Accounting & Finance for Bankers

Report
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 accountSuspense account- After preparation
of T/B
Rectification when books are closedDiff. 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
(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
i.
ii.
iii.
iv.
i.
ii.
iii.
iv.
Credit sale of
Rs.5000 to Suresh is posted to his credit,
then rectification is
Credit Suresh to the extent of Rs.10,000
Credit Suresh to the extent of Rs.5,000
Debit Suresh to the extent of Rs.10,000
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
Debit machinery a/c and credit Traveling Exp a/c.
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.
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
a.
b.
c.
(2)
a.
b.
c.
machinery is ----Capital expenditure
Revenue expenditure
Deferred revenue expenditure
Loss of goods due to fire Rs.8000 is a revenue
expenditure because---It is recurring
Amount involved is small
Loss is arising out of business operations
Cap. & Rev. Expenditure-Examples
(3)
a.
b.
c.
(4)
a.
b.
c.
Expenditure 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
acquisition of leasehold premises is---Capital expenditure
Deferred revenue expenditure
Revenue expenditure
with
Examples
(5)Preliminary expenses , discount allowed
on issue of shares are the examples of
a.
b.
c.
Capital expenditure
Deferred revenue expenditure
Revenue 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.
b.
c.
Capital receipt of Rs. 2000 & Rev. Receipt of Rs.10000
Capital receipt of Rs. 9000 & Rev. Receipt of Rs.3000
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)
b)
c)
d)
LIFO method
FIFO method
Average cost method
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 areFIFO 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
consignorConsignment 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)
b)
c)
d)
Q.:
a)
b)
c)
d)
the normal commission is not payable to the consignee
the bad debts, if occur, are borne by the consignor
the bad debts, if occur, are borne by the consignee
the bad debts, if occur, 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
by the consignor
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

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