Accounting & Finance for Bankers MODULE C. PRESENTATION BY S.D.BARGIR Joint Director, IIBF

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1 Accounting & Finance for Bankers MODULE C PRESENTATION BY S.D.BARGIR Joint Director, IIBF

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

3 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

4 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

5 EXAMPLES M/s Shekhar Enterprises.was maintaining account with KRB Bank Ltd. On 31st December,2006, Bank column of cash book of company showed a debit balance of Rs 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 Bank s books. Rs Rs Rs Rs.22500

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

7 Trial Balance(TB)- Rectification entries Trial balance meaning Types- gross 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

8 Suspense account- Suspense account- After preparation of T/B Rectification when books are closed- Diff. in nominal A/c adj. through P & L Adj. A/c- then effect on Capital A/c

9 Rectification of Errors-Examples (1) Rs paid as wages for installing the machinery should be debited 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----- 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

10 Rectification of Errors-Examples (1) Rs paid as wages for installing the machinery should be debited 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----- 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

11 Rectification of Errors-Examples Credit 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 Freight expenses for carrying New Machinery is carried to Traveling Exp. a/c. Choose the correct rectification entry i. Debit machinery a/c and credit Traveling Exp a/c. ii. Credit machinery a/c and debit Freight Exp a/c iii. Credit profit and loss account and debit Freight Exp a/c. iv. Debit profit and loss a/c( P&L a/c) and credit Traveling Exp a/c.

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

13 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

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

15 Examples (5)Preliminary expenses, discount allowed on issue of shares are the examples of a. Capital expenditure b. Deferred revenue expenditure c. Revenue expenditure (6) Machinery costing Rs.10,000, whose current book value is Rs.7000 is sold for Rs what is the amount of capital & revenue receipt a. Capital receipt of Rs & Rev. Receipt of Rs b. Capital receipt of Rs & Rev. Receipt of Rs.3000 c. Capital receipt of Rs & Rev. Receipt of Rs.Nil

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

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

18 Examples-conted. 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-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), (b) and (c) above (a), (b), (c) and (d) above None of the above

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

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

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

22 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.

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

24 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

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

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

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

28 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

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

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

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

32 Examples Q.When separate set of books are kept for keeping the accounts of Joint Venture, 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 co-venturers are maintained. d) Joint Venture, Co-venturers and Joint Bank accounts are opened* Q.A debit balance in Joint Venture A/c indicates a. Profit on Joint Venture b. Loss on Joint venture c. Amount receivable d. Amount payable

33 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

34 Leasing Examples A lease which does not secure for the lessor, 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----- (a) Capital Lease (b) Operational Lease (c) Service Lease (d) Leveraged Lease

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

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

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

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

39 Receipt & Payment A/ct Distinction 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

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

41 Q.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 non-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

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

43 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 credit 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

JAIIB-ACCOUNTING & FINANCE FOR BANKERS-MOD-C: MODEL QUESTIONS 1) Which of the following may not be part of the reconciliation process.

JAIIB-ACCOUNTING & FINANCE FOR BANKERS-MOD-C: MODEL QUESTIONS 1) Which of the following may not be part of the reconciliation process. a) Interest on overdraft b) Dishonour of cheque c) Cash drawn from