ACCOUNTING AND FINANCE BANKERS J A I I B PAPER-2 SPECIAL ACCOUNTS - MODULE

1
ACCOUNTING AND FINANCE BANKERS J A I I
BPAPER-2SPECIAL ACCOUNTS - MODULE C

• By
• RAVI ULLAL
• CONSULTANT

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
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.
• .

4
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.

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BANK RECONCILIATION STATEMENT

• BANK RECONCILIATION( B. R. ) IS BASED ON THE
  PRINCIPLE OF DOUBLE ENTRY.
• CREDIT THE GIVER AND DEBIT THE RECEIVER
• B. R. SHOWS CAUSES OF DIFFERENCES BETWEEN CASH
  BOOK AND PASS BOOK BALANCE
• DEBIT BALANCE AS PER CASH BOOK IS CREDIT BALANCE
  AS PER PASS BOOK POSITIVE BALANCE
• CREDIT BALANCE IN CASH BOOK IS DEBIT BALANCE IN
  PASS BOOK NEGATIVE BALANCE/OVERDRAFT
• WHETHER WE START WITH CASH OR PASS BOOK
  RECONCILIATION ENTRIES WILL REMAIN SAME AS PER
  PRINCIPLES

6
BANK RECONCILIATION STATEMENT

• CAUSES OF DIFFERENCES
  TREATMENT
  
• 
  CASH/PASS BOOK
• 
  DT.
  CR.
• .
• CHEQUES ISSUED BUT NOT PRESENTED v
• CHEQUES DEPOSITED BUT NOT COLLECTED
  v
• BANK CHARGES
  v
• INTEREST ON SAVINGS BANK
  v
• INTEREST ON LOAN
  v
• AMOUNT PAID BY BANK AS PER
  v
• STANDING INSTRUCTIONS
• . DIRECT PAYMENTS MADE BY CUSTOMERS v

7
BANK RECONCILIATION STATEMENT

• CAUSES OF DIFFERENCES
  TREATMENT
• 
  CASH/PASS BOOK
• 
  DT.
  CR.
• . PAYMENTS SIDE OF CASH BOOK
• UNDERCAST
  v
• . DEPOSIT SIDE OF CASH BOOK
• OVERCAST
  v
• . CHEQUE ISSUED BUT NOT TAKEN
• IN BANK COLUMN
  v
• . DEBIT BALANCE X BROUGHT
• FORWARD AS CREDIT BALANCE 2X
• . CHEQUE ISSUED BUT RECORDED
• TWICE
  v

8
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.

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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.

10
BANK RECONCILIATION STATEMENT

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

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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 Banks books.
• Rs.30500
• Rs.25500
• Rs.21500
• Rs.22500

12
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
• Undercasting of the credit side of Cash Book has
  the same effect as overcasting of the
• Debit side of the pass book.
  
• Credit side of the pass book.
• There is no relevance between the two
  

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TRIAL BALANCE

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

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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

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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

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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

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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

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TRIAL BALANCE

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

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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/-.

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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 PURCHASERS DEBIT BALANCE OF 9000/- HAS NOT
  BEEN TAKEN.
• RECTIFICATION DEBIT DEBTORS, CREDIT SUSPENCE TO
  THE EXTENT OF 9000/-.

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Rectification of Errors-Examples

• (1) Rs. 5000 paid as wages for installing the
  machinery should be debited to-----
• Wages A/c
• Machinery a/c
• Capital A/c
• None of the above
• (2) Sales to Navin of Rs.1000 is debited to Ravin
  A/c. this will be rectified by-----
• Debiting Navin a/c and Crediting Ravin A/c
• Debiting both Accounts
• Debiting Ravin a/c and Crediting Navin A/c
• Debiting Navin A/c and crediting Sales A/C

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Rectification of Errors-Examples

• (1) Rs. 5000 paid as wages for installing the
  machinery should be debited to-----
• Wages A/c
• Machinery a/c
• Capital A/c
• None of the above
• (2) Sales to Navin of Rs.1000 is debited to Ravin
  A/c. this will be rectified by-----
• Debiting Navin a/c and Crediting Ravin A/c
• Debiting both Accounts
• Debiting Ravin a/c and Crediting Navin A/c
• Debiting Navin A/c and crediting Sales A/C

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Rectification of Errors-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( PL a/c) and credit
  Traveling Exp a/c.

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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

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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

26
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

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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.

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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.

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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

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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

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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

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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

33
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

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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

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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

36
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.

37
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.

38
INVENTORY VALUATION

• 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.
• 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).

39
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
• .

40
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.

41
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.

42
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.

43
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.
• .

44
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.

45
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
  DR.
• TO BILLS RECEIVABLE
• ( BILL IS MET ON DUE DATE)

46
BILLS OF EXCHANGE

• BILL ENDORSED TO C
• . Cs a/c
  DR.
• TO BILLS RECEIVABLE
• ( NO ENTRY WHEN BILL IS MET)
• BILL SENT FOR COLLECTION
• . BANK FOR BILL COLLECTION a/c DR.
• TO BILLS RECEIVABLE
• . CASH a/c
  DR.
• TO BANK FOR BILL COLLECTION
• ( BILL SENT FOR COLLECTION IS MET)
• .
• .

47
BILLS OF EXCHANGE

• IN CASE OF DISCOUNTING
• CASH a/c
  DR.
• DISCOUNT a/c
  DR.
• TO BILLS RECEIVABLE
• ( NO ENTRY WHEN BILL IS MET)
• THE ENTRIES IN THE BOOKS OF DRAWEE B
• .. As a/c
  DR.
• TO BILLS PAYABLE
• . BILLS PAYABLE a/c
  DR.
• TO CASH
• ( BILL IS PAID)

48
BILLS OF EXCHANGE

• THERE ARE CASES WHEN BILLS ARE DISHONOURED.
• IN THAT CASE THE ENTRIES ARE AS FOLLOWS
• IN As BOOKS
• BILL DIRECTLY SENT FOR PAYMENT
• Bs 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)

49
BILLS OF EXCHANGE

• -- Bs a/c
  DR.
• TO BILLS RECEIVABLE
• TO NOTING CHARGES
• (BILL RETURNED TO A)
• 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)
• . Bs a/c
  DR.
• TO BILLS RECEIVABLE
• TO NOTING CHARGES
• (BILL RETURNED TO B)

50
BILLS OF EXCHANGE

• DISHONOUR OF ENDORSED BILL
• . BILLS RECEIVABLE a/c DR.
• NOTING CHARGES a/c DR.
• TO C
• Bs a/c
  DR.
• TO BILLS RECEIVABLE
• TO NOTING CHARGES
• (BILL RETURNED TO B)

51
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.

52
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.

53
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

54
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 PL 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.

55
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.

56
JOINT VENTURE

• THERE ARE 3 ACCOUNTS
• -- JOINT BANK WHICH SHOWS EACH CO-VENTURERS
• INVESTMENT
• -- CO-VENTURERS ACCOUNT
• -- JOINT VENTURE INTO WHICH THE FINAL
• PROFIT/LOSS IS TRANSFERRED.

57
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.

58
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.

59
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 ).

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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.

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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.

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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.

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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

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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

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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 dr.
• to asset
• (annual depreciation
• Of the asset)
• P L a/c dr.
• to depreciation
• (depn. Charged to P L a/c)
  (scroll down)
• if annual lease chargegtdepn.

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LEASING AND HIRE PURCHASE

• IN THE BOOKS OF THE LESSEE
• Lease rent paid a/c dr.
• to bank
• (lease rent paid)
• 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
  

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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 basis-
• to 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
  scroll down
• (depn. Charged to P L)\
• . P L a/c dr.
• to expenses
• (any other expenses charged to P L)

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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.

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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.

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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.

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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.

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DEPRECIATION

• WHAT CAUSES DEPRECIATION ?
• SIMPLY WEAR AND TEAR
• MISHAPS
• OBSOLESCENCE
• PASSAGE OF TIME
• FALL IN VALUE

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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.

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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.

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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.

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E N D

• ANY QUERIES MAY BE ADDRESSED TO
• techengine_at_rediffmail.com