SPECIAL ACCOUNTING ✔ Claim against the bank not acknowledged as debt.
✔ Liability for partly paid investments.
1 Marks or 2 Marks Questions and Answer
1. Define Banking.
Accepting for the purpose of lending or investing of deposit of
money from the public, repayable on demand or otherwise, and
withdrawal by cheque, draft, and order or otherwise.
2. What is rebate on Bills Discounted?
Bill Discounting refers to unexpired discount on bill discounted.
The amount of discount proportional to the period that falls in
the year subsequent to the year in which the bills are discounted
should therefore be considered an unexpired (unearned) discount
of the year.
3. What is Bill for Collection?
The bank usually provides the facility to remit funds from one
place to another by means of bank draft, telegraphic transfer,
circular note, pay order etc.
4. What do you mean by Statutory Reserve in a banking
company?
Every banking company incorporated in India shall create a
reserve fund and transfer to it at least 25% of its annual profit as
disclosed in the profit and loss account prepared under section
29 and before any dividend is declared.
5. What do you mean by NPA?
Non-Performing assets is an asset held by the bank from which
no income is received by the bank within a certain period and
that remains out of order for a minimum of 90 days.
6. What is CRR?
Banks are required to maintain a certain percentage of their total
deposit (time and demand deposit) with the central bank. It is
called a cash reserve.
7. What is the Slip system of posting?
It is a method of rapid posting in a book maintained under the
Double Entry Principle. Under this system posting is done from
slips and not from journals or cash books.
8. What is SLR?
The bank should maintain in cash, gold and unencumbered
approved securities, an amount not less than prescribed rate of its
demand and time liabilities in addition to the cash reserve
requirement.
9. What are Non-Banking Assets?
Non-banking assets are the assets acquired in satisfaction of
claims. A banking company cannot hold any immovable
property how so ever acquired except for own use, for any
period exceeding seven years from the date of acquisition
thereof.
10. What are Contingent Liabilities in a Bank?
✔ Liability on account of outstanding forward exchange
contracts etc.
✔ Guarantees given on behalf of customers.
11. What are the advantages of the slip system of posting?
It is a method of rapid posting in a book maintained under the
Double Entry Principle. Under this system posting is done from
slips and not from journals or cash books.
✔ It reduces the possibility of errors and frauds.
✔ It saves a lot of time since the slips are prepared by the
customer themselves.
✔ It provides a good system of internal check etc
12. What is contingent liability?
A contingent liability is one which is not an actual liability but
which will become an actual one on the happening of some event
which is uncertain.
13. What are Performing Assets?
These are advances that return income on a continuous basis.
They do not carry more risk than the normal risk attached to the
business.
14. What do you mean by Branch Adjustment? Explain its
recording in banking final Accounts.
Bank has several branches and its deal with numerous
transactions take place between the head office and branches and
between one branch and another. In order to prepare the final
account these balances are grouped by the Head Office under
Branch Adjustment. The branch adjustment should be included
in schedule 5 other liabilities, if it has a credit balance or
schedule 11 other assets if it has a debit balance.
15. Give four examples of Contingent Liabilities.
A contingent liability is one which is not an actual liability but
which will become an actual one on the happening of some event
which is uncertain.
✔ Claim against the bank not acknowledged as debt.
✔ Liability for partly paid investments.
✔ Liability on account of outstanding forward exchange
contracts etc.
✔ Guarantees given on behalf of customers.
16. What do you mean by Held to Maturity securities?
These are the securities acquired with intention to hold them up
to maturity. These maturitys come under the permanent category
and are held to maturity security.
17. What do you mean by Held for trading securities?
These are securities acquired by the bank with the intention of
taking advantage of short term price/ interest rate movements.
18. Define Insurance.
It’s a contract whereby one person in consideration of a certain
sum known as premium agrees to pay on the happening of an
event or on the expiry of a period a sum of money or to
compensate the loss to the other.
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19. What is Policy?
The document containing the terms and conditions of an
insurance contract is known as the policy.
20. What is Premium?
Premium is the consideration received from the insured by the
insurance company as per the contract of insurance. It is the
main source of a life insurance company.
21. What is Reinsurance?
Reinsurance is the insurance effected by an insurance company
with another insurance company in order to reduce the risk in
respect of policies accepted.
22. What is Insurance?
Insurance is a contract between insurance company and policy
holder to reduce the risk of insured and at the same time enables
the insurance companies to make some profit.
23. What is Double Insurance?
If the same subject matter is insured with more than one
insurance company, it is known as double insurance.
24. What is the commission on reinsurance ceded?
On taking reinsurance, the original insurance company is selling
a part of its business to the other company called re-insurer. Here
the original insurer is acting as agent to the reinsurer for which a
commission is payable to the original insurer. It’s called
commission on reinsurance ceded.
25. What is annuity?
It is an annual payment which a life insurance company
guarantees to pay for a lump sum money received in advance.
26. What is the surrender policy?
Surrender of policy is the outright sale of a policy by the insured
to the insurance company before the maturity of the policy.
27. What is the valuation balance sheet?
Valuation balance sheet is a statement prepared by life insurance
companies to find out the excess of life assurance funds over net
liability or vice versa.
28. What is general insurance?
All insurances other than life insurance are regarded as General
insurance. Examples are fire insurance, marine insurance,
vehicle insurance, medical insurance etc.
29. Who is an Insurer?
The insurer is a party who agrees to compensate another person
against possible losses. It is also known as assurer.
30. Who is insured?
The insured is a party who gets his life or property insured
against risk. The insured or the assured is also known as a policy
holder.
31. What is fire Insurance?
A fire insurance is a contract under which the insurer in return
for a consideration (premium) agrees to indemnify the insured
for the financial loss which the latter may suffer due to
destruction of or damage to property or goods, caused by fire,
during a specified period.
32. What is Marine Insurance?
Marine insurance covers the loss or damage of ships, cargo,
terminals, and any transport by which the property is transferred,
acquired, or held between the points of origin and the final
destination.
33. What is a bonus in life insurance?
Bonus is the share of profit which a policy holder gets from the
insurance company.
34. What is the type of bonus?
Bonus is the share of profit which a policy holder gets from the
insurance company.
● Cash bonus
● Reversionary bonus
● Bonus in reduction of premium
35. What is the bonus in the reduction of the premium?
Instead of paying a bonus in cash to the policyholders, the
insurance company deducts the amount from the premium
payable to it.
36. What is the bonus in the reduction of the premium? How
is it treated in accounting?
Instead of paying a bonus in cash to the policyholders, the
insurance company deducts the amount from the premium
payable to it.
While recording the revenue account, if bonus in reduction of
premium is required to be adjusted, the amount should be
debited to revenue account and the same is added to the premium
amount to be shown on the credit side of the revenue account as
it stands reduced by the amount utilised for reduction of
premium.
But if the bonus in reduction of premium is given in the Trial
Balance, it needed only be debited in the revenue account.
37. What is a life assurance fund?
Life assurance being an endowment insurance, the surplus of
income after meeting expenses for the period cannot be treated
as profit for the period.in order to meet the liabilities that may
occur in future out of present insurance policies., the surplus is
generally placed in a fund. This fund is known as life fund to life
assurance fund.
38. What is a life assurance fund? Where does it appear in
the balance sheet?
Life assurance being an endowment insurance, the surplus of
income after meeting expenses for the period cannot be treated
as profit for the period.in order to meet the liabilities that may
occur in future out of present insurance policies., the surplus is
generally placed in a fund. This fund is known as life fund to life
assurance fund.
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Life fund is credited by transferring the revenue surplus and it’s
shown in the balance sheet under schedule 6 reserves and
surplus.
39. What do you mean by insurance claim?
Claim refers to the amount payable by the insurance company to
the insured as per the insurance contract.
40. What do you mean by reinsurance premium ceded?
The premium payable by the original insurance company to
Reinsurance Company is called reinsurance premium ceded.
41. What do you mean by surrender value?
The value paid by the insurance company on surrender of such
policy is known as surrender value.
42. What do you understand about the reversionary bonus?
Reversionary bonus – it is the portion of profit payable as bonus
to the policy holder on maturity of the policy. It is paid along
with the policy amount. It is an expense to be debited in the
revenue account.
43. Who is an Actuary?
An actuary is a mathematician having thorough knowledge of
the intricacies of life insurance and is an expert in the valuation
of policy.
44. What do you mean by actuarial valuation?
The process by which it is ascertained the net liability in respect
of the un-matured policies and annuity contract is known as
actuarial Valuation.
45. What are trade investments?
Investments made to earn regular income. They are held for a
long period and are treated as fixed assets.
46. What are marketable securities?
These are short term investments held for not more than one
year. These are held as temporary investments made to earn
some return on idle cash.
47. What are fixed income bearing securities?
Securities that carry a fixed rate of income (such as interest and
dividend) that falls due on some specific dates regularly.
Example: debentures, bonds etc.
48. What are variable income bearing securities?
Income of such securities varies from period to period.
Example: Equity shares.
49. What is brokerage?
In stock exchange investment transactions are made through
brokers who charge a small commission for the services
rendered by them. Banks may also impose commission.
Government also imposes stamp duty at prescribed rates.
Generally they are known as brokerage.
50. What are investments?
Investments are assets held by an enterprise for earning income
by way of dividends, interest and rentals; for capital
appreciation; for other benefits to the investing enterprise.
51. What is a quotation price?
Price at which one party is willing to buy or sell a certain
number of shares or stock or any other securities from the other
party.
52. Differentiate cum interest and ex-interest purchases.
Cum-interest: the quoted price will include the interest from the
date of last interest to the date of transaction.
Ex-interest: the quoted price will not include the interest.
53. Differentiate cum interest and ex-interest sales.
Cum-interest: the quoted price will include the interest from the
date of last interest to the date of transaction.
Ex-interest: the quoted price will not include the interest.
54. Explain an investment ledger.
Ledger used by an investing entity to record all the details of
each investment. It helps to record all the details related to
purchase or sales of securities and to ascertain the profit or loss
on such transactions. It also facilitates the determination of the
value of the securities at the end of each accounting period.
55. What are investment accounts?
Investment account is a real account maintained by the investing
enterprise. An investment account is prepared for each
investment such that the account is headed with the name of the
security, rate of interest or dividend and the dates on which
interest and dividend is payable. On purchase of investment the
account is debited and on sales, it is credited.
56. What do you mean by dissolution of partnership?
Termination of the original partnership agreement among the
partners.
57. What do you mean by dissolution of partnership firm?
Dissolution of a firm is the dissolution of partnership between all
partners of the firm. It leads to closure of business. The assets of
the firm are realised and the liabilities are discharged.
58. Explain the realisation account in dissolution of
partnership firm.
Realisation account is a nominal account prepared to close the
accounts of assets and liabilities and to find out the profit or loss
on realisation of assets and payment of liabilities. It is debited
with all assets except cash and fictitious assets, provision related
to liabilities, realisation expense and settlement of liabilities. It is
credited with all external liabilities, provisions for assets,
realisation of assets etc. The account is closed by transferring the
profit or loss to the partner's capital account.
59. Explain the capital account of partners in dissolution of
partnership firms.
Capital accounts are opened to which all accumulated profits and
realisation profit if any are credited and any accumulated losses
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and realisation loss if any are debited. The balance in the capital A fire insurance policy is taken to cover:-
account represents the amount due to or due from partners and is
closed by paying off or bringing in cash as the case may be. i. Sundry assets

60. What is ‘deficiency’ in dissolution of partnership? ii. Stock in trade

On dissolution, the capital account balance of a partner may turn
to be a debit balance because of the adjustments made. Such a
debit balance is called deficiency.
61. What makes a partner become insolvent?
If a partner does not have sufficient funds with him to bring into
the business to make good any deficiency, then he may be
declared as insolvent.
62. What is the ‘Garner vs. Murray decision’?
As per the decision, in the absence of any agreement to the
contrary, the loss due to the insolvency of a partner should be
borne by the solvent partners in the ratio of their capitals. The
capital for the purpose means the agreed capitals standing prior
to the time of dissolution.
63. What is the applicability of Garner vs. Murray rule in
India?
In India, the G vs. M rule is applied with some modification, i.e.,
the realisation loss need not be brought in cash by the solvent
partners because ultimately the same will have to be returned to
them.
iii. Profits that may lost due to disruption caused by fire
69. What is the Average Clause?
The clause which limits the liability of the insurer to that
proportion of actual loss which the insured amount or policy
value bears to the actual value of stock on the date of fire.
70. How do you calculate admissible claims?
Admissible claim= Net claim x Policy value / Value of stock on
the date of fire
71. What is under- insurance?
If the insured value is less than the insurable value or average
value of stock in the godown, it is called under- insurance
72. How is the treatment of abnormal items done?
a) Calculation of Gross Profit by preparing Trading a/c
b) Excluding abnormal items from sales
c) Gross Profit ratio on normal goods is calculated
d) Prepare Memorandum trading account
e) The stock of abnormal goods on the date of fire is
added to the value of normal goods on the date of fire.

64. When are all the partners considered to be insolvent in
dissolution of partnership firms?
When the external liabilities of the firm cannot be paid in full,
out of the firm’s own assets as well as the personal assets of the
partners, then all the partners are said to be insolvent.
73. What do you mean by Loss of profit policy?
A loss of profit policy is a policy attached to the fire insurance
policy, where the insured will be compensated also for the loss in
profit due to interruption in business activities due to fire in
addition to loss of stock.

65. What do you mean by piecemeal distribution? 74. Differentiate between fire insurance policy and loss of
stock policy.
On dissolution of a firm, the assets are realised gradually and
therefore the liabilities can be settled only gradually over a Fire insurance Loss of stock
period of time. In such a situation, the claims of different parties
must be settled in the order of preference when any asset is Coverage Loss or damage to Loss of gross profit
realised without unnecessarily waiting for the final realisation. the insured property due to business
The method of distributing cash to the different parties, as and interruption
when made available, is called piecemeal distribution.
Subject Tangible, i.e. Intangible, i.e. Earning
66. Mention the order of payment on dissolution of the firm. matter material property capacity
Order of payment

● Payment of realisation expense

● Payment to preferential creditors 75. Which are the various insured standing charges?
● Payment to creditors and other external liabilities ✔ Rent, rate sand taxes
● Payment of partner’s loan ✔ Interest on debentures and loans
● Balance utilised in payment of capital to the partners. ✔ Salaries of permanent staff
67. How is the business entitled to recover the amount from ✔ Wages of skilled workers
the insurance company? ✔ Directors fees
✔ Auditors fee, etc...
On the occurrence of any mishap, the business can recover the
least of the following:- 76. What is standard turnover?

I. The full value of insurance policy It is the turnover during that period in the twelve months
II. The actual cost of assets lost immediately before the date of damage which corresponds with
the indemnity period.
68. What does a fire insurance policy cover?
77. What is the increased cost of additional expenses?
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It refers to the additional expense incurred reasonably in order to
avoid reduction in turnover or output. It is a result of the damage
during the indemnity period.
78. How will you deal with the following items in the loss of
stock policy?
a) Fire fighting expense
b) Goods sent on approval basis, not received by the
customer
c) Goods at godown without purchase invoice
d) Salvaged stock.
a) Add the fire fighting expense to the book value of stock
on the date of fire to compute claim amount
b) It should be deducted from the value of stock on the
date of fire
c) Added to the value of stock to determine claim
d) It is deducted from the value of stock to determine
claim
Short Questions and Answer (4 Marks)
1. What are the conditions to be satisfied for granting a
Banking licence by the RBI?
Accepting for the purpose of lending or investing of deposit of
money from the public, repayable on demand or otherwise, and
withdrawal by cheque, draft, and order or otherwise.
If the following conditions are satisfied, the RBI may grant a
licence:
✔ That the company is or will be in a position to pay its
present and future depositors in full as their claim
accrue;
✔ That the affairs of the company are not being or are not
likely to be conducted in a manner detrimental to the
interest of its present or future depositors;
✔ That in the case of a foreign banking company, the
carrying on of a banking business by such company in
India will be in the public interest, that the government
or the law of the country of its origin does not
discriminate against Indian banking companies
carrying on business in that country and that it
complies with all the requirements of law applicable to
it.
2. What is the Slip System of posting? What are its
advantages and disadvantages?
It is a method of rapid posting in a book maintained under the
Double Entry Principle. Under this system posting is done from
slips and not from journals or cash books.
Advantage:
✔ It reduces the possibility of errors and frauds.
✔ It saves a lot of time since the slips are prepared by the
customer themselves.
✔ It provides a good system of internal checks etc.
Disadvantage:
✔ System is not free from snags/ problems.
✔ It suffers from the risk of loss.
✔ It suffers from the risk of misappropriation or
destruction of slip since they are loose.
3. Explain the special features of Bank Accounting.
✔ Entries are posted in the personal ledger directly from
slip instead of being posted from the book of primary
entry.
✔ Trial balance is prepared every day from the balance of
account in the general ledger.
✔ Personal ledgers are kept under an elf balancing
system. Trial balance is prepared for personal ledger
twice in a month.
✔ Slips posted into different personal ledgers every day
are summarised on a summary sheet, totals of which
are posted to the control accounts in the general ledger.
4. What is Bonus in Insurance Business? Explain the
type of bonus in insurance.
Bonus is the share of profit which a policy holder gets from
the insurance company.
✔ Cash bonus – amount of bonus paid in cash. It is
an expense to be debited in the revenue account.
✔ Reversionary bonus – it is the portion of profit
payable as bonus to the policy holder on maturity
of the policy. It is paid along with the policy
amount. It is an expense to be debited in the
revenue account.
✔ Bonus in reduction of premium- Instead of
paying bonus in cash to the policyholders, the
insurance company deduct the amount from
premium payable to it.
While recording the revenue account, if bonus in reduction
of premium is required to be adjusted, the amount should be
debited to revenue account and the same is added to the
premium amount to be shown on the credit side of the
revenue account as it stands reduced by the amount utilised
for reduction of premium.
But if the bonus in reduction of premium is given in the
Trial Balance, it needed only be debited in the revenue
account.
5. What is the bonus in the reduction of the premium?
Explain its treatment in the revenue account.
Bonus in reduction of premium- Instead of paying bonus in
cash to the policyholders, the insurance company deduct the
amount from premium payable to it.
While recording the revenue account, if bonus in reduction
of premium is required to be adjusted, the amount should be
debited to revenue account and the same is added to the
premium amount to be shown on the credit side of the
revenue account as it stands reduced by the amount utilised
for reduction of premium.
But if the bonus in reduction of premium is given in the
Trial Balance, it needed only be debited in the revenue
account.
6. Explain following terms
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 a) Policy
b) Premium
c) Reinsurance
d) Double Insurance
e) Commission on reinsurance ceded
f) Surrender policy
g) Insurance claim
The document containing the terms and conditions of an
insurance contract is known as the policy.
● Premium is the consideration received from the
insured by the insurance company as per the
contract of insurance. It is the main source of a life
insurance company.
● Reinsurance is the insurance effected by an
insurance company with another insurance
company in order to reduce the risk in respect of
policies accepted.
● If the same subject matter is insured with more
than one insurance company, it is known as double
insurance.
● On taking reinsurance, the original insurance
company is selling a part of its business to the
other company called re-insurer. Here original
insurer is acting as agent to the reinsurer for which
a commission is payable to the original
● Surrender of policy is the outright sale of a policy
by the insured to the insurance company before the
maturity of the policy.
● Claim refers to the amount payable by the
insurance company to the insured as per the
insurance contract.
7. Explain the different modes of dissolution of the firm.
Modes of dissolution of firm:
a) Dissolution by agreement
b) Compulsory dissolution
c) Dissolution on the happening of contingencies
d) Dissolution by notice
e) Dissolution by court.
8. Explain the mode of settlement of accounts on the
dissolution of partnership firms. Mode of settlement of
accounts:
I. Payment of losses: The amount of loss including the
deficiency of capital shall be paid first out of profits, next
out of capital and lastly, if necessary, will be realised
from the partners in their profit sharing ratio.
II. Distribution of assets: Amount realised from the sale of
assets shall be applied in the following order:
a) Pay the expenses for realising the assets and
collecting debts
b) Paying debts of the firm to third parties
c) Repayment of loans from partners
d) Repayment of capital contributed by partners.
e) Any surplus left, is distributed among partners in
the ratio at which they share profits.
iii. Payment of firm’s debts and personal debts: The assets of
the firm shall be applied first in payment of debts of the
firm and if any surplus remains it will be applied in
payment of his personal debts. The personal property
shall be applied first in payment of personal debts and if
there is any surplus, it will be applied in payment of firm
debts.
9. Explain the Garner vs. Murray decision.
On dissolution, the capital account balance of a partner
may turn to be a debit balance because of the adjustments
made. Such a debit balance is called deficiency. If a
partner does not have sufficient funds with him to bring
into the business to make good any deficiency, then he
may be declared as insolvent. If a partner is insolvent his
capital deficiency will be borne by the remaining solvent
partners. As per the G vs. M decision, the loss due to the
insolvency of a partner should be borne by the solvent
partners in their last adjusted capital ratio.
Decision in Garner vs. Murray
a) The realisation loss will be borne by all the partners
including the insolvent partner in their profit sharing
ratio.
b) The solvent partners should bring in cash equal to their
share of loss on realization.
c) The insolvency loss of the insolvent partner (capital
account deficiency or debit balance in capital account)
must be shared by the solvent partners in their capital
ratio.
d) Capital ratio will be determined on the basis of their
capitals appearing in the balance sheet of the firm just
prior to dissolution.
e) The partners having debit balances in their capital
account though solvent need not share the loss due to
insolvency of a partner.
f) Partners having credit balance in their capital accounts
have to share the insolvency loss.
g) While determining the capital ratio of the solvent
partners, it should be considered whether the capitals are
maintained according to fixed capital method or
Fluctuating capital method.
• In the case of a fixed capital method, the balances of
capital appearing in the balance sheet will be considered.
In such a case, all adjustments like General reserve,
Profit and Loss account balance, drawings, interest on
capital, interest on drawings etc. Are made through a
current account.
• In the case of fluctuating capital methods, the last agreed
capital should be taken as the base. It is arrived at after
making adjustments for General reserve, Profit and Loss
account balance, drawings, interest on capital, interest on
drawings etc. However, while calculating the last agreed
capital ratio, the realisation profit or loss is not
considered.
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 10. Explain the accounting procedure when all the
partners are insolvent in a partnership firm.

Accounting Procedure

a) Realisation A/c should be prepared without transferring

creditors and other external liabilities.

b) Separate accounts should be opened for creditors and

external liabilities

c) The unpaid balance of creditors and external liabilities

must be transferred to the deficiency account.

d) Partners capital A/c is prepared. The debit or credit

balance of partners’ capital account will also be
transferred to the deficiency account.

e) A cash A/c should be prepared. The cash available in the

firm, together with the amount received from the private
estate of the partners is paid to the creditors, after
meeting the realisation expense.

f) Finally, the deficiency account is automatically closed.

Thus, the books will be closed.

11. Explain the methods of piecemeal distribution. Methods

of piecemeal distribution:

A. Proportionate capital method

This method is also called surplus capital method or relative

capital method. Under this method the amount payable to
partners whose capitals are relatively in excess of their profit
sharing ratio is calculated.in other words, surplus capitals are to
be found out on the basis of profit sharing ratio. As and when
cash is available for partners, the surplus capitals are paid off.
After paying the surplus capital, the balance amount is
distributed amongst the partners in their profit sharing ratio.
When all the realisations have been distributed, the unpaid
balance of capital will represent the loss on realisation.

B. Maximum loss method (or Notional loss method)

Under this method, it is assumed that at each stage of realisation

of assets the unrealised assets are worthless. In other words it is
assumed that there is no further realisation. By comparing the
total adjusted capital of the partners with the amount available,
the maximum loss can be ascertained. The maximum loss is
ascertained at every stage of realisation and this loss is
distributed among the partners in their profit sharing ratio. The
balance left on the capital accounts will be the amount payable to
the partners.

12. Explain the procedure in calculating the amount of loss in

profit.

a. Calculation of rate of gross profit

b. Calculation of short sales
c. Calculation of gross profit on short sales
d. Calculation of the amount of admissible
additional expenses
e. Computation of the amount of gross claim
f. Application of average clause

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