Accounting & Finance for Bankers

TOPICSBANK RECONCILIATIONTRIAL BALANCECAPITAL & REVENUE EXPENDITUREINVENTORY VALUATIONBILLS OF EXCHANGECONSIGNMENT ACCOUNTJOINT VENTURELEASING & HIRE PURCHASENON-TRADING ORGANISATIONSDEPRECIATIONMODEL QUESTIONS

Bank Reconciliation statementMeaningCauses of differences

Cheque issued but not presented for paymentCheque deposited but not yet realizedBank chargesInterest on saving bankInt. on overdraftAmount directly collected by bankAmount directly paid by bank on Std. InstructionsDishonor of a ChequeDirect payment into bank by customererrors

BANK RECONCILIATION STATEMENT

BANK RECONCILIATION( B. R. ) IS BASED ON THE PRINCIPLE OF DOUBLE ENTRY.

DEBIT THE RECEIVER AND CREDIT THE GIVER

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

EXAMPLESM/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.4000Bank 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.30500Rs.25500Rs.21500Rs.22500

EXAMPLES2. 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 CBb) deduct Rs.1000 in CBc) Add Rs.2000 in cash bookd) Deduct Rs.2000 in CB

3. Cheque issued to Rohan for Rs.4000 was recorded twice in cash book

a) Deduct Rs.4000 in Cash bookb) Add Rs. 4000 in cash bookc) Add Rs.8000 in Cash Bookd) Deduct Rs.8000 in cashbook

EXAMPLES4. Sujit is having account with two banks viz. PNB and

Canara bank. He made a deposit of Rs. 3000 in Canara Bank , but wrongly entered in column of PNB.For preparing BRS of Canara Bank , sujit will----

a) Add Rs.3000 in Cash Book of Canara BK columnb) deduct Rs.3000 in Cash book of Canara BK

columnc) Add Rs.6000 in cash book of Canara BK columnd) Deduct Rs.6000 in CB of Canara BK column

5. Payment side of cash book of LKJ ltd. Is overcast by Rs.9000.

a) Deduct Rs.9000 in Cash bookb) Add Rs. 9000 in cash bookc) Add Rs.18000 in Cash Bookd) Deduct Rs.18000 in cashbook

Trial Balance(TB)- Rectification entriesTrial balance – meaningTypes- gross TB, Net TBDisagreement of TBClassification of errors

Clerical errors– Errors of omission – Errors of commission

Posting of correct amount at wrong side Posting wrong amount at wrong sideTotaling error in subsidiary bookMistake while balancing of ledger

– Compensating errors

Errors of principles

Suspense account-

Suspense account- After preparation of T/BRectification 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. 7000 paid as wages for installing the

machinery should be debited to-----Wages A/cMachinery a/cCapital A/cNone 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/cDebiting both AccountsDebiting Ravin a/c and Crediting Navin A/cDebiting Navin A/c and crediting Sales A/C

Trial Balance-Examples3. Credit sale of Rs.5000 to Suresh is posted to

his credit, then rectification is i. Credit Suresh to the extent of Rs.10,000ii. Credit Suresh to the extent of Rs.5,000 iii. Debit Suresh to the extent of Rs.10,000iv. Debit Suresh to the extent of Rs.5000

4. 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/ciii. 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.

Rectification of Errors-Examples5. One of the pair given below is mismatch, identify the same

i. Trial balance <> Statement of balances of ledger accounts

ii. Real Account<> Always shows debit balance iii. Suspense Account<> difference in trail balanceiv. Outstanding Expenses<> Nominal Account

6. One of the statement is incorrect. Select the incorrect statement.

i. If the trial balance shows short debit, the suspense a/c will have credit balance.

ii. Errors which cancel out the effect of one another are called compensating errors.

iii. One sided errors are rectified without passing journal entries

iv. Two sided errors originate in the primary books

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

Deferred Revenue expenditure Expenditure incurred in one year , but benefit of which is accruing not in one year but following two or more years , then such expenditure is called as Deferred Revenue expenditure Examples– Heavy advertisement exp.– Issue of capital expenses– Preliminary expenses

Cap. & Rev. Expenditure-Examples

(1)Cost of replacement of defective parts of the machinery is -----

a. Capital expenditureb. Revenue expenditurec. Deferred revenue expenditured. None of the above

(2) Loss of goods due to fire Rs.8000 is a revenue expenditure because----

a. It is recurringb. Amount involved is smallc. Loss is arising out of business operationsd. None of the above

Cap. & Rev. Expenditure-Examples(3) Expenditure incurred in acquiring the patents

rights for the business is an example of ----a. Capital expenditureb. Deferred revenue expenditurec. Revenue expenditure

(4) Professional fees paid in connection with acquisition of leasehold premises is----

a. Capital expenditureb. Deferred revenue expenditurec. Revenue expenditure

Examples(5)Preliminary expenses , discount allowed

on issue of shares are the examples of a. Capital expenditureb. Deferred revenue expenditurec. 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. Capital receipt of Rs. 2000 & Rev. Receipt of Rs.10000b. Capital receipt of Rs. 9000 & Rev. Receipt of Rs.3000c. 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

Examples1. Select the incorrect statement from the following---

a. Inventory valuation is subjective because it depends upon the accounting policies adopted by the organisation

b. The basis of inventory valuation adopted should not be changed frequently because it violates accounting principle of ‘consistency’

c. Accounting standard recommends FIFO or weighted average method

d. The ascertainment of value of stock from accounting record is known as Perpetual inventory

Examples-conted..Q:During the rising prices the ______

method will reflect (FIFO/LIFO/weighted Average)lowest cost of material supplied and results in under pricing the productsInventory is shown at the higher priced material.Lock up of large amount of working capital.Profits are inflatedMore liability for payment of taxes

Bill of ExchangeBill 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 dateRetirement Discounting of billSent for collection to bankEndorsed to creditorRenewal of the billAccommodation bill

ExamplesQ1. ___________ draws a bill on __________Q2. A bill of exchange is a negotiable instrument

TrueFalse

Q3. Negotiable instruments can be ________from one person to another

Q4. A bill of exchange must be in writingTrueFalse

Q5: A bill of exchange is not to be datedTrueFalse

Examples-contedQ6.: The date on which the bill is payable is called

its _________Q7. The due date is calculated after adding

__________ to the actual period of the bill.Q8. If the due date falls on a public holiday, then it

becomes due on the -------Q9.A bill was drawn on 23rd Dec. 2005 for one

month maturity. What will be its due date.Q10. 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 ACCOUNTA 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/cConsignee A/cGoods sent on Consignment

Valuation of closing stockConsigning goods at higher price

CONSIGNMENT ACCOUNT

A TYPICAL CONSIGNMENT ACCOUNT WILL APPEAR AS FOLLOWS:DR. CRTo 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

ExamplesQ1. The possession of the goods remains with the _________,

but the property in or the ownership of the goods remain with the _________

Q2 : Usually the consignee recovers all ___________ by him on the consignment.

Q3.:Consignment account is of the nature ofa. Personal accountb. Nominal accountc. Real account

Q4.When the goods are sent by the consignor to the consignee, they are accompanied by

a. Proforma invoice*b. Commercial invoicec. Account salesd. Bank draft

Consignee, Consignor, expenses incurred, nominal

ExamplesQ5. 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 consignorc) the bad debts, if occur, are borne by the consigneed) the bad debts, if occur, are shared by the consignor

and consignee equallyQ6: The principle followed in valuations of closing

stock on consignment isa) to include the expenses by the consignor onlyb) 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 VENTUREMeaningTemporary partnershipAccounting-when separate books

– Joint Bank Account– Co-venturer’s Account– Joint Venture Account

Accounting-when no separate books are maintained

– Joint Venture– Co-Venturer

ExamplesQ1.When separate set of books are kept for keeping

the accounts of Joint Venture, thena) Memorandum Joint Venture Account is

preparedb) Transactions take the form of ordinary

accounting systemc) Only Joint Venture and Personal accounts of

the co-venturers are maintained.d) Joint Venture, Co-venturers and Joint Bank

accounts are opened

Q2.A debit balance in Joint Venture A/c indicatesa. Profit on Joint Ventureb. Loss on Joint venturec. Amount receivabled. Amount payable

LEASING Contract between two partiesOwner of an asset transfers his right of use to other party on payment of a fixed rent periodically

Types >> Finance or Capital Lease Operating LeaseService LeaseLeveraged Lease

Leasing ExamplesA 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

Leasing Examples(2) There are three parties in-----a. Capital Leaseb. Operational Leasec. Service Leased. 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.3000c. 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 Accountd. 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

MeaningNeed for maintenance of accountsAccounts

Receipt & Payment accountIncome & Expenditure AccountBalance sheet

DistinctionReceipt & Payment A/c 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 itemsDonations- purpose to be seenEntrance fees- cap. receiptLife membership fees-cap receiptGovernment grants-for maintenance revenue-for specific purpose cap.receiptSpecial fund- exps& income of that fundbooked to that fundOp. & closing. Stock of stationary- consumed during year to be taken as exps.Sale of fixed assets/investments- above BV below BVSports material-asset and dep is chargedOpening/closing Balance sheetCapital fund

adjustments

Outstanding incomeOutstanding expensesIncome received in advancePrepaid expensesDepreciation on assets

EXAMPLES

1. SOLID PVT LIMITED HAS FOLLOWING TRANSACTIONS (Purchase of inventory I-Q100 @10 on 1.1.06),II(Q150@12 on 2.1.06)

(Issue of inventory I-Q100 on 3.1.06 II-Q50on 4.1.06) q=quantityWhat is value of closing stock ,if co. follows FIFO method

a. Rs.1200b. Rs.1000c. Rs.1800d. None of the above

2. What is the value of closing stock, if co. follows LIFO methoda. Rs.1800b. Rs.1200c. Rs.1000d. None of the above

3. What is the value of closing stock, if co. follows weighted average cost method

a. Rs.1120b. Rs.12001. Rs.18002. None of the above

EXAMPLES

4. Identify the wrong paira. Maker of the bill ^^drawerb. Dishonour of bill ^^ rebatec. Person in whose favour bill is endorsed^^endorseed. Bill of exchange ^^ negotiable instrument

5. One of the following pair is mismatch.Identify the wrong paira. Diminishing balance method^^ depreciated value of asset never become

zerob. Current asset^^ asset on which depreciation is not providedc. Depreciation^^ decreases the value of the assetd. Rate of depreciation^^ depends upon profit of the firm

6. Select the true statementa. Goodwill is a current assetb. The expenditure incurred on installation of machinery is revenue

expenditurec. Reducing balance method is also known as SLM d. Even if an asset is not used ,mere passage of time will cause a fall in its

value unless it happens to be land

EXAMPLES

Sudhir Draws following bills1. On Ruchira for Rs.10002. On Madhur for Rs.20003. On Trichur for Rs.30004. On Nupur for Rs.4000

All the bills are accepted by all.Solve the examples as per following7. Ruchira’s acceptance is retained till due date, but it was

dishonoured. Identify the correct entry in sudhir’s booksa. Debit bill a/c and credit BR a/cb. Debit Ruchira A/c and credit BR a/cc. Debit BR a/c and credit Ruchira a/cd. Debit Dishonour Bill a/c credit BR a/c

8. Madhur’s acceptance is discounted with the bank, but it was dishonoured. Identify the correct entry in sudhir’s books

a. Debit Madhur credit bank a/cb. Debit BR a/c credit Madhur a/cc. Debit Madhur a/c credit BR a/c 1. No entry as bill is discounted with the bank

EXAMPLES

9. Trichur’s acceptance is endorsed to Tayyab and noting charges of Rs.50 were paid, but bill was dishonoured. Identify the correct entry in sudhir’s books

a. Debit Trichur a/c by Rs.3050 and credit Tayyab a/c by Rs.3050b. Debit BR A/c, Debit Noting charges Rs.50 and credit Tayyab a/c

Rs.3050c. Debit Tayyab a/c Rs.3050 and credit Bank a/c Rs.3050d. No entry as bill is endorsed to Tayyab

10. Nupur’s acceptance was sent to bank for collection, but it was dishonoured. Identify the correct entry in sudhir’s books

a. Debit Nupur credit BR a/cb. Debit Nupur a/c credit Bill sent to Bank for collection a/cc. Debit Bill sent to bank for collection a/c credit Bank a/c d. No entry as bill is sent to bank for collection

EXAMPLES

11.Choose the wrong paira. There is no difference in appearance between trade

bill and accommodation billb. Both the parties must accept the accommodation

billc. Accommodation bill is drawn and accepted without

any considerationd. The purpose of any accommodation bill is to

provide temporary finance

EXAMPLES

12.A trainee in a/c dept. has put up following four entries for accounting for closing stock of joint venture . One of the entries is correct. Select the same

a. Debit bank a/c –credit joint venture a/cb. Debit stock credit joint venture a/cc. Debit co-venturer a/c credit joint ventured. Debit joint venture credit stock

EXAMPLES

13.Select the wrong statement in respect of joint

a. It is temporary partnershipb. Nature of co-venturer’s liability is limitedc. Balancing figure of Joint venture a/c is either profit or

loss on joint ventured. Joint bank account is the account in which banking

transactions are transacted by co-venturers

EXAMPLES

14.Select the wrong pair in respect of joint

a. Joint venture ^^ real accountb. Joint bank account ^^ personal a/cc. Unsold stock taken over by coventurer ^^ credit

joint venture a/cd. Credit balance in Joint venture a/c ^^ profit on

joint venture a/c

EXAMPLES

15.Select the false statementa. Amount spent on uniform of workers is a

revenue expenditureb. Expenses of whitewashing of a factory building is

a revenue expenditurec. Cost of stores consumed in manufacturing

machinery for installation in owned factory is a revenue expenditure

d. Wages paid for construction of the extension of the factory building is a capital expenditure

.

16.The following financial statement is not prepared by a non-trading concerns

a) Receipt and Payment accountb) Income & Expenditure Accountc) Profit & Loss Accountd) Balance Sheet

17.Receipts and Payments account isa) Real accountb) Personal accountc) Nominal account

EXAMPLES

18.Incurring of expenditure of Rs.100000 on dismantling, removing and reinstalling plant & machinery is a -----

a. Capital expenditureb. Revenue expensesc. Deferred revenue expenditured. None of the above

EXAMPLES

20. RVY sport club has given following information regarding subscription income. Ascertain income for Current year

1. Subscription received in cash Rs.5000 during Apr04 to Mar.052. Subscription outstanding on 31.3.05 Rs.1003. Subscription outstanding on 31.3.04 Rs.2004. Subscription received in advance during 04-05 Rs.3005. Subscription received in advance during 03-04 Rs.400

Indicate from the following the exact amount of subscription to be credited to Income & Expenditure Account

a. Rs.5800b. Rs.6000c. Rs.5200d. Rs.5600

Examples

21. IfA= Income accrued during CY (figure from I & E a/c)B= outstanding for CYC= outstanding for PYD=advance for CYE= advance for PYFind the income received in cash during cy to be shown in receipt &

payment a/ca. A + B + C + D – Eb. A – B + C + D – Ec. A + B –C - D + Ed. A – B + C – D + E

EXAMPLES

23. Select the wrong statement in respect of lease accounting

a. Lease Terminal Adjustment a/c is carried forward from year to year

b. If Lease Terminal Adjustment a/c shows credit balance it is shown at liability side

c. If Lease Terminal Adjustment a/c shows debit balance it is debited to Profit and Loss account

d. Lease Terminal Adjustment a/c balance is not carried forward to next year but written off to Profit and Loss account

EXAMPLES

22. Select the wrong statement in respect of lease accounting

a. If lease charges are Rs.31439 and annual depreciation is Rs. 24000, the correct entry would be- Debit Lease equalisation a/c by Rs.7439 and credit Lease Terminal a/c by Rs.7439

b. If lease charges are Rs.14228 and annual depreciation is Rs. 14400, the correct entry would be- Debit Lease equalisation a/c by Rs.152 and credit Lease Terminal a/c by Rs.152

c. If lease charges are Rs.7152 and annual depreciation is Rs. 8640, the correct entry would be- Debit Lease Terminal a/c by Rs.1488 and credit Lease Equalisation a/c by Rs.1488

d. If Desai is a lessor and he purchases an asset for Rs.100000 for the purpose of giving the same on lease . The correct entry will be Debit Asset Rs.100000 and credit Bank Rs.100000