JAIIB / Diploma in Banking & Finance ACCOUNTING AND FINANCE FOR BANKERS SPECIAL ACCOUNTS - MODULE C

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

2. BANK RECONCILIATION • The bank pass book indicates the amount paid into the bank and the amount withdrawn there from.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.

3. 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.

4. 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.

5. 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.

6. 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.

7. 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. .

8. 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.

9. BANK RECONCILIATION STATEMENT ADVANTAGES OF BANK RECONCILIATION . VERIFICATION OF ACCURACY OF ENTRIES . TIMELY CORRECTIVE ACTION . PREVENTS FRAUDS . CONTROL TOOL FOR MANAGEMENT

10. 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

11. Bank Reconciliation • Debit balance in the cash book means • a) Overdraft • b) Favourable balance • c) Temperory overdraft • d) None of the above

12. 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

13. Bank Reconciliation • Bank reconciliation statement is prepared by • A) Business man • B) Bank • C) Debtor • D) None of the above

14. Bank Reconciliation • To reconcile the cash book with the pass book the un presented cheques are • A) added • B) subtracted • C) multiplied • D) devided

15. 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) added • B) subtracted • C) multiplied • D) devided

16. Bank Reconciliation Undercasting of the credit side of Cash Book has the same effect as overcasting of the– • A) Debit side of the pass book. • B) Credit side of the pass book. • C) There is no relevance between the two • D) None of the above

17. TRIAL BALANCE • DEFINITION • IT IS A STATEMENT SHOWING CREDIT AND DEBIT BALANCES FROM THE LEDGER. • HELPS ARITHMETICAL ACCURACY AND FACILITATES FINAL ACCOUNTS.

18. 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

19. 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

20. 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

21. 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

22. TRIAL BALANCE TYPICAL TRIAL BALANCE N A M EDEBIT CREDIT • CAPITAL X • DRAWINGS X • PURCHASES X • SALES X • EXPENSES X • DEBTORS(CUSTOMRES) X • CREDITORS(SUPPLIERS) X • CASH X • SALES RETURN X

23. 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/-.

24. 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/-.

25. 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

26. Rectification of Errors-Examples • 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

27. 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

28. 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

29. 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

30. 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

31. 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.

32. 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.

33. 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

34. 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

35. Capital & Revenue Expenditure

36. 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

37. Cap. & Rev. Expenditure-Examples (1)Cost of replacement of defective parts of the machinery is ----- • Capital expenditure • Revenue expenditure • Deferred revenue expenditure (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

38. Cap. & Rev. Expenditure-Examples (3) Professional fees paid in connection with acquisition of leasehold premises is---- • Capital expenditure • Deferred revenue expenditure • Revenue expenditure

39. Examples (4)Preliminary expenses , discount allowed on issue of shares are the examples of • 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 • 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

40. 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

41. 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.

42. 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.

43. 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).

44. 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 .

45. 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.

46. 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.

47. Methods of valuation of inventory

48. 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.

49. ExampleLet'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.

50. 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