Title: ACCOUNTING AND FINANCE BANKERS J A I I B PAPER-2 MODULE
1ACCOUNTING AND FINANCE BANKERS J A I I
BPAPER-2 MODULE C
2TOPICS
- 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
3BASICS 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.
- .
4BASIC 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.
5BANK 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
6BANK 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
7BANK 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
8BANK 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.
9BANK 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.
10BANK RECONCILIATION STATEMENT
- ADVANTAGES OF BANK RECONCILIATION
- . VERIFICATION OF ACCURACY OF ENTRIES
- . TIMELY CORRECTIVE ACTION
- . PREVENTS FRAUDS
- . CONTROL TOOL FOR MANAGEMENT
11TRIAL BALANCE
- DEFINITION
- IT IS A STATEMENT SHOWING CREDIT AND DEBIT
- BALANCES FROM THE LEDGER.
- HELPS ARITHMETICAL ACCURACY AND FACILITATES
- FINAL ACCOUNTS.
12TRIAL 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
13TRIAL 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
-
14TRIAL 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
15TRIAL 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
16TRIAL 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
17TRIAL 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/-.
18TRIAL 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/-.
19CAPITAL 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
20CAPITAL 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
-
21CAPITAL 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
22CAPITAL 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. -
-
23CAPITAL 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.
24CAPITAL 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
25CAPITAL 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
26CAPITAL 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
27INVENTORY 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
28 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. -
29INVENTORY 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.
30INVENTORY 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).
31INVENTORY 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
- .
32INVENTORY 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.
33INVENTORY 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.
34INVENTORY 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.
35BILLS 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.
- .
36BILLS 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.
37BILLS 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)
38BILLS 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)
-
- .
- .
39BILLS 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)
40BILLS 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)
41BILLS 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)
42BILLS 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)
43CONSIGNMENT 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.
44CONSIGNMENT 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.
45CONSIGNMENT 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
46CONSIGNMENT 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.
47 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.
48JOINT 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.
49 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.
50LEASING 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.
51LEASING 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 ).
-
52LEASING 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.
53LEASING 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.
54LEASING 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.
55LEASING 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
56LEASING 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
57LEASING 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.
58LEASING 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
59LEASING 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)
60NON-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.
61NON-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.
62DEPRECIATION
- 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.
63DEPRECIATION
- 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.
64DEPRECIATION
- WHAT CAUSES DEPRECIATION ?
- SIMPLY WEAR AND TEAR
- MISHAPS
- OBSOLESCENCE
- PASSAGE OF TIME
- FALL IN VALUE
-
65DEPRECIATION
- 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.
-
66DEPRECIATION
- 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.
67FINAL 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.
68E N D
- ANY QUERIES MAY BE ADDRESSED TO
- techengine_at_rediffmail.com