
Net Profit/Loss (-) for the
year
Profit/Loss (-) brought
forward

Total:
IV. Appropriations
Transfer to statutory reserves

Transfer to ACSF
Transfer to other reserves
Transfer to
Government/proposed
dividend
Balance carried over to
balance sheet

Total:

:: 73 ::
 SCHEDULE 13
Interest Earned

Year ended on Year ended on

31-3 ........ 31-3 ..........
(current year) (previous year)
I. Interest/discount on advance/bills
II. Income on investments
III.InterestonbalanceswithReserve Bank
of India and other inter-bank
funds
IV. Others

Total:

SCHEDULE 14

Other Income
Year ended on Year ended on
31-3......... 31-3.........
(current year) (previous year)
I. Commission, exchange and brokerage
II. Profit on sale of investments
Less : Loss on sale of investments
III. Profit on revaluation of investments
Less : Loss on revaluation of
investments
IV. Profit on sale of land, buildings and other
assets
Less : Loss on sale of land, buildings and
other assets
V. Profit on exchange transactions
Less : Loss on exchange transactions
VI. Income earned by way of dividends etc. from
subsidiaries/companies and/or joint
ventures abroad/in India
VII. Miscellaneous Income

Total:

:: 74 ::
 SCHEDULE 15

Interest Expended

Year ended on Year ended on

31-3.......... 31-3........
(current year) (previous year)
I. Interest on deposits
II. Interest on Reserve Bank of
India/Inter-bank borrowings
III. Others

Total:

SCHEDULE 16 A

Operating Expenses

Year ended on Yearendedon

31-3.......... 31-3........
(current year) (previous year)
I. Payments to and provisions for
employees
II. Rent, taxes and lighting
III. Printing and stationery
IV. Advertisement and publicity
V. Depreciation on Bank's property
VI. Director's fees, allowances and
expenses
VII. Auditors' fees andexpenses
(Including branch auditors)
VIII. Law charges
IX. Postages. Telegrams, Telephones, etc.
X. Repairs and maintenance
XI. Insurance
XII. Other expenditure

Total:

:: 75 ::
 SCHEDULE 16 B

Operating Expenses

Year ended on Yearendedon

31-3.......... 31-3........
(current year) (previous year)
I. Provisions for Branch adjustment
account
II. Provision for other Assets
III. Provisions for Standard Assets
IV. Gratuity Fund
V. Investment depreciationReserve
VI. Provision for NPA

Total:

:: 76 ::
 11. RATIO ANALYSIS OF BALANCE SHEET

What is ratio analysis? The Balance Sheet and the Statement of Income are essential, but
they are only the starting point for successful financial management. Apply Ratio Analysis
to Financial Statements to analyze the success, failure, and progress of your business.

Ratio Analysis enables the business owner/manager to spot trends in a business and to
compare its performance and condition with the average performance of similar
businesses in the same industry. To do this, compare your ratios with the average of
businesses similar to yours and compare your own ratios for several successive years,
watching especially for any unfavorable trends that may be starting. Ratio analysis may
provide the all-important early warning indications that allow you to solve your business
problems before your business is destroyed by them.

Balance Sheet Ratio Analysis Formula

Important Balance Sheet Ratios measure liquidity and solvency (a business's ability to pay
its bills as they come due) and leverage (the extent to which the business is dependent on
creditors' funding). They include the following ratios:

Liquidity Ratios
These ratios indicate the ease of turning assets into cash. They include the Current Ratio,
Quick Ratio, and Working Capital.

Current Ratios. The Current Ratio is one of the best known measures of financial
strength. It is figured as shown below:
Current Ratio = Total current Assets/ Total Current Liabilities

The main question this ratio addresses is: "Does your business have enough current assets
to meet the payment schedule of its current debts with a margin of safety for possible
losses in current assets, such as inventory shrinkage or collectable accounts?" A generally
acceptable current ratio is 2 to
1. But whether or not a specific ratio is satisfactory depends on the nature of the business
and the characteristics of its current assets and liabilities. The minimum acceptable
current ratio is obviously 1:1, but that relationship is usually playing it too close for
comfort.

If you decide your business's current ratio is too low, you may be able to raise it by:
 Paying some debts.
 Increasing your current assets from loans or other borrowings with a maturity of
more than one year.
 Converting non-current assets into current assets.
 Increasing your current assets from new equity contributions.
 Putting profits back into the business.

:: 77 ::
Quick Ratios. The Quick Ratio is sometimes called the "acid-test" ratio and is one of the
best measures of liquidity. It is figured as shown below:

Quick Ratio= Cash + Government Securities + Receivables / Total current

liabilities
The Quick Ratio is a much more exacting measure than the Current Ratio. By excluding
inventories, it concentrates on the really liquid assets, with value that is fairly certain. It
helps answer the question: "If all sales revenues should disappear, could my business meet
its current obligations with the readily convertible `quick' funds on hand?"
An acid-test of 1:1 is considered satisfactory unless the majority of your "quick assets" are
in accounts receivable, and the pattern of accounts receivable collection lags behind the
schedule for paying current liabilities.

Working Capital. Working Capital is more a measure of cash flow than a ratio. The
result of this calculation must be a positive number. It is calculated as shown below:
Working Capital = Total Current Assets - Total Current Liabilities
Bankers look at Net Working Capital over time to determine a company's ability to
whether financial crises. Loans are often tied to minimum working capital requirements.
A general observation about these three Liquidity Ratios is that the higher they are the
better, especially if you are relying to any significant extent on creditor money to finance
assets.
Leverage Ratio
This Debt/Net Worth or Leverage Ratio indicates the extent to which the business is
reliant on debt financing (creditor money versus owner's equity):
Total Liabilities
Debt/Net Worth Ratio =
Net worth
Generally, the higher this ratio, the more risky a creditor will perceive its exposure in your business,
making it correspondingly harder to obtain credit.
Income Statement Ratio Analysis
The following important State of Income Ratios measure profitability:

Gross Margin Ratio

This ratio is the percentage of sales dollars left after subtracting the cost of goods sold
from net sales. It measures the percentage of sales dollars remaining (after obtaining or
manufacturing the goods sold) available to pay the overhead expenses of the company.
Comparison of your business ratios to those of similar businesses will reveal the relative
strengths or weaknesses in your business. The Gross Margin Ratio is calculated as follows:

Gross profit
Gross Margin Ratio =
Net sales
(Gross Profit = Net Sales - Cost of Goods Sold)

:: 78 ::
Net Profit Margin Ratio
This ratio is the percentage of sales dollars left after subtracting the Cost of Goods sold and
all expenses, except income taxes. It provides a good opportunity to compare your
company's "return on sales" with the performance of other companies in your industry. It
is calculated before income tax because tax rates and tax liabilities vary from company to
company for a wide variety of reasons, making comparisons after taxes much more difficult.
The Net Profit Margin Ratio is calculated as follows:
Net profit before Tax
Net Profit Margin Ratio =
Net sales

Management Ratios
Other important ratios, often referred to as Management Ratios, are also derived from
Balance Sheet and Statement of Income information.
Inventory Turnover Ratio
This ratio reveals how well inventory is being managed. It is important because the more
times inventory can be turned in a given operating cycle, the greater the profit. The
Inventory Turnover Ratio is calculated as follows:

Inventory Turnover Ratio= Net sales / Average Inventory at cost

Accounts Receivable Turnover Ratio

This ratio indicates how well accounts receivable are being collected. If receivables are not
collected reasonably in accordance with their terms, management should rethink its
collection policy. If receivables are excessively slow in being converted to cash, liquidity
could be severely impaired. The Accounts Receivable Turnover Ratio is calculated as
follows:
Net Credit Sales/Year
=DailyCreditSales 365
Days/Year
Accounts receivable / Daily credit sales
Accounts Receivable Turnover (in days) =
Return on Assets Ratio
This measures how efficiently profits are being generated from the assets employed in the
business when compared with the ratios of firms in a similar business. A low ratio in
comparison with industry averages indicates an inefficient use of business assets. The
Return on Assets Ratio is calculated as follows:
Return on Assets = Net profit before Tax / Total assets

:: 79 ::
Return on Investment (ROI) Ratio.
The ROI is perhaps the most important ratio of all. It is the percentage of return on funds
invested in the business by its owners. In short, this ratio tells the owner whether or not
all the effort put into the business has been worthwhile. If the ROI is less than the rate of
return on an alternative, risk- free investment such as a bank savings account, the owner
may be wiser to sell the company, put the money in such a savings instrument, and avoid
the daily struggles of small business management. The ROI is calculated as follows:

Return on Investment = Net profit before Tax / Net worth

These Liquidity, Leverage, Profitability, and Management Ratios allow the business owner
to identify trends in a business and to compare its progress with the performance of
others through data published by various sources. The owner may thus determine the
business's relative strengths and weaknesses.

:: 80 ::
 Case Exercise on calculation of Ratios
The Profit & Loss Account for the year 2018-19 and Balance Sheet of XYZ DCCB Limited as
on 31 March 2019 are furnished below:

Profit and Loss Account for the Year 2018-19

Rs. in Lakhs
Amount Amount
Expenditure Income
(Rs.) (Rs.)
Interest On
Intereston Loans
i) Deposits 1,078.00 1,939.00
and Advances
Income on
ii) Borrowings 1,487.00 1,384.00
Investments
Establishment&Other
Mice. Income 11.00
Expenses
i) Salary & Allowances 295.00
ii) Management
5.00
Expenses
RentRates,Electricityand
10.00
Repair Cost on Premises
Insurance 0
Postage & Telephone Charges 1.00
Printing & Stationery 8.00
Audit Fees 2.00
Travelling & Conveyance Expenses
2.00

Depreciation on Properties 12.10

Other Expenses 2.00
Provisions for NPAs 300.00
Provision for Standard Assets 100.00
Profit for the year 31.90
Total 3,334.00 Total 3,334.00

:: 81 ::
 Appropriation of Profit
(Rs. in Lakhs)
Amount
Expenditure Income Amount (Rs.)
(Rs.)
Accumulated losses Profit for the current
179.00 31.90
(Previous year) year

Balance of losses
carried to 147.10
Balance Sheet

Total 179.00 Total 179.00

Balance Sheet of XYZ DCCB Limited as on 31 March 2019

Amount Amount
Liabilities Assets
(Rs.) (Rs.)
Capital Cash on Hand 3.00
Paid up – PACS 1,085.00 Balances with SCB
Paid up – Government 200.00
Paid up – individuals 25.00 Savings Account 325.00
Reserves & Funds Investments
Reserve Fund 37.00 Term Deposits with SCB 13,707.00
Grants andother Term Deposits with SCB
81.00
Funds – RF deposits
Subsidy meant for Shares in Cooperatives
34.00 362.00
Societies Institutions
Staff P F Balance with P F
Trust / as Deposit with 400.00
SCB
Deposits Loans & Advances
KCC Loans – Rs.
Savings Deposits 4,263.00
12,176.00
Loan against Deposits –
Recurring Deposits 1,540.00
Rs. 610.00
Less: Provision for NPS Rs.
Term Deposits 8,553.00
902.00
Loans & Advances net of
Borrowings 11,884.00
Provisions
KCC Credit Limit 11,655.00 Closing Stock 47.00
Fixed Assets net of
Other Liabilities
Depreciation
:: 82 ::
Interest Accrued on
2,076.00 Land & Buildings 204.50
Deposits
Furniture & Fixtures,
Interest accrued on
306.00 Computers and other 41.40
Borrowings
Electrical installations
Sundry Creditors 87.00 Other Assets
Interest Accrued but not
Other Liabilities 406.00 414.00
due
Interest Receivable on
Provisions 2,740.00
Investments
Provision for Standard Sundry Debtors
100.00
Assets Rs. 180.00
Less: Provision for
Provision for Outstanding
2.00 Sundry Debtors Rs.
Expenses
169.00
Net Sundry Debtors 11.00
Prepaid Insurance 2.00
Profit & Loss A/c
147.10
(Accumulated Loss)
Total 30,369.00 Total 30,369.00

From the above financial statements, workout the following:

1. Working Funds
2. Interest Income
3. Interest Expenses
4. Net Interest Income
5. Miscellaneous Income
6. Cost of Management
7. Operating Income
8. Operating Cost
9. Operating Profit
10. Gross Income
11. Gross Expenses
12. Net Income (Net Profit)
13. Average Yield
14. Average Cost
15. Financial Margin
16. Transaction Cost
17. Risk Cost

:: 83 ::
18. Net Financial Margin
19. Net Margin
20. Owned Funds/Net Worth
21. Credit Deposit Ratio
22. Ratio of Total Loans to Total Assets
23. Ratio of Total Deposits to Total Assets
24. Ratio of Operating Expenses to Total Assets
25. Ratio of Interest Earned to Interest Paid

:: 84 ::
 Work Sheet on Calculation of Risk Weighted Assets
(Rs. In Lakhs)
Risk Risk Weighted
Sl. Amount
Assets Weight Assets
No. (Rs.)
(%) (3 X 4) / 100
(1) (2) (3) (4) (5)
1 Cash on Hand 0%
2 Balances with SCB
A In Current Account 20%
B Savings Bank Account 22.5%
3 Balances with Other Banks
A In Current Account 20%
B In Savings Bank Account 22.5%
C Others 22.5%
4 Investments
A Government Securities 2.5%
Shares in other Cooperative
B 102.5%
Institutions
Fixed Deposits with SCB/Other
C 22.5%
Banks
D NSC/KVP 2.5%
Staff P F balance with P F Trust/as
E 22.5%
Deposits with Banks
Other – Deposits with
F 102.5%
Marketing Societies
5 Loans & Advances
A ST/MT/LT Loans to PACS 100%
Loans to staff covered by
B mortgage/ superannuation benefits 20%

C Other Loans (Specify) 100%

6 Closing Stock 100%
7 Fixed Assets
A Land & Buildings, Godown 100%
Furniture, Fixtures, Banking
B counter,Computers& 100%
Electrical Installations
C Vehicles 100%

:: 85 ::
D Agriculture Machinery 100%
8 Other Assets
Interest Accrued but not
A 100%
overdue
B Overdue Interest 100%
Interest Receivable on
C 100%
Investments
D Sundry Debtors 100%
E Other Receivable 100%
F Amount involved in Frauds 100%
G Prepaid Expenses 100%
9 Total Risk Weighted Assets

:: 86 ::
 12. BALANCING OF LEDGERS AND RECONCILIATION OF
ACCOUNTS
Concept of Balancing of Ledgers

What is balancing?

Balancing of ledgers is a procedure of verifying the total amount of Balances of

Individual / Institution Accounts in a Bank under various Heads with the Balance of
respective Head in the General Ledger on a certain date.

Objective

• To know the arithmetical accuracy of each account in the Bank.

• To rectify the errors if any, in the same month or in the following month.

• To find out any fraudulent postings in the Ledgers in the same month or in the
following month. A stitch in time saves nine. If we take timely actions, it may save a
lot of possible loss and additional work at a later date.

When balancing is to be done?

On last Friday of every month the following ledgers may be tallied. Saving Bank,

Current Account, Gold Loan, Depositor Loan, Secured

Overdraft, Clean Overdraft, SAO, etc.

On last Friday of every quarter i.e., in March, June, September, and December, the
following ledgers may be tallied.

Fixed Deposit, Re-investment plan, Consumer durable loan, Education loan, Sunday
creditors, Sundry debtors, Matured deposit, all interest payable A/c etc.

The total balance of all Ledgers under each head should be tallied with the General
ledger figures under the relative Head. This balancing work should be completed by 10th of
the following month and the relative balancing certificate should be sent to Head Office
immediately.

How balancing is to be done?

For the ledgers other than saving bank ledgers, the balancing is to be done as under.

On the last Friday of the month/ quarter, the balances of all accounts under each
Head are to be extracted in the balancing book. The Balancing books are to be maintained
for each head separately. In other words separate balancing ledgers are to be maintained for
Fixed Deposit (FD), Re-investment Plan (RIP), Gold loans etc. The total of such balances
should be tallied with

:: 87 ::
the Balance under the relative Head in the General Ledger.

Proforma of Balancing Book

Sl. Account
No. No. Name Balance as Balance as Balance as
on........ on........ on........

Tallying of SB ledgers is a little bit cumbersome. All the vouchers viz., Debit
Transfers, Credit Transfers, withdrawals, cheques irrespective of Cash and Transfer passed
under SB are to be written in ledger wise scrolls every day after business hours. The
proforma of scroll is as under.

Credit Debit

Sl. Sl.
No. Particulars Cash Transfer No. Particulars Cash Transfer

On the last Friday of every month, the balance of each A/c in SB ledgers is to be
extracted in the ledger-wise balancing books and to be totalled. After this, with the help of
scroll, progressive figures for each ledger is to be arrived at.

How to get the progressive figures is detailed below: Proforma of

Progressive book:
Date Credit Debit

Opening Balance=
(+) Total Credits
(-) Total Debits
=Closing Balance

In the Progressive Book, the transactions in the scroll of each side debit and credit are
to be written date wise. The figures under cash and transfer of each side in the scroll are to be
totalled to put them in appropriate columns in the progressive book. Since the last month‟s
balances are tallied upto last Friday of the month, the transactions are to be taken for this
month from last Saturday of previous month to last Friday of this month. Last month‟s
closing

:: 88 ::
balance would be the opening balance for this month. For this opening balance the total of
credits in this month is to be added and the total of debits is to be deducted. The resultant
figures should tally with the total figures of balancing book. Likewise, all the SB ledgers
should be tallied. The total of resultant figures in the progressive book under each ledger
should be tallied. The grand total should be tallied to the General Ledger figure under
Savings Bank.

Who has to attend the Balancing Work?

In Cooperative Banks generally clerical staff is attending the balancing work. The
Officers of the bank are the certifying authorities of balancing work. Soon after tallying of
each ledger the clerk who has attended the balancing work has to first put his initial after
writing the word “Tallied” underneath of his signature the concerned officer has also to put
his initial in the balancing book after due checking /verification.

Balancing of ledgers will rectify the errors of Omission and Commission in the
ledgers. But the compensating errors under same head cannot be detected.

Ex: If an amount was credited to S.B. A/C of B instead of A, it cannot be detected.

Balancing work facilitates rectification of the mistakes in the Day Book and General
Ledger also.

Ex: Inter Scroll Transactions: An R.D. Pay-in-slip may mix up with S.B. vouchers and goes
under S.B Head or vice versa. This type of transactions will affect the accuracy of
Day book and General ledger. Such mistakes can be rectified by passing the
adjustment entries.

Under Computerized environment, to find out the accuracy in daily postings, All OK
Statements are to be generated for every month. The All OK Statement reveals the balances
at account level and product level under each head. These two balances (Account level and
Product level) are to be one and the same, otherwise there is a mistake in the process for
which it is to be verified and rectified. However, the compensating errors i.e. giving credits
/ debits for one account instead of another account cannot be found out in the process.

Reconciliation of Accounts

General:

a. The reconciliation of Inter Branch and Inter Bank transactions is the most important
and vital job in any SCB /DCCB.

b. Many frauds in banks have been made possible due to non-reconciliation of Inter
Branch and Inter Bank transactions for longer periods.

c. Huge interest losses have also been incurred by many banks due to

:: 89 ::
 inordinate delay in reconciling such transactions or due to non-
reconciliation of such transactions.

d. The Banks are under obligation to keep provision for un-reconciled amounts of
more than one year in the Banks.

Transactions to be Reconciled:

In a SCB/DCCB the following transactions or accounts have to be reconciled on a

month to month basis:

i) Inter Branch transactions.

ii) All transactions under the State Draft Scheme (SDS) by the member DCCBs and
Cooperative Urban Banks and the SCB.

iii) All transactions under AIMAS.

iv) All transactions put through the Current Accounts with the SCB, SBI and other banks
like ICICI, HDFC etc.,

v) All transactions in the Current Account with RBI.

Inter Branch Transactions:

Transactions between branches or between a branch and HO may arise in the following
circumstances:

i) Remittance of surplus cash by the branch to the HO/Feeder Branch.

ii) Withdrawal of cash from HO/feeder branch as and when required.

iii) Crediting to HO account the amounts of DDs issued by the branch on any day under
AIMAS or SDS for being transferred /credited to the respective paying banks or their
DCCBs/SCBs as the case may be.

iv) Transfer of funds to HO or other branches as per the instructions of the customers of
the branch.

v) Closing and transferring the customer‟s account, as per his request, by a branch to HO
or another branch.

vi) Withdrawal of funds by a staff member of the bank from his account with HO or other
branches wherever the rules permit such operations.

vii) Adjustment entries in respect of wrong debits/credits by HO or other branches and

also relating to instruments wrongly sent to the branch by HO due to wrong sorting of
Inward Clearing Cheques.

viii) Daily debit of HO account for the total of clearing cheques lodged with HO for
clearance ( for being presented in the Clearing House) and also
:: 90 ::
 daily credits to HO account in respect of clearing cheques received through HO (
cheques drawn on the branch presented by other banks in the clearing house)

ix) Debit and Credit entries to HO account relating to “Returned (unpaid ) Cheques”
both Inward and Outward returns.

x) Debit or Credit to HO account relating to movement of cash between branches

wherever permitted (drawal of cash from one branch by another in case of urgent
requirements).

Head Office Accounts Statement:

a. In respect of all the transactions detailed above, the branch where a transaction is
originating will adjust the amounts to the „Head Office Account‟ in its GL.

b. The next day morning a statement called “HO Account Statement” will be sent to the HO
(normally this is done through a courier as per arrangements made by HO on a
regular basis for movement of tappals between HO and branches) In this statement
full details of each transaction ( Debit or Credit) will be furnished. In addition to this
“HO Account Statements”, the branches will also be sending the Debit/Credit advices
in respect of all “originating entries” passed at the branches to the HO-Reconciliation
Section in a closed cover so that the advices do not get delivered to wrong sections
in HO.

Reconciliation Arrangements:

a. The reconciliation of Inter Branch transactions as well as the transactions between

HO and branches shall be centralized at HO.

b. Based on the volume of transactions the HO may have separate “Reconciliation

Section‟ for

i. Inter Branch transactions.

ii. For SDS operations and

iii. For AIMAS operations or it may have one (single) Reconciliation Section which will
take care of all AIMAS operations as well as inter branch transactions and the
reconciliation work relating to SDS operations.

Procedure at HO – Books maintained:

a. The HO of the Bank has a “Branches Account” in the GL for putting through the
transactions between HO and branches and also between branches.

b. All the Inter Branch transactions are put through the “Head Office Account only” at
the branches.

:: 91 ::
c. The HO (Branch Reconciliation Section) shall maintain a Subsidiary Day book called
“Branches Register” to record the transactions relating to branches. In this register
separate folios shall be allotted for each branch to ascertain the outstanding / balance
position against each branch and also for doing the reconciliation work.

d. The Officer incharge of Branch Reconciliation Section at HO, on receipt of closed

covers marked “Branch Reconciliation Section” from the branches, shall open all
such covers and distribute the advices and HO Account Statements to the Staff in the
Section. They will first verify the Credit / Debit advices with the respective entries in
the HO statement to satisfy that all the advices relating to all originating entries at
the branches have been received. If any advice is not received from a branch, that
branch shall be reminded either over phone or through a preprinted letter.

Distribution of Advices:

a. All the advices received from the branches by the “Branch Reconciliation Section (BR
Section)” at HO shall be sorted out Section-wise and sent to respective Sections (like
Administration, SDS, Stationery, Development or Premises Section etc.,) for
preparation and passing of vouchers relating to responding entries on the same day of
receipt of advices from the branches.

b. Such distribution of Branch Advices to concerned Sections in HO should be made

through a delivery book for proper accounting of all advices received from the
branches.

c. The Branch Reconciliation Section should ensure that the advices distributed among
various sections were vouched on the same day without fail.

Subsidiary Day Book / Branches Register:

a. The BR Section shall maintain the Subsidiary Day Book called “Branches Register” in
which all the debit/credit vouchers relating to the branches will be recorded. This
register shall be checked by the Officer in charge of Branch Reconciliation Section.
b. The summary of Debit/Credit entries as per the Branches Register should be sent to
Main Day Book Section for incorporation in the Main Cash/Day book.

Reconciliation Procedure :

a. Actual Reconciliation work (matching and scoring off the identical items of entries)
shall be done on Day-to-Day basis with reference to the details available in the HO
Account Statement received from the Branches Register maintained at HO.

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b. The Inter Branch Reconciliation work relating to the transactions of previous
month, should be completed within 10 days of succeeding month. Branch wise list of
items pending reconciliation, duly classified as “HO debits unadjusted”, “HO credits
unadjusted”, “Branch Debits unadjusted” and “Branch Credits unadjusted” for each
branch should be prepared and the balance as per HO books and branch books shall
be tallied for each branch by taking into account the unadjusted items pending
reconciliation.

c. After completing the above work the Branch Reconciliation Section shall be put up a
note to the GM/CEO through the AGM/DGM in charge of Banking furnishing the
details of pending items enclosing the branch- wise statements.

d. This section shall also issue notes or Inter Office Memos to other Sections in HO and
the branches giving the details of items pending reconciliation with a request to
eliminate such pending items by passing adjustment entries and report to the
Reconciliation Section.

e. This section shall also issue a circular to all the branches by 2nd week of March every
year covering the following :

i. All the Branch Managers shall ensure that all the debit and credit advices relating to
HO are sent to HO the very next day without fail.

ii. On receipt of advices from HO, the branches shall pass the corresponding entries on
the same day.

iii. Branches may be debiting/crediting other branches through HO account. In all the
advices relating to such transactions sent to HO “Branch Advised” should be
prominently marked. Similarly in the advices sent to the respective branch “HO Advised”
shall be prominently marked.
iv. The advices relating to each branch shall be kept in a separate cover with the name of
the concerned branch written boldly on the cover and all such covers shall be sent to
HO through banks couriers along with other tappals on the day of transactions or on
the very next day. The HO shall arrange to forward such covers to the respective
branches.

v. In respect of DDs issued by the branch for which the branch had sent consolidated
advice to HO, the branch will be getting a Computer Debit Advice (summary) from HO.
The branch should verify the Computer debit Advice received from HO whether all the
DDs issued by it have been debited by HO and also satisfy that the details of debits
furnished in the Computer Debit Advice agree with branch records. If there is any
discrepancy the same should be brought to the notice of State Drafts Scheme Section
or AIMAS section in HO.

f. The Branch Reconciliation Section of HO shall complete the reconciliation of all Inter
Branch transactions as on 28th / 29th of February each year before 7th of March. From
that day both the HO and all the branches should ensure that all responding entries
are passed in

:: 93 ::
 respect of all originating entries.

g. In case some transactions relating to BC realized or certain debits / credits have

been required on the last working day i.e. 31st March, the branches and HO should
ensure that all such advices are transacted on the first working day of the succeeding
financial year.

h. Despite all such efforts, some transactions may remain unadjusted as on 31st March at
one end. That is, if any inter branch debit or credit is made on the last working day of the
financial year the relative advice will reach the concerned branch only on 1st / 2nd
April. In respect of such originating entries made on 31st March, the adjustment
entries could be made only on 2nd /3rd of April or on a subsequent day and hence
such originating entries made on the last working day of the financial year at one
branch will remain unresponded by the concerned branch and this item of entry will
remain unadjusted inreconciliation.
i. However, all items pending adjustment relating to the transaction made during the
last week of the financial year should be traced and adjusted before 7th of April in the
succeeding financial year.

j. In this process all inter branch transactions could be properly accounted and no
transaction will remain unadjusted after 7th April.

Reconciliation of SDS Transactions:

a. In respect of transactions under the State Drafts Scheme by all the participants like
DCCBs, their branches, Cooperative Urban Banks, their branches and State
Cooperative Bank and its branches, all the adjustment entries are centralized at the
SCB and hence all the member DCCBs and CUBs will have to pass adjustment entries at
their level only as per the advice by the SCB.
b. However, the reconciliation process under SDS operations will be based on the
common errors that may be committed by any of the participants. To simplify the
procedure of reconciliation all the common errors that may occur while the Debit /
Credit Registers are prepared and the procedure for rectifying such errors are
detailed hereunder:

Nature of error Reasons

a) Wrong code number of issuing bank

i) Wrong Debit
found in DD issue advice
b) Bad figures (Jumbling) in writing the
issuing bank code
c) Wrong feeding at SCB
a) Wrong Code Number of paying bank
ii) Wrong Credit furnished by issuing bank in the DD issue
advice
b) Bad figures (Jumbling) in writing the paying
bank code

:: 94 ::
 c) Incorrect feeding of code numbers by SCB
in the computer
a) Receiptof(DD issuedadvice)advice from
iii) Double Debit
issuing bank Twice
b) Failure to PROMINENTLY recording in the
advice about issue of Fax
(already) for high value DDs
c) SCB acting first on the Fax and again
on the advice
iv) Excess / Incorrect feeding of DD amounts by SCB into the
Short Debit computer

Procedure for Rectification of Errors:

a. The issuing Bank/branch on receipt of “Debit Register” from the SCB, should
compare the following particulars in the DD issue Register/consolidated advice with
the particulars in the “Debit Register” received from the SCB to find out whether
following type of mistakes have occurred.

i) Wrong Debit : The DD number as shown in the Debit Register of SCB will
not tally with that recorded by issuing Bank in its books /
advice.

ii) Excess/Short Debit : The issuing bank would have noted the date of debit
of the DD by the SCB in the DD issue Register immediately
on receipt the Debit Register from the SCB on receipt of the
present/Current Debit Register from SCB if the issuing
Bank finds in its DD issue
Register that already date of debit has been noted against
the particular DD number and all other details of the DD
it is a case of Double Debit by the SCB. Then it must take
out the Debit Register of the date on which the SCB has
made the first debit to make sure the present debit is the
second debit.

iii) Wrong credit : The details regarding DD number, date of DD and amount
of DD between the Debit Register and the DD issue
register will tally. But the name and code number of
paying bank in the Debit Register will vary from the name
& Code number of the paying bank noted in DD issue
register by the issuing bank. It means that the SCB has
credited the DD amount to some other bank and not to
the Bank on whom the DD has been issued.
b. Whenever discrepancies like wrong debit/credit, double debit and excess/short
debit are noticed by the issuing bank as detailed in previous paras the issuing bank
should send a letter to the SCB.

:: 95 ::
c. The issuing banks will have to take additional responsibility for initiating action for
rectification of mistakes noticed in the Debit Register/Debit Advice of the SCB,
irrespective of the fact that whether there is temporary gain or loss to them by early
rectification of the errors.

d. To facilitate a quick and proper reconciliation of pending items under SDS

operations, the SCB can prescribe various statements to be prepared and sent to SCB
H.O by each DCCB as at the end of each quarter.
e. On receipt of such statements from the DCCBs, the SCB compares the pending items
indicated in these statements with the particulars available with the SCB and tries to
eliminate all such pending/wrong adjustment entries.
Reconciliation of AIMAS Transactions:

a. On receipt of periodical Current Accounts Statements from other SCBs, the SCB
should take up the reconciliation work immediately (By canceling identical entries
in subsidiary Day Book – AIMAS and the Current Account statement received from
respective SCB.)
b. Prepare a reconciliation statement at the end of every month.
c. Write letters about the pending unadjusted items of entries to other SCBs without
delay.
d. Ensure to eliminate the pending items at the earliest.

Reconciliation with RBI/SBI and other Banks:

a. In case the banks effecting Transfers to various DCCBs through SBI or any other
bank with whom the bank has such arrangements and also Transfers through RBI to
other SCBs, “Statement of Accounts” of the bank‟s Current Account with that bank (
RBI/SBI/other banks) must be collected on daily basis.

b. The Funds Section of the Bank will be getting all the communications in respect of
“Inward Transfers (Transfers effected by various DCCBs or CUBs or any other Bank)
and also the instructions from various sections of the bank HO for effecting “Outward
Transfers”
c. On getting the daily Statement of Accounts from RBI/SBI/other banks the Funds
Section staff should “Cross Check” the entries therein with the “Inward Transfers
Communications/Messages” and “Outward Transfers instructions” to ensure that
outward Transfers have been effected and Inward Transfers have been credited to the
bank‟s Current Account with that bank (RBI/SBI/Other Banks.)

d. In case there is no debit towards any outward Transfer on the date of Bank‟s
request for effecting such outward Transfer, the funds section must immediately
contact the concerned Section RBI/SBI/Other banks to ascertain the reason for not
effecting the Transfer on the required date and then should arrange to sort out and
settle the issue.

:: 96 ::
e. Similarly in case any Inward Transfer is not received and credited to the banks‟
current account with that bank for more than two days from the date of remittance by
the remitting bank, then the Funds section should contact the officers of the
concerned of that bank ( RBI /SBI/Other banks) and try to get the amount credited in
the bank‟s Current Account without further delay.

f. In case inward Transfers relate to the bank‟s AIMAS section or SDS section or
Advances section or Treasury Section and the amounts relating to some of the
Inward Transfers have not been received and credited to the bank‟s account on the
same date, then the Funds Section should inform the concerned Section (mentioned
about like AIMAS/SDS/Advances / Treasury as the case may be) so that the
concerned Section in the bank could take suitable action immediately like sending
fax message or contacting over phone the remitting bank and informing them about
non-receipt of the remittance. The Funds section should retain such Inward Transfer
messages in the Section and continue to follow up with the Bank (RBI/SBI/Other
banks).

g. In case any credit in the bank‟s Current Account with RBI /SBI /Other Banks does
not relate to the bank, has confirmed by all the concerned Sections in the bank like
AIMAS/SDS/Advances/Treasury/FD etc., then the Funds section through the
concerned competent authority should checkup with Remitter Bank to ascertain
whether they have remitted any such amount for credit of the SCB. In case the bank gets
a negative reply from the Remitter Bank, then the bank should immediately inform
the concerned bank (RBI /SBI /Other Banks) in writing about such wrong credit.

h. The Funds section of the bank should follow up such items of wrong credit and
ensure such credits are reversed within a reasonable time.

i. This must be carefully followed as there are quite a few instances where RBI/ SBI have
charged interest to the SCBs to whose accounts such wrong credits have been made
by RBI/SBI.

:: 97 ::
 Case exercise on Reconciliation

XYZ DCCB - Golconda Branch

Head Office Account

(Amount in Rupees)

DATE PARTICULARS Dr. Cr. BALANCE

01.02.19 Balance 60,00,000 60,00,000

01.02.19 To DD No.1122 on GunturDCCB 10,000 60,10,000

Cancelled
By DD No.1130 issued on DCCB Eluru 12,000 59,98,000
(HO)
To Clearing 4,00,000 63,98,000
By Clearing 3,00,000 60,98,000
03.02.19 To SB A/c No. 222 Transferred 600 60,98,600
from H.O.
To Clearing 2,50,000 63,48,600
By Clearing 5,00,000 58,48,600
04.02.19 To Cash Sent to H.O. 6,00,000 64,48,600
To Cash sent to Ramnagar Branch 2,00,000 66,48,600
By Clearing 1,50,000 64,98,600
To Clearing 3,10,000 68,08,600
06.02.19 By Cash received from H.O. 8,00,000 60,08,600
To Clearing 7,00,000 67,08,600
By Clearing 5,50,000 61,58,600
07.02.19 By Cash remitted by Sri Subba Rao 25,000 61,33,600
for credit of his SBA/c.
No.1212 at H.O.
To Cash remitted by Smt. Pallavi at H.O. 5,000 61,38,600
for credit of her C A/c.
No.1050 with the Branch
By Clearing 1,10,000 60,28,600
08.02.19 To Cash sent to H.O. 5,00,000 65,28,600
By DD No.1131 issued on 70,000 64,58,600
Sangareddy Branch
To SB A/c. No.256 Transferred from 1,000 64,59,600
H.O.
To Clearing 2,50,000 67,09,600
By Clearing 3,79,000 63,30,600
09.02.19 By Interest on FDR No.1070 2,800 63,27,800
Transferred for Credit of Sri Gopal’s SB
A/c. No.2055 with HO
To Interest on FDR from H.O. for Credit 1,500 63,29,300
of SB A/c. No.1188 of Smt.
P. Sudha

:: 98 ::
DATE PARTICULARS Dr. Cr. BALANCE

By Clearing 8,90,000 54,39,300

To Clearing 6,50,000 60,89,300

09.02.19 60,89,300
10.02.19 To DD No.1130 issued on Eluru 12,000 61,01,300
Cancelled
By Cash received from H.O. 9,00,000 52,01,300
To Clearing 48,000 52,49,300
By Clearing 5,20,000 47,29,300
11.02.19 To SB A/c. No.3125 Transferred from 1,900 47,31,200
H.O.
By DD No.1132 issued on Kurnool DCCB 40,000 46,91,200

By Clearing 4,90,000 42,01,200

To Clearing 1,50,000 43,51,200
13.02.19 By Cash received from H.O. 3,00,000 40,51,200
To Clearing 8,50,000 49,01,200
By Clearing 2,45,000 46,56,200
14.02.19 By Interest on FDR No.1090 8,000 46,48,200
Transferred for Credit SB A/c
No.2120 of K.N. Rao with HO
By DD No.1133 issued on 15,000 46,33,200
Khammam DCCB
By Clearing 2,75,000 43,58,200
To Clearing 4,25,000 47,83,200
15.02.19 To Cash Send to H.O. 5,00,000 52,83,200
By Clearing 75,000 52,08,200
To Clearing 48,000 52,56,200

:: 99 ::
 XYZ DCCB (H.O)
GOLCONDA BRANCHACCOUNT
(Amount in Rupees)
DATE PARTICULARS Dr. Cr. Balance
01.02.19 Balance 60,00,000 60,00,000
01.02.19 By DD No.1122 on Guntur 10,000 60,10,000
DCCB Cancelled
To DD No.1130 issued on 12,000 59,98,000
DCCB Eluru (HO)
By Clearing 4,00,000 63,98,000
To Clearing 3,00,000 60,98,000
03.02.19 By Clearing 2,50,000 63,48,000
To Clearing 5,00,000 58,48,000
04.02.19 ByCashreceived from 6,00,000 64,48,000
Golconda Branch
By Cash sent by Golconda 2,00,000 66,48,000
Branch to Ramnagar
Branch
To Clearing 1,50,000 64,98,000
By Clearing 3,10,000 68,08,000
06.02.19 To Cash sent to Golconda 8,00,000 60,08,000
Branch
By RD A/c. No.355 Tr.from 15,000 60,23,000
T. Nagar Branch for Credit of
Gold Loan A/c. No.1199
with Golkonda Branch.
By Clearing 7,00,000 67,23,000
To Clearing 5,50,000 61,73,000
07.02.19 To Cash remitted by Sri Subba 25,000 61,48,000
Rao for credit of his
SB A/c. No.1212 at H.O.
To Clearing 1,10,000 60,38,000
08.02.19 ByCashreceived from 5,00,000 65,38,000
Golconda Branch
By SB A/c. No.256 1,000 65,39,000
Transferred to Golconda
Branch
By Clearing 2,50,000 67,89,000
To Clearing 3,79,000 64,10,000
09.02.19 By Interest on FDR Tr. for 1,500 64,11,500
Credit of SB A/c. No.1258
with the Branch
To Clearing 8,90,000 55,21,500
By Clearing 6,50,000 61,71,500
10.02.19 By DD No.1130 issued by 12,000 61,83,500
Golconda Branch on Eluru
Cancelled
To Cash sent to Golconda 9,00,000 52,83,500
Branch

:: 100 ::
DATE PARTICULARS Dr. Cr. Balance
By Clearing 48,000 53,31,500
To Clearing 5,20,000 48,11,500

10.02.19 48,11,500
11.02.19 To DD No.3125 issued on 40,000 47,71,500
Kurnool DCCB by Golconda
Branch
To Clearing 4,90,000 42,81,500
By Clearing 1,50,000 44,31,500
13.02.19 To Cash sent to Golconda 3,00,000 41,31,500
Branch
To Advertisement Charges for 30,000 41,01,500
Gold Loan Auction for
Golconda Branch
By Clearing 8,50,000 49,51,500
To Clearing 2,45,000 47,06,500
14.02.19 To Intereston FDR No.1090 8,000 46,98,500
Transferred for Creditof SB
A/c. No.2120 of K.N. Rao
To Clearing 2,75,000 44,23,500
By Clearing 4,25,000 48,48,500
15.02.19 By Cash Sent to H.O. 5,00,000 53,48,500
By FDR No.1145 of Sri 1,50,000 54,98,500
Kumar transferred for re-
investment at Golconda
Branch
To Clearing 75,000 54,23,500
By Clearing 48,000 54,71,500

:: 101 ::
RBI / 2005-06 / 178
RPCD.CO.RF.BC.No. 44 / 07.38.03 / 2005-06

October10, 2005
Ashwina 18, Saka 1927

All State Co-operative Banks (SCBs) and District

Central Co-operative Banks (DCCBs)

Dear Sir,

Balance sheets of co-operative banks – Disclosure of additional information

In terms of section 29 of the Banking Regulation Act, 1949 (As Applicable to Co-operative
Societies), every co-operative bank is required to prepare a Balance Sheet and Profit and
Loss Account in respect of all business transacted by it as on March 31 every year. With a
view to ensuring transparency in the annual financial statements (i.e. Balance Sheets and
Profit and Loss Accounts) of the SCBs / DCCBs, it has been decided to introduce certain
disclosure standards in the form of "Notes on Accounts" to their Balance Sheets.
Accordingly, the particulars of information to be disclosed by SCBs / DCCBs have been
furnished in the Annexure. The SCBs
/ DCCBs are advised to furnish the information as "Notes on Accounts" to their Balance
Sheets effective from the year ending March 31, 2006.

2. The contents of this circular may be placed before the Board of your bank.

3. Please acknowledge receipt to our concerned Regional Office.

Yours faithfully

(K.Bhattacharya)
GeneralManager
Encls : 2

:: 102 ::
 Annexure

Sr.
Particulars
No.
1. Investments – (only SLR) – with break-up under permanent and current category –
Under current category with the following break-up
(a) Book value and face value of Investments
(b) Market value of Investments
[Further, as regards non-SLR investment, instructions for disclosure already
issuedvideRBIcircularRPCD.CO.RF.BC.No.65/07.02.03/ 2003-04 dated
February 23, 2004 should be strictly adhered to.]
Advances to directors, their relatives, companies / firms in which they
are interested.
2. (a) Fund-based
(b) Non-fund based (Guarantees, L/C, etc.)
3. Cost of Deposits – Average cost of Deposits.
4. NPAs.
(a) Gross NPAs
(b) Net NPAs
(c) Percentage of gross NPAs to total advances and
(d) Percentage of net NPAs to net advances
5. Movement of NPAs
6. Profitability.
(a) Interest income as a percentage of working funds.
(b) Non-interest income as a percentage of working funds.
(c) Operating profit as a percentage of working funds.
(d) Return on Assets
(e) Business (Deposits + Advances) peremployee
(f) Profit per employee
7. Provisions
(a) Provisions on NPAs required to be made
(b) Provisions on NPAs actually made
(c) Provisions required to be made in respect of overdue interest
taken into income account, gratuity fund, provident fund, arrears
in reconciliation of inter-branch account etc.
(d) Provisions actually made in respect of overdue interest taken into income
account, gratuity fund, provident fund and arrears in reconciliation of inter-
branch account.
(e) Provisions required to be made on depreciation in Investments.
(f) Provisions actually made on depreciation in Investments.
8. Movement in Provisions
(a) Towards NPAs
(b) Towards depreciation on investments.
(c) Towards standard assets.
(d) Towards all other items under 7 above
9 Payment of Insurance premia to the DICGC, including arrears, if any.
10 Penalty imposed by RBI for any violation
11 Information on extent of arrears in reconciliation of inter-bank and inter-
branch accounts

:: 103 ::