Unit 1

1. Explain various concepts of accounting?

There are the necessary assumptions or conditions upon which accounting is based.Accounting concepts
are postulates, assumptions or conditions upon which accounting records and statement are based. The
various accounting concepts are as follows:
1. Entity Concept:
For accounting purpose the business is treated as a separate entity from the proprietor(s). One can sell
goods to himself,, but all the transactions are recorded in the book of the business. This concepts helps
in keeping private affairs of the proprietor away from the business affairs. E.g. If a proprietor invests Rs.
1,00,000/- in the business, it is deemed that the proprietor has given Rs. 1,00,000/- to the business
and it is shown as a liability in the books of the business. Similarly, if the proprietor withdraws Rs.
10,000/- from the business, it is charged to them.
2. Dual Aspect Concept:
As per this concept, every business transaction has a dual affect. For example, if Ram starts business
with cash Rs. 1,00,000/- there are two aspects of the transaction: Asset Account and Capital Account.
The business gets asset (cash) of Rs. 1,00,000/- and on the other hand the business owes Rs. 1,00,000/to Ram.
3. Going Business Concept (Continuity of Activity):
It is assumed that the business concern will continue for a fairly long time, unless and until has entered
into a state of liquidation. It is as per this assumption, that the accountant does not take into account the
forced sale values of assets while valuing them.
4. Money measurement concept:
As per this concept, in accounting everything is recorded in terms of money. Events or transactions which
cannot be expressed in terms of money are not recorded in the books of accounts, even if they are very
important or useful for the business. Purchase and sale of goods, payment of expenses and receipt of
income are monetary transactions which are recorded in the accounting books however events like death
of an executive, resignation of a manager are such events which cannot be expressed in money.
5. Cost Concept (Objectivity Concept):
This concept does not recognize the realizable value, the replacement value or the real worth of an
asset. Thus, as per the cost concept
a) as asset is ordinarily recorded at the price paid to acquire it i.e. at its cost, and
b) this cost is the basis for all subsequent accounting for the asset.
For example, if a machine is purchased for Rs. 10,000/- it is recorded in the books at Rs. 10,000/- and
even if its market value at the time of the preparation of the final account is Rs. 20,000/- or Rs. 60,000/the same will not considered.
6. Cost-Attach Concept:

This concept is also known as cost-merge concept. When a finished good is produced from the raw
material there are certain process and costs which are involved like labor cost, power and other overhead
expenses. These costs have a capacity to merge or attach when they are broughtr together.
7. Accounting Period Concept:
An accounting period is the interval of time at the end of which the income statement and financial
position statement (balance sheet) are prepared to know the results and resources of the business.
8. Accrual Concept:
The accrual system is a method whereby revenue and expenses are identified with specific periods of
time like a month, half year or a year. It implies recording of revenues and expenses of a particular
accounting period, whether they are received/paid in cash or not.
9. Period Matching of Cost and Revenue Concept:
This concept is based on the period concept. Making profit is the most important objective that keeps the
proprietor engaged in business activities. That is why most of the accountants time is spent in evolving
techniques for measuring the profit/profitability of the concern. To ascertain the profit made during a
period, it is necessary to match revenues of the period with the expenses of that period. Income
(profit) earned by the business during a period is compared with the expenditure incurred to earn the
revenue.
10. Realization Concept:
According to this concept profit, should be accounted for only when it is actually realized. Revenue is
recognized only when sale is affected or the services are rendered. However, in order to recognize
revenue, receipt of cash us not essential. Even credit sale results in realization as it creates a definite
asset called Account Receivable. However there are certain exception to the concept like in case of
contract accounts, hire purchase etc. Similarly incomes like commission interest rent etc. are shown in
Profit and Loss A/c on accrual basis though they may not be realized in cash on the date of preparing
accounts.

2. Explain the Causes of preparing bank reconciliation statement also enumerate the causes of difference
betwwen cash book and pass book.

Bank reconciliation statement is an important technique by which the accuracy of the bank balance shown
by the pass book and cash book is ensured. The need and importance of bank reconciliation statement can
be summarized in the following points.
* Bank reconciliation statement ensures the accuracy of the balances shown by the pass book and cash
book.
* Bank reconciliation statement provides a check on the accuracy of entries made in both the books.
* Bank reconciliation statement helps to detect and rectify any error committed in both the books.
* Bank reconciliation statement helps to update the cash book by discovering some entries not yet
recorded.
* Bank reconciliation statement indicates any undue delay in the collection and clearance of some
cheques.
Bank reconciliation means some of the transaction entered in the cash book not in the pass book and
some transaction entered in the pass book not in the cash book. In other words we can say that always
opposite entry in cash book and pass book. The bank pass book indicates the amount paid into the bank
and the amount withdrawn there form. The pass book balance or any given data must be the same as the
balance shown by the bank column of the cash book on the same date.The reason responsible for the

difference may be delay in intimation, time gap between recordings of transaction in cash book and pass
book due to errors and omissions in cash book and pass book.
Reasons of difference between cash book & pass book balance:

Cheque issued but not presented for payment: When cheque are issued then immediately
make entry in the cash book. The cheque issued can be presented for payment to the bank within six
month from the date of cheque as per banking law. The cheque are presented for payment after the
expiry of the above period then payment is refused by the bank. This cheque is also known as stale
cheque. It is posssible at the time when the balance of the two books are being compared, thus more
chances of causing a disagreement b/w the two balances.

Cheque paid into the bank but not yet cleared: As soon as the cheque are deposited into the
bank, the immediately entry is passed in the cash book. This will make entry in pass book only when
cheque are cleared. It is posssible at the time when the balance of the two books are being compared,
thus more chances of causing a disagreement b/w the two balances.

Interst 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 book. It is possible that the entry of such interest
may not have been made by the customer in the cash book, thus causing a disagreement b/w the two
balances.

Interest and Bank charges debited by bank: Sometime bank charges interest from the
customer then immediately entry in the pass book but not in cash book. so, in this case when check
the balance b/w cash and bank book then disagreement b/w the two balances. So, it is the main reason
to create difference b/w two books.

Interst, dividend collected by the bank: sometime interest on government security or dividend
on share is collected by the bank and is credited to customer account. If the entry does not appear in
the cash book then balance will differ.

Direct payment by bank: Sometimes, understanding instruction from the clients certain payment
like insurance premium, club fees instalment etc. are made by the bank. then this entry is recorded
only in the pass book. This entry is made in the cash book only when the necessary intimation to that
effect is received from the bank by the client. The entries in the cash and pass book may be on
different dates.

Direct payment into the bank by a customer: Sometimes, our customer deposit money direct
into the account in the bank. It is only recorded in the pass book not in the cash book. It is posssible at
the time when the balance of the two books are being compared, thus more chances of causing a
disagreement b/w the two balances.

Dishonour of bill discounted with the bank: Sometimes, customer 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
customer account with the amount of the bills together with the nothing charges if any.The customer
will pass the entry in the cash book only. when balance of the two books are being compared, thus
more chances of causing a disagreement b/w the two balances.

Dishonour of cheque: When the received cheque are deposited into bank, these are immediately
recorded in the cash book. As a result cash book balance is increased. but the deposited cheque is
dishonoured due to lack of funds or due to other reasons. Bank doesnot credit the amount of the
depositor. as a result disagreement b/w the two balances.

Error and ommissions: If any error is committed either by the bank or by a customer in the cash
book While recording a transaction in their respective books, it causing a disagreement b/w the two
balances. the error may be:
1.
undercast/overcast of receipt side or payment side.
2.
bank charges omitted from the banks or recorded twice in the books.
3.
wrong carry forward of cash book balance.

Unit 4
1. Explain the The Miller-Orr Model of cash management.

Most firms dont use their cash flows uniformly and also cannot predict their daily cash inflows and
outflows. Miller-Orr Model helps them by allowing daily cash flow variation.

Under the model, the firm allows the cash balance to fluctuate between the upper control limit and the
lower control limit, making a purchase and sale of marketable securities only when one of these limits is
reached. The assumption made here is that the net cash flows are normally distributed with a zero value of
mean and a standard deviation. This model provides two control limits the upper control limit and the
lower control limit as well as a return point. When the firms cash limit fluctuates at random and touches
the upper limit, the firm buys sufficient marketable securities to come back to a normal level of cash
balance i.e. the return point. Similarly, when the firms cash flows wander and touch the lower limit, it sells
sufficient marketable securities to bring the cash balance back to the normal level i.e. the return point.

The lower limit is set by the firm based on its desired minimum safety stock of cash in hand The firm
should also determine the following factors:
1. An interest rate for marketable securities, (i)
2. A fixed transaction cost for buying and selling marketable securities, (c)
3. The standard deviation if its daily cash flows, (s)
The upper control limits and return path are than calculated by the Miller-Orr Model as follows:
Distance between the upper limits and lower limits is 3Z.
(Upper limit Lower limit) = (3/4 C Transaction Cost C Cash Flow Variance/Interest Rate) 1/3
Z = (3/4 C cs2/i) 1/3
If the transaction cost is higher or cash flows shows greater fluctuations, than the upper limit and lower
limit will be far off from each other. As the interest rate increases, the limits will come closer. There is an
inverse relation between the Z and the interest rate. The upper control limit is three times above the lower
control limits and the return point lies between the upper and lower limits. Hence,
Upper Limit = Lower Limit + 3Z
Return Point = Lower Limit + Z
So, the firm holds the average cash balance equal to:
Average Cash Balance = Lower Limit + 4/3 Z
The Miller-Orr Model is more realistic as it allows variation in cash balance within the lower and upper
limits. The lower limit can be set according to the firms liquidity requirement. To determine the standard
deviation of net cash flows the pasty data of the net cash flow behaviour can be used. Managerial
attention is needed only if the cash balance deviates from the limits.

2. Explain the cs of Credit management.

It's one of the most common questions among small business owners seeking financing: "What will the
bank be looking for from me and my business?" While each lending situation is unique, many banks utilize
some variation of evaluating the five C's of credit when making credit decisions: character, capacity,
capital, conditions and collateral. We'll take a look at each of these ingredients and how they may impact
your funding request. Review each category and see how you stack up.
Character What is the character of the management of the company? What is management's
reputation in the industry and the community? Investors want to put their money with those who have
impeccable credentials and references. The way you treat your employees and customers, the way you
take responsibility, your timeliness in fulfilling your obligations these are all part of the character
question.
This is really about you and your personal leadership. How you lead yourself and conduct both your
business and personal life gives the lender a clue about how you are likely to handle leadership as a CEO.
It's a banker's responsibility to look at the downside of making a loan. Your character immediately comes
into play if there is a business crisis, for example. As small business owners, we place our personal stamp
on everything that affects our companies. Often, banks do not even differentiate between us and our
businesses. This is one of the reasons why the credit scoring process evolved, with a large component
being our personal credit history.
Capacity What is your company's borrowing history and track record of repayment? How much debt
can your company handle? Will you be able to honor the obligation and repay the debt? There are
numerous financial benchmarks, such as debt and liquidity ratios, that investors evaluate before advancing
funds. Become familiar with the expected pattern in your industry. Some industries can take a higher debt
load; others may operate with less liquidity.
Capital How well-capitalized is your company? How much money have you invested in the business?
Investors often want to see that you have a financial commitment and that you have put yourself at risk in
the company. Both your company's financial statements and your personal credit are keys to the capital
question. If the company is operating with a negative net worth, for example, will you be prepared to add
more of your own money? How far will your personal resources support both you and the business as it is
growing? If the company has not yet made profits, this may be offset by an excellent customer list and
payment history. All of these issues intertwine, and you want to ensure that the bank perceives the
business as solid.
Conditions What are the current economic conditions and how does your company fit in? If your
business is sensitive to economic downturns, for example, the bank wants a comfort level that you're
managing productivity and expenses. What are the trends for your industry, and how does your company
fit within them? Are there any economic or political hot potatoes that could negatively impact the growth
of your business?
Collateral While cash flow will nearly always be the primary source of repayment of a loan, bankers
look at what they call the secondary source of repayment. Collateral represents assets that the company
pledges as an alternate repayment source for the loan. Most collateral is in the form of hard assets, such
as real estate and office or manufacturing equipment. Alternatively, your accounts receivable and
inventory can be pledged as collateral.
The collateral issue is a bigger challenge for service businesses, as they have fewer hard assets to pledge.
Until your business is proven, you're nearly always going to pledge collateral. If it doesn't come from your
business, the bank will look to your personal assets. This clearly has its risks you don't want to be in a
situation where you can lose your house because a business loan has turned sour. If you want to be
borrowing from banks or other lenders, you need to think long and hard about how you'll handle this
collateral question.