JAIIB / Diploma in Banking & Finance

ACCOUNTING AND FINANCE

FOR BANKERS

SPECIAL ACCOUNTS - MODULE C

M Syed Kunmir
SPBT College
 BANK RECONCILIATION
The bank pass book indicates the amount
paid into the bank and the amount
withdrawn there from. The pass book
balance on any given date must be the
same as the balance shown by the bank
column of the cash book on the same date.
But in actual practice the bank pass book
balance seldom agrees with the balance
shown by the bank column of the cash
book. This happens when some of the
transactions appear in the cash book but
not in the pass book or in the pass book
but not in the cashbook.
 Reasons For Difference
1. Cheques issued but not presented for
payment. When cheques are issued, the entry
in the cash book is made immediately. In the
books of the bank, the entry is made only
when the cheque is presented for payment..
2. Cheques paid into the bank but not yet
cleared. As soon as the cheques arc
deposited into the bank, the entry is passed on
the debit side of the bank column in the cash
book. The customer's account is credited by
the bank only when the cheques are cleared.
3. Interest allowed by the bank. Bank
might have credited the account of the
customer with the interest and may have
made the entry in the pass bk.
 Reasons For Difference
4. Interest and bank charges debited by
bank. The bank debits the account of the
customer by way of interest on overdraft. It
also debits the account of the customers by
way of incidental charges and collection
charges.
5. Interest, dividend etc. collected by the
bank. Sometimes interest on government
securities or dividend on shares is collected
by the bank and is credited to customer's
account. If the entry for these do not appear
in the cash book, the balance will differ.
 Reasons For Difference
6. Direct payment by the bank
Sometimes under standing instructions from
the client, certain payments like insurance
premium, club fees etc. are made by the
bank.
7. Direct payment into the bank by a
customer. Sometimes our customers
deposit money direct into the account in the
bank, the corresponding entry for which may
not appear in the cash book, due to delay in
necessary instructions by the customers.
 Reasons For Difference
8. Dishonor of bill discounted with the bank.
Sometimes customers get their bills discounted
with the bank. If the bank is not able to get
payment of these bills on the due date, it will
debit the customers accounts with the amount of
the bills together with the noting charges, if any.
The customer will pass the entry in his books on
receipt of the information from the bank.
9. Any error committed by the bank Or
Customer Besides the above reasons if any error
is committed either by the bank or by the
customer himself while recording the transactions
in their respective books it will cause
disagreement between the two balances.
 BASICS OF ACCOUNTING

DOUBLE ENTRY SYSTEM

3 TYPES OF ACCOUNTS:

-- REAL: ASSETS OF BUSINESS, TANGIBLE AND

IDENTIFIABLE.

-- PERSONAL: THEY ARE HEADED WITH THE NAME OF

PERSON/BUSINESS/FIRM. DEBTORS OR CREDITORS.

-- NOMINAL: THEY RECORD TRANSACTIONS OF

INTANGIBLES SUCH AS RENT EXPENSES.
.
 BASIC RULES OF ACCOUNTING

RULES:
-- REAL : DEBIT THE ACCOUNT WHEN WE PURCHASE
AN ASSET & CREDIT WHEN WE SELL OR
DEPRECIATE.

-- PERSONAL : DEBIT THE RECEIVER OF GOODS &

CREDIT THE GIVER OF GOODS.

-- NOMINAL : DEBIT LOSSES & EXPENSES, CREDIT

INCOMES & GAINS.

-- IN A LEDGER, ASSETS OR LOSSES HAVE DEBIT

BALANCE WHILE LIABILITIES OR GAINS HAVE
CREDIT BALANCE.
 BANK RECONCILIATION STATEMENT

ADVANTAGES OF BANK RECONCILIATION

. VERIFICATION OF ACCURACY OF ENTRIES

. TIMELY CORRECTIVE ACTION

. PREVENTS FRAUDS

. CONTROL TOOL FOR MANAGEMENT

 EXAMPLES
X co .was maintaining account with KRB Bank Ltd.
On 31st December,2006, Bank column of cash book
of company showed a debit balance of Rs. 26000.
Cheques deposited into the bank but not credited
before 31st December,2006 amounted to Rs.4000
Bank charges of Rs. 500 were debited by the bank
but no entry was made by the accountant of the
company.
From the above particulars, find out the balance as
per KRB Banks books.
A) Rs.30500
B) Rs.25500
C) Rs.21500
D) Rs.22500
 Bank Reconciliation
Debit balance in the cash book
means
a) Overdraft
b) Favourable balance
c) Temperory overdraft
d) None of the above
 Bank Reconciliation
Bank reconciliation statement is
A) Ledger account
B) Part of the cash book
C) Statement containing differnece of
cash book and bank pass book
D) None of the above
 Bank Reconciliation
Bank reconciliation statement is
prepared by
A) Business man
B) Bank
C) Debtor
D) None of the above
 Bank Reconciliation
To reconcile the cash book with the
pass book the un presented cheques
are
A) added
B) subtracted
C) multiplied
D) devided
 Bank Reconciliation
To reconcile the cash book with the
pass book when the cash book is
overcast by Rs 100, Rs 100 will be
A) added
B) subtracted
C) multiplied
D) devided
 Bank Reconciliation

Undercasting of the credit side of Cash Book has the same

effect as overcasting of the

A) Debit side of the pass book.

B) Credit side of the pass book.
C) There is no relevance between the two
D) None of the above
 TRIAL BALANCE

DEFINITION

IT IS A STATEMENT SHOWING CREDIT AND DEBIT

BALANCES FROM THE LEDGER.

HELPS ARITHMETICAL ACCURACY AND FACILITATES

FINAL ACCOUNTS.
 TRIAL BALANCE

BASIC PRINCIPLE :

SINCE IT IS DOUBLE ENTRY BOOK-KEEPING,

HENCE ASSETS AND EXPENSES ARE DEBIT BALANCES

LIABILITIES AND INCOMES ARE CREDIT BALANCES

. IN CASE OF ARITHMETICAL INACCURACY IDENTIFY

CLERICAL/PRINCIPLE ERRORS AND RECTIFY

 TRIAL BALANCE

TYPES OF ERRORS:

A) CLERICAL ERRORS

-- ERRORS OF OMISSION

--- OMISSION OF TRANSACTION FROM BOOKS

--- COMPLETE OMISSION NOT AFFECTING TRIAL

BALANCE

--- PARTIAL OMISSION AFFECTING TRIAL

BALANCE
 TRIAL BALANCE

-- ERRORS OF COMMISSION

--- FIGURE POSTED ON THE WRONG SIDE OR WITH

WRONG AMOUNT

-- COMPENSATING ERRORS

--- ONE ERROR BALANCES ANOTHER ERROR

. B) ERRORS OF PRINCIPLE

-- ERRORS IN CONTRAVENTION OF ACCOUNTING

PRINCIPLES
 TRIAL BALANCE

RECTIFICATION OF ERRORS IS A SERIES OF STEPS:

PASS THE CORRECT ENTRY

COMPARE THE WRONG ENTRY WITH THE CORRECT

ONE

PASS THE RECTIFICATION ENTRY

IF TRIAL BALANCE DOES NOT TALLY THEN

DIFFERENCE IS TRANSFERRED TO SUSPENCE
ACCOUNT
 TRIAL BALANCE

TYPICAL TRIAL BALANCE

NAME DEBIT
CREDIT
CAPITAL X
DRAWINGS X
PURCHASES X
SALES X
EXPENSES X
DEBTORS(CUSTOMRES) X
CREDITORS(SUPPLIERS) X
CASH X
SALES RETURN X
 TRIAL BALANCE

TYPICAL ERRORS:

-- CLERICAL:

A) SALARY PAID 1000/- BUT POSTED AS 10, 000/-.

RECTIFICATION: CREDIT SALARY WITH 9000/-.

B) SALARY PAID 1000/- BUT POSTED IN RENT A/C.

RECTIFICATION: DEBIT SALARY AND CREDIT RENT WITH
1000/-.

C) GOODS WORTH 100/- SOLD TO VIJAY WRONGLY

RECORDED IN PURCHASE REGISTER.
RECTIFICATION: CREDIT SALES AND PURCHASE A/Cs
WITH 100/- EACH AND DEBIT VIJAY WITH 200/-.
 TRIAL BALANCE

AFTER TRIAL BALANCE IS PREPARED ONE FINDS

. D) SALES OF 500/- POSTED AS 5000/- WHILE RENT PAID

500/- POSTED AS 5000/-.
. RECTIFICATION: DEBIT SALES WITH 4500/-, CREDIT
SUSPENCE WITH 4500/-, CREDIT RENT WITH 4500/-,
DEBIT SUSPENCE WITH 4500/-.

E) SALARY PAID AS 1000/- BUT POSTED AS 10,000/- IN RENT

A/C.
RECTIFICATION: DEBIT SALARY WITH 1000/- SUSPENCE
WITH 9000/-; CREDIT RENT WITH 10000/-

F) A PURCHASERS DEBIT BALANCE OF 9000/- HAS NOT

BEEN TAKEN.
RECTIFICATION: DEBIT DEBTORS, CREDIT SUSPENCE TO
THE EXTENT OF 9000/-.
Rectification of Errors-Examples

Sales to Navin of Rs.1000 is debited to Ravin A/c. this will be

rectified by-----
Debiting Navin a/c and Crediting Ravin A/c
Debiting both Accounts
Debiting Ravin a/c and Crediting Navin A/c
Debiting Navin A/c and crediting Sales A/C
 Rectification of Errors-Examples
sale of Rs.5000 to Suresh is posted to his credit, then
rectification is
i. Credit Suresh to the extent of Rs.10,000
ii. Credit Suresh to the extent of Rs.5,000
iii. Debit Suresh to the extent of Rs.10,000
iv. Debit Suresh to the extent of Rs.5000 Credit
Trail balance Say True or false
1) Wrong balancing of an account will not affect
the trial balance
2) Trial balance does not ensure arithmetical
accuracy
3) Preparations of trial balance helps in locating
accounting errors
4) Debit balance of ledger account is shown in
debit column of trial balance
5) Fixed deposits with banks shows debit
balance
6) Purchases are shown in the debit side of the
trial balance
7) Banks overdraft is shown on the debit side of
the trial balance
 CAPITAL AND REVENUE EXPENDITURE

BASIC PRINCIPLE:

. ALL EXPENSES AND RECEIPTS OF REVENUE NATURE

ARE TAKEN TO TRADING AND PROFIT & LOSS

ACCOUNT

. ALL EXPENDITURES AND RECEIPTS OF CAPITAL

NATURE

ARE TAKEN TO BALANCE SHEET

 CAPITAL AND REVENUE EXPENDITURE

REVENUE RECEIPTS/PAYMENTS :

. ARE SMALLER IN SIZE(RELATIVELY)

. ARE RECURRING IN NATURE

. THE BENEFITS ARE OVER A SHORTER PERIOD (1 YEAR)

. THE PURPOSE IS TO RUN THE BUSINESS ON A DAY TO

DAY BASIS

. MAINTAIN ASSETS IN WORKING CONDITION

 CAPITAL & REVENUE EXPENDITURE

CAPITAL RECEIPTS/PAYMENTS:

ARE USUALLY LARGE(RELATIVELY)

ARE NON-RECURRING IN NATURE

THE BENEFITS ARE OVER LONGER DURATION

THE PURPOSE IS TO ENHANCE PRODUCTIVITY OF

THE ASSETS
 CAPITAL AND REVENUE EXPENDITURE

THERE ARE CERTAIN EXPENDITURES WHICH ARE

OTHERWISE REVENUE IN NATURE BUT SOMETIMES

UNUSUALLY LARGE AND WHOSE BENEFIT TO THE

ORGANISATION MAY ACCRUE AFTER FEW YEARS.THESE

MAY BE TREATED AS DEFERRED REVENUE EXPENDITURE ,

CARRIED TO THE BALANCE SHEET , AND WRITTEN OFF TO

THE PROFIT & LOSS ACCOUNT OVER A PERIOD OF TIME.

 CAPITAL AND REVENUE EXPENDITURE

SAME IS THE CASE WITH CERTAIN RECEIPTS SUCH AS

SALE OF ASSETS, WHERE THE RECEIPTS UPTO BOOK

VALUE IS DEDUCTED FROM THE ASSET, AND , IF

BETWEEN BOOK VALUE & COST AS REVENUE

RECEIPT & ABOVE COST AS CAPITAL RECEIPT.

. THERE IS A THIN LINE BETWEEN CAPITAL & REVENUE

CLASSIFICATION. FOR INSTANCE REPAIRS TO
MACHINERY WHICH KEEPS THE ASSET IN WORKING
CONDITION IS CHARGED TO THE P & L A/C WHILE
BETTERMENT EXPENSE IS CAPITALISED.
 CAPITAL & REVENUE EXPENDITURE

EXAMPLES OF EACH TYPE OF CLASSIFICATION:

CAPITAL NATURE:

-- PURCHASE OF ASSETS SUCH AS BUILDING,

MACHINERY, VEHICLES.
-- EXPENDITURE IN PURCHASE /SETTING UP OF
CAPITAL GOODS/ASSETS
-- EXCESS OF SALE PRICE OF ASSET OVER ITS COST
PRICE
-- FUNDS RAISED THRU BANKS/INSTITUTIONS
-- FUNDS RAISED THRU ISSUE OF SHARES, &
DEBENTURES
 CAPITAL AND REVENUE EXPENDITURE

REVENUE NATURE:

ALL TRANSACTIONS RELATING TO NOMINAL

ACCOUNTS

EVEN CERTAIN EXPENSES OF NON-RECURRING

NATURE BASED ON MATERIALITY CONCEPT

EXCESS OF SALE VALUE OF ASSET OVER W D VALUE

UPTO COST OF ASSET
 Capital & Revenue
Expenditure
CAPITAL REVENUE

Large amount Relatively small

Improve or enhance earning Maintain asset

capacity
Long duration benefit Short duration

Non- recurring recurring

Balance sheet item Trading /P & L A/c item

 CAPITAL AND REVENUE EXPENDITURE

DEFERRED REVENUE EXPENDITURE:

LARGE ADVERTISING EXPENDITURE FOR(SAY)

LAUNCH OF A PRODUCT

EXPENDITURE FOR RAISING OF FUNDS INCLUDING

PREPARATION OF PROJECT REPORT

INITIAL EXPENSES FOR SETTING UP OF A COMPANY

 Cap. & Rev. Expenditure-
Examples
(1)Cost of replacement of defective parts of the
machinery is -----
a. Capital expenditure
b. Revenue expenditure
c. Deferred revenue expenditure
(2) Loss of goods due to fire Rs.8000 is a revenue
expenditure because----
a. It is recurring
b. Amount involved is small
c. Loss is arising out of business operations
 Cap. & Rev. Expenditure-
Examples
(3) Professional fees paid in connection with
acquisition of leasehold premises is----
a. Capital expenditure
b. Deferred revenue expenditure
c. Revenue expenditure
 Examples

(4)Preliminary expenses , discount allowed

on issue of shares are the examples of
a. Capital expenditure
b. Deferred revenue expenditure
c. Revenue expenditure
(5) Machinery costing Rs.10,000, whose
current book value is Rs.7000 is sold for
Rs.12000 what is the amount of capital &
revenue receipt
a. Capital receipt of Rs. 2000 & Rev. Receipt of Rs.10000
b. Capital receipt of Rs. 9000 & Rev. Receipt of Rs.3000
c. Capital receipt of Rs. 12000 & Rev. Receipt of Rs.Nil
 INVENTORY VALUATION

VALUATION OF STOCKS IS IMPORTANT FROM THE

POINT OF INCOME DETERMINATION.

THE DANGER COULD BE OF EITHER OVERVALUATION

OR UNDERVALUATION OF STOCKS RESULTING IN
OVERSTATING OR UNDERSTATING OF PROFITS.

METHODS OF VALUATION:
-- FIFO
-- LIFO
-- AVERAGE OR WEIGHTED AVERAGE COST METHOD
-- BASE STOCK METHOD
-- ADJUSTED SELLING PRICE METHOD
 INVENTORY VALUATION

UNDER FIFO GOODS ISSUED TO PRODUCTION IS

VALUED AT THE EARLIEST PRICE WHEREAS THE
CLOSING STOCK IS AT THE LATEST PRICE.

UNDER LIFO GOODS ISSUED TO PRODUCTION IS

VALUED AT THE LATEST PRICE WHEREAS THE
CLOSING PRICE IS AT THE EARLIEST PRICE.

UNDER WEIGHTED AVERAGE COST METHOD

ARITHMETIC MEAN OF TOTAL PRICE BY TOTAL
QUANTITY RECEIVED IS TAKEN FOR VALUATION.
 INVENTORY VALUATION

ADJUSTING SELLING PRICE METHOD IS GENERALLY

USED BY SMALL BUSINESSMEN WHO ARE UNABLE TO
DIFFERENTIATE VARIOUS COSTS.

HENCE THEY VALUE THE STOCKS AT SELLING PRICE

AND THEN REDUCE ITS VALUE TO THE EXTENT OF
ESTIMATED GROSS MARGIN.
 INVENTORY VALUATION

BASE STOCK METHOD

IT IS ON THE ASSUMPTION THAT A MINIMUM

QUANTITY OF INVENTORY ( BASE STOCK ) MUST BE
HELD AT ALL TIMES IN ORDE TO CARRY ON THE
BUSINESS

PRESENTLY ACCOUNTING STANDARDS PERMIT

FIFO(HISTORICAL PRICE) OR WEIGHTED AVERAGE
COST METHOD.

VALUE OF STOCK CAN BE ASCERTAINED BY

PERIODIC(PHYSICAL VERIFICATION) OR PERPETUAL
INVENTORY ( MAINTAINENCE OF STOCK REGISTER).
 INVENTORY VALUATION

CHARACTERISTICS OF DIFFERENT METHODS OF

INVENTORY VALUATION

FIFO :
-- IN RISING MARKET FIFO RESULTS IN HIGHER
PROFITS LOCKING UP OF SCARCE W. C.
-- GOODS ARE SOLD AT CURRENT HIGHER PRICES
WHILE COST OF GOODS REFLECTS LOWER THAN
CURRENT COSTS
-- IN FALLING MARKET FIFO RESULTS IN LOWER
PROFITS
.
 INVENTORY VALUATION

-- LIFO :

-- IN FALLING MARKET THE EFFECT IS THE SAME AS

THAT OF FIFO IN RISING MARKET

-- IN RISING MARKET THE EFFECT IS SAME AS THAT

OF FIFO IN FALLING MARKET.
 INVENTORY VALUATION

IN THIS CHAPTER IT IS IMPORTANT TO DISCUSS THE

VARIOUS ACCOUNTING CONVENTIONS
CONSERVATISM CONCEPT: RECOGNITION OF
INCREASES IN EARNINGS REQUIRES BETTER
EVIDENCE THAN DOES RECOGNITION OF DECREASES
THAT IS EXPENSES
REALISATION CONCEPT: RECOGNITION OF AMOUNT
OF REVENUE THAT HAS CERTAINTY OF REALISATION
MATCHING CONCEPT: RECOGNITION OF REVENUES
AND EXPENSES FOR A CERTAIN EVENT.
 Methods of valuation of
inventory
FIFO LIFO AVERAGECOST

Goods issued Goods issued Found out by

valued at valued at dividing total
earliest price latest price price paid by
Stock Stock quantity
valuation at valuation at received
latest price earliest price
 INVENTORY VALUATION

CONSISTENCY CONCEPT: ONCE A CERTAIN METHOD

IS DECIDED UPON FOR ALL SUBSEQUENT EVENTS OF
THE SAME CHARACTER THE SAME METHOD SHOULD
BE USED UNLESS THERE IS A SOUND REASON TO
CHANGE
MATERIALITY CONCEPT: DEPENDING UPON
JUDGEMENT AND COMMON SENSE IMMATERIAL
EVENTS / TRIVIAL MATTERS SHOULD NOT BE GIVEN
MORE IMPORTANCE THAN WARRANTED.
HISTORICAL COSTS: COST OF ACQUISITION
DISCOUNTS, IF ANY, + COSTS INCIDENTAL TO
BRINGING THE ASSET/ ERECTING THE ASSET.
 Example
Let's examinethe inventory of Cory's Tequila Co.
(CTC) to see how the different inventory valuation
methods can affect the financial analysis of a
company.
Monthly Inventory Purchases*

Month Units Purchased Cost/unit Total Value

January 1,000 Rs10 Rs10,000

February 1,000 Rs12 Rs12,000

March 1,000 Rs15 Rs15,000

Total 3,000

Beginning Inventory = 1,000 units purchased at Rs8 each (a total of 4,000 units)

Income Statement (simplified): January-March*

Item LIFO FIFO Average

Sales = 3,000 units @
Rs60,000 Rs60,000 Rs60,000
Rs20 each
Beginning Inventory 8,000 8,000 8,000
Purchases 37,000 37,000 37,000
Ending Inventory (appears
on B/S) 8,000 15,000 11,250
*See calculation below
COGS Rs37,000 Rs30,000 Rs33,750

Expenses 10,000 10,000 10,000

Net Income Rs13,000 Rs20,000 Rs16,250

 LIFO Ending
Inventory Cost = 1,000 units X Rs8 each = Rs8,000
Remember that the last units in are sold first; therefore, we
leave the oldest units for ending inventory.

FIFO Ending
Inventory Cost = 1,000 units X Rs15 each = Rs15,000
Remember that the first units in (the oldest ones) are sold first;
therefore, we leave the newest units for ending inventory.

Average Cost Ending Inventory = [(1,000 x 8) + (1,000 x

10) + (1,000 x 12) + (1,000 x 15)]/4000 units = Rs11.25 per
unit

1,000 units X Rs11.25 each = Rs11,250 Remember that we

take a weighted average of all the units in inventory
 BILLS OF EXCHANGE

BILL OF EXCHANGE IS THE VEHICLE FOR CREDIT

TRANSACTIONS IN BUSINESS; HAS 3 PARTIES:

DRAWER WHO MAKES THE BILL/ CREDITOR;

DRAWEE ON WHOM THE BILL IS DRAWN;

PAYEE -- WHO RECEIVES THE MONEY;

SOMETIMES DRAWER & PAYEE ARE THE SAME.

ACCEPTANCE TO PAY BY THE DRAWEE IS ESSENTIAL.

.
 BILLS OF EXCHANGE

. PROMISSORY NOTE IS SIMILAR ; HAS ONLY 2 PARTIES

BUT SIGNED BY DEBTOR; NOTING NECESSARY.

. ACCOMODATION BILL : THERE IS NO TRANSACTION;

THE BILL IS DISCOUNTED TO RAISE MONEYS FOR

BOTH PARTIES, WHO SHARE THE AMOUNT.

 BILLS OF EXCHANGE

TYPICAL ENTRIES:
. THE ENTRIES IN THE BOOKS OF DRAWER A ARE:
DIRECT BILL TRANSACTION
BILLS RECEIVABLE a/c DR.
TO DRAWEE B

. CASH a/c DR.

TO BILLS RECEIVABLE
( BILL IS MET ON DUE DATE)
 BILLS OF EXCHANGE

BILL ENDORSED TO C
. Cs a/c DR.
TO BILLS RECEIVABLE
( NO ENTRY WHEN BILL IS MET)

BILL SENT FOR COLLECTION

. BANK FOR BILL COLLECTION a/c DR.
TO BILLS RECEIVABLE
. CASH a/c DR.
TO BANK FOR BILL COLLECTION
( BILL SENT FOR COLLECTION IS MET)
.
.
.
 BILLS OF EXCHANGE

IN CASE OF DISCOUNTING
CASH a/c DR.
DISCOUNT a/c DR.
TO BILLS RECEIVABLE
( NO ENTRY WHEN BILL IS MET)

THE ENTRIES IN THE BOOKS OF DRAWEE B:

.. As a/c DR.
TO BILLS PAYABLE

. BILLS PAYABLE a/c DR.

TO CASH
( BILL IS PAID)
 BILLS OF EXCHANGE

THERE ARE CASES WHEN BILLS ARE DISHONOURED.

IN THAT CASE THE ENTRIES ARE AS FOLLOWS:
IN As BOOKS:
BILL DIRECTLY SENT FOR PAYMENT
Bs A/C DR.
TO BILLS RECEIVABLE
TO CASH
( CASH IS THE NOTING CHARGE)

DISHONOUR OF DISCOUNTED BILL

. BILLS RECEIVABLE A/C DR.

NOTING CHARGES A/C DR.
TO CASH
(CASH (notary charges) IS PAID TO THE BANK)
 BILLS OF EXCHANGE

-- Bs a/c DR.
TO BILLS RECEIVABLE
TO NOTING CHARGES
(BILL RETURNED TO A)

DISHONOUR OF BILL SENT BY BANK FOR PAYMENT

BILL RECEIVABLE a/c DR.

NOTING CHARGE a/c DR.
TO CASH
TO BANK FOR BILL COLLECTION
( DISHONOUR OF BILL FOR COLLECTION)

. Bs a/c DR.
TO BILLS RECEIVABLE
TO NOTING CHARGES
(BILL RETURNED TO B)
 BILLS OF EXCHANGE

DISHONOUR OF ENDORSED BILL

. BILLS RECEIVABLE a/c DR.

NOTING CHARGES a/c DR.
TO C

Bs a/c DR.
TO BILLS RECEIVABLE
TO NOTING CHARGES
(BILL RETURNED TO B)
 CONSIGNMENT ACCOUNT

WHEN OWNER SENDS GOODS TO HIS AGENT FOR THE

PURPOSE OF SELLING THEN IT IS CALLED
CONSIGNMENT.

IT IS DIFFERENT FROM SALE IN THAT THE

CONSIGNEE CANNOT DISPOSE OFF THE GOODS
ACCORDING TO HIS CHOICE; DOES NOT RECEIVE ANY
RISK FROM THE CONSIGNOR; CAN RETURN THE
GOODS IF NOT MARKETABLE.
 CONSIGNMENT ACCOUNT

IN CONSIGNMENT ACCOUNTING THERE ARE 3

ACCOUNTS:

CONSIGNMENT ACCOUNT; WHICH SHOWS

GOODS/STOCK AT COST INCLUDING EXPENSES
INCURRED IN SENDING THE GOODS.

CONSIGNEE ACCOUNT; WHICH IS NET OF HIS

SELLING PRICE AND THE NON-RECURRING OR DIRECT
EXPENSES INCURRED BY HIM.

GOODS SENT ON CONSIGNMENT ACCOUNT.

 Consignment Inventory is inventory that is
in the possession of the customer, but is
still owned by the supplier.
In other words, the supplier places some of his
inventory in his customers possession (in their
store or warehouse) and allows them to sell or
consume directly from his stock. The customer
purchases the inventory only after he has resold
or consumed it.
The key benefit to the customer should be
obvious; he does not have to tie up his capital in
inventory. This does not mean that there are no
inventory carrying costs for the customer; he
does still incur costs related to storing and
managing the inventor
 For a more specific example, consider a bicycle manufacturer
that produces a wide range of bicycles ranging in price from a
couple hundred dollars to several thousand dollars. He has
customers (local independent bicycle shops) that stock his low-
to-mid-priced models but are hesitant to stock the more
expensive bikes because they do not have the confidence that
their customers are willing to pay that much for a bike. And, if
they do get a customer that wants a high-end bike, they could
always special order it for them. The bicycle manufacturer
strongly believes that getting his high-end bikes in the shops
where customers can see and touch them is critical in driving
up sales for these models as well as helping to promote his
brand which ultimately drives up sales for the lower cost
models. The solution? Well I think you can take it from here.
This is a classic consignment model because it is the best-case
scenario for applying the consignment inventory model. It
works well for:
New and unproven products
The introduction of existing product lines into new sales
channels.
Very expensive products where sales are questionable.
 CONSIGNMENT ACCOUNT

A TYPICAL CONSIGNMENT ACCOUNT WILL APPEAR AS

FOLLOWS:
DR. CR
To goods sent on by consignee
consignment (goods sold by
(invoice value) consignee)
To bank by closing stock
(all expenses incurred by
Consignor in transporting)
To consignee
(all expenses incurred by
Consignee in selling)
To profit & loss a/c
 CONSIGNMENT ACCOUNT

NOTES:
CLOSING STOCK IS VALUED AT COST/INVOICE PRICE +
PROPORTIONATE AMOUNT OF COST INCURRED BY
CONSIGNOR IN TRANSPORTING.

IF GOODS ARE LOST IN TRANSIT THE SAME METHOD OF

COSTING IS APPLIED AND THAT AMOUNT IS CREDITED TO
THE CONSIGNMENT ACCOUNT.

NOMINAL LOSSES ARE PROPORTIONATELY CHARGED TO

ALL STOCK WHETHER SOLD OR NOT. ABNORMAL LOSS IS
DIRECTLY CHARGED TO P&L A/C.

APART FROM FIXED RATE OF COMMISSION ON THE GOODS

SOLD AN ADDITION DEL CREDERE COMMISSION IS PAID
TO THE CONSIGNEE FOR ENCOURAGING SALES ON
CREDIT BASIS.
HOWEVER THE INHERENT RISKS REMAIN WITH THE
CONSIGNEE.
 Joint Venture
A joint venture (often abbreviated JV) is
an entity formed between two or more
parties to undertake economic activity
together. The parties agree to create a
new entity by both contributing equity,
and they then share in the revenues,
expenses, and control of the enterprise.
The venture can be for one specific
project only, or a continuing business
relationship such as the Sony Ericsson
joint venture
 JOINT VENTURE

JOINT VENTURE ACCOUNTS ARE TEMPORARY IN

NATURE ; FOR THE AD HOC PURPOSE OF AN
ASSIGNMENT UNDERTAKEN.

IT IS SIMILAR TO A PARTNERSHIP EXCEPT SUCH

ASSOCIATIONS ARE TEMPORARY IN NATURE.

ALSO IN PARTNERSHIP THE ACCOUNTING IS ON

ACCRUAL BASIS WHILE IN JOINT VENTURE
ACCOUNTING IS ON CASH BASIS.
 JOINT VENTURE

THERE ARE 3 ACCOUNTS:

-- JOINT BANK WHICH SHOWS EACH CO-VENTURERS

INVESTMENT;

-- CO-VENTURERS ACCOUNT

-- JOINT VENTURE INTO WHICH THE FINAL

PROFIT/LOSS IS TRANSFERRED.
 Difference Between Leasing
& Hire Purchase
BASIS LEASE FINANCING
Meaning A lease transaction is a
commercial arrangement,
whereby an equipment
owner or manufacturer
conveys to the equipment
user the right to use the
equipment in return for a rental
Option to user No option is provided to
the lessee (user) to
purchase the goods
Nature of expenditure Lease rentals paid by the
lessee are entirely revenue
expenditure of the lesse
HIRE PURCHASE
Hire purchase is a type of
instalment credit under
which the hire purchaser
agrees to take the goods on
hire at a stated rental,
which is inclusive of the
repayment of principal as
well as interest, with an option
to purchase
Option is provided to the hirer (
user)
Only interest element
included in the HP
instalments is revenue
expenditure by nature
 LEASING
Contract between two parties
Owner of an asset transfers his right
of use to other party on payment of
a fixed rent periodically
Types >> Finance or Capital Lease

Operating Lease
Service Lease
Leveraged Lease
 LEASING AND HIRE PURCHASE

LESSOR (OWNER) GIVES HIS ASSETS TO LESSEE

(USER) FOR USE; RECEIVES LEASE RENTALS IN
RETURN, AN AMOUNT WHICH INCLUDES COST OF
DEPRECIATION, COST OF FINANCE, AND
ADMINISTRATIVE EXPENSES OF THE LESSOR.

. LEASING HELPS IN IMPROVING SALES VOLUME OF

GOODS; REDUCES CAPITAL INVESTMENT FOR
LESSEE, INCREASES HIS BORROWING CAPACITY,
REDUCES TAX LIABILITY AS RENTALS ARE FULLY TAX
DEDUCTABLE, HOWEVER BURDENSOME.
 LEASING AND HIRE PURCHASE

FINANCIAL LEASE IS THE MOST POPULAR, LONG

TERM IN NATURE, GENERALLY USEFUL FOR PLANT
AND MACHINERY.

OTHER TYPES ARE OPERATING AND SERVICE

LEASES.

LESSOR RECEIVES LEASE RENTALS, CLAIMS

DEPRECIATION.

LESSEE CHARGES THE LEASE RENTALS PAID TO THE

P & L ACCOUNT.
 LEASING AND HIRE PURCHASE

THE LESSOR BREAKS UP THE RENTALS RECEIVED

INTO FINANCE INCOME AND ANNUAL LEASE

CHARGE.

FINANCE INCOME = TOTAL RENTALS OVER THE

LEASE PERIOD + RESIDUAL VALUE OF LEASED ASSET

-- COST OF LEASED ASSET ( FAIR VALUE ).

 LEASING AND HIRE PURCHASE

USE SUM OF DIGITS METHOD TO FIND ANNUAL

FINANCE INCOME.

ANNUAL LEASE CHARGE = ANNUAL LEASE RENT

ANNUAL FINANCE INCOME.

ANNUAL LEASE CHARGE = STATUTORY

DEPRECIATION + LEASE EQUALISATION CHARGE.

LEASE EQUALISATION CHARGE IS DEDUCTED FROM

THE LEASE RENTALS OR THE PROFIT & LOSS
ACCOUNT.
 LEASING & HIRE PURCHASE

SOMETIMES THE ANNUAL LEASE IS LESS THAN

STATUTORY DEPRECIATION; THEN THE LEASE
EQUALISATION CHARGE IS ADDED TO THE PROFIT &
LOSS ACCOUNT.

THE LEASE EQUALISATION CHARGE ACCOUNTED

THROUGH THE LEASE TERMINAL ADJ. A/C WHICH
FINALLY IS DEDUCTED FROM THE WRITTEN DOWN
VALUE OF THE ASSET.

IN CASE OF OPERATING LEASE IF THE PERIOD IS LESS

THAN 1 YEAR ( WHICH IS GENERALLY THE CASE ) THEN
THE ENTIRE AMOUNT IS TAKEN TO THE PROFIT & LOSS
ACCOUNT.

IF THE PERIOD IS MORE THAN 1 YEAR AND THE ENTIRE

RENTAL IS TAKEN INTO A LEASE RENT SUSPENCE
ACCOUNT AND YEARLY RENTALS ARE CHARGED TO IT.
 LEASING & HIRE PURCHASE

NOTES:

FINANCE INCOME IS THE PERCEIVED RETURN ON

LEASED ASSET.

LEASE EQUALISATION CHARGE IS THE EXCESS OF

LEASE RENT AFTER DUE WEIGHTAGE IS GIVEN TO
THE RETURN ON THE LEASED ASSET AND THE
EXTENT OF DEPRECIATION CHARGED.

THIS AMOUNT IS CARRIED FORWARD IN THE

BALANCE SHEET TO BE CHARGED AGAINST THE
WRITTEN DOWN VALUE OF THE ASSET.
 LEASING AND HIRE PURCHASE

Explanation
The concept of lease equalisation account is
an equaliser between the capital recovery
inherent in lease rentals and the depreciation
chargeable as per Companies Act.

The objective of the lessor is to write-off an

amount equal to the capital recovery inherent
in lease rentals, so as to leave in the revenue
statement only the financing charges
 LEASING AND HIRE PURCHASE

HIRE PURCHASE IS DIFFERENT IN THAT THE HIRER IS

THE OWNER FOR THE PURPOSE OF DEPRECIATION.
ALTHOUGH ACTUAL OWNERSHIP PASSES ON THE DATE
OF PAYMENT OF LAST INSTALMENT.

THE HIRE PURCHASE PRICE CONSISTS OF CASH PRICE

AND INTEREST.

INSTALMENT SALE IS SIMILAR EXCEPT THAT

OWNERSHIP PASSES ON TO BUYER AS SOON AS THE 1ST
INSTALMENT IS PAID.

THE 1ST INSTALMENT IN BOTH CASES IS CALLED DOWN

PAYMENT.

THE SELLER OF THE ASSET IS CALLED VENDOR

 LEASING AND HIRE PURCHASE
A TYPICAL LEASE TRANSACTION IN THE BOOKS OF THE LESSOR:
Bank a/c dr.
to lease rent
(lease rent received)
Lease rent a/c dr.
to P & L a/c
(lease rent transferred to profit)
Depreciation a/c dr.
to asset
(annual depreciation
Of the asset)

P&L a/c dr.

to depreciation
(depn. Charged to P & L a/c)
if annual lease charge>depn.
Lease equalisation a/c dr.
to lease terminal adj.
P & L a/c dr.
to lease equalisation
if annual lease charge<depn
Lease terminal adj. a/c dr.
to lease equalisation charge.
. P&L a/c dr.
to other expenses
(all other expenses debited)

.
 LEASING AND HIRE PURCHASE

IN THE BOOKS OF THE LESSEE :

Lease rent paid a/c dr.

to bank
(lease rent paid)

P & L a/c dr.

to lease rent
(lease rent charged to P & L)

IF LEASE RENT IS PAID FOR THE ENTIRE PERIOD THE

SAME IS ACCOUNTED FOR IN BANK A/C AND AN
ANNUAL AMOUNT IS CHARGED TO P & L A/C EVERY
YEAR
 LEASING AND HIRE PURCHASE
A TYPICAL TRANSACTION IN THE BOOKS OF THE HIRER:

Asset a/c dr.

to vendor
(purchase of asset on H P basis-
to the extent of the amount agreed)
. Vendor a/c dr.
to bank
(down payment/instalment)
. Depreciation a/c dr.
to asset
(depn. Of asset)
. P&L a/c dr.
to depreciation
(depn. Charged to P & L)\
. P&L a/c dr.
to expenses
(any other expenses charged to P & L)

IN THE BOOKS OF LESSEE:

. Hirer a/c dr.

to sales
(sale of asset on H P basis)
Bank a/c dr.
to hirer
(instalment received)
 NON-TRADING ORGANISATIONS

NON-TRADING ORGANISATIONS ARE NON PROFIT

MAKING BODIES, RENDERING SERVICES TO PUBLIC,
COLLECTING MONEYS BY WAY OF MEMBERSHIP
FEES, SUBSCRIPTIONS, DONATIONS. HOWEVER TO
PREVENT MISUSE OF FUNDS, ACCOUNTS ARE
MAINTAINED.

RECEIPTS & PAYMENTS STATEMENT CONTAINS REAL

ACCOUNTS, ACTUAL RECEIPTS AND PAYMENTS, BOTH
CAPITAL AND REVENUE ITEMS.

. INCOME & EXPENDITURE STATEMENT CONTAINS

NOMINAL ACCOUNTS, OF REVENUE ITEMS OF INCOME
& EXPENSES FOR A FIXED PERIOD.
 NON-TRADING ORGANISATIONS

A TYPICAL WAY OF CONVERTING RECEIPTS &

PAYMENTS STATEMENT INTO INCOME &
EXPENDITURE STATEMENT IS TAKE THE
RECEIPTS/PAYMENTS OF THE CURRENT YEAR
SUBTRACT THE OPENING BALANCE OF THE CURRENT
YEAR AND ADD THE CLOSING BALANCE ( IF ANY ).

THE CLOSING BALANCES WILL CONSTITUTE THE

BALANCE SHEET.
 DEPRECIATION

DEPRECIATION IS A CHARGE ON PROFITS, TO

ACCOUNT FOR THE FALL IN THE VALUE( NOTIONAL
OR OTHERWISE ) OF AN ASSET DURING THE PERIOD
OF USE.

DEPRECIATION OR WRITING OFF OF A CERTAIN

PORTION OF AN ASSET ON AN ANNUAL BASIS IS A
PRUDENT WAY OF SAVINGS FOR REPLACEMENT OF
THE ASSET AFTER ITS USEFUL LIFE IS OVER.

SINCE DEPRECIATION IS AN OPERATING COST AND

THEREFORE TAX DEDUCTIBLE, EACH YEAR THE
SAVING IS TO THE EXTENT OF (TAX RATE)* ANNUAL
DEPRECIATION.
 DEPRECIATION

DEPRECIATION CAN ALSO BE LOOKED IN A

DIFFERENT WAY.

DEPRECIATION IS AN ACCOUNTING PROCESS FOR

THE GRADUAL CONVERSION OF THE CAPITALIZED
COST OF FIXED(TANGIBLE) ASSETS INTO EXPENSE.

SIMILARLY, INTANGIBLE ASSETS ARE CONVERTED

INTO EXPENSE BY AMORTISATION.

WHILE ASSETS SUCH AS NATURAL RESOURCES ARE

CONVERTED BY PROCESS CALLED DEPLETION.
 DEPRECIATION

WHAT CAUSES DEPRECIATION ?

SIMPLY WEAR AND TEAR

MISHAPS

OBSOLESCENCE

PASSAGE OF TIME

FALL IN VALUE
 DEPRECIATION

IN ORDER TO CALCULATE DEPRECIATION THERE ARE

BASIC ISSUES TO BE ASCERTAINED :

-- ESTIMATED USEFUL LIFE OF THE ASSET(YEARS).

-- THE RESIDUAL VALUE OF THE ASSET.

-- METHOD TO BE USED FOR PROVIDING

DEPRECIATION.
 DEPRECIATION

METHODS OF DEPRECIATION :
. STRAIGHT LINE METHOD. EQUAL FRACTION OF THE
NET COST(COST OF THE ASSET LESS THE RESIDUAL
VALUE) IS CHARGED EACH YEAR.

WRITTEN DOWN VALUE METHOD. EQUAL

PERCENTAGE OF THE WRITTEN DOWN VALUE IN THE
BOOKS OF THE COMPANY IS CHARGED EACH YEAR.

SINKING FUND METHOD. IT IS STRAIGHT LINE

METHOD BUT THE DEPRECIATION CHARGED OR A
PORTION OF IT IS KEPT AS A RESERVE, INVESTED IN
MARKETABLE SECURITIES. THE FUND GROWS INTO
REPLACEMENT VALUE OF THE ASSET.
 Straight Line Method
Cost Rs 140000
Salvage Value Rs 20000
Useful life 5 years

Straight line depreciation

Year Depreciation
2006 Rs 1 8,000 =(Rs110,000 - Rs20,000) x 1/5
2007 Rs 1 8,000 =(Rs110,000 - Rs20,000) x 1/5
2008 Rs 1 8,000 =(Rs110,000 - Rs20,000) x 1/5
2009 Rs 1 8,000 =(Rs110,000 - Rs20,000) x 1/5
2010 Rs 1 8,000 =(Rs110,000 - Rs20,000) x 1/5

Total Rs 9 0,000
 Written Down Method
Book value at the beginning
Year of the year Dep Dep Expens ACC Dep Book Value
2006 Rs 1 10,000 40% Rs44,000 Rs44,000 Rs66,000
2007 Rs 6 6,000 40% Rs26,400 Rs70,400 Rs39,600
2008 Rs 3 9,600 40% Rs15,840 Rs86,240 Rs23,760

2009 Rs 2 3,760 40% Rs 3,760 (*1) Rs90,000 Rs20,000

2010 Rs 2 0,000 40% Rs - Rs90,000 Rs20,000
Total Rs90,000

(*1) Depreciation stops when accumulated depreciation reaches

depreciation base.
Depreciation base = cost - salvage value = Rs110,000 - Rs20,000 =
Rs90,000