Bank Accounting Concepts

8/6/2019 Bank Accounting Concepts

http://slidepdf.com/reader/full/bank-accounting-concepts 1/39

KFA Research & Training Center 1

Bank Accounting Concepts




Accounting

Accounting is a language of business

which systematically records daily

events, leading to presentation of

complete financial picture. It is an art

of recording, classifying and

summarizing financial transactions &events.




Classification of Accounts

Assets Expenses Liability Capital Income




Assets

An asset is a resource controlled by the enterprise asa result of past events and from which futureeconomic benefits are expected to flow to theenterprise.




Expenses

Expenses are decreases in economic benefitsduring the accounting period in the form of outflows or depletions of assets or incurrenceof liabilities that result in decreases in equity,other than those relating to distributions to equityparticipants.




Liability

A liability is a present obligation of the enterprisearising from past events, the settlement of which isexpected to result in an outflow from the enterprise of resources embodying economic benefits.




Capital

It is the Investment of the owners towards thebusiness of the enterprises as well as all theretained earnings of the previous andcorresponding year.




Income

Income is increases in economic benefits during theaccounting period in the form of inflows orenhancements of assets or decreases of liabilitiesthat result in increases in equity, other than thoserelating to contributions from equity participants.




Fundamental Accounting Assumptions

Accrual BasisUnder this basis, the effects of transactions andother events are recognized when they occur (andnot as cash or its equivalent is received or paid)and they are recorded in the accounting records

and reported in the financial statements of theperiods to which they relate. Financial statementsprepared on the accrual basis inform users notonly of past transactions involving the paymentand receipt of cash but also of obligations to pay

cash in the future and of resources that representcash to be received in the future. Hence, theyprovide the type of information about pasttransactions and other events that is most usefulto users in making economic decisions.





Going Concern:

The financial statements are normally prepared

on the assumption that an enterprise is a going

concern and will continue in operation for theforeseeable future. Hence, it is assumed that the

enterprise has neither the intention nor the need

to liquidate or curtail materially the scale of its

operations; if such an intention or need exists,the financial statements may have to be prepared

on a different basis and, if so, the basis used is

disclosed.





Consistency:

The presentation and classification of items

in the financial statements should be

retained from one period to the next

period.





Materiality:

Each material item should be presented

separately in the financial statements.

Immaterial amounts should be aggregated

with amounts of a similar nature or

function and need not be presented

separately.




Accounting Equation

Assets + Expenses=

Liabilities + Capital + Income




Accounting Equation

+ = + + Assets Expenses Liability Capital Income

Dr. Side Cr. Side




Debit & Credit Procedure

Each transaction must affect two or more

accounts to keep the basic accounting

equation in balance. In other words, for

each transaction, debits must equal

credits. The equality of debits and credits

provides the basis for the double entryaccounting system.




Debits & Credits

The term debit and credit reflects left and

right side of the equation respectively.

They are commonly abbreviated as Dr. for

debit and Cr. for credit.

These terms do not mean increase or

decrease.

These terms are used repeatedly in therecording process to describe where entries

are made in accounts.




Dr./ Cr. Procedures for Assets &

Liabilities

Increases and decreases in liabilities will

have to be recorded opposite fromincreases and decreases in assets. Thus,

increase in liabilities must be entered on

the right or credit side, and decrease inliabilities must be entered on the left or

debit side.




Debits

Increase Assets

Decrease Liabilities




AssetsIncrease Debit Decrease Credit

Normal Balance




Liabilities

Decrease Debit Increase Credit

Normal Balance




R evenues & Expenses

R evenue accounts are increased by credits and

decreased by debits

Expenses are recorded by debits

Debits

DecreaseRevenues

Credits

IncreaseRevenues

IncreaseExpenses

DecreaseExpenses




ExpensesIncrease Debit Decrease Credit

NORMAL BALANCE




R evenuesDecrease Debit Increase Credit

NORMAL BALANCE




Normal BalanceAssets = Debit

Liabilities = Credit

Capital = Credit

Income = Credit

Expenses =

Debit




Accounting ConceptsThe accounting profession has worked in

recent years to develop a conceptual

framework for accounting. The purpose of

the framework is to act as a foundation for

specific principles and standards needed by

the profession. An important part of the

conceptual framework is a set of assumptionwe make in preparing financial statements




Accounting concept

Business Entity Concept

Money measurement concept

Cost concept

Duality concept

Accounting period concept

Matching concept




Business entity concept

Business consists of person and resources. Person representing the business is separate and

distinct from the business enterprises.

Accounting system deals with the economicactivities of the business not of owner.

Preparation of B/S of the business does not

consider the personal assets and liability of theowner of the business.




Cost concept

An assets will be recorded at its cost-theprice paid or to be paid to acquire it.

Fair value of assets is not considered for

the accounting purpose. Any subsequent change in the market

value is not recorded in the accounts of the

company.

It fails to reflect the true worth of the

assets.




Duality concept

Entity creates value with the use of resources.

Economic resources are called assets.

Assets acquired from the fund provided byowners, and from outside parties.

Assets = equities.

Assets = owners equity + liabilities

The duality concept states that each business

transaction has two aspects affecting assetsand equities.




Accounting period concept Financial statements are prepared to reflect

the financial position and performance.

Users need periodical reporting.

For reporting the entire life of firm isdivided into small periods called accounting

period.

P/L account prepared for accounting periodand B/S at the closing date of the accounting

period




Matching concept To determine the net result of the firm

expense should be matched with revenue.

R evenue-inflow of the assets or outflows

of the liabilities.

Expenses-outflow of the assets or inflow

of liability to produce revenue.

Cost may be expense or assets.

Cost should be recognized as expenses in

the period when the revenue is realized.




Deposit & Withdrawal AccountingNrs Cash Deposit

Tellers Cash Nrs. Debit

Clients Account Credit

FCY Cash Deposit

Tellers Cash FCY Debit Clients Account Credit




Deposit & Withdrawal AccountingCheque Encashment

Clients Account Debit

Tellers Cash A/C Credit

Sale of FCY

Tellers Cash FCY A/C Debit Tellers Cash Nrs. A/C Credit




Deposit & Withdrawal AccountingFCY Sale

Tellers Cash Nrs. A/C Debit

Tellers Cash FCY A/C Credit




Credit AccountingHire Purchase Loan

Hire Purchase Loan A/C Debit

Partys Current A/C Credit

Term Loan

Term Loan A/C Debit Partys Current A/C Credit




Credit AccountingCredit Against FDR

Demand Loan (Against FDR) Debit

Partys Current Account Credit

Credit Against Share

Demand Loan (Against Share) Debit Partys Current Account Credit




Credit AccountingStaff Loan

Staff Loan A/C Debit

Staff Savings Account Credit




Thank You

Have a Nice Day

Bank Accounting Concepts

Documents

Transcript of Bank Accounting Concepts