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Module C - Special Accounts

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  • 1. ACCOUNTING AND FINANCE BANKERS J A I I B PAPER-2 SPECIAL 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 √
    • CHEQUES DEPOSITED BUT NOT COLLECTED √
    • BANK CHARGES √
    • INTEREST ON SAVINGS BANK √
    • INTEREST ON LOAN √
    • AMOUNT PAID BY BANK AS PER √
    • STANDING INSTRUCTIONS
    • . DIRECT PAYMENTS MADE BY CUSTOMERS √
    • . DISHONOUR OF CHEQUES RECEIVED √
  • 7. BANK RECONCILIATION STATEMENT
    • CAUSES OF DIFFERENCES TREATMENT
    • CASH/PASS BOOK
    • DT. CR.
    • . PAYMENTS SIDE OF CASH BOOK
    • UNDERCAST √
    • . DEPOSIT SIDE OF CASH BOOK
    • OVERCAST √
    • . CHEQUE ISSUED BUT NOT TAKEN
    • IN BANK COLUMN √
    • . DEBIT BALANCE X BROUGHT
    • FORWARD AS CREDIT BALANCE 2X
    • . CHEQUE ISSUED BUT RECORDED
    • TWICE √
  • 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 Bank’s 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) D educt 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–
    • D ebit 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 PURCHASER’S 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.
    • (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
    Rectification of Errors-Examples
  • 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 F r e i g h t Exp a/c.
    • Debit profit and loss a/c( P&L 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
    • R evenue 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
    • L oss 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 ----
    • C apital expenditure
    • Deferred revenue expenditure
    • R e v e n u e e xp e ndi t u r e
    • ( 4) Professional fees paid in connection with acquisition of leasehold premises is----
    • C apital expenditure
    • Deferred revenue expenditure
    • R e v e n u e e xp e ndi t u r e
  • 34. Examples
    • (5)Preliminary expenses , discount allowed on issue of shares are the examples of
    • Capital expenditure
    • D eferred revenue expenditure
    • R e v e n u e e xp e ndi t u r e
    • (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
    • C apital 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
    • . C’s 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’:
    • .. A’s 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 A’s BOOKS :
    • BILL DIRECTLY SENT FOR PAYMENT
    • B’s 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
    • -- B’s 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)
    • . B’s 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
    • B’s 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 P&L 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-VENTURER’S
    • INVESTMENT;
    • -- CO-VENTURER’S 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 1 ST INSTALMENT IS PAID.
    • THE 1 ST 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 charge>depn.
    • Lease equalisation a/c dr.
    • to lease terminal adj.
    • P & L a/c dr.
    • to lease equalisation
    • if annual lease charge<depn
    • Lease terminal adj. a/c dr.
    • to lease equalisation charge.
    • . P & L a/c dr.
    • to other expenses
    • (all other expenses debited)
    • .
  • 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)
    • IN THE BOOKS OF LESSEE:
    • . Hirer a/c dr.
    • to sales
    • (sale of asset on H P basis)
    • Bank a/c dr.
    • to hirer
    • (instalment received)
  • 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
    • [email_address]