JAIIBAccounting & Finance for Bankers

PRESENTATION BY S.D.BARGIRJoint Director, IIBF

17-10-2007

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 Banks books.Rs.30500Rs.25500Rs.21500Rs.22500

EXAMPLESWhen 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 CBCheque issued to Rohan for Rs.4000 was recorded twice in cash bookDeduct Rs.4000 in Cash bookAdd Rs. 4000 in cash bookAdd Rs.8000 in Cash BookDeduct Rs.8000 in cashbook

EXAMPLESSujit 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 columnPayment side of cash book of LKJ ltd. Is overcast by Rs.9000.Deduct Rs.9000 in Cash bookAdd Rs. 9000 in cash bookAdd Rs.18000 in Cash BookDeduct Rs.18000 in cashbook

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

Clerical errorsErrors of omission Errors of commissionPosting of correct amount at wrong side Posting wrong amount at wrong sideTotaling error in subsidiary bookMistake while balancing of ledgerCompensating errorsErrors 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-ExamplesCredit sale of Rs.5000 to Suresh is posted to his credit, then rectification is Credit Suresh to the extent of Rs.10,000Credit Suresh to the extent of Rs.5,000 Debit Suresh to the extent of Rs.10,000Debit Suresh to the extent of Rs.5000 Freight expenses for carrying New Machinery is carried to Traveling Exp. a/c. Choose the correct rectification entryDebit machinery a/c and credit Traveling Exp a/c.Credit machinery a/c and debit Freight Exp a/cCredit 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.

Rectification of Errors-ExamplesOne of the pair given below is mismatch, identify the same Trial balance Statement of balances of ledger accountsReal Account Always shows debit balance Suspense Account difference in trail balanceOutstanding Expenses Nominal Account One of the statement is incorrect. Select the incorrect statement.If the trial balance shows short debit, the suspense a/c will have credit balance.Errors which cancel out the effect of one another are called compensating errors.One sided errors are rectified without passing journal entriesTwo sided errors originate in the primary books

Capital & Revenue Expenditure

CAPITALREVENUELarge amountRelatively smallImprove or enhance earning capacityMaintain assetLong duration benefitShort durationNon- recurringrecurringBalance sheet itemTrading /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 expensesPreliminary expenses

Cap. & Rev. Expenditure-Examples(1)Cost of replacement of defective parts of the machinery is -----Capital expenditureRevenue expenditureDeferred revenue expenditureNone of the above(2) Loss of goods due to fire Rs.8000 is a revenue expenditure because----It is recurringAmount involved is smallLoss is arising out of business operationsNone of the above

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

Examples(5)Preliminary expenses , discount allowed on issue of shares are the examples of Capital expenditureDeferred revenue expenditureRevenue 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 receiptCapital receipt of Rs. 2000 & Rev. Receipt of Rs.10000Capital receipt of Rs. 9000 & Rev. Receipt of Rs.3000Capital receipt of Rs. 12000 & Rev. Receipt of Rs.Nil

Methods of valuation of inventory

FIFOLIFOAVERAGECOSTGoods issued valued at earliest priceStock valuation at latest priceGoods issued valued at latest priceStock valuation at earliest priceFound out by dividing total price paid by quantity received

ExamplesSelect the incorrect statement from the following---Inventory valuation is subjective because it depends upon the accounting policies adopted by the organisationThe basis of inventory valuation adopted should not be changed frequently because it violates accounting principle of consistencyAccounting standard recommends FIFO or weighted average methodThe 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 Exchange

Bill of Exchange Promissory NoteUnconditional orderUnconditional promiseMade by creditorMade by debtorAcceptance by debtor mustNo acceptance as suchThree parties to a billTwo parties to a billNoting is not necessaryOn dishonor, noting is necessary by notary public

Bill of ExchangeHonoring 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 instrumentTrueFalse

Q3. Negotiable instruments can be ________from one person to anotherQ4. 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 SaleBooks of Account in the books of consignor- Consignment A/cConsignee A/cGoods sent on ConsignmentValuation 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 ofPersonal accountNominal accountReal accountQ4.When the goods are sent by the consignor to the consignee, they are accompanied byProforma invoice*Commercial invoiceAccount salesBank draft

Consignee, Consignor, expenses incurred, nominal

ExamplesQ5. Where del-credere commission is paid:the normal commission is not payable to the consigneethe bad debts, if occur, are borne by the consignorthe bad debts, if occur, are borne by the consigneethe bad debts, if occur, are shared by the consignor and consignee equallyQ6: The principle followed in valuations of closing stock on consignment isto include the expenses by the consignor onlycost to the consignor plus proportionate expenses incurred till the goods reach to the premises of the consignee plus direct expenses of consigneeCost plus proportionate non-recurring expenses incurred by the consignorCost plus proportionate non-recurring expenses incurred by the consignee

JOINT VENTUREMeaningTemporary partnershipAccounting-when separate books

Joint Bank AccountCo-venturers AccountJoint Venture AccountAccounting-when no separate books are maintained

Joint VentureCo-Venturer

ExamplesQ1.When separate set of books are kept for keeping the accounts of Joint Venture, thenMemorandum Joint Venture Account is preparedTransactions take the form of ordinary accounting systemOnly Joint Venture and Personal accounts of the co-venturers are maintained.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-----Capital LeaseOperational LeaseService LeaseLeveraged 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-----FY Rs.7500,SY Rs.7500 TY Rs.7500, FY Rs.7500 FY Rs.12000,SY Rs.9000 TY Rs.6000 FOURTH Y Rs.3000FY Rs.3000,SY Rs.6000 TY Rs.9000 FY Rs.12000 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-----Lease Equalization account is debited (with the difference)Lease Equalization account is credited (with the difference)Lease Terminal Adjustment account is debited (with the difference)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------Debit Lessee account and Credit Rent Suspense a/c* Debit Advance Lease Rent account and Credit Lease Rent a/c Debit Bank Account and Credit Lease Rent AccountDebit Bank Account and Credit Advance Lease Rent Account

HIRE PURCHASE & INSTALMENT SALEA 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 organizationsMeaningNeed for maintenance of accountsAccounts

Receipt & Payment accountIncome & Expenditure AccountBalance sheet

Distinction

Receipt & Payment A/cIncome& ExpenditureA/cReal AccountNominal AccountAll receipts & payment in a yearOnly income and expenses in a yearCapital/ revenue itemsOnly revenue itemsStarts with Opening cash & end with closing cashNo op. balance but end with surplus/ deficitcurrent,previous and next yearCurrent 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

adjustmentsOutstanding incomeOutstanding expensesIncome received in advancePrepaid expensesDepreciation on assets

EXAMPLES

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 methodRs.1200Rs.1000Rs.1800None of the aboveWhat is the value of closing stock, if co. follows LIFO methodRs.1800Rs.1200Rs.1000None of the aboveWhat is the value of closing stock, if co. follows weighted average cost methodRs.1120Rs.1200Rs.1800None of the above

EXAMPLES

Identify the wrong pairMaker of the bill ^^drawerDishonour of bill ^^ rebatePerson in whose favour bill is endorsed^^endorseeBill of exchange ^^ negotiable instrumentOne of the following pair is mismatch.Identify the wrong pairDiminishing balance method^^ depreciated value of asset never become zeroCurrent asset^^ asset on which depreciation is not providedDepreciation^^ decreases the value of the assetRate of depreciation^^ depends upon profit of the firmSelect the true statementGoodwill is a current assetThe expenditure incurred on installation of machinery is revenue expenditureReducing balance method is also known as SLM 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 billsOn Ruchira for Rs.1000On Madhur for Rs.2000On Trichur for Rs.3000On Nupur for Rs.4000All the bills are accepted by all.Solve the examples as per followingRuchiras acceptance is retained till due date, but it was dishonoured. Identify the correct entry in sudhirs booksDebit bill a/c and credit BR a/cDebit Ruchira A/c and credit BR a/cDebit BR a/c and credit Ruchira a/cDebit Dishonour Bill a/c credit BR a/cMadhurs acceptance is discounted with the bank, but it was dishonoured. Identify the correct entry in sudhirs booksDebit Madhur credit bank a/cDebit BR a/c credit Madhur a/cDebit Madhur a/c credit BR a/c No entry as bill is discounted with the bank

EXAMPLES

Trichurs acceptance is endorsed to Tayyab and noting charges of Rs.50 were paid, but bill was dishonoured. Identify the correct entry in sudhirs booksDebit Trichur a/c by Rs.3050 and credit Tayyab a/c by Rs.3050Debit BR A/c, Debit Noting charges Rs.50 and credit Tayyab a/c Rs.3050Debit Tayyab a/c Rs.3050 and credit Bank a/c Rs.3050No entry as bill is endorsed to TayyabNupurs acceptance was sent to bank for collection, but it was dishonoured. Identify the correct entry in sudhirs booksDebit Nupur credit BR a/cDebit Nupur a/c credit Bill sent to Bank for collection a/cDebit Bill sent to bank for collection a/c credit Bank a/c No entry as bill is sent to bank for collection

EXAMPLES

Choose the wrong pairThere is no difference in appearance between trade bill and accommodation billBoth the parties must accept the accommodation billAccommodation bill is drawn and accepted without any considerationThe purpose of any accommodation bill is to provide temporary finance

EXAMPLES

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 sameDebit bank a/c credit joint venture a/cDebit stock credit joint venture a/cDebit co-venturer a/c credit joint ventureDebit joint venture credit stock

EXAMPLES

Select the wrong statement in respect of jointIt is temporary partnershipNature of co-venturers liability is limitedBalancing figure of Joint venture a/c is either profit or loss on joint ventureJoint bank account is the account in which banking transactions are transacted by co-venturers

EXAMPLES

Select the wrong pair in respect of jointJoint venture ^^ real accountJoint bank account ^^ personal a/cUnsold stock taken over by coventurer ^^ credit joint venture a/cCredit balance in Joint venture a/c ^^ profit on joint venture a/c

EXAMPLES

Select the false statementAmount spent on uniform of workers is a revenue expenditureExpenses of whitewashing of a factory building is a revenue expenditureCost of stores consumed in manufacturing machinery for installation in owned factory is a revenue expenditureWages paid for construction of the extension of the factory building is a capital expenditure

.

The following financial statement is not prepared by a non-trading concernsReceipt and Payment accountIncome & Expenditure AccountProfit & Loss AccountBalance SheetReceipts and Payments account isReal accountPersonal accountNominal account

EXAMPLES

Incurring of expenditure of Rs.100000 on dismantling, removing and reinstalling plant & machinery is a ----- Capital expenditureRevenue expensesDeferred revenue expenditureNone of the above

EXAMPLES

RVY sport club has given following information regarding subscription income. Ascertain income for Current yearSubscription received in cash Rs.5000 during Apr04 to Mar.05Subscription outstanding on 31.3.05 Rs.100Subscription outstanding on 31.3.04 Rs.200Subscription received in advance during 04-05 Rs.300Subscription received in advance during 03-04 Rs.400

Indicate from the following the exact amount of subscription to be credited to Income & Expenditure AccountRs.5800Rs.6000Rs.5200Rs.5600

Examples 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 + B + C + D EA B + C + D EA + B C - D + EA B + C D + E

EXAMPLES

Select the wrong statement in respect of lease accountingLease Terminal Adjustment a/c is carried forward from year to yearIf Lease Terminal Adjustment a/c shows credit balance it is shown at liability sideIf Lease Terminal Adjustment a/c shows debit balance it is debited to Profit and Loss accountLease Terminal Adjustment a/c balance is not carried forward to next year but written off to Profit and Loss account

EXAMPLES

Select the wrong statement in respect of lease accountingIf 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

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.152If 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.1488If 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

Thank youFor any queries or difficulties do contact at S.D.BARGIR, JOINT DIRECTOR, IIBFE mail: sudaaba@iibf.org.inPhone; 022-22183898

Best of luck