Accounting & Finance for Bankers

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.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.30500 Rs.25500 Rs.21500 Rs.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 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 account- Suspense account- After preparation of T/B Rectification 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. 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 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 Freight expenses for carrying New Machinery is carried to

Traveling Exp. a/c. Choose the correct rectification entryi. 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.

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 machinery is -----

a. Capital expenditure

b. Revenue expenditure

c. Deferred revenue expenditure

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

a. It is recurring

b. Amount involved is small

c. Loss is arising out of business operations

Cap. & Rev. Expenditure-Examples

(3) Expenditure incurred in acquiring the patents rights for the business is an example of ----

a. Capital expenditure

b. Deferred revenue expenditure

c. Revenue expenditure

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

a. Capital expenditure

b. Deferred revenue expenditure

c. Revenue expenditure

Examples(5)Preliminary expenses , discount allowed on issue of

shares are the examples of a. Capital expenditure

b. Deferred revenue expenditure

c. 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.10000

b. Capital receipt of Rs. 9000 & Rev. Receipt of Rs.3000

c. 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) LIFO method

b) FIFO method

c) Average cost method

d) 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 helda) 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 are- FIFO or Weighted average Standard cost LIFO or latest purchase priceQ: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 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 date Retirement Discounting of bill Sent for collection to bank Endorsed to creditor Renewal of the bill Accommodation bill

ExamplesQ. ___________ draws a bill on __________Q. A bill of exchange is a negotiable instrument True FalseQ. Negotiable instruments can be ________from one person to

anotherQ. A bill of exchange must be in writing True FalseQ: A bill of exchange is not to be dated True False

Examples-contedQ.: 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 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/c Consignee A/c Goods sent on Consignment

Valuation of closing stockConsigning 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

ExamplesQ. 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 ofa. Personal accountb. Nominal accountc. Real accountQ.When the goods are sent by the consignor to the consignee, they are

accompanied bya. Proforma invoice*b. Commercial invoicec. Account salesd. Bank draft

Consignee, Consignor, expenses incurred, nominal

Examples

Q. Where del-credere commission is paid:a) the normal commission is not payable to the consigneeb) 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

equallyQ.: 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 consigneec) Cost plus proportionate non-recurring expenses incurred by the

consignord) 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

ExamplesQ.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*

Q.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 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 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

Meaning Need for maintenance of accounts Accounts

Receipt & Payment account Income & Expenditure Account Balance sheet

DistinctionReceipt & 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 Feeb) Tuition Feec) Subscriptionsd) Donations

Q:The following financial statement is not prepared by a non-trading concernsa) Receipt and Payment accountb) Income & Expenditure Accountc) Profit & Loss Accountd) Balance SheetQ: Receipts and Payments account isa) Real accountb) Personal accountc) Nominal account

ADJUSTING ENTRIES

Some common adjustments are:1. Closing Stock2. 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 assets7. Interest on Capital8. Interest on Drawings9. Interest on Loan10. Bad debts to be written off11. Provision for bad debts12. Provision for discount on Debtors13. Provision for discount on creditors14. Losses on account of accidents15. Commission payable on profit

Goods used by the proprietor1. Goods distributed as Free Samples

CLOSING ENTRIESClosing 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