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

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X co .was maintaining account with KRB Bank Ltd. On 31st December,2006, Bank ... DISCOUNTS, IF ANY, COSTS INCIDENTAL TO BRINGING THE ASSET/ ERECTING THE ASSET. ... – PowerPoint PPT presentation

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Title: 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.

5
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.

9
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

11
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

13
TRIAL BALANCE
  • DEFINITION
  • IT IS A STATEMENT SHOWING CREDIT AND DEBIT
  • BALANCES FROM THE LEDGER.
  • HELPS ARITHMETICAL ACCURACY AND FACILITATES
  • FINAL ACCOUNTS.

14
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

15
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

16
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

17
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

18
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

19
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/-.

20
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/-.

21
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

22
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

23
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.

24
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

25
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

27
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.

28
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.

29
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

30
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

31
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

32
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

34
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

35
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 ).

60
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.

61
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.

62
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.

63
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

64
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

65
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.

66
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

67
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)

68
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.

69
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.

70
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.

71
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.

72
DEPRECIATION
  • WHAT CAUSES DEPRECIATION ?
  • SIMPLY WEAR AND TEAR
  • MISHAPS
  • OBSOLESCENCE
  • PASSAGE OF TIME
  • FALL IN VALUE

73
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.

74
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.

75
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.

76
E N D
  • ANY QUERIES MAY BE ADDRESSED TO
  • techengine_at_rediffmail.com
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