Accounting & Finance for Bankers MODULE...

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

NON-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 .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 Bank’s books.

Rs.30500

Rs.25500

Rs.21500

Rs.22500

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

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

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

Rectification of Errors-Examples

(1) Rs. 5000 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

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.

Capital & Revenue Expenditure

CAPITAL REVENUE

Large amount Relatively small

Improve or enhance earning capacity

Maintain asset

Long duration benefit Short duration

Non- recurring recurring

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

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) Expenditure incurred in acquiring the patents

rights for the business is an example of ----


b. Deferred revenue expenditure

c. Revenue expenditure

(4) Professional fees paid in connection with

acquisition of leasehold premises is----




Examples (5)Preliminary expenses , discount allowed

on issue of shares are the examples of a. Capital expenditure



(6) 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

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

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

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

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

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.

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

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

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

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. 2005 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

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

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

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

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

JOINT VENTURE

Meaning

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

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

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 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

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. 30000

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.12000 d. FY Rs.NIL,SY Rs.10000 TY Rs.10000 FOURTH Y

Rs.10000

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

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

Accounting of non-trading

organizations

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

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

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

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

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

Accounting & Finance for Bankers MODULE...

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