JAIIB Accounting

1
JAIIBAccounting Finance for Bankers

• PRESENTATION BY
• S.D.BARGIR
• Joint Director, IIBF
• 17-10-2007

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
Bank Reconciliation statement

• Meaning
• Causes of differences
• Cheque issued but not presented for payment
• Cheque deposited but not yet realized
• Bank charges
• Interest on saving bank
• Int. on overdraft
• Amount directly collected by bank
• Amount directly paid by bank on Std. Instructions
• Dishonor of a Cheque
• Direct payment into bank by customer
• errors

4
BANK RECONCILIATION STATEMENT

• BANK RECONCILIATION( B. R. ) IS BASED ON THE
  PRINCIPLE OF DOUBLE ENTRY.
• DEBIT THE RECEIVER AND CREDIT THE GIVER
• 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

5
EXAMPLES

• M/s Shekhar Enterprises .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

6
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
• Cheque issued to Rohan for Rs.4000 was recorded
  twice in cash book
• Deduct Rs.4000 in Cash book
• Add Rs. 4000 in cash book
• Add Rs.8000 in Cash Book
• Deduct Rs.8000 in cashbook

7
EXAMPLES

• Sujit is having account with two banks viz. PNB
  and Canara bank. He made a deposit of Rs. 3000 in
  Canara Bank , but wrongly entered in column of
  PNB.For preparing BRS of Canara Bank , sujit
  will----
• a) Add Rs.3000 in Cash Book of Canara BK column
• b) deduct Rs.3000 in Cash book of Canara BK
  column
• c) Add Rs.6000 in cash book of Canara BK column
• d) Deduct Rs.6000 in CB of Canara BK column
• Payment side of cash book of LKJ ltd. Is overcast
  by Rs.9000.
• Deduct Rs.9000 in Cash book
• Add Rs. 9000 in cash book
• Add Rs.18000 in Cash Book
• Deduct Rs.18000 in cashbook

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Trial Balance(TB)- Rectification entries

• Trial balance meaning
• Types- gross TB, Net TB
• Disagreement of TB
• Classification of errors
• Clerical errors
• Errors of omission
• Errors of commission
• Posting of correct amount at wrong side
• Posting wrong amount at wrong side
• Totaling error in subsidiary book
• Mistake while balancing of ledger
• Compensating errors
• Errors of principles

9
Suspense account-

• Suspense account- After preparation of T/B
• Rectification when books are closed- Diff. in
  nominal A/c adj. through P L Adj. A/c- then
  effect on Capital A/c

10
Rectification of Errors-Examples

• (1) Rs. 7000 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

11
Trial Balance-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.

12
Rectification of Errors-Examples

• One of the pair given below is mismatch, identify
  the same
• Trial balance ltgt Statement of balances of ledger
  accounts
• Real Accountltgt Always shows debit balance
• Suspense Accountltgt difference in trail balance
• Outstanding Expensesltgt Nominal Account
• One of the statement is incorrect. Select the
  incorrect statement.
• If the trial balance shows short debit, the
  suspense a/c will have credit balance.
• Errors which cancel out the effect of one another
  are called compensating errors.
• One sided errors are rectified without passing
  journal entries
• Two sided errors originate in the primary books

13
Capital Revenue Expenditure
CAPITAL REVENUE
Large amount Relatively small
Improve or enhance earning capacity Maintain asset
Long duration benefit Short duration
Non- recurring recurring
Balance sheet item Trading /P L A/c item
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Deferred Revenue expenditure

• Expenditure incurred in one year , but benefit of
  which is accruing not in one year but following
  two or more years , then such expenditure is
  called as Deferred Revenue expenditure
• Examples
• Heavy advertisement exp.
• Issue of capital expenses
• Preliminary expenses

15
Cap. Rev. Expenditure-Examples

• (1)Cost of replacement of defective parts of the
  machinery is -----
• Capital expenditure
• Revenue expenditure
• Deferred revenue expenditure
• None of the above
• (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
• None of the above

16
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

18
Methods of valuation of inventory
FIFO LIFO AVERAGECOST
Goods issued valued at earliest price Stock valuation at latest price Goods issued valued at latest price Stock valuation at earliest price Found out by dividing total price paid by quantity received
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Examples

• Select the incorrect statement from the
  following---
• Inventory valuation is subjective because it
  depends upon the accounting policies adopted by
  the organisation
• The basis of inventory valuation adopted should
  not be changed frequently because it violates
  accounting principle of consistency
• Accounting standard recommends FIFO or weighted
  average method
• The ascertainment of value of stock from
  accounting record is known as Perpetual inventory

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Examples-conted..

• QDuring the rising prices the ______ method will
  reflect (FIFO/LIFO/weighted Average)
• lowest cost of material supplied and results in
  under pricing the products
• Inventory is shown at the higher priced material.
• Lock up of large amount of working capital.
• Profits are inflated
• More liability for payment of taxes

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Bill of Exchange
Bill of Exchange Promissory Note
Unconditional order Unconditional promise
Made by creditor Made by debtor
Acceptance by debtor must No acceptance as such
Three parties to a bill Two parties to a bill
Noting is not necessary On dishonor, noting is necessary by notary public
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Bill of Exchange

• Honoring on due date
• Retirement
• Discounting of bill
• Sent for collection to bank
• Endorsed to creditor
• Renewal of the bill
• Accommodation bill

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Examples

• Q1. ___________ draws a bill on __________
• Q2. A bill of exchange is a negotiable instrument
• True
• False
• Q3. Negotiable instruments can be ________from
  one person to another
• Q4. A bill of exchange must be in writing
• True
• False
• Q5 A bill of exchange is not to be dated
• True
• False

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Examples-conted

• Q6. The date on which the bill is payable is
  called its _________
• Q7. The due date is calculated after adding
  __________ to the actual period of the bill.
• Q8. If the due date falls on a public holiday,
  then it becomes due on the -------
• Q9.A bill was drawn on 23rd Dec. 2005 for one
  month maturity. What will be its due date.
• Q10. When a Bill of exchange or promissory note
  has been dishonoured for non acceptance or non
  payment, the holder may, within a reasonable
  period, cause such dishonour to be noted and
  certified by a notary public, such a certificate
  is called________
• Ans. due date, Three days of grace, Previous
  working day, 25th January,protest

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CONSIGNMENT ACCOUNT

• A consignment is the dispatch of goods by its
  owner to his agent for the purpose of selling.
• Consignor, consignee, Proforma Invoice, Account
  Sale
• Books of Account in the books of consignor-
• Consignment A/c
• Consignee A/c
• Goods sent on Consignment
• Valuation of closing stock
• Consigning goods at higher price

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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

27
Examples

• Q1. The possession of the goods remains with the
  _________, but the property in or the ownership
  of the goods remain with the _________
• Q2 Usually the consignee recovers all
  ___________ by him on the consignment.
• Q3.Consignment account is of the nature of
• Personal account
• Nominal account
• Real account
• Q4.When the goods are sent by the consignor to
  the consignee, they are accompanied by
• Proforma invoice
• Commercial invoice
• Account sales
• Bank draft
• Consignee, Consignor, expenses incurred, nominal

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Examples

• Q5. Where del-credere commission is paid
• the normal commission is not payable to the
  consignee
• the bad debts, if occur, are borne by the
  consignor
• the bad debts, if occur, are borne by the
  consignee
• the bad debts, if occur, are shared by the
  consignor and consignee equally
• Q6 The principle followed in valuations of
  closing stock on consignment is
• to include the expenses by the consignor only
• cost to the consignor plus proportionate expenses
  incurred till the goods reach to the premises of
  the consignee plus direct expenses of consignee
• Cost plus proportionate non-recurring expenses
  incurred by the consignor
• Cost plus proportionate non-recurring expenses
  incurred by the consignee

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JOINT VENTURE

• Meaning
• Temporary partnership
• Accounting-when separate books
• Joint Bank Account
• Co-venturers Account
• Joint Venture Account
• Accounting-when no separate books are maintained
• Joint Venture
• Co-Venturer

30
Examples

• Q1.When separate set of books are kept for
  keeping the accounts of Joint Venture, then
• Memorandum Joint Venture Account is prepared
• Transactions take the form of ordinary accounting
  system
• Only Joint Venture and Personal accounts of the
  co-venturers are maintained.
• Joint Venture, Co-venturers and Joint Bank
  accounts are opened
• Q2.A debit balance in Joint Venture A/c
  indicates
• a. Profit on Joint Venture
• b. Loss on Joint venture
• c. Amount receivable
• d. Amount payable

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LEASING

• Contract between two parties
• Owner of an asset transfers his right of use to
  other party on payment of a fixed rent
  periodically
• Types gtgt Finance or Capital Lease
• Operating Lease
• Service Lease
• Leveraged Lease

32
Leasing Examples

• A lease which does not secure for the lessor, the
  recovery of his capital outlay (original cost of
  the asset leased) plus a return on the funds
  invested during the lease term is called-----
• (a) Capital Lease
• (b) Operational Lease

33
Leasing Examples

• (2) There are three parties in-----
• Capital Lease
• Operational Lease
• Service Lease
• Leveraged Lease
• (3) Allocating total finance income of Rs. 30000
  over the leased period of 4 years by the sum of
  the digit method results in-----
• FY Rs.7500,SY Rs.7500 TY Rs.7500, FY Rs.7500
• FY Rs.12000,SY Rs.9000 TY Rs.6000 FOURTH Y
  Rs.3000
• FY Rs.3000,SY Rs.6000 TY Rs.9000 FY Rs.12000
• FY Rs.NIL,SY Rs.10000 TY Rs.10000 FOURTH Y
  Rs.10000

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Leasing Examples

• (4) If Lease charges of the year exceed the
  depreciation charge of the year then-----
• Lease Equalization account is debited (with the
  difference)
• Lease Equalization account is credited (with the
  difference)
• Lease Terminal Adjustment account is debited
  (with the difference)
• None of the above
• (5) In case operational Lease , if the total
  lease rent is receivable in various installments
  then in the first year of lease , the journal
  entry for total lease rent receivable, in the
  books of lessor is------
• Debit Lessee account and Credit Rent Suspense
  a/c
• Debit Advance Lease Rent account and Credit Lease
  Rent a/c
• Debit Bank Account and Credit Lease Rent Account
• Debit Bank Account and Credit Advance Lease Rent
  Account

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HIRE PURCHASE INSTALMENT SALE

• A buyer purchases goods but pays the price in
  various installments.
• In hire purchase ownership passes to the buyer on
  the payment of last installment while in
  installment selling it passes immediately.
• The hire purchase price consists of two elements
  a) cash price and b) interest for delayed
  payments

36
Accounting of non-trading organizations

• Meaning
• Need for maintenance of accounts
• Accounts
• Receipt Payment account
• Income Expenditure Account
• Balance sheet

37
Distinction
Receipt Payment A/c Income ExpenditureA/c
Real Account Nominal Account
All receipts payment in a year Only income and expenses in a year
Capital/ revenue items Only revenue items
Starts with Opening cash end with closing cash No op. balance but end with surplus/ deficit
current,previous and next year Current year only
38
Treatment of some items

• Donations- purpose to be seen
• Entrance fees- cap. receipt
• Life membership fees-cap receipt
• Government grants-for maintenance revenue-for
  specific purpose cap.receipt
• Special fund- exps income of that fundbooked to
  that fund
• Op. closing. Stock of stationary- consumed
  during year to be taken as exps.
• Sale of fixed assets/investments- above BV below
  BV
• Sports material-asset and dep is charged
• Opening/closing Balance sheet
• Capital fund

39
adjustments

• Outstanding income
• Outstanding expenses
• Income received in advance
• Prepaid expenses
• Depreciation on assets

40
EXAMPLES

• SOLID PVT LIMITED HAS FOLLOWING TRANSACTIONS
  (Purchase of inventory I-Q100 _at_10 on
  1.1.06),II(Q150_at_12 on 2.1.06)
• (Issue of inventory I-Q100 on 3.1.06 II-Q50on
  4.1.06) qquantity
• What is value of closing stock ,if co. follows
  FIFO method
• Rs.1200
• Rs.1000
• Rs.1800
• None of the above
• What is the value of closing stock, if co.
  follows LIFO method
• Rs.1800
• Rs.1200
• Rs.1000
• None of the above
• What is the value of closing stock, if co.
  follows weighted average cost method
• Rs.1120
• Rs.1200
• Rs.1800
• None of the above

41
EXAMPLES

• Identify the wrong pair
• Maker of the bill drawer
• Dishonour of bill rebate
• Person in whose favour bill is endorsedendorsee
• Bill of exchange negotiable instrument
• One of the following pair is mismatch.Identify
  the wrong pair
• Diminishing balance method depreciated value of
  asset never become zero
• Current asset asset on which depreciation is
  not provided
• Depreciation decreases the value of the asset
• Rate of depreciation depends upon profit of the
  firm
• Select the true statement
• Goodwill is a current asset
• The expenditure incurred on installation of
  machinery is revenue expenditure
• Reducing balance method is also known as SLM
• Even if an asset is not used ,mere passage of
  time will cause a fall in its value unless it
  happens to be land

42
EXAMPLES

• Sudhir Draws following bills
• On Ruchira for Rs.1000
• On Madhur for Rs.2000
• On Trichur for Rs.3000
• On Nupur for Rs.4000
• All the bills are accepted by all.Solve the
  examples as per following
• Ruchiras acceptance is retained till due date,
  but it was dishonoured. Identify the correct
  entry in sudhirs books
• Debit bill a/c and credit BR a/c
• Debit Ruchira A/c and credit BR a/c
• Debit BR a/c and credit Ruchira a/c
• Debit Dishonour Bill a/c credit BR a/c
• Madhurs acceptance is discounted with the bank,
  but it was dishonoured. Identify the correct
  entry in sudhirs books
• Debit Madhur credit bank a/c
• Debit BR a/c credit Madhur a/c
• Debit Madhur a/c credit BR a/c
• No entry as bill is discounted with the bank

43
EXAMPLES

• Trichurs acceptance is endorsed to Tayyab and
  noting charges of Rs.50 were paid, but bill was
  dishonoured. Identify the correct entry in
  sudhirs books
• Debit Trichur a/c by Rs.3050 and credit Tayyab
  a/c by Rs.3050
• Debit BR A/c, Debit Noting charges Rs.50 and
  credit Tayyab a/c Rs.3050
• Debit Tayyab a/c Rs.3050 and credit Bank a/c
  Rs.3050
• No entry as bill is endorsed to Tayyab
• Nupurs acceptance was sent to bank for
  collection, but it was dishonoured. Identify the
  correct entry in sudhirs books
• Debit Nupur credit BR a/c
• Debit Nupur a/c credit Bill sent to Bank for
  collection a/c
• Debit Bill sent to bank for collection a/c credit
  Bank a/c
• No entry as bill is sent to bank for collection

44
EXAMPLES

• Choose the wrong pair
• There is no difference in appearance between
  trade bill and accommodation bill
• Both the parties must accept the accommodation
  bill
• Accommodation bill is drawn and accepted without
  any consideration
• The purpose of any accommodation bill is to
  provide temporary finance

45
EXAMPLES

• A trainee in a/c dept. has put up following four
  entries for accounting for closing stock of joint
  venture . One of the entries is correct. Select
  the same
• Debit bank a/c credit joint venture a/c
• Debit stock credit joint venture a/c
• Debit co-venturer a/c credit joint venture
• Debit joint venture credit stock

46
EXAMPLES

• Select the wrong statement in respect of joint
• It is temporary partnership
• Nature of co-venturers liability is limited
• Balancing figure of Joint venture a/c is either
  profit or loss on joint venture
• Joint bank account is the account in which
  banking transactions are transacted by
  co-venturers

47
EXAMPLES

• Select the wrong pair in respect of joint
• Joint venture real account
• Joint bank account personal a/c
• Unsold stock taken over by coventurer credit
  joint venture a/c
• Credit balance in Joint venture a/c profit on
  joint venture a/c

48
EXAMPLES

• Select the false statement
• Amount spent on uniform of workers is a revenue
  expenditure
• Expenses of whitewashing of a factory building is
  a revenue expenditure
• Cost of stores consumed in manufacturing
  machinery for installation in owned factory is a
  revenue expenditure
• Wages paid for construction of the extension of
  the factory building is a capital expenditure

49
.

• The following financial statement is not prepared
  by a non-trading concerns
• Receipt and Payment account
• Income Expenditure Account
• Profit Loss Account
• Balance Sheet
• Receipts and Payments account is
• Real account
• Personal account
• Nominal account

50
EXAMPLES

• Incurring of expenditure of Rs.100000 on
  dismantling, removing and reinstalling plant
  machinery is a -----
• Capital expenditure
• Revenue expenses
• Deferred revenue expenditure
• None of the above

51
EXAMPLES

• RVY sport club has given following information
  regarding subscription income. Ascertain income
  for Current year
• Subscription received in cash Rs.5000 during
  Apr04 to Mar.05
• Subscription outstanding on 31.3.05 Rs.100
• Subscription outstanding on 31.3.04 Rs.200
• Subscription received in advance during 04-05
  Rs.300
• Subscription received in advance during 03-04
  Rs.400
• Indicate from the following the exact amount of
  subscription to be credited to Income
  Expenditure Account
• Rs.5800
• Rs.6000
• Rs.5200
• Rs.5600

52
Examples

• If
• A Income accrued during CY (figure from I E
  a/c)
• B outstanding for CY
• C outstanding for PY
• Dadvance for CY
• E advance for PY
• Find the income received in cash during cy to be
  shown in receipt payment a/c
• A B C D E
• A B C D E
• A B C - D E
• A B C D E

53
EXAMPLES

• Select the wrong statement in respect of lease
  accounting
• Lease Terminal Adjustment a/c is carried forward
  from year to year
• If Lease Terminal Adjustment a/c shows credit
  balance it is shown at liability side
• If Lease Terminal Adjustment a/c shows debit
  balance it is debited to Profit and Loss account
• Lease Terminal Adjustment a/c balance is not
  carried forward to next year but written off to
  Profit and Loss account

54
EXAMPLES

• Select the wrong statement in respect of lease
  accounting
• If lease charges are Rs.31439 and annual
  depreciation is Rs. 24000, the correct entry
  would be- Debit Lease equalisation a/c by Rs.7439
  and credit Lease Terminal a/c by Rs.7439
• If lease charges are Rs.14228 and annual
  depreciation is Rs. 14400, the correct entry
  would be- Debit Lease equalisation a/c by Rs.152
  and credit Lease Terminal a/c by Rs.152
• If lease charges are Rs.7152 and annual
  depreciation is Rs. 8640, the correct entry would
  be- Debit Lease Terminal a/c by Rs.1488 and
  credit Lease Equalisation a/c by Rs.1488
• If Desai is a lessor and he purchases an asset
  for Rs.100000 for the purpose of giving the same
  on lease . The correct entry will be Debit Asset
  Rs.100000 and credit Bank Rs.100000

55

• Thank you
• For any queries or difficulties do contact at
• S.D.BARGIR, JOINT DIRECTOR, IIBF
• E mail sudaaba_at_iibf.org.in
• Phone [phone]
• Best of luck