Basics of Accounting

Introduction
“Modern Accounting is the language of business.” A businessman invests capital in a business with the objective of making profits and increasing his resources. He incurs various expenses like salaries, rent, power and stationery to operate his business. He receives income from different sources like commission, interest and discount in the course of his business operations. He buys and sells goods or services on cash or credit basis. He acquires and disposes of properties and assets such as land and building, plant and machinery and furniture and fixtures for producing and selling goods and services to generate revenue. He borrows money from various sources like banks, financial institutions and private money-lenders for financing the business. In effect, a business:  Owns Assets such as land & building, plant & machinery and furniture & fixtures  Owes Liabilities such as Capital (lent by business promoters), Loans & Borrowings raised from banks, financial institutions and the market  Receives income from different sources sales (of goods), commission, interest and discount  Incurs expenses towards purchase (of goods), salaries, rent, power and stationery Effective management of business requires control over expenses to reduce the cost of operation and optimize the profitability of business. Assets must be properly maintained to increase their productivity. Liabilities have to be repaid in due time. Dealings with customers and suppliers have to be managed properly to keep them satisfied. In order to maintain assets in good condition, to repay debts and other liabilities in time, to reduce the expenses and to increase income from sales and other sources, the businessman requires complete information about his business transactions at any point in time especially on:  What it (his business) owns?  What it owes?  How much income it has earned?  How much expenses it has incurred?  What is the profit made?  What his financial position is? To help businessmen in finding the required information on the status of his business at any point in time, Accounting was developed. Financial Transactions relating to business are recorded in the form of accounting entries through generally accepted principles of accounting so that income and financial position may be stated fairly. Accounting is thus a device for recording, classifying and summarizing financial transactions and interpreting its results for evaluating financial performance of business by stake-holdersproprietors, managers, creditors and investors.

Objectives, Advantages and Limitations
Why do we need Accounting?  Maintenance of financial records - the basis of accounting function  Ascertainment of Profit and Loss - net results of operations  Depiction of financial position - a true and fair view  Providing information - on resources utilization for decision making What are the advantages of maintaining accounts? • Systematic record keeping • Assessment of progress

Tool for SWOT analysis (Strengths Weaknesses Opportunities Threats)

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• • • •

Aid in decision making Statutory compliances Information to interested groups Legal evidence Taxation compliance Acquisitions and Mergers (of enterprises)

What are the limitations of accounting? Accounting, • Ignores transactions which cannot be expressed in terms of money • Cannot measure qualitative aspects of products, policies, management and workers

• • •

Cannot quantify morale and motivation of human resources Relies on estimates and forecasts in valuations of investments, inventory and useful life of assets employed Relies on historical data on valuation of assets ignoring price level changes and inflation

Branches in Accounting 1. Financial Accounting: This is used to record revenues, expenses, assets and liabilities and usually takes
the form of: • Profit and Loss Account - Revenues and expenses for an accounting period

Balance Sheet - Showing the Assets and Liabilities which indicates the financial position as on the reporting date

2. Cost Accounting: This involves the recording, classification, allocation and summarizing current and
prospective costs for: • Ascertainment of costs (of production and distribution)

• • •

Pricing of products and services Cost reduction and cost control Better management of business

3. Management Accounting: This is used for managerial decision making and for discharging managerial
functions. Information is provided on: • Funds flows and cash flows • Investment projects

Budgeting and implementation

The above branches are accounting are separate areas of study by itself and yet are interlinked. Our area of discussion is restricted to financial accounting.

Methods of Accounting
Accounting methods can be classified into:

1. Single Entry System:
An accounting method in which transactions are recorded as a single entry, rather than as both a debit and a credit as in double-entry bookkeeping. Personal accounts are maintained i.e. Cash books, Books for Debtors and Creditors. When using single entry bookkeeping, income is just the difference between cash expenses and cash receipts over the relevant time period. Single entry accounting tends to be suitable only for small companies with simple financial statements.

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2. Double Entry System:
Double-entry accounting system is the standard practice for recording financial transactions. This provides the underlying foundation for a system of accounting, which accumulates and organizes the raw data into useful information. The system is based on the concept that a business can be described by a number of different variables or accounts, each describing an aspect of the business in monetary terms. Every transaction has a 'dual effect'. This method of accounting records two aspects of each financial transaction - the Debit and the Credit (or the plus and the minus.) a. Benefit receiving aspect or income aspect – known as ‘Debit’ - Due for that - ‘Dr.’ b. Another, benefit giving aspect or outgoing aspect - known as ‘Credit’ - Due to that - ‘Cr.’ Double entry provides checks and balances to ensure that your books are always in balance. Debits must always equal credits. Because debits equal credits, double-entry accounting prevents some common bookkeeping errors. Errors that aren't prevented are easier to find. Double-entry accounting is the basis of a true accounting system. Advantages of Double Entry System: 1. 2. 3. 4. 5. 6. Complete, systematic and accurate record keeping of financial transactions Ascertainment of Profit or Loss of a business operations for a given period Knowledge of financial position Check on the accuracy of the accounts-Every debit has a corresponding credit Limitations on scope for frauds and misappropriations Better statutory, regulatory and tax compliances Receivables (on credit sales) and Payable (on Credit purchases) management Inter-firm, intra-firm comparative studies on annual results

7. 8.

Types of Accounts and Related Rules
Types of Accounts
Accounts

Personal

Impersonal

Proprietor

Creditors

Real

Nominal

Assets - For Use in Business Goods - For ResaleBusiness

Expenses and Losses Incomes and Gains

Personal accounts are those that are related to any person or firm. For example, accounts for Customers, Suppliers, Owners, Lenders etc. A personal account would be used when anything is given or received from or to a person by way of a loan or a credit.

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Accounting Rule: Debit the receiver Credit the giver Real accounts refer to fixed and current assets such as Cash, Building, Plant & Machinery, Vehicles, Stock of Goods etc. An asset has been described as anything that is used to further the course of business. Assets have been classified into fixed and current. Although termed as ‘fixed’, this category of assets refers to long term assets (assets of which the value is derived from for more than a year.) Similarly current assets are short terms assets what are usually used within a year. For example, for a confectionary shop, the shop building owned by the business is a fixed asset whereas the stock of chocolates is an example current asset. Accounting Rule: Debit what comes in Credit what goes out Nominal accounts relate to Expenses and Incomes such as Rent, Electricity, Interest Received, Depreciation etc. Accounting Rule: Debit all expenses and losses Credit all incomes and gains Summary Accounting Classification Personal Accounts Real Accounts Nominal Accounts Double Entry Book-keeping rules Debit the receiver Credit the giver Debit: What comes in Credit: What goes out Debit: All Expenses and Losses Credit: All Incomes and Gains

Basis for Accounting 1. Cash Basis Accounting: All incomes are considered earned and all expenses considered expended only
when they are actually received or incurred. The difference between total income and expenses represent profit. No adjustments are needed for outstanding and prepaid expenses. Similarly, accrued incomes and incomes received in advance are also not adjusted. Thus, income is recognized only when cash is received. Expense is recognized only when cash is paid. Government system of accounting is mostly on cash basis. Professionals like doctors, lawyers, brokers also prefer cash basis accounting.

2. Accrual Basis Accounting: This is also known as ‘Mercantile Basis Accounting’. In this system,
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 debited to the period in which they are incurred, whether cash is paid or not. The profit or loss for any accounting period is the difference between the aggregates of incomes earned and expenses incurred, for that period, irrespective of cash payments or receipts. All outstanding expenses and prepaid expenses, accrued incomes and incomes received in advance are adjusted while finalizing the accounts for a relevant period. This method was initially followed by merchants, trade and industry and was therefore known as the ‘Mercantile System’.

3. Mixed or Hybrid Basis: As the name suggests, certain items are recorded on a Cash basis and others on
accrual basis. For example, a trader may choose to record certain categories of sales on a Cash basis while following the Accrual system for everything else. However, the treatment of the items on Cash basis and Accrual basis must be decided upfront and followed on a strict basis.

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Accounting Concepts
Dual Aspect Concept This concept sets up for us the basic accounting equation from which financial statements are derived. The Accounting Equation states that "total assets = total liabilities and equities" Assets are what the company owns, Liabilities are what the company owes against those assets. The difference is the so called Equity in the company, or the net worth of the company. You have what you own (your assets), you have what you owe (your liabilities), and the difference is the owners equity or the owners investment in the assets. Entity Concept Business is separate from ownership. This is an important concept and the business treats the owners are persons who have invested in the business (but are not part of it.) "Accounts are kept for the business entity as distinguished from the person(s) that own it" If the owner of the business receives a salary and/or dividends from the business, you will see these transactions on the financial statements of the company. However, if the owner uses the funds received from the company to buy stock in another company, this will not be disclosed because it has no affect on the financial status of the business entity. Going Concern Concept The next concept is that the business will go on for ever. This is not the say that the business is not prone to being wound up. But the perpetual concept allows businesses to indulge in the concept of credit terms. If the business is thought of in the here and now without the notion of tomorrow, it would not be possible to businesses to be conducted on credit terms because the notion of here and now excludes the concept of tomorrow. "Accountants assume that the business will continue indefinitely" Without this assumption it would not be reasonable to spread (amortize) the cost of an asset over the period of its economic life. If the business is not going to continue all costs would have to be accounted for immediately as soon as they are acquired. Accrual concept Income is spread over the period for which it is earned. The time of actual receipt of money has little to do with when the money was earned. Accounting records the period for which the income was earned. Similarly, accounting also records expenses as they are incurred and not when they are actually paid. Matching Concept "Expenses incurred in earning revenues are matched against the revenues" Whatever revenues your company earns during a certain period, you match the appropriate expenses that you incurred in earning those revenues during the same period Conservatism Concept "Accountants are conservative in recording transactions". This principle has probably contributed most to the stereotypical image of the professional accountant. They always tend to take the pessimistic view in recording transactions because they are obligated to protect the reader of financial statements from concluding that the financial status of a company is brighter than it really is. Thus accountants tend to bring to light any potential losses while ignoring any potential gains.

Accounting Conventions 1. Disclosure: Truth, honesty and transparency should characterize accounting statements. Full and fair
disclosure of all the significant information material to stake-holders-owners, investors, creditors etc.

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must be clearly presented. Proper classification, summarization, aggregation and explanation of the numerous business transactions is another imperative of accounting disclosure.

2. Consistency: Preservation of the compatibility and reliability of financial statements could be achieved by
consistent accounting practices and concepts among different accounting years. e.g., valuation of stock, investments, depreciation etc.

3. Materiality: All important and significant items and facts which could influence the decision of an
informed stake-holder. Materiality covers three aspects-Information, Amounts and Procedures.

4. Conservatism: Policy of caution or playing safe. Used as a defensive accounting mechanism against
uncertainty. Events and transactions are recorded adopting the least favorable of all immediate alternatives projecting a worst case scenario. E.g. Valuation of stock by the least of cost or market value, provision for bad and doubtful debts etc. Conservatism within limits serves a useful purpose. In extremes, it may result in understatement of facts and figures and might conflict with Full Disclosure norm.

The Process of Building Financial Statements
Journal Entry (aka Accounting Entry / GL Entry) Posting to General Ledger

Extracting Trial Balance Determining Expense/Income, Asset/ Liability Creating Profit & Loss a/c and Balance Sheet

Journal entry The process of accounting begins with recording each financial transaction. This record – which takes into account dual aspects to the transaction is called a journal entry. E.g. Ram decides to begin a chocolate shop by investing Rs.50,000/- in cash Dr Cash a/c 50,000 Cr Ram’s capital a/c 50,000 {Note the use of accounting principals: • Cash is a real a/c (an asset) and therefore “Debit what comes in” • Ram is a personal a/c (belonging to a person) and therefore “Credit the giver” • Dual Concept – (1) Cash is increasing and (2) A liability is created (cash outflow) • Entity Concept – the business is treated the owner as a separate person – i.e. a person to whom the business owns money)} Ram decided to buy chocolates for Rs.30,000/- in cash Dr Chocolates a/c 30,000 Cr Cash a/c 30,000 General Ledger

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Each journal entry and looked at and collated into tables. These tables show the inflow and outflow for that particular a/c Cash a/c Cr Ram’s capital a/c 50,000 Dr Chocolates a/c 30,000 Net 20,000 (Debit short by 20,000 i.e. Debit balance) Ram’s Capital a/c Dr Cash 50,000 Net 50,000 (Credit short 50,000 i.e. Credit balance) by Chocolates a/c Cr Cash 30,000 Net 30,000 (Debit short by 30,000 i.e. Debit balance)

Trial Balance This is a summary of the ledger accounts Cash Ram’s Capital Chocolates Total Dr balances 20,000 30,000 50,000 Cr balances 50,000 50,000

The debit and credit balances in a trial balance will always be the same as accounting follows the dual aspect. An unbalanced trial balance is an indication of errors in recording or posting journal entries. Expense/ Income/Asset/Liability? The next step is to examine the items in the trial balance and determine where they are to be posted: Expense ‘Loss’ under Profit and Loss a/c Income ‘Profit’ under Profit and Loss a/c Asset ‘Asset’ item in the Balance Sheet Liability ‘Liability’ item in the Balance Sheet Profit and Loss a/c and Balance Sheet reflect the financial position of a business for a given period. While preparing these statements, it is important to consider the Matching Concept: "Expenses incurred in earning revenues are matched against the revenues" Therefore, if expenses have been incurred for which the benefit is likely to be carried forward in the next financial year, such expenses spread over such a period. In such cases, part of the expenses will be shown in the P&L a/c and the rest in the Balance Sheet under the asset heading “Deferred Expenses / Expenses Prepaid” Cash (asset) Ram’s Capital (liability) Chocolates (asset) Dr balances 20,000 30,000 Cr balances 50,000

Preparation of Profit and Loss a/c and Balance Sheet Profit and Loss a/c Balance Sheet Nil Capital 50,000 Total 50,000

Cash 20,000 Chocolates 30,000 Total 50,000

Accounting for Contingent Liabilities
A contingent event is something that may or may not happen. Nonetheless, as discussed, any event that may have a negative impact on the business needs to be recorded. (A positive contingent event is ignored.) For recording contingent events, contingent entries are posted. These are not nominal accounts. A rule of thumb that could apply to contingent events is:

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Dr Cr

What May Come In (Recourse in case the liability becomes real) What May Go Out (Liability that may become real)

Since contingent account balances do not capture real liabilities i.e. an item that must be paid – they do not find a place in the Balance Sheet. Instead, they are shown as a footnote to the balance sheet and are called Off Balance Sheet items. Example: Alpha Ltd discounts bills of exchange (Rs.20,000) due to it in the open market. There is a possibility that the buyer – Bravo Ltd will not honor those bills. Such items are in the nature of a contingent liability: Dr Bravo Ltd Bills Discounted (Contingent) Liability a/c 20,000 Cr General Bills Discounted (Contingent) Liability a/c 20,000 Balance Sheet of Alpha Ltd. Liabilities xx Assets xx Total xx Total xx

Contingent Liabilities: General Bills Discounted (Contingent) Liability Bravo Ltd 20,000 ----------------------------------------------------Total 20,000 -----------------------------------------------------

Concept of Accrual and Amortization
Let’s have a look at the matching concept again: "Expenses incurred in earning revenues are matched against the revenues" Whatever revenues your company earns for a certain period must be spread over that period irrespective of when you actually receive the money. This is required to present an accurate picture of the actual incomes and expenses. Amortization At the time of financing e.g. discounting export collection bills, we often collect the interest upfront. Although this interest is collected on Day Zero, i.e. the day of the financing, this interest is earned over a period of time i.e. over the period for which the funds were lent. If for any reason, the exporter decided the return the funds earlier than the maturity date, the interest would have to be refunded. Therefore Interest is not Income per se but rather “Interest Received but not Earned”. With the passage of time, part of this amount will be translated into income. To record the change from Interest Received to Income, amortization entries are posted Dr Cr Interest (Received but not earned) a/c Interest Income <Portion of Interest> <Portion of interest>

The amortization entries are posted at various intervals – this is usually at the end of every day or at the end of every month. The portion of interest to be transferred will therefore depend on the frequency of posting the entry. Accrual Just as interest can be collected upfront, it can also be collected at maturity. Nonetheless, interest is earned over the passage of time and becomes due to the lender. This also needs to be recorded in order to provide an accurate picture of incomes and expenses. Appropriate accrual entries need to be posted to reflect this picture. Dr Cr Interest (Earned but not Received) a/c Interest Income <Portion of Interest> <Portion of interest>

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Like amortization entries, the portion of interest will depend on the frequency of the posting event.

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Accounting for Trade
Collections
Export Collections Receipt Nil (There is no financial impact) Amendment / Acceptance Nil (There is no financial impact) Payment Dr Nostro (or any other a/c where funds are parked) Cr Commission a/c (for our charges) Cr Customer’s Current a/c (or other a/c where funds are to be credited) If exporter requires bills to be discounted Dr Customer’s Bills Discounted a/c Cr Interest (Received but not Earned) a/c Cr Commission a/c (for our charges) Cr Customer’s Current a/c (or other a/c where funds are to be credited) Interest amortization Dr Interest (Received but not Earned) a/c Cr Interest Income At the time of bills discounting settlement Dr Nostro (or any other a/c where funds are parked) Dr Customer’s Current a/c (for shortfall) Cr Customer’s Bills Discounted a/c Import Collections Receipt Nil (There is no financial impact) Amendment / Acceptance Nil (There is no financial impact) Payment Dr Customer’s Current a/c (or any other a/c where funds are parked) Cr Commission a/c (for our charges) Cr Nostro a/c (or other a/c where funds are to be credited) If bills are to be avalised (at the time of avalisation) Dr Customer Avalisation Liability a/c Cr General Avalisation Liability a/c Dr Customer’s Current a/c Cr Commission a/c <Amount received> <Commission amount> <Net amount to customer> <Bill amount> <Interest collected> <Commission amount> <Net amount to customer> <Amount to be amortization> <Amount to be amortization> <Amount received> <Shortfall, if any> <Bill amount>

<Amount due including commission if any> <Commission amount> <Amount to be paid out> <Bill amount> <Bill amount> <Avalisation charges> <Avalisation charges>

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Additional entries to be posted for bills avalised at the time of payment Dr General Avalisation Liability a/c <Bill amount> Cr Customer Avalisation Liability a/c <Collection amount> If the customer requires an Import Loan to pay his import collection bills Dr Customer’s Import loan liability a/c <Bill amount> Cr Nostro (or other a/c where funds are to be credited) <Bill amount> Interest accrual Dr Interest (Earned but not Received) a/c Cr Interest Income At the time of settlement of the import loan Dr Customer’s current a/c Cr Interest (Earned but not Received) a/c Cr Commission a/c Cr Customer’s Import loan liability a/c Import L/C Issuance: Liability and charges Dr Customer’s L/C Contingent Liability – Sight / Usance Cr General L/C Contingent Liability – Sight / Usance Dr Customer’s current a/c Cr Commission a/c Amendment: Liability increase and charges Dr Customer’s L/C Contingent Liability – Sight / Usance Cr General L/C Contingent Liability – Sight / Usance Dr Customer’s current a/c Cr Commission a/c Amendment: Liability decrease and charges Dr General L/C Contingent Liability – Sight / Usance Cr Customer’s L/C Contingent Liability – Sight / Usance Dr Customer’s current a/c Cr Commission a/c <L/C amount + Tolerance> <L/C amount + Tolerance> <L/C commission amount> <L/C commission amount> <L/C amount increase> <L/C amount increase> <L/C commission amount> <L/C commission amount> <L/C amount increase> <L/C amount increase> <L/C commission amount> <L/C commission amount> <Amount accrued> <Amount accrued> <Import loan, Interest and charges> <Interest collected> <Commissions a/c> <Import loan amount>

Acceptance – Compliant Documents / Discrepant documents at the time of acceptance Dr General L/C Contingent Liability – Sight / Usance <L/C drawing> Cr Customer’s L/C Contingent Liability – Sight / Usance <L/C drawing> (Reversing contingent liability) Dr Cr Customer’s L/C Acceptance Liability General L/C Acceptance Liability (Creating real liability) <L/C drawing> <L/C drawing>

Payment: Sight – Compliant Documents / Discrepant documents at the time of payment Dr General L/C Contingent Liability – Sight <L/C drawing> Cr Customer’s L/C Contingent Liability – Sight <L/C drawing> (Canceling contingent liability as the obligation is met) Dr Cr Cr Customer’s current a/c Nostro Commission <L/C drawing, commission> <L/C drawing> <Commission>

(No entries will be posted for discrepant documents that are refused except for collection of charges, if any)

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Payment: Usance Dr General L/C Acceptance Liability Cr Customer’s L/C Acceptance Liability (Canceling liability as the obligation is met) Dr Cr Cr Customer’s current a/c Nostro Commission

<L/C drawing> <L/C drawing> <L/C drawing, commission> <L/C drawing> <Commission>

In case an import loan is required by the applicant, entries similar to those for import collection loan will be posted. Export L/C Advising: charges Dr Customer’s current a/c Cr Commission a/c Amendment advising: charges Dr Customer’s current a/c Cr Commission a/c Acceptance Nil Payment Dr Nostro (or any other a/c where funds are parked) Cr Commission a/c (for our charges) Cr Customer’s Current a/c (or other a/c where funds are to be credited) If beneficiary requires pre-payment of funds (with recourse) Dr Customer’s Bills Discounted (L/C) a/c Cr Interest (Received but not Earned) a/c Cr Commission a/c (for our charges) Cr Customer’s Current a/c (or other a/c where funds are to be credited) If beneficiary requires pre-payment of funds (without recourse) Dr Issuing Bank’s Bills Discounted (L/C) a/c Cr Interest (Received but not Earned) a/c Cr Commission a/c (for our charges) Cr Customer’s Current a/c (or other a/c where funds are to be credited) At the time of pre-payment funding settlement Dr Nostro (or any other a/c where funds are parked) Dr Customer’s Current a/c (for shortfall) Cr Customer’s / Issuing Bank Bills Discounted (L/C) a/c Confirmed L/Cs Export L/C Confirmation Dr Issuing Bank’s Export L/C Contingent Liability a/c Cr General Export L/C Contingent Liability a/c Dr Customer’s current a/c Cr Commission a/c <L/C amount + Tolerance> <L/C amount + Tolerance> <Confirmation commission> <Confirmation commission> <Amount received> <Commission amount> <Net amount to customer> <Drawing amount> <Interest collected> <Commission amount> <Net amount to customer> <Drawing amount> <Interest collected> <Commission amount> <Net amount to customer> <Amount received> <Shortfall, if any> < Drawing amount> <Advising commission> <Advising commission> <Amendment advising commission> <Amendment advising commission>

(Note the similarities between L/C confirmation and L/C Issuance entries)

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Acceptance – Compliant Documents / Discrepant documents at the time of acceptance Dr General Export L/C Contingent Liability a/c <L/C drawing> Cr Issuing Bank’s Export L/C Contingent Liability a/c <L/C drawing> Dr Issuing Bank’s Export L/C Acceptance a/c <L/C drawing> Cr General Export L/C Acceptance a/c <L/C drawing> Payment: Sight – Compliant Documents / Discrepant documents at the time of payment Dr General Export L/C Contingent Liability a/c <L/C drawing> Cr Issuing Bank’s Export L/C Contingent Liability a/c <L/C drawing> Dr Nostro <Amount in Nostro> Cr Commission a/c <Commission, Charges> Cr Customer’s Current a/c <Net Amount> Payment: Usance Documents Dr General Export L/C Acceptance a/c Cr Issuing Bank’s Export L/C Acceptance a/c Dr Nostro Cr Commission a/c Cr Customer’s Current a/c If beneficiary requires pre-payment of funds – Sight documents Dr General Export L/C Contingent Liability a/c Cr Issuing Bank’s Export L/C Contingent Liability a/c Dr Issuing Bank’s Bills Discounted (L/C) a/c Cr Interest (Received but not Earned) a/c Cr Commission a/c (for our charges) Cr Customer’s Current a/c (or other a/c where funds are to be credited) <L/C drawing> <L/C drawing> <Amount in Nostro> <Commission, Charges> <Net Amount> <L/C drawing> <L/C drawing> <Drawing amount> <Interest collected> <Commission amount> <Net amount to customer>

If beneficiary requires pre-payment of funds – Usance documents Dr General Export L/C Acceptance a/c <L/C drawing> Cr Issuing Bank’s Export L/C Acceptance a/c <L/C drawing> Dr Issuing Bank’s Bills Discounted (L/C) a/c <Drawing amount> Cr Interest (Received but not Earned) a/c <Interest collected> Cr Commission a/c (for our charges) <Commission amount> Cr Customer’s Current a/c (or other a/c where funds are to be credited) <Net amount to customer>

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Trade Items on the Balance Sheet
Balance Sheet as on 31st Dec, XX Liabilities Capital Deposits from customers Profits Provisions for Losses Trade liabilities Import L/C Drawing acceptance Confirmed L/C Drawing acceptance (in EUR ’000,000) 250 2,100 300 50 200 100 Assets Fixed Assets Other Assets Loans to customers (in EUR ’000,000) 200 100 2,000

Trade assets Import Customer L/C Drawing acceptance 200 Receivable from Issuing Bank (Confirmed L/C Drawing acceptance) 100 Collections Bills discounted 50 Import Loans 25 Export L/C Bills discounted - with recourse 250 - without recourse 75 Total 3,000

Total Off Balance Sheet Items Bills Avalised L/Cs Issued Export L/Cs Confirmed

3,000

10 190 100

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Accounting terminology
Accounting Terminology Capital Liability Assets Revenue Expense Revenue Capital Debtors Creditors Fixed Assets Current or Floating Assets Long-term Liabilities Current Liabilities Purchases Sales Profit Revenue Others Revenue Others Stock Drawings Tangible Assets Intangible Assets Fictitious Assets Definition and Scope Owners’ funds invested in business Debts and Outside Liabilities (Not belonging to owners) Anything of value owned or controlled by business firm from which future economic benefits are derived Inflow of assets resulting in owner’s equity Amounts (of short-term nature) spent to produce and sell the goods and services (cost of the use of things to generate revenue Long-term Receiver of a benefit without immediate cash payment (credit sales) Giver of a benefit without immediate cash payment (credit purchases) Assets acquired for sustained income generation, over a long period, but not for resale Assets convertible into cash in less than a year Liabilities repayable in periods longer than one year Liabilities repayable in periods less than one year Buying of goods with an intention to sell, for cash or credit Selling of goods for cash or credit Excess of revenue over expenses of a business in an accounting period Gains resulting on account of sale of an asset Excess of Expenses over revenue in an accounting period. Loss due to fire or on account of sale of an asset Goods or inventory lying unsold on a particular date Amounts withdrawn by owners of a business Assets having physical existence Assets which cannot be seen or felt Unadjusted losses shown on the assets side Equivalent Terms/Examples Equity/Net Worth

Sales receipts, interest, commission Salaries, rent, power and water, Purchase of raw materials Acquisition of long-term assets Trade Debtors Trade Creditors Land and Building, Plant and Machinery Stock, Debtors, Cash Bank Loans, Mortgage Loans Trade Creditors, Bills Payable Cash and Credit Purchases Cash and Credit Sales Gross Profit and Net Profit

Loss

Gross Loss and Net Loss

Opening and Closing Stocks Subtracted from Capital Land and Building, Plant and Machinery Goodwill Preliminary and Preoperative expenses

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