Transcript TRIAL BALANCE - Indian Institute of Banking and Finance

ACCOUNTING AND FINANCE
BANKERS
JAIIB
PAPER-2
MODULE ‘ C ‘
By
RAVI ULLAL
CONSULTANT
TOPICS
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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
BASICS OF ACCOUNTING
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DOUBLE ENTRY SYSTEM
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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
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BANK RECONCILIATION( B. R. ) IS BASED ON THE PRINCIPLE
OF DOUBLE ENTRY.
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CREDIT THE GIVER AND DEBIT THE RECEIVER
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B. R. SHOWS CAUSES OF DIFFERENCES BETWEEN CASH
BOOK AND PASS BOOK BALANCE
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DEBIT BALANCE AS PER CASH BOOK IS CREDIT BALANCE
AS PER PASS BOOK = POSITIVE BALANCE
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CREDIT BALANCE IN CASH BOOK IS DEBIT BALANCE IN
PASS BOOK = NEGATIVE BALANCE/OVERDRAFT
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WHETHER WE START WITH CASH OR PASS BOOK
RECONCILIATION ENTRIES WILL REMAIN SAME AS PER
PRINCIPLES
BANK RECONCILIATION STATEMENT
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.
CAUSES OF DIFFERENCES
TREATMENT
CASH/PASS BOOK
DT.
CR.
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CHEQUES ISSUED BUT NOT PRESENTED
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CHEQUES DEPOSITED BUT NOT COLLECTED
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BANK CHARGES
√
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INTEREST ON SAVINGS BANK
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INTEREST ON LOAN
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AMOUNT PAID BY BANK AS PER
STANDING INSTRUCTIONS
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.
DIRECT PAYMENTS MADE BY CUSTOMERS
.
DISHONOUR OF CHEQUES RECEIVED
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BANK RECONCILIATION STATEMENT
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CAUSES OF DIFFERENCES
. PAYMENTS SIDE OF CASH BOOK
UNDERCAST
DT.
TREATMENT
CASH/PASS BOOK
CR.
√
. DEPOSIT SIDE OF CASH BOOK
OVERCAST
√
. CHEQUE ISSUED BUT NOT TAKEN
IN BANK COLUMN
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. DEBIT BALANCE X BROUGHT
FORWARD AS CREDIT BALANCE
. CHEQUE ISSUED BUT RECORDED
TWICE
2X
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BANK RECONCILIATION STATEMENT
IMPORTANT : WHETHER WE ARE RECONCILING PASS BOOK OR CASH
BOOK , EACH OF THE RECTIFICATION ENTRIES WILL
APPEAR ON THE SAME SIDE . ADDITION OR SUBRACTION
OF ENTRIES FROM THE OPENING OR GIVEN BALANCE
DEPENDS UPON WHICH SIDE OF THE LEDGER THEY ARE
CAST OR TO BE CAST. THUS WHAT WE SIMPLY NEED TO
KNOW IS WHETHER EACH FIGURE GIVEN IN THE
PROBLEM IS A DEBIT OR CREDIT ENTRY. I WILL EXPLAIN
WITH THE HELP OF A PROBLEM LATER.
BANK RECONCILIATION STATEMENT
SIMPLY PUT, IF AN ENTRY IS ALREADY THERE BUT EITHER
THE WHOLE OR PART IT HAS TO BE RECTIFIED THEN THAT
PORTION IS POSTED ON THE OPPOSITE SIDE OF THE
ORIGINAL ENTRY.
BANK RECONCILIATION STATEMENT
ADVANTAGES OF BANK RECONCILIATION
. VERIFICATION OF ACCURACY OF ENTRIES
. TIMELY CORRECTIVE ACTION
. PREVENTS FRAUDS
. CONTROL TOOL FOR MANAGEMENT
TRIAL BALANCE
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DEFINITION
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IT IS A STATEMENT SHOWING CREDIT AND DEBIT
BALANCES FROM THE LEDGER.
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HELPS ARITHMETICAL ACCURACY AND FACILITATES
FINAL ACCOUNTS.
TRIAL BALANCE
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BASIC PRINCIPLE :
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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
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TYPES OF ERRORS:
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A) CLERICAL ERRORS
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-- ERRORS OF OMISSION
--- OMISSION OF TRANSACTION FROM BOOKS
--- COMPLETE OMISSION NOT AFFECTING TRIAL
BALANCE
--- PARTIAL OMISSION AFFECTING TRIAL
BALANCE
TRIAL BALANCE
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-- 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
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RECTIFICATION OF ERRORS IS A SERIES OF STEPS:
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PASS THE CORRECT ENTRY
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COMPARE THE WRONG ENTRY WITH THE CORRECT
ONE
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PASS THE RECTIFICATION ENTRY
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IF TRIAL BALANCE DOES NOT TALLY THEN
DIFFERENCE IS TRANSFERRED TO SUSPENCE
ACCOUNT
TRIAL BALANCE
TYPICAL TRIAL BALANCE
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NAME
CAPITAL
DRAWINGS
PURCHASES
SALES
EXPENSES
DEBTORS(CUSTOMRES)
CREDITORS(SUPPLIERS)
CASH
SALES RETURN
DEBIT
CREDIT
X
X
X
X
X
X
X
X
X
TRIAL BALANCE
TYPICAL ERRORS:
-- CLERICAL:
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A) SALARY PAID 1000/- BUT POSTED AS 10, 000/-.
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RECTIFICATION: CREDIT SALARY WITH 9000/-.
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B) SALARY PAID 1000/- BUT POSTED IN RENT A/C.
RECTIFICATION: DEBIT SALARY AND CREDIT RENT WITH
1000/-.
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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/-.
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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/-.
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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
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CAPITAL RECEIPTS/PAYMENTS:
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ARE USUALLY LARGE(RELATIVELY)
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ARE NON-RECURRING IN NATURE
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THE BENEFITS ARE OVER LONGER DURATION
THE PURPOSE IS TO ENHANCE PRODUCTIVITY OF THE
ASSETS
CAPITAL AND REVENUE EXPENDITURE
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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
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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
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REVENUE NATURE:
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ALL TRANSACTIONS RELATING TO NOMINAL
ACCOUNTS
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EVEN CERTAIN EXPENSES OF NON-RECURRING
NATURE BASED ON MATERIALITY CONCEPT
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EXCESS OF SALE VALUE OF ASSET OVER W D VALUE
UPTO COST OF ASSET
CAPITAL AND REVENUE EXPENDITURE
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DEFERRED REVENUE EXPENDITURE:
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LARGE ADVERTISING EXPENDITURE FOR(SAY)
LAUNCH OF A PRODUCT
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EXPENDITURE FOR RAISING OF FUNDS INCLUDING
PREPARATION OF PROJECT REPORT
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INITIAL EXPENSES FOR SETTING UP OF A COMPANY
INVENTORY VALUATION
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VALUATION OF STOCKS IS IMPORTANT FROM THE
POINT OF INCOME DETERMINATION.
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THE DANGER COULD BE OF EITHER OVERVALUATION
OR UNDERVALUATION OF STOCKS RESULTING IN
OVERSTATING OR UNDERSTATING OF PROFITS.
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METHODS OF VALUATION:
-- FIFO
-- LIFO
-- AVERAGE OR WEIGHTED AVERAGE COST METHOD
-- BASE STOCK METHOD
-- ADJUSTED SELLING PRICE METHOD
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INVENTORY VALUATION
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UNDER FIFO GOODS ISSUED TO PRODUCTION IS
VALUED AT THE EARLIEST PRICE WHEREAS THE
CLOSING STOCK IS AT THE LATEST PRICE.
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UNDER LIFO GOODS ISSUED TO PRODUCTION IS
VALUED AT THE LATEST PRICE WHEREAS THE
CLOSING PRICE IS AT THE EARLIEST PRICE.
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UNDER WEIGHTED AVERAGE COST METHOD
ARITHMETIC MEAN OF TOTAL PRICE BY TOTAL
QUANTITY RECEIVED IS TAKEN FOR VALUATION.
INVENTORY VALUATION
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ADJUSTING SELLING PRICE METHOD IS GENERALLY
USED BY SMALL BUSINESSMEN WHO ARE UNABLE TO
DIFFERENTIATE VARIOUS COSTS.
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HENCE THEY VALUE THE STOCKS AT SELLING PRICE
AND THEN REDUCE ITS VALUE TO THE EXTENT OF
ESTIMATED GROSS MARGIN.
INVENTORY VALUATION
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BASE STOCK METHOD IS SIMILAR TO LIFO. CLOSING
STOCK IS ALWAYS AT COST AT THE BEGINNING OF
BUSINESS. IN TIMES OF INFLATION VERY LOW VALUE
OF STOCK MAKES FOR EXCELLENT ACCOUNTING.
IT HOWEVER REQUIRES A MINIMUM STOCK TO BE
MAINTAINED.
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PRESENTLY ACCOUNTING STANDARDS PERMIT
FIFO(HISTORICAL PRICE) OR WEIGHTED AVERAGE
COST METHOD.
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VALUE OF STOCK CAN BE ASCERTAINED BY
PERIODIC(PHYSICAL VERIFICATION) OR PERPETUAL
INVENTORY ( MAINTAINENCE OF STOCK REGISTER).
INVENTORY VALUATION
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CHARACTERISTICS OF DIFFERENT METHODS OF
INVENTORY VALUATION
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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
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-- LIFO :
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-- IN FALLING MARKET THE EFFECT IS THE SAME AS
THAT OF FIFO IN RISING MARKET
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-- IN RISING MARKET THE EFFECT IS SAME AS THAT
OF FIFO IN FALLING MARKET.
INVENTORY VALUATION
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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.
INVENTORY VALUATION
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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.
BILLS OF EXCHANGE
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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’
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. CASH a/c
TO BILLS RECEIVABLE
( BILL IS MET ON DUE DATE)
DR.
BILLS OF EXCHANGE
BILL ENDORSED TO C
.
C’s a/c
TO BILLS RECEIVABLE
DR.
( NO ENTRY WHEN BILL IS MET)
BILL SENT FOR COLLECTION
.
BANK FOR BILL COLLECTION a/c
TO BILLS RECEIVABLE
DR.
.
CASH a/c
TO BANK FOR BILL COLLECTION
( BILL SENT FOR COLLECTION IS MET)
DR.
.
BILLS OF EXCHANGE
IN CASE OF DISCOUNTING
CASH a/c
DISCOUNT a/c
TO BILLS RECEIVABLE
( NO ENTRY WHEN BILL IS MET)
DR.
DR.
THE ENTRIES IN THE BOOKS OF DRAWEE ‘B’:
.. A’s a/c
DR.
TO BILLS PAYABLE
. BILLS PAYABLE a/c
TO CASH
( BILL IS PAID)
DR.
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)
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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
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-- B’s a/c
TO BILLS RECEIVABLE
TO NOTING CHARGES
(BILL RETURNED TO ‘A’)
DR.
DISHONOUR OF BILL SENT BY BANK FOR PAYMENT
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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
TO BILLS RECEIVABLE
TO NOTING CHARGES
(BILL RETURNED TO B)
DR.
BILLS OF EXCHANGE
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DISHONOUR OF ENDORSED BILL
. BILLS RECEIVABLE a/c
 NOTING CHARGES a/c
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TO C
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B’s a/c
TO BILLS RECEIVABLE
TO NOTING CHARGES
(BILL RETURNED TO B)
DR.
DR.
DR.
CONSIGNMENT ACCOUNT
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WHEN OWNER SENDS GOODS TO HIS AGENT FOR THE
PURPOSE OF SELLING THEN IT IS CALLED
CONSIGNMENT.
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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
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IN CONSIGNMENT ACCOUNTING THERE ARE 3
ACCOUNTS:
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CONSIGNMENT ACCOUNT; WHICH SHOWS
GOODS/STOCK AT COST INCLUDING EXPENSES
INCURRED IN SENDING THE GOODS.
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CONSIGNEE ACCOUNT; WHICH IS NET OF HIS
SELLING PRICE AND THE NON-RECURRING OR DIRECT
EXPENSES INCURRED BY HIM.
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GOODS SENT ON CONSIGNMENT ACCOUNT.
CONSIGNMENT ACCOUNT
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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
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NOTES:
CLOSING STOCK IS VALUED AT COST/INVOICE PRICE
+ PROPORTIONATE AMOUNT OF COST INCURRED BY
CONSIGNOR IN TRANSPORTING.
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IF GOODS ARE LOST IN TRANSIT THE SAME METHOD
OF COSTING IS APPLIED AND THAT AMOUNT IS
CREDITED TO THE CONSIGNMENT ACCOUNT.
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NOMINAL LOSSES ARE PROPORTIONATELY CHARGED
TO ALL STOCK WHETHER SOLD OR NOT. ABNORMAL
LOSS IS DIRECTLY CHARGED TO P&L A/C.
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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
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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
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THERE ARE 3 ACCOUNTS:
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-- JOINT BANK WHICH SHOWS EACH CO-VENTURER’S
INVESTMENT;
-- CO-VENTURER’S ACCOUNT
-- JOINT VENTURE INTO WHICH THE FINAL
PROFIT/LOSS IS TRANSFERRED.
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.
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OTHER TYPES ARE OPERATING AND SERVICE LEASES.
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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.
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THE LEASE EQUALISATION CHARGE ACCOUNTED
THROUGH THE LEASE TERMINAL ADJ. A/C WHICH
FINALLY IS DEDUCTED FROM THE WRITTEN DOWN
VALUE OF THE ASSET.
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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
LEASING & HIRE PURCHASE
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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
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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
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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
to asset
(annual depreciation
Of the asset)
P&L
a/c
to depreciation
dr.
dr.
LEASING AND HIRE PURCHASE
IN THE BOOKS OF THE LESSEE :
Lease rent paid
to bank
(lease rent paid)
a/c
dr.
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 basisto 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.

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.
FINAL LEG

THANK YOU VERY MUCH FOR YOUR
PATIENCE; I TRUST IT WAS USEFUL.
BEFORE WE DISPERSE LET US GO
THRU’ A SET OF QUESTIONS WITH
MULTIPLE CHOICE ANSWERS,WHICH
WILL COVER THOSE ASPECTS OF
ACCOUNTING THAT MAY NOT BEEN
TOUCHED UPON.
END
ANY QUERIES MAY BE ADDRESSED TO
[email protected]