JAIIB Accounting & Finance for Bankers

1. JAIIBAccounting & Finance for Bankers PRESENTATION BY S.D.BARGIR Joint Director, IIBF 17-10-2007

2. 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

3. 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

4. BANK RECONCILIATION STATEMENT • BANK RECONCILIATION( B. R. ) IS BASED ON THE PRINCIPLE OF DOUBLE ENTRY. • DEBIT THE RECEIVER AND CREDIT THE GIVER • 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

5. 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 Bank’s books. • Rs.30500 • Rs.25500 • Rs.21500 • Rs.22500

6. EXAMPLES • 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 • Cheque issued to Rohan for Rs.4000 was recorded twice in cash book • Deduct Rs.4000 in Cash book • Add Rs. 4000 in cash book • Add Rs.8000 in Cash Book • Deduct Rs.8000 in cashbook

7. EXAMPLES • Sujit is having account with two banks viz. PNB and Canara bank. He made a deposit of Rs. 3000 in Canara Bank , but wrongly entered in column of PNB.For preparing BRS of Canara Bank , sujit will---- a) Add Rs.3000 in Cash Book of Canara BK column b) deduct Rs.3000 in Cash book of Canara BK column c) Add Rs.6000 in cash book of Canara BK column d) Deduct Rs.6000 in CB of Canara BK column • Payment side of cash book of LKJ ltd. Is overcast by Rs.9000. • Deduct Rs.9000 in Cash book • Add Rs. 9000 in cash book • Add Rs.18000 in Cash Book • Deduct Rs.18000 in cashbook

8. 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

9. 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

10. Rectification of Errors-Examples (1) Rs. 7000 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

11. Trial Balance-Examples • 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.

12. Rectification of Errors-Examples • One of the pair given below is mismatch, identify the same • Trial balance <> Statement of balances of ledger accounts • Real Account<> Always shows debit balance • Suspense Account<> difference in trail balance • Outstanding Expenses<> Nominal Account • One of the statement is incorrect. Select the incorrect statement. • If the trial balance shows short debit, the suspense a/c will have credit balance. • Errors which cancel out the effect of one another are called compensating errors. • One sided errors are rectified without passing journal entries • Two sided errors originate in the primary books

13. Capital & Revenue Expenditure

14. Deferred Revenue expenditure • Expenditure incurred in one year , but benefit of which is accruing not in one year but following two or more years , then such expenditure is called asDeferred Revenue expenditure • Examples • Heavy advertisement exp. • Issue of capital expenses • Preliminary expenses

15. Cap. & Rev. Expenditure-Examples (1)Cost of replacement of defective parts of the machinery is ----- • Capital expenditure • Revenue expenditure • Deferred revenue expenditure • None of the above (2) 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 • None of the above

16. Cap. & Rev. Expenditure-Examples (3) Expenditure incurred in acquiring the patents rights for the business is an example of ---- • Capital expenditure • Deferred revenue expenditure • Revenue expenditure (4) Professional fees paid in connection with acquisition of leasehold premises is---- • Capital expenditure • Deferred revenue expenditure • Revenue expenditure

17. Examples (5)Preliminary expenses , discount allowed on issue of shares are the examples of • 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 • 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

18. Methods of valuation of inventory

19. Examples • Select the incorrect statement from the following--- • Inventory valuation is subjective because it depends upon the accounting policies adopted by the organisation • The basis of inventory valuation adopted should not be changed frequently because it violates accounting principle of ‘consistency’ • Accounting standard recommends FIFO or weighted average method • The ascertainment of value of stock from accounting record is known as Perpetual inventory

20. Examples-conted.. 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

21. Bill of Exchange

22. 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

23. Examples Q1. ___________ draws a bill on __________ Q2. A bill of exchange is a negotiable instrument • True • False Q3. Negotiable instruments can be ________from one person to another Q4. A bill of exchange must be in writing • True • False Q5: A bill of exchange is not to be dated • True • False

24. Examples-conted Q6.: The date on which the bill is payable is called its _________ Q7. The due date is calculated after adding __________ to the actual period of the bill. Q8. If the due date falls on a public holiday, then it becomes due on the ------- Q9.A bill was drawn on 23rd Dec. 2005 for one month maturity. What will be its due date. Q10. 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

25. 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 consignor- • Consignment A/c • Consignee A/c • Goods sent on Consignment Valuation of closing stock Consigning goods at higher price

26. 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

27. Examples Q1. The possession of the goods remains with the _________, but the property in or the ownership of the goods remain with the _________ Q2 : Usually the consignee recovers all ___________ by him on the consignment. Q3.:Consignment account is of the nature of • Personal account • Nominal account • Real account Q4.When the goods are sent by the consignor to the consignee, they are accompanied by • Proforma invoice* • Commercial invoice • Account sales • Bank draft • Consignee, Consignor, expenses incurred, nominal

28. Examples Q5. Where del-credere commission is paid: • 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 Q6: 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

29. 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

30. Examples Q1.When separate set of books are kept for keeping the accounts of Joint Venture, then • Memorandum Joint Venture Account is prepared • Transactions take the form of ordinary accounting system • Only Joint Venture and Personal accounts of the co-venturers are maintained. • Joint Venture, Co-venturers and Joint Bank accounts are opened Q2.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

31. 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

32. 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

33. Leasing Examples (2)There are three parties in----- • Capital Lease • Operational Lease • Service Lease • 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----- • FY Rs.7500,SY Rs.7500 TY Rs.7500, FY Rs.7500 • FY Rs.12000,SY Rs.9000 TY Rs.6000 FOURTH Y Rs.3000 • FY Rs.3000,SY Rs.6000 TY Rs.9000 FY Rs.12000 • FY Rs.NIL,SY Rs.10000 TY Rs.10000 FOURTH Y Rs.10000

34. Leasing Examples (4)If Lease charges of the year exceed the depreciation charge of the year then----- • Lease Equalization account is debited (with the difference) • Lease Equalization account is credited (with the difference) • Lease Terminal Adjustment account is debited (with the difference) • 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------ • Debit Lessee account and Credit Rent Suspense a/c* • Debit Advance Lease Rent account and Credit Lease Rent a/c • Debit Bank Account and Credit Lease Rent Account • Debit Bank Account and Credit Advance Lease Rent Account

35. 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

36. Accounting of non-trading organizations • Meaning • Need for maintenance of accounts • Accounts • Receipt & Payment account • Income & Expenditure Account • Balance sheet

37. Distinction

38. Treatment of some items • Donations- purpose to be seen • Entrance fees- cap. receipt • Life membership fees-cap receipt • Government grants-for maintenance revenue-for specific purpose cap.receipt • Special fund- exps& income of that fundbooked to that fund • Op. & closing. Stock of stationary- consumed during year to be taken as exps. • Sale of fixed assets/investments- above BV below BV • Sports material-asset and dep is charged • Opening/closing Balance sheet • Capital fund

39. adjustments • Outstanding income • Outstanding expenses • Income received in advance • Prepaid expenses • Depreciation on assets

40. EXAMPLES • SOLID PVT LIMITED HAS FOLLOWING TRANSACTIONS (Purchase of inventory I-Q100 @10 on 1.1.06),II(Q150@12 on 2.1.06) (Issue of inventory I-Q100 on 3.1.06 II-Q50on 4.1.06) q=quantity What is value of closing stock ,if co. follows FIFO method • Rs.1200 • Rs.1000 • Rs.1800 • None of the above • What is the value of closing stock, if co. follows LIFO method • Rs.1800 • Rs.1200 • Rs.1000 • None of the above • What is the value of closing stock, if co. follows weighted average cost method • Rs.1120 • Rs.1200 • Rs.1800 • None of the above

41. EXAMPLES • Identify the wrong pair • Maker of the bill ^^drawer • Dishonour of bill ^^ rebate • Person in whose favour bill is endorsed^^endorsee • Bill of exchange ^^ negotiable instrument • One of the following pair is mismatch.Identify the wrong pair • Diminishing balance method^^ depreciated value of asset never become zero • Current asset^^ asset on which depreciation is not provided • Depreciation^^ decreases the value of the asset • Rate of depreciation^^ depends upon profit of the firm • Select the true statement • Goodwill is a current asset • The expenditure incurred on installation of machinery is revenue expenditure • Reducing balance method is also known as SLM • Even if an asset is not used ,mere passage of time will cause a fall in its value unless it happens to be land

42. EXAMPLES Sudhir Draws following bills • On Ruchira for Rs.1000 • On Madhur for Rs.2000 • On Trichur for Rs.3000 • On Nupur for Rs.4000 All the bills are accepted by all.Solve the examples as per following • Ruchira’s acceptance is retained till due date, but it was dishonoured. Identify the correct entry in sudhir’s books • Debit bill a/c and credit BR a/c • Debit Ruchira A/c and credit BR a/c • Debit BR a/c and credit Ruchira a/c • Debit Dishonour Bill a/c credit BR a/c • Madhur’s acceptance is discounted with the bank, but it was dishonoured. Identify the correct entry in sudhir’s books • Debit Madhur credit bank a/c • Debit BR a/c credit Madhur a/c • Debit Madhur a/c credit BR a/c • No entry as bill is discounted with the bank

43. EXAMPLES • Trichur’s acceptance is endorsed to Tayyab and noting charges of Rs.50 were paid, but bill was dishonoured. Identify the correct entry in sudhir’s books • Debit Trichur a/c by Rs.3050 and credit Tayyab a/c by Rs.3050 • Debit BR A/c, Debit Noting charges Rs.50 and credit Tayyab a/c Rs.3050 • Debit Tayyab a/c Rs.3050 and credit Bank a/c Rs.3050 • No entry as bill is endorsed to Tayyab • Nupur’s acceptance was sent to bank for collection, but it was dishonoured. Identify the correct entry in sudhir’s books • Debit Nupur credit BR a/c • Debit Nupur a/c credit Bill sent to Bank for collection a/c • Debit Bill sent to bank for collection a/c credit Bank a/c • No entry as bill is sent to bank for collection

44. EXAMPLES • Choose the wrong pair • There is no difference in appearance between trade bill and accommodation bill • Both the parties must accept the accommodation bill • Accommodation bill is drawn and accepted without any consideration • The purpose of any accommodation bill is to provide temporary finance

45. EXAMPLES • A trainee in a/c dept. has put up following four entries for accounting for closing stock of joint venture . One of the entries is correct. Select the same • Debit bank a/c –credit joint venture a/c • Debit stock credit joint venture a/c • Debit co-venturer a/c credit joint venture • Debit joint venture credit stock

46. EXAMPLES • Select the wrong statement in respect of joint • It is temporary partnership • Nature of co-venturer’s liability is limited • Balancing figure of Joint venture a/c is either profit or loss on joint venture • Joint bank account is the account in which banking transactions are transacted by co-venturers

47. EXAMPLES • Select the wrong pair in respect of joint • Joint venture ^^ real account • Joint bank account ^^ personal a/c • Unsold stock taken over by coventurer ^^ credit joint venture a/c • Credit balance in Joint venture a/c ^^ profit on joint venture a/c

48. EXAMPLES • Select the false statement • Amount spent on uniform of workers is a revenue expenditure • Expenses of whitewashing of a factory building is a revenue expenditure • Cost of stores consumed in manufacturing machinery for installation in owned factory is a revenue expenditure • Wages paid for construction of the extension of the factory building is a capital expenditure

49. . • The following financial statement is not prepared by a non-trading concerns • Receipt and Payment account • Income & Expenditure Account • Profit & Loss Account • Balance Sheet • Receipts and Payments account is • Real account • Personal account • Nominal account

50. EXAMPLES • Incurring of expenditure of Rs.100000 on dismantling, removing and reinstalling plant & machinery is a ----- • Capital expenditure • Revenue expenses • Deferred revenue expenditure • None of the above