JAIIB / Diploma in Banking & Finance ACCOUNTING AND FINANCE

FOR BANKERS

SPECIAL ACCOUNTS - MODULE C

M Syed Kunmir

SPBT College

BANK RECONCILIATION

• The bank pass book indicates the amount paid into the bank and the amount withdrawn there from. The pass book balance on any given date must be the same as the balance shown by the bank column of the cash book on the same date. But in actual practice the bank pass book balance seldom agrees with the balance shown by the bank column of the cash book. This happens when some of the transactions appear in the cash book but not in the pass book or in the pass book but not in the cashbook.

• 1. Cheques issued but not presented for payment. When cheques are issued, the entry in the cash book is made immediately. In the books of the bank, the entry is made only when the cheque is presented for payment..

• 2. Cheques paid into the bank but not yet cleared. As soon as the cheques arc deposited into the bank, the entry is passed on the debit side of the bank column in the cash book. The customer's account is credited by the bank only when the cheques are cleared.

• 3. Interest allowed by the bank. Bank might have credited the account of the customer with the interest and may have made the entry in the pass bk.

Reasons For Difference

• 4. Interest and bank charges debited by bank. The bank debits the account of the customer by way of interest on overdraft. It also debits the account of the customers by way of incidental charges and collection charges.

• 5. Interest, dividend etc. collected by the bank. Sometimes interest on government securities or dividend on shares is collected by the bank and is credited to customer's account. If the entry for these do not appear in the cash book, the balance will differ.

Reasons For Difference

• 6. Direct payment by the bank Sometimes under standing instructions from the client, certain payments like insurance premium, club fees etc. are made by the bank.

• 7. Direct payment into the bank by a customer. Sometimes our customers deposit money direct into the account in the bank, the corresponding entry for which may not appear in the cash book, due to delay in necessary instructions by the customers.

Reasons For Difference

• 8. Dishonor of bill discounted with the bank. Sometimes customers get their bills discounted with the bank. If the bank is not able to get payment of these bills on the due date, it will debit the customers accounts with the amount of the bills together with the noting charges, if any. The customer will pass the entry in his books on receipt of the information from the bank.

• 9. Any error committed by the bank Or Customer Besides the above reasons if any error is committed either by the bank or by the customer himself while recording the transactions in their respective books it will cause disagreement between the two balances.

Reasons For Difference

BASICS OF ACCOUNTING

• DOUBLE ENTRY SYSTEM • 3 TYPES OF ACCOUNTS:

-- REAL: ASSETS OF BUSINESS, TANGIBLE AND IDENTIFIABLE.

-- PERSONAL: THEY ARE HEADED WITH THE NAME OF PERSON/BUSINESS/FIRM. DEBTORS OR CREDITORS.

-- NOMINAL: THEY RECORD TRANSACTIONS OF INTANGIBLES SUCH AS RENT EXPENSES..

BASIC RULES OF ACCOUNTING

RULES: -- REAL : DEBIT THE ACCOUNT WHEN WE PURCHASE AN ASSET & CREDIT WHEN WE SELL OR DEPRECIATE.

-- PERSONAL : DEBIT THE RECEIVER OF GOODS & CREDIT THE GIVER OF GOODS.

-- NOMINAL : DEBIT LOSSES & EXPENSES, CREDIT INCOMES & GAINS.

-- IN A LEDGER, ASSETS OR LOSSES HAVE DEBIT BALANCE WHILE LIABILITIES OR GAINS HAVE CREDIT BALANCE.

BANK RECONCILIATION STATEMENT

ADVANTAGES OF BANK RECONCILIATION

. VERIFICATION OF ACCURACY OF ENTRIES

. TIMELY CORRECTIVE ACTION

. PREVENTS FRAUDS

. CONTROL TOOL FOR MANAGEMENT

EXAMPLES• X co .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.

• A) Rs.30500• B) Rs.25500• C) Rs.21500• D) Rs.22500

Bank Reconciliation

• Debit balance in the cash book means• a) Overdraft• b) Favourable balance• c) Temperory overdraft• d) None of the above

Bank Reconciliation

• Bank reconciliation statement is – A) Ledger account– B) Part of the cash book– C) Statement containing differnece of cash book

and bank pass book– D) None of the above

Bank Reconciliation

• Bank reconciliation statement is prepared by– A) Business man– B) Bank – C) Debtor– D) None of the above

Bank Reconciliation

• To reconcile the cash book with the pass book the un presented cheques are– A) added– B) subtracted– C) multiplied– D) devided

Bank Reconciliation

• To reconcile the cash book with the pass book when the cash book is overcast by Rs 100, Rs 100 will be– A) added– B) subtracted– C) multiplied– D) devided

Bank Reconciliation

Undercasting of the credit side of Cash Book has the same effect as overcasting of the–

• A) Debit side of the pass book. • B) Credit side of the pass book.• C) There is no relevance between the two • D) None of the above

TRIAL BALANCE

• DEFINITION

• IT IS A STATEMENT SHOWING CREDIT AND DEBIT

BALANCES FROM THE LEDGER.

• HELPS ARITHMETICAL ACCURACY AND FACILITATES

FINAL ACCOUNTS.

TRIAL BALANCE

• BASIC PRINCIPLE :

• SINCE IT IS DOUBLE ENTRY BOOK-KEEPING,

• HENCE ASSETS AND EXPENSES ARE DEBIT BALANCES

LIABILITIES AND INCOMES ARE CREDIT BALANCES

. IN CASE OF ARITHMETICAL INACCURACY IDENTIFY

CLERICAL/PRINCIPLE ERRORS AND RECTIFY

TRIAL BALANCE

• TYPES OF ERRORS:

• A) CLERICAL ERRORS

• -- ERRORS OF OMISSION

--- OMISSION OF TRANSACTION FROM BOOKS

--- COMPLETE OMISSION NOT AFFECTING TRIAL BALANCE

--- PARTIAL OMISSION AFFECTING TRIAL BALANCE

TRIAL BALANCE

• -- ERRORS OF COMMISSION

--- FIGURE POSTED ON THE WRONG SIDE OR WITH WRONG AMOUNT -- COMPENSATING ERRORS

--- ONE ERROR BALANCES ANOTHER ERROR . B) ERRORS OF PRINCIPLE

-- ERRORS IN CONTRAVENTION OF ACCOUNTING PRINCIPLES

TRIAL BALANCE

• RECTIFICATION OF ERRORS IS A SERIES OF STEPS:

• PASS THE CORRECT ENTRY

• COMPARE THE WRONG ENTRY WITH THE CORRECT ONE

• PASS THE RECTIFICATION ENTRY

• IF TRIAL BALANCE DOES NOT TALLY THEN DIFFERENCE IS TRANSFERRED TO SUSPENCE ACCOUNT

TRIAL BALANCE

TYPICAL TRIAL BALANCE N A M E DEBIT CREDIT• CAPITAL X• DRAWINGS X• PURCHASES X• SALES X• EXPENSES X• DEBTORS(CUSTOMRES) X• CREDITORS(SUPPLIERS) X• CASH X• SALES RETURN X

TRIAL BALANCE

• TYPICAL ERRORS:

• -- CLERICAL:• • A) SALARY PAID 1000/- BUT POSTED AS 10, 000/-.• RECTIFICATION: CREDIT SALARY WITH 9000/-.

• B) SALARY PAID 1000/- BUT POSTED IN RENT A/C.• RECTIFICATION: DEBIT SALARY AND CREDIT RENT WITH 1000/-.• • C) GOODS WORTH 100/- SOLD TO VIJAY WRONGLY RECORDED IN PURCHASE REGISTER.• RECTIFICATION: CREDIT SALES AND PURCHASE A/Cs WITH 100/- EACH AND DEBIT VIJAY WITH 200/-.

TRIAL BALANCE

AFTER TRIAL BALANCE IS PREPARED ONE FINDS

. D) SALES OF 500/- POSTED AS 5000/- WHILE RENT PAID 500/- POSTED AS 5000/-.

. RECTIFICATION: DEBIT SALES WITH 4500/-, CREDIT SUSPENCE WITH 4500/-, CREDIT RENT WITH 4500/-,

DEBIT SUSPENCE WITH 4500/-. • E) SALARY PAID AS 1000/- BUT POSTED AS 10,000/- IN RENT A/C.• RECTIFICATION: DEBIT SALARY WITH 1000/- SUSPENCE WITH

9000/-; CREDIT RENT WITH 10000/-

• F) A PURCHASER’S DEBIT BALANCE OF 9000/- HAS NOT BEEN TAKEN.

• RECTIFICATION: DEBIT DEBTORS, CREDIT SUSPENCE TO THE EXTENT OF 9000/-.

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-ExamplesRectification of Errors-Examples

Rectification of Errors-Examples

• 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 Credit

Trail balance – Say True or false

• 1) Wrong balancing of an account will not affect the trial balance

• 2) Trial balance does not ensure arithmetical accuracy• 3) Preparations of trial balance helps in locating

accounting errors• 4) Debit balance of ledger account is shown in debit

column of trial balance• 5) Fixed deposits with banks shows debit balance• 6) Purchases are shown in the debit side of the trial

balance• 7) Bank’s overdraft is shown on the debit side of the

trial balance

CAPITAL AND REVENUE EXPENDITURE

BASIC PRINCIPLE:

. ALL EXPENSES AND RECEIPTS OF REVENUE NATURE

ARE TAKEN TO TRADING AND PROFIT & LOSS ACCOUNT

. ALL EXPENDITURES AND RECEIPTS OF CAPITAL NATURE

ARE TAKEN TO BALANCE SHEET

CAPITAL AND REVENUE EXPENDITURE

REVENUE RECEIPTS/PAYMENTS :

. ARE SMALLER IN SIZE(RELATIVELY)

. ARE RECURRING IN NATURE

. THE BENEFITS ARE OVER A SHORTER PERIOD (1 YEAR)

. THE PURPOSE IS TO RUN THE BUSINESS ON A DAY TO DAY BASIS

. MAINTAIN ASSETS IN WORKING CONDITION

CAPITAL & REVENUE EXPENDITURE

• CAPITAL RECEIPTS/PAYMENTS:

• ARE USUALLY LARGE(RELATIVELY)

• ARE NON-RECURRING IN NATURE

• THE BENEFITS ARE OVER LONGER DURATION

• THE PURPOSE IS TO ENHANCE PRODUCTIVITY OF THE ASSETS

CAPITAL AND REVENUE EXPENDITURE

• THERE ARE CERTAIN EXPENDITURES WHICH ARE OTHERWISE REVENUE IN NATURE BUT SOMETIMES

UNUSUALLY LARGE AND WHOSE BENEFIT TO THE

ORGANISATION MAY ACCRUE AFTER FEW YEARS.THESE

MAY BE TREATED AS DEFERRED REVENUE EXPENDITURE ,

CARRIED TO THE BALANCE SHEET , AND WRITTEN OFF TO

THE PROFIT & LOSS ACCOUNT OVER A PERIOD OF TIME.

CAPITAL AND REVENUE EXPENDITURE

SAME IS THE CASE WITH CERTAIN RECEIPTS SUCH AS SALE OF ASSETS, WHERE THE RECEIPTS UPTO BOOK

VALUE IS DEDUCTED FROM THE ASSET, AND , IF

BETWEEN BOOK VALUE & COST AS REVENUE

RECEIPT & ABOVE COST AS CAPITAL RECEIPT.

. THERE IS A THIN LINE BETWEEN CAPITAL & REVENUE CLASSIFICATION. FOR INSTANCE REPAIRS TO MACHINERY WHICH KEEPS THE ASSET IN WORKING CONDITION IS CHARGED TO THE P & L A/C WHILE BETTERMENT EXPENSE IS CAPITALISED.

CAPITAL & REVENUE EXPENDITURE

• EXAMPLES OF EACH TYPE OF CLASSIFICATION:• CAPITAL NATURE:

-- PURCHASE OF ASSETS SUCH AS BUILDING, MACHINERY, VEHICLES. -- EXPENDITURE IN PURCHASE /SETTING UP OF CAPITAL GOODS/ASSETS -- EXCESS OF SALE PRICE OF ASSET OVER ITS COST PRICE -- FUNDS RAISED THRU BANKS/INSTITUTIONS -- FUNDS RAISED THRU ISSUE OF SHARES, & DEBENTURES

CAPITAL AND REVENUE EXPENDITURE

• REVENUE NATURE:

• ALL TRANSACTIONS RELATING TO NOMINAL ACCOUNTS

• EVEN CERTAIN EXPENSES OF NON-RECURRING NATURE BASED ON MATERIALITY CONCEPT

• EXCESS OF SALE VALUE OF ASSET OVER W D VALUE UPTO COST OF ASSET

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

CAPITAL AND REVENUE EXPENDITURE

• DEFERRED REVENUE EXPENDITURE:

• LARGE ADVERTISING EXPENDITURE FOR(SAY) LAUNCH OF A PRODUCT

• EXPENDITURE FOR RAISING OF FUNDS INCLUDING PREPARATION OF PROJECT REPORT

• INITIAL EXPENSES FOR SETTING UP OF A COMPANY

Cap. & Rev. Expenditure-Examples

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

a. Capital expenditureb. Revenue expenditurec. Deferred revenue expenditure(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 operations

Cap. & Rev. Expenditure-Examples

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

a. Capital expenditureb. Deferred revenue expenditurec. Revenue expenditure

Examples

(4)Preliminary expenses , discount allowed on issue of shares are the examples of

a. Capital expenditureb. Deferred revenue expenditurec. Revenue expenditure

(5) 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

INVENTORY VALUATION

• VALUATION OF STOCKS IS IMPORTANT FROM THE POINT OF INCOME DETERMINATION.

• THE DANGER COULD BE OF EITHER OVERVALUATION OR UNDERVALUATION OF STOCKS RESULTING IN OVERSTATING OR UNDERSTATING OF PROFITS.

• METHODS OF VALUATION:• -- FIFO• -- LIFO• -- AVERAGE OR WEIGHTED AVERAGE COST METHOD• -- BASE STOCK METHOD• -- ADJUSTED SELLING PRICE METHOD

INVENTORY VALUATION

• UNDER FIFO GOODS ISSUED TO PRODUCTION IS VALUED AT THE EARLIEST PRICE WHEREAS THE CLOSING STOCK IS AT THE LATEST PRICE.

• UNDER LIFO GOODS ISSUED TO PRODUCTION IS VALUED AT THE LATEST PRICE WHEREAS THE CLOSING PRICE IS AT THE EARLIEST PRICE.

• UNDER WEIGHTED AVERAGE COST METHOD ARITHMETIC MEAN OF TOTAL PRICE BY TOTAL QUANTITY RECEIVED IS TAKEN FOR VALUATION.

INVENTORY VALUATION

• ADJUSTING SELLING PRICE METHOD IS GENERALLY USED BY SMALL BUSINESSMEN WHO ARE UNABLE TO DIFFERENTIATE VARIOUS COSTS.

• HENCE THEY VALUE THE STOCKS AT SELLING PRICE AND THEN REDUCE ITS VALUE TO THE EXTENT OF ESTIMATED GROSS MARGIN.

INVENTORY VALUATION

• BASE STOCK METHOD

• IT IS ON THE ASSUMPTION THAT A MINIMUM QUANTITY OF INVENTORY ( BASE STOCK ) MUST BE HELD AT ALL TIMES IN ORDE TO CARRY ON THE BUSINESS

• PRESENTLY ACCOUNTING STANDARDS PERMIT FIFO(HISTORICAL PRICE) OR WEIGHTED AVERAGE COST METHOD.

• VALUE OF STOCK CAN BE ASCERTAINED BY PERIODIC(PHYSICAL VERIFICATION) OR PERPETUAL INVENTORY ( MAINTAINENCE OF STOCK REGISTER).

INVENTORY VALUATION

• CHARACTERISTICS OF DIFFERENT METHODS OF INVENTORY VALUATION

• FIFO : -- IN RISING MARKET FIFO RESULTS IN HIGHER PROFITS LOCKING UP OF SCARCE W. C. -- GOODS ARE SOLD AT CURRENT HIGHER PRICES WHILE COST OF GOODS REFLECTS LOWER THAN CURRENT COSTS -- IN FALLING MARKET FIFO RESULTS IN LOWER PROFITS.

INVENTORY VALUATION

• -- LIFO :

• -- IN FALLING MARKET THE EFFECT IS THE SAME AS THAT OF FIFO IN RISING MARKET

• -- IN RISING MARKET THE EFFECT IS SAME AS THAT OF FIFO IN FALLING MARKET.

INVENTORY VALUATION

• IN THIS CHAPTER IT IS IMPORTANT TO DISCUSS THE VARIOUS ACCOUNTING CONVENTIONS

• CONSERVATISM CONCEPT: RECOGNITION OF INCREASES IN EARNINGS REQUIRES BETTER EVIDENCE THAN DOES RECOGNITION OF DECREASES THAT IS EXPENSES

• REALISATION CONCEPT: RECOGNITION OF AMOUNT OF REVENUE THAT HAS CERTAINTY OF REALISATION

• MATCHING CONCEPT: RECOGNITION OF REVENUES AND EXPENSES FOR A CERTAIN EVENT.

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

INVENTORY VALUATION

• CONSISTENCY CONCEPT: ONCE A CERTAIN METHOD IS DECIDED UPON FOR ALL SUBSEQUENT EVENTS OF THE SAME CHARACTER THE SAME METHOD SHOULD BE USED UNLESS THERE IS A SOUND REASON TO CHANGE

• MATERIALITY CONCEPT: DEPENDING UPON JUDGEMENT AND COMMON SENSE IMMATERIAL EVENTS / TRIVIAL MATTERS SHOULD NOT BE GIVEN MORE IMPORTANCE THAN WARRANTED.

• HISTORICAL COSTS: COST OF ACQUISITION – DISCOUNTS, IF ANY, + COSTS INCIDENTAL TO BRINGING THE ASSET/ ERECTING THE ASSET.

Example Let's examine the inventory of Cory's Tequila Co. (CTC) to see how the different inventory valuation methods can affect the financial

analysis of a company. Monthly Inventory Purchases*

Month Units Purchased Cost/unit Total Value

January 1,000 Rs10 Rs10,000

February 1,000 Rs12 Rs12,000

March 1,000 Rs15 Rs15,000

Total 3,000

Beginning Inventory = 1,000 units purchased at Rs8 each (a total of 4,000 units)

Income Statement (simplified): January-March*

Item LIFO FIFO Average

Sales = 3,000 units @ Rs20 each Rs60,000 Rs60,000 Rs60,000

Beginning Inventory 8,000 8,000 8,000

Purchases 37,000 37,000 37,000

Ending Inventory (appears on B/S) *See calculation below 8,000 15,000 11,250

COGS Rs37,000 Rs30,000 Rs33,750

Expenses 10,000 10,000 10,000

Net Income Rs13,000 Rs20,000 Rs16,250

• LIFO Ending Inventory Cost = 1,000 units X Rs8 each = Rs8,000 Remember that the last units in are sold first; therefore, we leave the oldest units for ending inventory.

•FIFO Ending Inventory Cost = 1,000 units X Rs15 each = Rs15,000 Remember that the first units in (the oldest ones) are sold first; therefore, we leave the newest units for ending inventory.

•Average Cost Ending Inventory = [(1,000 x 8) + (1,000 x 10) + (1,000 x 12) + (1,000 x 15)]/4000 units = Rs11.25 per unit

1,000 units X Rs11.25 each = Rs11,250 Remember that we take a weighted average of all the units in inventory

BILLS OF EXCHANGE

• BILL OF EXCHANGE IS THE VEHICLE FOR CREDIT TRANSACTIONS IN BUSINESS; HAS 3 PARTIES:

DRAWER – WHO MAKES THE BILL/ CREDITOR;

DRAWEE – ON WHOM THE BILL IS DRAWN;

PAYEE -- WHO RECEIVES THE MONEY;

SOMETIMES DRAWER & PAYEE ARE THE SAME.

ACCEPTANCE TO PAY BY THE DRAWEE IS ESSENTIAL.

.

BILLS OF EXCHANGE

. PROMISSORY NOTE IS SIMILAR ; HAS ONLY 2 PARTIES

BUT SIGNED BY DEBTOR; NOTING NECESSARY.

. ACCOMODATION BILL : THERE IS NO TRANSACTION;

THE BILL IS DISCOUNTED TO RAISE MONEYS FOR

BOTH PARTIES, WHO SHARE THE AMOUNT.

BILLS OF EXCHANGE

• TYPICAL ENTRIES:. THE ENTRIES IN THE BOOKS OF DRAWER ‘A’ ARE:• DIRECT BILL TRANSACTION• BILLS RECEIVABLE a/c DR. TO DRAWEE ‘B’

. CASH a/c DR. TO BILLS RECEIVABLE ( BILL IS MET ON DUE DATE)

BILLS OF EXCHANGE

BILL ENDORSED TO C. C’s a/c DR. TO BILLS RECEIVABLE

( NO ENTRY WHEN BILL IS MET)

BILL SENT FOR COLLECTION

. BANK FOR BILL COLLECTION a/c DR. TO BILLS RECEIVABLE

. CASH a/c DR. TO BANK FOR BILL COLLECTION ( BILL SENT FOR COLLECTION IS MET) .

.

.

BILLS OF EXCHANGE

IN CASE OF DISCOUNTING CASH a/c DR. DISCOUNT a/c DR. TO BILLS RECEIVABLE ( NO ENTRY WHEN BILL IS MET) THE ENTRIES IN THE BOOKS OF DRAWEE ‘B’: .. A’s a/c DR. TO BILLS PAYABLE

. BILLS PAYABLE a/c DR. TO CASH ( BILL IS PAID)

BILLS OF EXCHANGE

• THERE ARE CASES WHEN BILLS ARE DISHONOURED.• IN THAT CASE THE ENTRIES ARE AS FOLLOWS: IN A’s BOOKS: BILL DIRECTLY SENT FOR PAYMENT B’s A/C DR. TO BILLS RECEIVABLE TO CASH ( CASH IS THE NOTING CHARGE) DISHONOUR OF DISCOUNTED BILL

. BILLS RECEIVABLE A/C DR. NOTING CHARGES A/C DR. TO CASH (CASH (notary charges) IS PAID TO THE BANK)

BILLS OF EXCHANGE

• -- B’s a/c DR.• TO BILLS RECEIVABLE• TO NOTING CHARGES• (BILL RETURNED TO ‘A’)

DISHONOUR OF BILL SENT BY BANK FOR PAYMENT

• BILL RECEIVABLE a/c DR.• NOTING CHARGE a/c DR.• TO CASH• TO BANK FOR BILL COLLECTION ( DISHONOUR OF BILL FOR COLLECTION)

. B’s a/c DR. TO BILLS RECEIVABLE TO NOTING CHARGES (BILL RETURNED TO B)

BILLS OF EXCHANGE

• DISHONOUR OF ENDORSED BILL

. BILLS RECEIVABLE a/c DR.• NOTING CHARGES a/c DR.• TO C

• B’s a/c DR.• TO BILLS RECEIVABLE • TO NOTING CHARGES (BILL RETURNED TO B)

CONSIGNMENT ACCOUNT

• WHEN OWNER SENDS GOODS TO HIS AGENT FOR THE PURPOSE OF SELLING THEN IT IS CALLED CONSIGNMENT.

• IT IS DIFFERENT FROM SALE IN THAT THE CONSIGNEE CANNOT DISPOSE OFF THE GOODS ACCORDING TO HIS CHOICE; DOES NOT RECEIVE ANY RISK FROM THE CONSIGNOR; CAN RETURN THE GOODS IF NOT MARKETABLE.

CONSIGNMENT ACCOUNT

• IN CONSIGNMENT ACCOUNTING THERE ARE 3 ACCOUNTS:

• CONSIGNMENT ACCOUNT; WHICH SHOWS GOODS/STOCK AT COST INCLUDING EXPENSES INCURRED IN SENDING THE GOODS.

• CONSIGNEE ACCOUNT; WHICH IS NET OF HIS SELLING PRICE AND THE NON-RECURRING OR DIRECT EXPENSES INCURRED BY HIM.

• GOODS SENT ON CONSIGNMENT ACCOUNT.

• Consignment Inventory is inventory that is in the possession of the customer, but is still owned by the supplier.

• In other words, the supplier places some of his inventory in his customer’s possession (in their store or warehouse) and allows them to sell or consume directly from his stock. The customer purchases the inventory only after he has resold or consumed it.

• The key benefit to the customer should be obvious; he does not have to tie up his capital in inventory. This does not mean that there are no inventory carrying costs for the customer; he does still incur costs related to storing and managing the inventor

• For a more specific example, consider a bicycle manufacturer that produces a wide range of bicycles ranging in price from a couple hundred dollars to several thousand dollars. He has customers (local independent bicycle shops) that stock his low-to-mid-priced models but are hesitant to stock the more expensive bikes because they do not have the confidence that their customers are willing to pay that much for a bike. And, if they do get a customer that wants a high-end bike, they could always special order it for them. The bicycle manufacturer strongly believes that getting his high-end bikes in the shops where customers can see and touch them is critical in driving up sales for these models as well as helping to promote his brand which ultimately drives up sales for the lower cost models. The solution? Well I think you can take it from here.

• This is a classic consignment model because it is the best-case scenario for applying the consignment inventory model. It works well for:

• New and unproven products• The introduction of existing product lines into new sales channels.• Very expensive products where sales are questionable.

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

CONSIGNMENT ACCOUNT

• NOTES: • CLOSING STOCK IS VALUED AT COST/INVOICE PRICE +

PROPORTIONATE AMOUNT OF COST INCURRED BY CONSIGNOR IN TRANSPORTING.

• IF GOODS ARE LOST IN TRANSIT THE SAME METHOD OF COSTING IS APPLIED AND THAT AMOUNT IS CREDITED TO THE CONSIGNMENT ACCOUNT.

• NOMINAL LOSSES ARE PROPORTIONATELY CHARGED TO ALL STOCK WHETHER SOLD OR NOT. ABNORMAL LOSS IS DIRECTLY CHARGED TO P&L A/C.

• APART FROM FIXED RATE OF COMMISSION ON THE GOODS

SOLD AN ADDITION ‘ DEL CREDERE’ COMMISSION IS PAID TO THE CONSIGNEE FOR ENCOURAGING SALES ON CREDIT BASIS.

HOWEVER THE INHERENT RISKS REMAIN WITH THE CONSIGNEE.

Joint Venture

• A joint venture (often abbreviated JV) is an entity formed between two or more parties to undertake economic activity together. The parties agree to create a new entity by both contributing equity, and they then share in the revenues, expenses, and control of the enterprise. The venture can be for one specific project only, or a continuing business relationship such as the Sony Ericsson joint venture

JOINT VENTURE • JOINT VENTURE ACCOUNTS ARE TEMPORARY IN NATURE ;

FOR THE AD HOC PURPOSE OF AN ASSIGNMENT UNDERTAKEN.

• IT IS SIMILAR TO A PARTNERSHIP EXCEPT SUCH ASSOCIATIONS ARE TEMPORARY IN NATURE.

• ALSO IN PARTNERSHIP THE ACCOUNTING IS ON ACCRUAL BASIS WHILE IN JOINT VENTURE ACCOUNTING IS ON CASH BASIS.

JOINT VENTURE

• THERE ARE 3 ACCOUNTS:

• -- JOINT BANK WHICH SHOWS EACH CO-VENTURER’S INVESTMENT;

-- CO-VENTURER’S ACCOUNT

-- JOINT VENTURE INTO WHICH THE FINAL PROFIT/LOSS IS TRANSFERRED.

Difference Between Leasing & Hire Purchase

BASIS LEASE FINANCING HIRE PURCHASE

Meaning A lease transaction is acommercial arrangement,whereby an equipmentowner or manufacturerconveys to the equipmentuser the right to use theequipment in return for a rental

Hire purchase is a type ofinstalment credit underwhich the hire purchaseragrees to take the goods onhire at a stated rental,which is inclusive of therepayment of principal aswell as interest, with an option to purchase

Option to user No option is provided tothe lessee (user) topurchase the goods

Option is provided to the hirer ( user)

Nature of expenditure Lease rentals paid by thelessee are entirely revenueexpenditure of the lesse

Only interest elementincluded in the HPinstalments is revenueexpenditure by nature

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 AND HIRE PURCHASE

• LESSOR (OWNER) GIVES HIS ASSETS TO LESSEE (USER) FOR USE; RECEIVES LEASE RENTALS IN RETURN, AN AMOUNT WHICH INCLUDES COST OF DEPRECIATION, COST OF FINANCE, AND ADMINISTRATIVE EXPENSES OF THE LESSOR.

. LEASING HELPS IN IMPROVING SALES VOLUME OF GOODS; REDUCES CAPITAL INVESTMENT FOR LESSEE, INCREASES HIS BORROWING CAPACITY, REDUCES TAX LIABILITY AS RENTALS ARE FULLY TAX DEDUCTABLE, HOWEVER BURDENSOME.

LEASING AND HIRE PURCHASE

• FINANCIAL LEASE IS THE MOST POPULAR, LONG TERM IN NATURE, GENERALLY USEFUL FOR PLANT AND MACHINERY.

• OTHER TYPES ARE OPERATING AND SERVICE LEASES.

• LESSOR RECEIVES LEASE RENTALS, CLAIMS DEPRECIATION.

• LESSEE CHARGES THE LEASE RENTALS PAID TO THE P & L ACCOUNT.

LEASING AND HIRE PURCHASE

• THE LESSOR BREAKS UP THE RENTALS RECEIVED INTO FINANCE INCOME AND ANNUAL LEASE CHARGE.

• FINANCE INCOME = TOTAL RENTALS OVER THE

LEASE PERIOD + RESIDUAL VALUE OF LEASED ASSET

-- COST OF LEASED ASSET ( FAIR VALUE ).

LEASING AND HIRE PURCHASE

• USE SUM OF DIGITS METHOD TO FIND ANNUAL FINANCE INCOME.

• ANNUAL LEASE CHARGE = ANNUAL LEASE RENT – ANNUAL FINANCE INCOME.

• ANNUAL LEASE CHARGE = STATUTORY DEPRECIATION + LEASE EQUALISATION CHARGE.

• LEASE EQUALISATION CHARGE IS DEDUCTED FROM THE LEASE RENTALS OR THE PROFIT & LOSS ACCOUNT.

LEASING & HIRE PURCHASE

• SOMETIMES THE ANNUAL LEASE IS LESS THAN STATUTORY DEPRECIATION; THEN THE LEASE EQUALISATION CHARGE IS ADDED TO THE PROFIT & LOSS ACCOUNT.

• THE LEASE EQUALISATION CHARGE ACCOUNTED THROUGH THE LEASE TERMINAL ADJ. A/C WHICH FINALLY IS DEDUCTED FROM THE WRITTEN DOWN VALUE OF THE ASSET.

• IN CASE OF OPERATING LEASE IF THE PERIOD IS LESS THAN 1 YEAR ( WHICH IS GENERALLY THE CASE ) THEN THE ENTIRE AMOUNT IS TAKEN TO THE PROFIT & LOSS ACCOUNT.

• IF THE PERIOD IS MORE THAN 1 YEAR AND THE ENTIRE RENTAL IS TAKEN INTO A LEASE RENT SUSPENCE ACCOUNT AND YEARLY RENTALS ARE CHARGED TO IT.

LEASING & HIRE PURCHASE

• NOTES:

• FINANCE INCOME IS THE PERCEIVED RETURN ON LEASED ASSET.

• LEASE EQUALISATION CHARGE IS THE EXCESS OF LEASE RENT AFTER DUE WEIGHTAGE IS GIVEN TO THE RETURN ON THE LEASED ASSET AND THE EXTENT OF DEPRECIATION CHARGED.

• THIS AMOUNT IS CARRIED FORWARD IN THE BALANCE SHEET TO BE CHARGED AGAINST THE WRITTEN DOWN VALUE OF THE ASSET.

LEASING AND HIRE PURCHASE

Explanation • The concept of lease equalisation account is an

equaliser between the capital recovery inherent in lease rentals and the depreciation chargeable as per Companies Act.

• The objective of the lessor is to write-off an

amount equal to the capital recovery inherent in lease rentals, so as to leave in the revenue statement only the financing charges

LEASING AND HIRE PURCHASE

• HIRE PURCHASE IS DIFFERENT IN THAT THE HIRER IS THE OWNER FOR THE PURPOSE OF DEPRECIATION. ALTHOUGH ACTUAL OWNERSHIP PASSES ON THE DATE OF PAYMENT OF LAST INSTALMENT.

• THE HIRE PURCHASE PRICE CONSISTS OF CASH PRICE AND INTEREST.

• INSTALMENT SALE IS SIMILAR EXCEPT THAT OWNERSHIP PASSES ON TO BUYER AS SOON AS THE 1ST INSTALMENT IS PAID.

• THE 1ST INSTALMENT IN BOTH CASES IS CALLED DOWN PAYMENT.

• THE SELLER OF THE ASSET IS CALLED VENDOR

LEASING AND HIRE PURCHASE• A TYPICAL LEASE TRANSACTION IN THE BOOKS OF THE LESSOR:• Bank a/c dr. to lease rent (lease rent received)

• Lease rent a/c dr. to P & L a/c (lease rent transferred to profit)

• Depreciation a/c dr. to asset (annual depreciation Of the asset)

• P & L a/c dr. to depreciation (depn. Charged to P & L a/c)

if annual lease charge>depn. Lease equalisation a/c dr. to lease terminal adj. P & L a/c dr. to lease equalisation

if annual lease charge<depn • Lease terminal adj. a/c dr. to lease equalisation charge.

. P & L a/c dr. to other expenses (all other expenses debited)

.

LEASING AND HIRE PURCHASE

IN THE BOOKS OF THE LESSEE : Lease rent paid a/c dr. to bank (lease rent paid)

P & L a/c dr. to lease rent (lease rent charged to P & L)

IF LEASE RENT IS PAID FOR THE ENTIRE PERIOD THE SAME IS ACCOUNTED FOR IN BANK A/C AND AN ANNUAL AMOUNT IS CHARGED TO P & L A/C EVERY YEAR

LEASING AND HIRE PURCHASE• A TYPICAL TRANSACTION IN THE BOOKS OF THE HIRER:

• Asset a/c dr.• to vendor (purchase of asset on H P basis- to the extent of the amount agreed). Vendor a/c dr. to bank (down payment/instalment). Depreciation a/c dr. to asset (depn. Of asset). P & L a/c dr. to depreciation (depn. Charged to P & L)\. P & L a/c dr. to expenses (any other expenses charged to P & L)

IN THE BOOKS OF LESSEE:

. Hirer a/c dr. to sales (sale of asset on H P basis) Bank a/c dr. to hirer (instalment received)

NON-TRADING ORGANISATIONS

• NON-TRADING ORGANISATIONS ARE NON PROFIT MAKING BODIES, RENDERING SERVICES TO PUBLIC, COLLECTING MONEYS BY WAY OF MEMBERSHIP FEES, SUBSCRIPTIONS, DONATIONS. HOWEVER TO PREVENT MISUSE OF FUNDS, ACCOUNTS ARE MAINTAINED.

• RECEIPTS & PAYMENTS STATEMENT CONTAINS REAL ACCOUNTS, ACTUAL RECEIPTS AND PAYMENTS, BOTH

CAPITAL AND REVENUE ITEMS.

. INCOME & EXPENDITURE STATEMENT CONTAINS NOMINAL ACCOUNTS, OF REVENUE ITEMS OF INCOME &

EXPENSES FOR A FIXED PERIOD.

NON-TRADING ORGANISATIONS

• A TYPICAL WAY OF CONVERTING RECEIPTS & PAYMENTS STATEMENT INTO INCOME & EXPENDITURE STATEMENT IS TAKE THE RECEIPTS/PAYMENTS OF THE CURRENT YEAR SUBTRACT THE OPENING BALANCE OF THE CURRENT YEAR AND ADD THE CLOSING BALANCE ( IF ANY ).

• THE CLOSING BALANCES WILL CONSTITUTE THE BALANCE SHEET.

DEPRECIATION

• DEPRECIATION IS A CHARGE ON PROFITS, TO ACCOUNT FOR THE FALL IN THE VALUE( NOTIONAL OR OTHERWISE ) OF AN ASSET DURING THE PERIOD OF USE.

• DEPRECIATION OR WRITING OFF OF A CERTAIN PORTION OF AN ASSET ON AN ANNUAL BASIS IS A PRUDENT WAY OF SAVINGS FOR REPLACEMENT OF THE ASSET AFTER ITS USEFUL LIFE IS OVER.

• SINCE DEPRECIATION IS AN OPERATING COST AND THEREFORE TAX DEDUCTIBLE, EACH YEAR THE SAVING IS TO THE EXTENT OF (TAX RATE)* ANNUAL DEPRECIATION.

DEPRECIATION

• DEPRECIATION CAN ALSO BE LOOKED IN A DIFFERENT WAY.

• DEPRECIATION IS AN ACCOUNTING PROCESS FOR THE GRADUAL CONVERSION OF THE CAPITALIZED COST OF FIXED(TANGIBLE) ASSETS INTO EXPENSE.

• SIMILARLY, INTANGIBLE ASSETS ARE CONVERTED INTO EXPENSE BY AMORTISATION.

• WHILE ASSETS SUCH AS NATURAL RESOURCES ARE CONVERTED BY PROCESS CALLED DEPLETION.

DEPRECIATION

• WHAT CAUSES DEPRECIATION ?

• SIMPLY WEAR AND TEAR

• MISHAPS

• OBSOLESCENCE

• PASSAGE OF TIME

• FALL IN VALUE

DEPRECIATION

• IN ORDER TO CALCULATE DEPRECIATION THERE ARE BASIC ISSUES TO BE ASCERTAINED :

-- ESTIMATED USEFUL LIFE OF THE ASSET(YEARS).

-- THE RESIDUAL VALUE OF THE ASSET.

-- METHOD TO BE USED FOR PROVIDING DEPRECIATION.

DEPRECIATION

• METHODS OF DEPRECIATION : . STRAIGHT LINE METHOD. EQUAL FRACTION OF THE NET

COST(COST OF THE ASSET LESS THE RESIDUAL VALUE) IS CHARGED EACH YEAR.

• WRITTEN DOWN VALUE METHOD. EQUAL PERCENTAGE OF THE WRITTEN DOWN VALUE IN THE BOOKS OF THE COMPANY IS CHARGED EACH YEAR.

• SINKING FUND METHOD. IT IS STRAIGHT LINE METHOD BUT THE DEPRECIATION CHARGED OR A PORTION OF IT IS KEPT AS A RESERVE, INVESTED IN MARKETABLE SECURITIES. THE FUND GROWS INTO REPLACEMENT VALUE OF THE ASSET.

Cost Rs 140000

Salvage Value Rs 20000

Useful life 5 years

Straight line depreciation

Year Depreciation

2006 Rs 1 8,000 =(Rs110,000 - Rs20,000) x 1/5

2007 Rs 1 8,000 =(Rs110,000 - Rs20,000) x 1/5

2008 Rs 1 8,000 =(Rs110,000 - Rs20,000) x 1/5

2009 Rs 1 8,000 =(Rs110,000 - Rs20,000) x 1/5

2010 Rs 1 8,000 =(Rs110,000 - Rs20,000) x 1/5

Total Rs 9 0,000

Straight Line Method

YearBook value at the beginning

of the year Dep Dep Expens ACC Dep Book Value

2006 Rs 1 10,000 40% Rs44,000 Rs44,000 Rs66,000

2007 Rs 6 6,000 40% Rs26,400 Rs70,400 Rs39,600

2008 Rs 3 9,600 40% Rs15,840 Rs86,240 Rs23,760

2009 Rs 2 3,760 40% Rs 3,760 (*1) Rs90,000 Rs20,000

2010 Rs 2 0,000 40% Rs - Rs90,000 Rs20,000

Total Rs90,000

(*1) Depreciation stops when accumulated depreciation reaches depreciation base.

Depreciation base = cost - salvage value = Rs110,000 - Rs20,000 = Rs90,000

Written Down Method