Accounting & Finance for Bankers

MODULE C
PRESENTATION BY
S.D.BARGIR
Joint Director, IIBF

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

EXAMPLES
When overdraft as per cash book and a Cheque of

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 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 accountSuspense account- After preparation

of T/B
Rectification when books are closedDiff. 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
i.
ii.
iii.
iv.

i.
ii.
iii.
iv.

Credit sale of
Rs.5000 to Suresh is posted to his credit,
then rectification is
Credit Suresh to the extent of Rs.10,000
Credit Suresh to the extent of Rs.5,000
Debit Suresh to the extent of Rs.10,000
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 entry
Debit machinery a/c and credit Traveling Exp a/c.
Credit machinery a/c and debit Freight Exp a/c
Credit 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.

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
a.
b.
c.
(2)
a.
b.
c.

machinery is ----Capital expenditure

Revenue expenditure
Deferred revenue expenditure
Loss of goods due to fire Rs.8000 is a revenue
expenditure because---It is recurring
Amount involved is small
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.
b.
c.

Capital expenditure
Deferred revenue expenditure
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.
b.
c.

Capital receipt of Rs. 2000 & Rev. Receipt of Rs.10000

Capital receipt of Rs. 9000 & Rev. Receipt of Rs.3000
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)
b)
c)
d)

LIFO method
FIFO method
Average cost method
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 held
a) 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 areFIFO or Weighted average
Standard cost
LIFO or latest purchase price
Q: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 Exchange
Bill 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

Examples
Q. ___________ draws a bill on __________
Q. A bill of exchange is a negotiable instrument
True
False
Q. Negotiable instruments can be ________from
one person to another
Q. A bill of exchange must be in writing
True
False
Q: A bill of exchange is not to be dated
True
False

Examples-conted
Q.: 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 ACCOUNT
A 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 consignorConsignment A/c
Consignee A/c
Goods sent on Consignment

Valuation of closing stock

Consigning 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

Examples
Q. 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 of
a.
Personal account
b.
Nominal account
c.
Real account
Q.When the goods are sent by the consignor to the consignee,
they are accompanied by
a.
Proforma invoice*
b.
Commercial invoice
c.
Account sales
d.
Bank draft
Consignee, Consignor, expenses incurred, nominal

Examples
Q. Where del-credere commission is paid:
a)
b)
c)
d)

Q.:
a)
b)
c)
d)

the normal commission is not payable to the consignee

the bad debts, if occur, are borne by the consignor
the bad debts, if occur, are borne by the consignee
the bad debts, if occur, are shared by the consignor and
consignee equally
The principle followed in valuations of closing stock on
consignment is
to include the expenses by the consignor only
cost to the consignor plus proportionate expenses
incurred till the goods reach to the premises of the
consignee plus direct expenses of consignee
Cost plus proportionate non-recurring expenses incurred
by the consignor
Cost plus proportionate non-recurring expenses incurred
by the consignee

JOINT VENTURE
Meaning
Temporary partnership
Accounting-when separate books
Joint Bank Account
Co-venturers Account
Joint Venture Account

Accounting-when no separate books are maintained

Joint Venture
Co-Venturer

Examples
Q.When separate set of books are kept for keeping
the accounts of Joint Venture, then
a) Memorandum Joint Venture Account is prepared
b) Transactions take the form of ordinary
accounting system
c) 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 indicates
a. Profit on Joint Venture
b. Loss on Joint venture
c. Amount receivable
d. 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 Lease

b. Operational Lease
c. Service Lease
d. 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.3000
c. 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 Account
d.

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

Distinction
Receipt & 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 Fee
b) Tuition Fee
c) Subscriptions
d) Donations
Q:The following financial statement is not prepared by a
non-trading concerns
a) Receipt and Payment account
b) Income & Expenditure Account
c) Profit & Loss Account
d) Balance Sheet
Q: Receipts and Payments account is
a) Real account
b) Personal account
c) Nominal account

ADJUSTING ENTRIES
Some common adjustments are:
1.
Closing Stock
2.
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 assets
7.
Interest on Capital
8.
Interest on Drawings
9.
Interest on Loan
10. Bad debts to be written off
11. Provision for bad debts
12. Provision for discount on Debtors
13. Provision for discount on creditors
14. Losses on account of accidents
15. Commission payable on profit
16. Goods used by the proprietor
17. Goods distributed as Free Samples

CLOSING ENTRIES
Closing 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