Transcript JAIIB / Diploma in Banking & Finance ACCOUNTING AND FINANCE FOR BANKERS SPECIAL ACCOUNTS - M Syed Kunmir SPBT College MODULE C.

JAIIB / Diploma in Banking & Finance
ACCOUNTING AND FINANCE
FOR BANKERS
SPECIAL ACCOUNTS -
M Syed Kunmir
SPBT College
MODULE C
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the bank and the amount withdrawn there from.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.
Reasons For Difference
• 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.
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.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
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)
– B)
– C)
– D)
Business man
Bank
Debtor
None of the above
Bank Reconciliation
• To reconcile the cash book with the pass book
the un presented cheques are
– A)
– B)
– C)
– D)
added
subtracted
multiplied
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)
– B)
– C)
– D)
added
subtracted
multiplied
devided
Bank Reconciliation
Undercasting of the credit side of Cash Book has the same effect as
overcasting of the–
•
•
•
•
A)
B)
C)
D)
Debit side of the pass book.
Credit side of the pass book.
There is no relevance between the two
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
•
•
•
•
•
•
•
•
•
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:
•
•
•
•
•
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/-.
Rectification of Errors-Examples
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.
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 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 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)
a.
b.
c.
Professional fees paid in connection with acquisition of
leasehold premises is---Capital expenditure
Deferred revenue expenditure
Revenue expenditure
Examples
(4)Preliminary expenses , discount allowed on issue of
shares are the examples of
a.
b.
c.
Capital expenditure
Deferred revenue expenditure
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.
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
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
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
.
CASH a/c
TO BANK FOR BILL COLLECTION
( BILL SENT FOR COLLECTION IS MET)
.
.
.
DR.
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)
•
•
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
TO BILLS RECEIVABLE
TO NOTING CHARGES
(BILL RETURNED TO ‘A’)
DR.
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
TO BILLS RECEIVABLE
TO NOTING CHARGES
(BILL RETURNED TO B)
DR.
BILLS OF EXCHANGE
• DISHONOUR OF ENDORSED BILL
. BILLS RECEIVABLE a/c
• NOTING CHARGES a/c
•
TO C
• B’s a/c
•
TO BILLS RECEIVABLE
•
TO NOTING CHARGES
(BILL RETURNED TO B)
DR.
DR.
DR.
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 a
commercial arrangement,
whereby an equipment
owner or manufacturer
conveys to the equipment
user the right to use the
equipment in return for a
rental
Option to user
No option is provided to
the lessee (user) to
purchase the goods
Lease rentals paid by the
lessee are entirely revenue
expenditure of the lesse
Hire purchase is a type of
instalment credit under
which the hire purchaser
agrees to take the goods on
hire at a stated rental,
which is inclusive of the
repayment of principal as
well as interest, with an
option to purchase
Option is provided to the
hirer ( user)
Nature of expenditure
Only interest element
included in the HP
instalments is revenue
expenditure 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
to asset
(annual depreciation
Of the asset)
•
P&L
a/c
dr.
to depreciation
(depn. Charged to P & L a/c)
dr.
if annual lease charge>depn.
Lease equalisation a/c
dr.
to lease terminal adj.
P & L a/c
to lease equalisation
dr.
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
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.
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.
Straight Line Method
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
Written Down Method
Book value at the beginning
Year
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
40%
Rs -
Rs90,000
Rs20,000
Total
Rs 2 0,000
Rs90,000
(*1) Depreciation stops when accumulated depreciation reaches
depreciation base.
Depreciation base = cost - salvage value = Rs110,000 - Rs20,000 =
Rs90,000