Accounting & Finance for Bankers MODULE C

PRESENTATION BY S.D.BARGIR Joint Director, IIBF

TOPICS
BANK RECONCILIATION TRIAL BALANCE CAPITAL & REVENUE EXPENDITURE INVENTORY VALUATION BILLS OF EXCHANGE CONSIGNMENT ACCOUNT JOINT VENTURE LEASING & HIRE PURCHASE NONNON-TRADING ORGANISATIONS DEPRECIATION MODEL QUESTIONS

Bank Reconciliation statement
Meaning Causes of differences
Cheque issued but not presented for payment Cheque deposited but not yet realized Bank charges Interest on saving bank Int. on overdraft Amount directly collected by bank Amount directly paid by bank on Std. Instructions Dishonor of a Cheque Direct payment into bank by customer errors

BANK RECONCILIATION STATEMENT
BANK RECONCILIATION( B. R. ) IS BASED ON THE PRINCIPLE OF DOUBLE ENTRY.
CREDIT THE GIVER AND DEBIT THE RECEIVER

B. R. SHOWS CAUSES OF DIFFERENCES BETWEEN CASH BOOK AND PASS BOOK BALANCE DEBIT BALANCE AS PER CASH BOOK IS CREDIT BALANCE AS PER PASS BOOK = POSITIVE BALANCE CREDIT BALANCE IN CASH BOOK IS DEBIT BALANCE IN PASS BOOK = NEGATIVE BALANCE/OVERDRAFT

EXAMPLES M/s Shekhar Enterprises . From the above particulars. Rs. Bank column of cash book of company showed a debit balance of Rs.2006. On 31st December. find out the balance as per KRB Bank¶s books.22500 .4000 Bank charges of Rs.21500 Rs. 500 were debited by the bank but no entry was made by the accountant of the company. Cheques deposited into the bank but not credited before 31st December.30500 Rs. 26000.2006 amounted to Rs.25500 Rs.21500 Rs.was maintaining account with KRB Bank Ltd.

but not recorded in cash book---book---a) Add Rs. Rs.1000 in CB Rs.1000 directly deposited in the bank. b) Deduct Rs.2000 in cash book Rs. d) Deduct Rs.1000 in CB Rs. c) Add Rs. Undercasting of the credit side of Cash Book has the same effect as overcasting of the± the± ‡ Debit side of the pass book.When overdraft as per cash book and a Cheque of Rs. ‡ There is no relevance between the two EXAMPLES . ‡ Credit side of the pass book.2000 in CB Rs.

gross TB.Rectification entries Balance(TB)Trial balance ± meaning TypesTypes.Trial Balance(TB). Net TB Disagreement of TB Classification of errors Clerical errors ± Errors of omission ± Errors of commission Posting of correct amount at wrong side Posting wrong amount at wrong side Totaling error in subsidiary book Mistake while balancing of ledger ± Compensating errors Errors of principles .

Suspense accountaccountSuspense account. in nominal A/c adj.then effect on Capital A/c A/c- . through P & L Adj.After preparation accountof T/B Rectification when books are closedclosedDiff. A/c.

5000 paid as wages for installing the machinery should be debited to----to----Wages A/c Machinery a/c Capital A/c None of the above (2) Sales to Navin of Rs. this will be rectified by----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 .1000 is debited to Ravin A/c.Rectification of Errors-Examples Errors(1) Rs.

Rectification of Errors-Examples Errors(1) Rs. 5000 paid as wages for installing the machinery should be debited to----to----Wages A/c Machinery a/c Capital A/c None of the above (2) Sales to Navin of Rs.1000 is debited to Ravin A/c. this will be rectified by----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 .

a/c. i. iii.Rectification of Errors-Examples Errorsi.000 Debit Suresh to the extent of Rs. Choose the correct rectification entry Debit machinery a/c and credit Traveling Exp a/c. iii. .5.10.10. iv. ii.5000 to Suresh is posted to his credit. iv. then rectification is Credit Suresh to the extent of Rs.5000 Freight expenses for carrying New Machinery is carried to Traveling Exp.000 Credit Suresh to the extent of Rs. Credit machinery a/c and debit Freight Exp a/c Credit profit and loss account and debit Freight Exp a/c. Debit profit and loss a/c( P&L a/c) and credit Traveling Exp a/c. Credit sale of Rs.000 Debit Suresh to the extent of Rs. ii.

Capital & Revenue Expenditure CAPITAL Large amount Improve or enhance earning capacity Long duration benefit Non.recurring Balance sheet item REVENUE Relatively small Maintain asset Short duration recurring Trading /P & L A/c item .

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

. & Rev. Expenditure-Examples ExpenditureExpenditure incurred in acquiring the patents rights for the business is an example of ---Capital expenditure Deferred revenue expenditure Revenue expenditure Professional fees paid in connection with acquisition of leasehold premises is---is---Capital expenditure Deferred revenue expenditure Revenue expenditure ( 4) a. b. c. Cap. c. b.(3) a.

Nil Rs. Capital receipt of Rs. Rs.000.000. whose Rs. Capital receipt of Rs. c.10. 9000 & Rev. Capital receipt of Rs. Rs.7000 is sold for Rs. b. Receipt of Rs. Capital expenditure Deferred revenue expenditure Revenue expenditure Examples (6) Machinery costing Rs. Rev. 12000 & Rev. current book value is Rs. . c. discount allowed on issue of shares are the examples of a.(5)Preliminary expenses .10. Rev. Rs. b.3000 Rs.10000 Rs. 2000 & Rev. Rs. Receipt of Rs. Rs.12000 what is the amount of capital & revenue receipt a. Rev. Receipt of Rs.

Methods of valuation of inventory FIFO LIFO AVERAGECOST Found out by dividing total price paid by quantity received ‡Goods issued valued at earliest price ‡Stock valuation at latest price ‡Goods issued valued at latest price ‡Stock valuation at earliest price .

(1)During inflation. issue of material from the stores is charged to the products at the highest price under----under----a) b) c) d) LIFO method FIFO method Average cost method None of the above Examples (2) The ascertainment of value of stock from accounting record is known as ----a) Periodic inventory b) Perpetual inventory .

(b) and (c) above (a). (c) and (d) above None of the above . As per According to Accounting Standard 2 inventory means tangible property held a) for sale in the ordinary course of business (finished goods) b) in the process of production for such sale (work-in(work-in-process) c) for production in the production of goods or services for sale (Raw materials) d) Maintenance supplies and consumables other than Machinery and spares (Components) (a).ExamplesExamples-conted. (b).

. Q-The cost formulae recommended by Accounting Standard 2 for valuation of inventories areareFIFO or Weighted average Standard cost LIFO or latest purchase price Q:During the rising prices the ______ method will reflect (FIFO/LIFO/weighted Average) (F lowest cost of material supplied and results in under pricing the products Inventory is shown at the higher priced material.ExamplesExamples-conted. Lock up of large amount of working capital. Profits are inflated More liability for payment of taxes .

DEPRECIATION ACCCOUNTING Meaning Causes of depreciation Need for depreciation To know correct profit Show correct financial position Make provision for replacement of assets .

Factors of depreciation Cost of asset Residual value Life of an asset .

.METHODS OF DEPRECIATION Straight Line Method Written Down Value Method Example: Depreciation is a reduction in the book value of all fixed assets all fixed assets excepting land all fluctuating assets both fixed and current assets all assets used in business.

noting is necessary by notary public .Bill of Exchange Bill of Exchange Unconditional order Made by creditor Acceptance by debtor must Promissory Note Unconditional promise Made by debtor No acceptance as such Three parties to a bill Two parties to a bill Noting is not necessary On dishonor.

Bill of Exchange Honoring on due date Retirement Discounting of bill Sent for collection to bank Endorsed to creditor Renewal of the bill Accommodation bill .

Negotiable instruments can be ________from one person to another Q. A bill of exchange is a negotiable instrument True False Q. ___________ draws a bill on __________ Q.Examples Q. A bill of exchange must be in writing True False Q: A bill of exchange is not to be dated True False .

: due date.: The date on which the bill is payable is called its _________ Q.protest . If the due date falls on a public holiday.A bill was drawn on 23rd Dec. When a Bill of exchange or promissory note has been dishonoured for non acceptance or non payment. then it becomes due on the ------Q. such a certificate is called________ Ans. cause such dishonour to be noted and certified by a notary public. Q.ExamplesExamples-conted Q. within a reasonable period. Previous working day. 2005 for one month maturity. the holder may. The due date is calculated after adding __________ to the actual period of the bill. Three days of grace. What will be its due date. Q. 25th January.

CONSIGNMENT ACCOUNT A consignment is the dispatch of goods by its owner to his agent for the purpose of selling. Proforma Invoice. Account Sale Books of Account in the books of consignorconsignorConsignment A/c Consignee A/c Goods sent on Consignment Valuation of closing stock Consigning goods at higher price . Consignor. selling. consignee.

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 .

Real account Q.Examples Q. Proforma invoice* b.When the goods are sent by the consignor to the consignee. The possession of the goods remains with the _________. Commercial invoice c. they are accompanied by a. Personal account b. nominal . Nominal account c.:Consignment account is of the nature of a. Bank draft Consignee. expenses incurred. : Usually the consignee recovers all ___________ by him on the consignment. Q. Consignor. Account sales d. but the property in or the ownership of the goods remain with the _________ Q.

: a) b) c) d) the normal commission is not payable to the consignee the bad debts. are borne by the consignor the bad debts. are shared by the consignor and consignee equally The principle followed in valuations of closing stock on consignment is to include the expenses by the consignor only cost to the consignor plus proportionate expenses incurred till the goods reach to the premises of the consignee plus direct expenses of consignee Cost plus proportionate non-recurring expenses incurred nonby the consignor Cost plus proportionate non-recurring expenses incurred nonby the consignee . Where del-credere commission is paid: dela) b) c) d) Q.Examples Q. if occur. are borne by the consignee the bad debts. if occur. if occur.

JOINT VENTURE Meaning Temporary partnership Accounting-when separate books ± Joint Bank Account ± Co-venturer¶s Account Co± Joint Venture Account Accounting-when no separate books are maintained ± Joint Venture ± Co-Venturer Co- .

When separate set of books are kept for keeping the accounts of Joint Venture. Profit on Joint Venture b. maintained. d) Joint Venture. Co-venturers and Joint Bank Coaccounts are opened* Q. then a) Memorandum Joint Venture Account is prepared b) Transactions take the form of ordinary accounting system c) Only Joint Venture and Personal accounts of the coco-venturers are maintained. Amount receivable d.Examples Q. Amount payable . Loss on Joint venture c.A debit balance in Joint Venture A/c indicates a.

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 .

the recovery of his capital outlay (original cost of the asset leased) plus a return on the funds invested during the lease term is called----called----(a) Capital Lease (b) Operational Lease (c) Service Lease (d) Leveraged Lease .Leasing Examples A lease which does not secure for the lessor.

SY Rs. FY Rs.10000 TY Rs.12000 d.3000. Leveraged Lease Leasing Examples (3) Allocating total finance income of Rs. Operational Lease c.(2)There (2) There are three parties in----in----a.SY Rs.12000. 30000 over the leased period of 4 years by the sum of the digit method results in----in----a.6000 FOURTH Y Rs. FY Rs.NIL.9000 TY Rs. Service Lease d.7500.10000 . FY Rs. FY Rs.6000 TY Rs. Capital Lease b.10000 FOURTH Y Rs. FY Rs.7500 b.9000 FY Rs.3000 c.7500.SY Rs.7500 TY Rs.SY Rs.

the journal entry for total lease rent receivable. in the books of lessor is-----is-----a. Debit Bank Account and Credit Lease Rent Account d. Lease Terminal Adjustment account is debited (with the difference) d. Debit Lessee account and Credit Rent Suspense a/c* b. if the total lease rent is receivable in various installments then in the first year of lease . Lease Equalization account is debited (with the difference) b.Leasing Examples (4) If Lease charges of the year exceed the depreciation charge of the year then----then----a. None of the above (5) In case operational Lease . Debit Advance Lease Rent account and Credit Lease Rent a/c c. Debit Bank Account and Credit Advance Lease Rent Account . Lease Equalization account is credited (with the difference) c.

The hire purchase price consists of two elements a) cash price and b) interest for delayed payments . In hire purchase ownership passes to the buyer on the payment of last installment while in installment selling it passes immediately.HIRE PURCHASE & INSTALMENT SALE A buyer purchases goods but pays the price in various installments. immediately.

Accounting of non-trading nonorganizations Meaning Need for maintenance of accounts Accounts Receipt & Payment account Income & Expenditure Account Balance sheet .

Distinction Receipt & Payment A/ct Income& ExpenditureA/c Real Account Nominal Account All receipts & payment in a year Only income and expenses in a year Capital/ revenue items Only revenue items Starts with Opening cash & end with closing cash No op. balance but end with surplus/ deficit current.previous and next year Current year only .

& closing. Stock of stationary Sale of fixed assets/investments Sports material Opening/closing Balance sheet Capital fund Treatment of some items .Donations Entrance fees Life membership fees Government grants Special fund Op.

For rendering services to the public. Non Trading organizations collect moneys by way of a) Membership and Entrance Fee b) Tuition Fee c) Subscriptions d) Donations Q:The following financial statement is not prepared by a nonnon-trading concerns a) Receipt and Payment account b) Income & Expenditure Account c) Profit & Loss Account d) Balance Sheet Q: Receipts and Payments account is a) Real account b) Personal account c) Nominal account .Q.

Commission payable on profit 16. Incomes not due but received (Unearned incomes) 6.ADJUSTING ENTRIES Some common adjustments are: 1. Losses on account of accidents 15. Interest on Loan 10. Goods used by the proprietor 17. Bad debts to be written off 11. Expenses due but not paid (Outstanding expenses) 3. Expenses paid in advance (Prepaid expenses) 4. Provision for bad debts 12. Depreciation on assets 7. Interest on Drawings 9. Provision for discount on creditors 14. Provision for discount on Debtors 13. Closing Stock 2. Goods distributed as Free Samples . Incomes due but not received (Accrued incomes) 5. Interest on Capital 8.

CLOSING ENTRIES Closing consolidated journal entries are normally passed for Transfer of all manufacturing and purchase expense to the debit side of trading a/c Transfer of Purchases and Sales return to the debit side of Trading a/c Transfer of Sales and Purchases return to the credit side of Trading a/c Transfer of closing stock to the credit of trading account by an adjustment entry Transfer of Gross profit to the credit side of Profit & Loss a/c Transfer of Gross loss to the debit side of Profit & Loss a/c Transfer of all administrative. selling and financial expenses to the debit of P & L A/c Transfer of all operational and non-operational incomes to the noncredit of P & L A/c Transfer of Net profit to the credit of Capital a/c Transfer of net loss to the debit of Capital a/c .