accounting and finance bankers j a i i b paper-2 special accounts - module ‘ c ‘

ACCOUNTING AND FINANCE ACCOUNTING AND FINANCE BANKERS BANKERS

J A I I BJ A I I BPAPER-2PAPER-2

SPECIAL ACCOUNTS - MODULE ‘ C ‘SPECIAL ACCOUNTS - MODULE ‘ C ‘

By By RAVI ULLALRAVI ULLAL

CONSULTANTCONSULTANT

TOPICSTOPICS BANK RECONCILIATIONBANK RECONCILIATION TRIAL BALANCETRIAL BALANCE CAPITAL & REVENUE EXPENDITURECAPITAL & REVENUE EXPENDITURE INVENTORY VALUATIONINVENTORY VALUATION BILLS OF EXCHANGEBILLS OF EXCHANGE CONSIGNMENT ACCOUNTCONSIGNMENT ACCOUNT JOINT VENTUREJOINT VENTURE LEASING & HIRE PURCHASELEASING & HIRE PURCHASE NON-TRADING ORGANISATIONSNON-TRADING ORGANISATIONS DEPRECIATIONDEPRECIATION MODEL QUESTIONSMODEL QUESTIONS

BASICS OF ACCOUNTINGBASICS OF ACCOUNTING

DOUBLE ENTRY SYSTEMDOUBLE ENTRY SYSTEM 3 TYPES OF ACCOUNTS:3 TYPES OF ACCOUNTS:

-- -- REALREAL: ASSETS OF BUSINESS, TANGIBLE AND: ASSETS OF BUSINESS, TANGIBLE AND IDENTIFIABLE. IDENTIFIABLE.

-- -- PERSONALPERSONAL: THEY ARE HEADED WITH THE NAME OF: THEY ARE HEADED WITH THE NAME OF PERSON/BUSINESS/FIRM. DEBTORS OR CREDITORS.PERSON/BUSINESS/FIRM. DEBTORS OR CREDITORS.

-- -- NOMINALNOMINAL: THEY RECORD TRANSACTIONS OF : THEY RECORD TRANSACTIONS OF INTANGIBLES SUCH AS RENT EXPENSES.INTANGIBLES SUCH AS RENT EXPENSES.. .

BASIC RULES OF ACCOUNTINGBASIC RULES OF ACCOUNTING

RULESRULES: : -- -- REALREAL : DEBIT THE ACCOUNT WHEN WE PURCHASE : DEBIT THE ACCOUNT WHEN WE PURCHASE AN ASSET & CREDIT WHEN WE SELL OR AN ASSET & CREDIT WHEN WE SELL OR DEPRECIATE.DEPRECIATE.

-- -- PERSONAL PERSONAL : DEBIT THE RECEIVER OF GOODS & : DEBIT THE RECEIVER OF GOODS & CREDIT THE GIVER OF GOODS.CREDIT THE GIVER OF GOODS.

-- -- NOMINAL NOMINAL : DEBIT LOSSES & EXPENSES, CREDIT : DEBIT LOSSES & EXPENSES, CREDIT INCOMES & GAINS.INCOMES & GAINS.

-- IN A LEDGER, ASSETS OR LOSSES HAVE DEBIT -- IN A LEDGER, ASSETS OR LOSSES HAVE DEBIT BALANCE WHILE LIABILITIES OR GAINS HAVEBALANCE WHILE LIABILITIES OR GAINS HAVE CREDIT BALANCE. CREDIT BALANCE.

BANK RECONCILIATION STATEMENTBANK RECONCILIATION STATEMENT

BANK RECONCILIATION( B. R. ) IS BASED ON THE PRINCIPLE OF BANK RECONCILIATION( B. R. ) IS BASED ON THE PRINCIPLE OF DOUBLE ENTRY. DOUBLE ENTRY.

CREDIT THE GIVER AND DEBIT THE RECEIVERCREDIT THE GIVER AND DEBIT THE RECEIVER

B. R. SHOWS CAUSES OF DIFFERENCES BETWEEN CASH BOOK B. R. SHOWS CAUSES OF DIFFERENCES BETWEEN CASH BOOK AND PASS BOOK BALANCEAND PASS BOOK BALANCE

DEBIT BALANCE AS PER CASH BOOK IS CREDIT BALANCE AS PER DEBIT BALANCE AS PER CASH BOOK IS CREDIT BALANCE AS PER PASS BOOK = POSITIVE BALANCEPASS BOOK = POSITIVE BALANCE

CREDIT BALANCE IN CASH BOOK IS DEBIT BALANCE IN PASS BOOK CREDIT BALANCE IN CASH BOOK IS DEBIT BALANCE IN PASS BOOK = NEGATIVE BALANCE/OVERDRAFT= NEGATIVE BALANCE/OVERDRAFT

WHETHER WE START WITH CASH OR PASS BOOK RECONCILIATION WHETHER WE START WITH CASH OR PASS BOOK RECONCILIATION ENTRIES WILL REMAIN SAME AS PER PRINCIPLESENTRIES WILL REMAIN SAME AS PER PRINCIPLES


CAUSES OF DIFFERENCESCAUSES OF DIFFERENCES TREATMENTTREATMENT

CASH/PASS BOOKCASH/PASS BOOK DT. CR.DT. CR.. . CHEQUES ISSUED BUT NOT PRESENTED √CHEQUES ISSUED BUT NOT PRESENTED √

CHEQUES DEPOSITED BUT NOT COLLECTED √CHEQUES DEPOSITED BUT NOT COLLECTED √

BANK CHARGES √BANK CHARGES √ INTEREST ON SAVINGS BANK √INTEREST ON SAVINGS BANK √

INTEREST ON LOAN √INTEREST ON LOAN √

AMOUNT PAID BY BANK AS PER √AMOUNT PAID BY BANK AS PER √ STANDING INSTRUCTIONSSTANDING INSTRUCTIONS

. DIRECT PAYMENTS MADE BY CUSTOMERS √. DIRECT PAYMENTS MADE BY CUSTOMERS √

. DISHONOUR OF CHEQUES RECEIVED √ . DISHONOUR OF CHEQUES RECEIVED √


CAUSES OF DIFFERENCES TREATMENTCAUSES OF DIFFERENCES TREATMENT CASH/PASS BOOKCASH/PASS BOOK DT. CR.DT. CR.. PAYMENTS SIDE OF CASH BOOK . PAYMENTS SIDE OF CASH BOOK UNDERCAST √UNDERCAST √

. DEPOSIT SIDE OF CASH BOOK. DEPOSIT SIDE OF CASH BOOK OVERCAST √OVERCAST √

. CHEQUE ISSUED BUT NOT TAKEN. CHEQUE ISSUED BUT NOT TAKEN IN BANK COLUMN √IN BANK COLUMN √ . DEBIT BALANCE X BROUGHT . DEBIT BALANCE X BROUGHT FORWARD AS CREDIT BALANCE 2X FORWARD AS CREDIT BALANCE 2X . CHEQUE ISSUED BUT RECORDED. CHEQUE ISSUED BUT RECORDED TWICE √TWICE √


IMPORTANT : WHETHER WE ARE RECONCILING PASS BOOK OR CASHIMPORTANT : WHETHER WE ARE RECONCILING PASS BOOK OR CASH BOOK , EACH OF THE RECTIFICATION ENTRIES WILL BOOK , EACH OF THE RECTIFICATION ENTRIES WILL

APPEAR ON THE SAME SIDE . ADDITION OR SUBRACTION APPEAR ON THE SAME SIDE . ADDITION OR SUBRACTION

OF ENTRIES FROM THE OPENING OR GIVEN BALANCEOF ENTRIES FROM THE OPENING OR GIVEN BALANCE

DEPENDS UPON WHICH SIDE OF THE LEDGER THEY AREDEPENDS UPON WHICH SIDE OF THE LEDGER THEY ARE

CAST OR TO BE CAST. THUS WHAT WE SIMPLY NEED TOCAST OR TO BE CAST. THUS WHAT WE SIMPLY NEED TO

KNOW IS WHETHER EACH FIGURE GIVEN IN THEKNOW IS WHETHER EACH FIGURE GIVEN IN THE

PROBLEM IS A DEBIT OR CREDIT ENTRY. I WILL EXPLAIN PROBLEM IS A DEBIT OR CREDIT ENTRY. I WILL EXPLAIN

WITH THE HELP OF A PROBLEM LATER.WITH THE HELP OF A PROBLEM LATER.


SIMPLY PUT, IF AN ENTRY IS ALREADY THERE BUT EITHER SIMPLY PUT, IF AN ENTRY IS ALREADY THERE BUT EITHER

THE WHOLE OR PART IT HAS TO BE RECTIFIED THEN THAT THE WHOLE OR PART IT HAS TO BE RECTIFIED THEN THAT

PORTION IS POSTED ON THE OPPOSITE SIDE OF THE PORTION IS POSTED ON THE OPPOSITE SIDE OF THE

ORIGINAL ENTRY. ORIGINAL ENTRY.


ADVANTAGES OF BANK RECONCILIATIONADVANTAGES OF BANK RECONCILIATION

. VERIFICATION OF ACCURACY OF ENTRIES. VERIFICATION OF ACCURACY OF ENTRIES

. TIMELY CORRECTIVE ACTION. TIMELY CORRECTIVE ACTION

. PREVENTS FRAUDS. PREVENTS FRAUDS

. CONTROL TOOL FOR MANAGEMENT. CONTROL TOOL FOR MANAGEMENT

EXAMPLESEXAMPLES

X co .was maintaining account with KRB Bank Ltd. On 31st X co .was maintaining account with KRB Bank Ltd. On 31st December,2006, Bank column of cash book of company showed a debit December,2006, Bank column of cash book of company showed a debit balance of Rs. 26000. balance of Rs. 26000. Cheques deposited into the bank but not credited before 31st Cheques deposited into the bank but not credited before 31st December,2006 amounted to Rs.4000December,2006 amounted to Rs.4000Bank charges of Rs. 500 were debited by the bank but no entry was Bank charges of Rs. 500 were debited by the bank but no entry was made by the accountant of the company.made by the accountant of the company.

From the above particulars, find out the balance as per From the above particulars, find out the balance as per KRB Bank’s books.KRB Bank’s books.

Rs.30500Rs.30500 Rs.25500Rs.25500 RsRs.21500.21500 Rs.22500Rs.22500

EXAMPLESEXAMPLES

When overdraft as per cash book and a Cheque of Rs.1000 When overdraft as per cash book and a Cheque of Rs.1000 directly deposited in the bank, but not recorded in cash directly deposited in the bank, but not recorded in cash book----book----

a) Add Rs.1000 in CBa) Add Rs.1000 in CBb) b) DDeduct Rs.1000 in CBeduct Rs.1000 in CBc) Add Rs.2000 in cash bookc) Add Rs.2000 in cash bookd) Deduct Rs.2000 in CBd) Deduct Rs.2000 in CB

Undercasting of the credit side of Cash Book has the same Undercasting of the credit side of Cash Book has the same effect as overcasting of the– effect as overcasting of the–

• DDebit side of the pass book. ebit side of the pass book. • Credit side of the pass book.Credit side of the pass book.• There is no relevance between the twoThere is no relevance between the two

TRIAL BALANCETRIAL BALANCE

DEFINITIONDEFINITION

IT IS A STATEMENT SHOWING CREDIT AND DEBITIT IS A STATEMENT SHOWING CREDIT AND DEBIT

BALANCES FROM THE LEDGER.BALANCES FROM THE LEDGER.

HELPS ARITHMETICAL ACCURACY AND FACILITATESHELPS ARITHMETICAL ACCURACY AND FACILITATES

FINAL ACCOUNTS.FINAL ACCOUNTS.


BASIC PRINCIPLEBASIC PRINCIPLE : :

SINCE IT IS DOUBLE ENTRY BOOK-KEEPING, HENCE,SINCE IT IS DOUBLE ENTRY BOOK-KEEPING, HENCE,

ASSETS AND EXPENSES ARE DEBIT BALANCESASSETS AND EXPENSES ARE DEBIT BALANCES

LIABILITIES AND INCOMES ARE CREDIT BALANCESLIABILITIES AND INCOMES ARE CREDIT BALANCES

. IN CASE OF ARITHMETICAL INACCURACY IDENTIFY. IN CASE OF ARITHMETICAL INACCURACY IDENTIFY

CLERICAL/PRINCIPLE ERRORS AND RECTIFYCLERICAL/PRINCIPLE ERRORS AND RECTIFY


TYPES OF ERRORS:TYPES OF ERRORS:

A) A) CLERICAL ERRORSCLERICAL ERRORS

-- ERRORS OF OMISSION-- ERRORS OF OMISSION

--- OMISSION OF TRANSACTION FROM BOOKS--- OMISSION OF TRANSACTION FROM BOOKS

--- COMPLETE OMISSION NOT AFFECTING TRIAL--- COMPLETE OMISSION NOT AFFECTING TRIAL BALANCEBALANCE

--- PARTIAL OMISSION AFFECTING TRIAL--- PARTIAL OMISSION AFFECTING TRIAL BALANCEBALANCE


-- ERRORS OF COMMISSION-- ERRORS OF COMMISSION

--- FIGURE POSTED ON THE WRONG SIDE OR WITH --- FIGURE POSTED ON THE WRONG SIDE OR WITH WRONG AMOUNTWRONG AMOUNT -- COMPENSATING ERRORS-- COMPENSATING ERRORS

--- ONE ERROR BALANCES ANOTHER ERROR--- ONE ERROR BALANCES ANOTHER ERROR . B) . B) ERRORS OF PRINCIPLEERRORS OF PRINCIPLE

-- ERRORS IN CONTRAVENTION OF ACCOUNTING -- ERRORS IN CONTRAVENTION OF ACCOUNTING PRINCIPLESPRINCIPLES


RECTIFICATION OF ERRORS IS A SERIES OF STEPS:RECTIFICATION OF ERRORS IS A SERIES OF STEPS:

PASS THE CORRECT ENTRYPASS THE CORRECT ENTRY

COMPARE THE WRONG ENTRY WITH THE CORRECT ONECOMPARE THE WRONG ENTRY WITH THE CORRECT ONE

PASS THE RECTIFICATION ENTRYPASS THE RECTIFICATION ENTRY

IF TRIAL BALANCE DOES NOT TALLY THEN DIFFERENCE IS IF TRIAL BALANCE DOES NOT TALLY THEN DIFFERENCE IS TRANSFERRED TO SUSPENCE ACCOUNT TRANSFERRED TO SUSPENCE ACCOUNT


TYPICAL TRIAL BALANCETYPICAL TRIAL BALANCE N A M EN A M E DEBIT DEBIT CREDITCREDIT CAPITAL XCAPITAL X DRAWINGS XDRAWINGS X PURCHASES XPURCHASES X SALES XSALES X EXPENSES XEXPENSES X DEBTORS(CUSTOMRES) XDEBTORS(CUSTOMRES) X CREDITORS(SUPPLIERS) XCREDITORS(SUPPLIERS) X CASH XCASH X SALES RETURN XSALES RETURN X


TYPICAL ERRORS:TYPICAL ERRORS: -- CLERICAL:-- CLERICAL: A) SALARY PAID 1000/- BUT POSTED AS 10, 000/-.A) SALARY PAID 1000/- BUT POSTED AS 10, 000/-. RECTIFICATIONRECTIFICATION: CREDIT SALARY WITH 9000/-.: CREDIT SALARY WITH 9000/-.

B) SALARY PAID 1000/- BUT POSTED IN RENT A/C.B) SALARY PAID 1000/- BUT POSTED IN RENT A/C. RECTIFICATIONRECTIFICATION: DEBIT SALARY AND CREDIT RENT WITH: DEBIT SALARY AND CREDIT RENT WITH 1000/-.1000/-.

C) GOODS WORTH 100/- SOLD TO VIJAY WRONGLYC) GOODS WORTH 100/- SOLD TO VIJAY WRONGLY RECORDED IN PURCHASE REGISTER.RECORDED IN PURCHASE REGISTER. RECTIFICATIONRECTIFICATION: CREDIT SALES AND PURCHASE A/Cs: CREDIT SALES AND PURCHASE A/Cs WITH 100/- EACH AND DEBIT VIJAY WITH 200/-.WITH 100/- EACH AND DEBIT VIJAY WITH 200/-.


AFTER TRIAL BALANCE IS PREPARED ONE FINDSAFTER TRIAL BALANCE IS PREPARED ONE FINDS

. D) SALES OF 500/- POSTED AS 5000/- WHILE RENT PAID 500/- . D) SALES OF 500/- POSTED AS 5000/- WHILE RENT PAID 500/- POSTED AS 5000/-.POSTED AS 5000/-.

. . RECTIFICATION:RECTIFICATION: DEBIT SALES WITH 4500/-, CREDIT SUSPENCE DEBIT SALES WITH 4500/-, CREDIT SUSPENCE WITH 4500/-, CREDIT RENT WITH 4500/-,WITH 4500/-, CREDIT RENT WITH 4500/-,

DEBIT SUSPENCE WITH 4500/-.DEBIT SUSPENCE WITH 4500/-. E) SALARY PAID AS 1000/- BUT POSTED AS 10,000/- IN RENT A/C.E) SALARY PAID AS 1000/- BUT POSTED AS 10,000/- IN RENT A/C. RECTIFICATIONRECTIFICATION: DEBIT SALARY WITH 1000/- SUSPENCE WITH : DEBIT SALARY WITH 1000/- SUSPENCE WITH

9000/-; CREDIT RENT WITH 10000/-9000/-; CREDIT RENT WITH 10000/-

F) A PURCHASER’S DEBIT BALANCE OF 9000/- HAS NOT BEEN F) A PURCHASER’S DEBIT BALANCE OF 9000/- HAS NOT BEEN TAKEN.TAKEN.

RECTIFICATION:RECTIFICATION: DEBIT DEBTORS, CREDIT SUSPENCE TO THE DEBIT DEBTORS, CREDIT SUSPENCE TO THE EXTENT OF 9000/-.EXTENT OF 9000/-.

Rectification of Errors-ExamplesRectification of Errors-Examples

(1) Rs. 5000 paid as wages for installing the machinery should (1) Rs. 5000 paid as wages for installing the machinery should be debited to-----be debited to-----

Wages A/cWages A/cMachinery a/cMachinery a/cCapital A/cCapital A/cNone of the aboveNone of the above

(2) Sales to Navin of Rs.1000 is debited to Ravin A/c. this will (2) Sales to Navin of Rs.1000 is debited to Ravin A/c. this will be rectified by-----be rectified by-----

Debiting Navin a/c and Crediting Ravin A/cDebiting Navin a/c and Crediting Ravin A/c Debiting both AccountsDebiting both Accounts Debiting Ravin a/c and Crediting Navin A/cDebiting Ravin a/c and Crediting Navin A/c Debiting Navin A/c and crediting Sales A/CDebiting Navin A/c and crediting Sales A/C

(1) Rs. 5000 paid as wages for installing the machinery should (1) Rs. 5000 paid as wages for installing the machinery should be debited to-----be debited to-----

Wages A/cWages A/cMachinery a/cMachinery a/cCapital A/cCapital A/cNone of the aboveNone of the above

(2) Sales to Navin of Rs.1000 is debited to Ravin A/c. this will (2) Sales to Navin of Rs.1000 is debited to Ravin A/c. this will be rectified by-----be rectified by-----

Debiting Navin a/c and Crediting Ravin A/cDebiting Navin a/c and Crediting Ravin A/c Debiting both AccountsDebiting both Accounts Debiting Ravin a/c and Crediting Navin A/cDebiting Ravin a/c and Crediting Navin A/c Debiting Navin A/c and crediting Sales A/CDebiting Navin A/c and crediting Sales A/C

Rectification of Errors-ExamplesRectification of Errors-Examples

Rectification of Errors-ExamplesRectification of Errors-Examples Credit sale of Credit sale of Rs.5000 to Suresh is posted to his credit, then Rs.5000 to Suresh is posted to his credit, then

rectification is rectification is i.i. Credit Suresh to the extent of Rs.10,000Credit Suresh to the extent of Rs.10,000ii.ii. Credit Suresh to the extent of Rs.5,000 Credit Suresh to the extent of Rs.5,000 iii.iii. DebitDebit Suresh to the extent of Rs.10,000 Suresh to the extent of Rs.10,000iv.iv. Debit Suresh to the extent of Rs.5000 Debit Suresh to the extent of Rs.5000 Freight expenses for carrying New Machinery is carried to Traveling Freight expenses for carrying New Machinery is carried to Traveling

Exp. a/c. Choose the correct rectification entryExp. a/c. Choose the correct rectification entryi.i. Debit machinery a/c and credit Traveling Exp a/c.Debit machinery a/c and credit Traveling Exp a/c.ii.ii. Credit machinery a/c and debit Freight Exp a/cCredit machinery a/c and debit Freight Exp a/ciii.iii. Credit profit and loss account and debit Freight Exp a/c.Credit profit and loss account and debit Freight Exp a/c.iv.iv. Debit profit and loss a/c( P&L a/c) and credit Traveling Exp a/c.Debit profit and loss a/c( P&L a/c) and credit Traveling Exp a/c.

CAPITAL AND REVENUE EXPENDITURECAPITAL AND REVENUE EXPENDITURE

BASIC PRINCIPLEBASIC PRINCIPLE::

. ALL EXPENSES AND RECEIPTS OF REVENUE NATURE. ALL EXPENSES AND RECEIPTS OF REVENUE NATURE

ARE TAKEN TO TRADING AND PROFIT & LOSSARE TAKEN TO TRADING AND PROFIT & LOSS

ACCOUNTACCOUNT

. ALL EXPENDITURES AND RECEIPTS OF CAPITAL . ALL EXPENDITURES AND RECEIPTS OF CAPITAL

NATURE ARE TAKEN TO BALANCE SHEETNATURE ARE TAKEN TO BALANCE SHEET


REVENUE RECEIPTS/PAYMENTS :REVENUE RECEIPTS/PAYMENTS :

. ARE SMALLER IN SIZE(RELATIVELY). ARE SMALLER IN SIZE(RELATIVELY)

. ARE RECURRING IN NATURE. ARE RECURRING IN NATURE

. THE BENEFITS ARE OVER A SHORTER PERIOD (1 YEAR). THE BENEFITS ARE OVER A SHORTER PERIOD (1 YEAR)

. THE PURPOSE IS TO RUN THE BUSINESS ON A DAY TO . THE PURPOSE IS TO RUN THE BUSINESS ON A DAY TO DAY BASISDAY BASIS

. MAINTAIN ASSETS IN WORKING CONDITION . MAINTAIN ASSETS IN WORKING CONDITION

CAPITAL & REVENUE EXPENDITURE CAPITAL & REVENUE EXPENDITURE

CAPITAL RECEIPTS/PAYMENTS:CAPITAL RECEIPTS/PAYMENTS:

ARE USUALLY LARGE(RELATIVELY)ARE USUALLY LARGE(RELATIVELY)

ARE NON-RECURRING IN NATUREARE NON-RECURRING IN NATURE

THE BENEFITS ARE OVER LONGER DURATIONTHE BENEFITS ARE OVER LONGER DURATION

THE PURPOSE IS TO ENHANCE PRODUCTIVITY OF THE THE PURPOSE IS TO ENHANCE PRODUCTIVITY OF THE ASSETSASSETS


THERE ARE CERTAIN EXPENDITURES WHICH ARETHERE ARE CERTAIN EXPENDITURES WHICH ARE OTHERWISE REVENUE IN NATURE BUT SOMETIMESOTHERWISE REVENUE IN NATURE BUT SOMETIMES

UNUSUALLY LARGE AND WHOSE BENEFIT TO THE UNUSUALLY LARGE AND WHOSE BENEFIT TO THE

ORGANISATION MAY ACCRUE AFTER FEW YEARS.THESEORGANISATION MAY ACCRUE AFTER FEW YEARS.THESE

MAY BE TREATED AS DEFERRED REVENUE EXPENDITURE ,MAY BE TREATED AS DEFERRED REVENUE EXPENDITURE ,

CARRIED TO THE BALANCE SHEET , AND WRITTEN OFF TOCARRIED TO THE BALANCE SHEET , AND WRITTEN OFF TO

THE PROFIT & LOSS ACCOUNT OVER A PERIOD OF TIME.THE PROFIT & LOSS ACCOUNT OVER A PERIOD OF TIME.


SAME IS THE CASE WITH CERTAIN RECEIPTS SUCH ASSAME IS THE CASE WITH CERTAIN RECEIPTS SUCH AS SALE OF ASSETS, WHERE THE RECEIPTS UPTO BOOK SALE OF ASSETS, WHERE THE RECEIPTS UPTO BOOK

VALUE IS DEDUCTED FROM THE ASSET, AND , IFVALUE IS DEDUCTED FROM THE ASSET, AND , IF

BETWEEN BOOK VALUE & COST AS REVENUEBETWEEN BOOK VALUE & COST AS REVENUE

RECEIPT & ABOVE COST AS CAPITAL RECEIPT.RECEIPT & ABOVE COST AS CAPITAL RECEIPT.

. . THERE IS A THIN LINE BETWEEN CAPITAL & REVENUETHERE IS A THIN LINE BETWEEN CAPITAL & REVENUE CLASSIFICATION. FOR INSTANCE REPAIRS TOCLASSIFICATION. FOR INSTANCE REPAIRS TO MACHINERY WHICH KEEPS THE ASSET IN WORKINGMACHINERY WHICH KEEPS THE ASSET IN WORKING CONDITION IS CHARGED TO THE P & L A/C WHILE CONDITION IS CHARGED TO THE P & L A/C WHILE BETTERMENT EXPENSE IS CAPITALISED.BETTERMENT EXPENSE IS CAPITALISED.

CAPITAL & REVENUE EXPENDITURECAPITAL & REVENUE EXPENDITURE

EXAMPLES OF EACH TYPE OF CLASSIFICATION:EXAMPLES OF EACH TYPE OF CLASSIFICATION: CAPITAL NATURE:CAPITAL NATURE:

-- PURCHASE OF ASSETS SUCH AS BUILDING,-- PURCHASE OF ASSETS SUCH AS BUILDING, MACHINERY, VEHICLES.MACHINERY, VEHICLES. -- EXPENDITURE IN PURCHASE /SETTING UP OF -- EXPENDITURE IN PURCHASE /SETTING UP OF CAPITAL GOODS/ASSETSCAPITAL GOODS/ASSETS -- EXCESS OF SALE PRICE OF ASSET OVER ITS COST -- EXCESS OF SALE PRICE OF ASSET OVER ITS COST PRICEPRICE -- FUNDS RAISED THRU BANKS/INSTITUTIONS-- FUNDS RAISED THRU BANKS/INSTITUTIONS -- FUNDS RAISED THRU ISSUE OF SHARES, & -- FUNDS RAISED THRU ISSUE OF SHARES, & DEBENTURES DEBENTURES


REVENUE NATUREREVENUE NATURE::

ALL TRANSACTIONS RELATING TO NOMINAL ACCOUNTSALL TRANSACTIONS RELATING TO NOMINAL ACCOUNTS

EVEN CERTAIN EXPENSES OF NON-RECURRING NATURE EVEN CERTAIN EXPENSES OF NON-RECURRING NATURE BASED ON MATERIALITY CONCEPTBASED ON MATERIALITY CONCEPT

EXCESS OF SALE VALUE OF ASSET OVER W D VALUEEXCESS OF SALE VALUE OF ASSET OVER W D VALUE UPTO COST OF ASSETUPTO COST OF ASSET


DEFERRED REVENUE EXPENDITUREDEFERRED REVENUE EXPENDITURE::

LARGE ADVERTISING EXPENDITURE FOR(SAY) LAUNCH OF A LARGE ADVERTISING EXPENDITURE FOR(SAY) LAUNCH OF A PRODUCTPRODUCT

EXPENDITURE FOR RAISING OF FUNDS INCLUDING EXPENDITURE FOR RAISING OF FUNDS INCLUDING PREPARATION OF PROJECT REPORTPREPARATION OF PROJECT REPORT

INITIAL EXPENSES FOR SETTING UP OF A COMPANYINITIAL EXPENSES FOR SETTING UP OF A COMPANY

Cap. & Rev. Expenditure-Cap. & Rev. Expenditure-ExamplesExamples

((1)1)Cost of replacement of defective parts of the Cost of replacement of defective parts of the machinery is -----machinery is -----

a.a. Capital expenditureCapital expenditureb.b. RRevenue expenditureevenue expenditurec.c. Deferred revenue expenditureDeferred revenue expenditure(2) Loss of goods due to fire Rs.8000 is a revenue (2) Loss of goods due to fire Rs.8000 is a revenue

expenditure because----expenditure because----a.a. It is recurringIt is recurringb.b. Amount involved is smallAmount involved is smallc.c. LLoss is arising out of business operationsoss is arising out of business operations

Cap. & Rev. Expenditure-Cap. & Rev. Expenditure-ExamplesExamples

(3) (3) Expenditure incurred in acquiring the patents Expenditure incurred in acquiring the patents rights for the business is an example of ----rights for the business is an example of ----

a.a. CCapital expenditureapital expenditureb.b. Deferred revenue expenditureDeferred revenue expenditurec.c. Revenue expenditureRevenue expenditure((4) Professional fees paid in connection with 4) Professional fees paid in connection with

acquisition of leasehold premises is----acquisition of leasehold premises is----a.a. CCapital expenditureapital expenditureb.b. Deferred revenue expenditureDeferred revenue expenditurec.c. Revenue expenditureRevenue expenditure

ExamplesExamples

(5)Preliminary expenses , discount allowed (5)Preliminary expenses , discount allowed on issue of shares are the examples of on issue of shares are the examples of

a.a. Capital expenditureCapital expenditureb.b. DDeferred revenue expenditureeferred revenue expenditurec.c. Revenue expenditureRevenue expenditure(6) Machinery costing Rs.10,000, whose (6) Machinery costing Rs.10,000, whose

current book value is Rs.7000 is sold for current book value is Rs.7000 is sold for Rs.12000 what is the amount of capital & Rs.12000 what is the amount of capital & revenue receiptrevenue receipt

a.a. Capital receipt of Rs. 2000 & Rev. Receipt of Rs.10000Capital receipt of Rs. 2000 & Rev. Receipt of Rs.10000b.b. CCapital receipt of Rs. 9000 & Rev. Receipt of Rs.3000apital receipt of Rs. 9000 & Rev. Receipt of Rs.3000c.c. Capital receipt of Rs. 12000 & Rev. Receipt of Rs.NilCapital receipt of Rs. 12000 & Rev. Receipt of Rs.Nil

INVENTORY VALUATIONINVENTORY VALUATION

VALUATION OF STOCKS IS IMPORTANT FROM THE POINT OF VALUATION OF STOCKS IS IMPORTANT FROM THE POINT OF INCOME DETERMINATION.INCOME DETERMINATION.

THE DANGER COULD BE OF EITHER OVERVALUATION OR THE DANGER COULD BE OF EITHER OVERVALUATION OR UNDERVALUATION OF STOCKS RESULTING IN OVERSTATING UNDERVALUATION OF STOCKS RESULTING IN OVERSTATING OR UNDERSTATING OF PROFITS.OR UNDERSTATING OF PROFITS.

METHODS OF VALUATIONMETHODS OF VALUATION:: -- FIFO-- FIFO -- LIFO-- LIFO -- AVERAGE OR WEIGHTED AVERAGE COST METHOD-- AVERAGE OR WEIGHTED AVERAGE COST METHOD -- BASE STOCK METHOD-- BASE STOCK METHOD -- ADJUSTED SELLING PRICE METHOD-- ADJUSTED SELLING PRICE METHOD


UNDER FIFOUNDER FIFO GOODS ISSUED TO PRODUCTION IS VALUED AT GOODS ISSUED TO PRODUCTION IS VALUED AT THE EARLIEST PRICE WHEREAS THE CLOSING STOCK IS AT THE EARLIEST PRICE WHEREAS THE CLOSING STOCK IS AT THE LATEST PRICE.THE LATEST PRICE.

UNDER LIFOUNDER LIFO GOODS ISSUED TO PRODUCTION IS VALUED GOODS ISSUED TO PRODUCTION IS VALUED AT THE LATEST PRICE WHEREAS THE CLOSING PRICE IS AT AT THE LATEST PRICE WHEREAS THE CLOSING PRICE IS AT THE EARLIEST PRICE.THE EARLIEST PRICE.

UNDER WEIGHTED AVERAGE COSTUNDER WEIGHTED AVERAGE COST METHOD ARITHMETIC METHOD ARITHMETIC MEAN OF TOTAL PRICE BY TOTAL QUANTITY RECEIVED IS MEAN OF TOTAL PRICE BY TOTAL QUANTITY RECEIVED IS TAKEN FOR VALUATION.TAKEN FOR VALUATION.


ADJUSTING SELLING PRICE METHODADJUSTING SELLING PRICE METHOD IS GENERALLY USED BY IS GENERALLY USED BY SMALL BUSINESSMEN WHO ARE UNABLE TO DIFFERENTIATE SMALL BUSINESSMEN WHO ARE UNABLE TO DIFFERENTIATE VARIOUS COSTS.VARIOUS COSTS.

HENCE THEY VALUE THE STOCKS AT SELLING PRICE AND HENCE THEY VALUE THE STOCKS AT SELLING PRICE AND THEN REDUCE ITS VALUE TO THE EXTENT OF ESTIMATED THEN REDUCE ITS VALUE TO THE EXTENT OF ESTIMATED GROSS MARGIN. GROSS MARGIN.


BASE STOCK METHODBASE STOCK METHOD IS SIMILAR TO LIFO. CLOSING STOCK IS SIMILAR TO LIFO. CLOSING STOCK IS ALWAYS AT COST AT THE BEGINNING OF BUSINESS. IN IS ALWAYS AT COST AT THE BEGINNING OF BUSINESS. IN TIMES OF INFLATION VERY LOW VALUE OF STOCK MAKES TIMES OF INFLATION VERY LOW VALUE OF STOCK MAKES FOR EXCELLENT ACCOUNTING.FOR EXCELLENT ACCOUNTING.

IT HOWEVER REQUIRES A MINIMUM STOCK TO BEIT HOWEVER REQUIRES A MINIMUM STOCK TO BE MAINTAINED. MAINTAINED.

PRESENTLY ACCOUNTING STANDARDS PERMIT PRESENTLY ACCOUNTING STANDARDS PERMIT FIFO(HISTORICAL PRICE) OR WEIGHTED AVERAGE COST FIFO(HISTORICAL PRICE) OR WEIGHTED AVERAGE COST METHOD.METHOD.

VALUE OF STOCK CAN BE ASCERTAINED BY VALUE OF STOCK CAN BE ASCERTAINED BY PERIODIC(PHYSICAL VERIFICATION) OR PERPETUAL PERIODIC(PHYSICAL VERIFICATION) OR PERPETUAL INVENTORY ( MAINTAINENCE OF STOCK REGISTER).INVENTORY ( MAINTAINENCE OF STOCK REGISTER).

INVENTORY VALUATION INVENTORY VALUATION

CHARACTERISTICS OF DIFFERENT METHODS OF INVENTORY CHARACTERISTICS OF DIFFERENT METHODS OF INVENTORY VALUATIONVALUATION

FIFO : FIFO : -- IN RISING MARKET FIFO RESULTS IN HIGHER-- IN RISING MARKET FIFO RESULTS IN HIGHER PROFITS LOCKING UP OF SCARCE W. C.PROFITS LOCKING UP OF SCARCE W. C. -- GOODS ARE SOLD AT CURRENT HIGHER PRICES -- GOODS ARE SOLD AT CURRENT HIGHER PRICES WHILE COST OF GOODS REFLECTS LOWER THAN WHILE COST OF GOODS REFLECTS LOWER THAN CURRENT COSTS CURRENT COSTS -- IN FALLING MARKET FIFO RESULTS IN LOWER-- IN FALLING MARKET FIFO RESULTS IN LOWER PROFITSPROFITS. .


-- LIFO :-- LIFO :

-- IN FALLING MARKET THE EFFECT IS THE SAME AS-- IN FALLING MARKET THE EFFECT IS THE SAME AS THAT OF FIFO IN RISING MARKETTHAT OF FIFO IN RISING MARKET

-- IN RISING MARKET THE EFFECT IS SAME AS THAT-- IN RISING MARKET THE EFFECT IS SAME AS THAT OF FIFO IN FALLING MARKET. OF FIFO IN FALLING MARKET.


IN THIS CHAPTER IT IS IMPORTANT TO DISCUSS THE IN THIS CHAPTER IT IS IMPORTANT TO DISCUSS THE VARIOUS ACCOUNTING CONVENTIONSVARIOUS ACCOUNTING CONVENTIONS

CONSERVATISM CONCEPTCONSERVATISM CONCEPT: RECOGNITION OF INCREASES IN : RECOGNITION OF INCREASES IN EARNINGS REQUIRES BETTER EVIDENCE THAN DOES EARNINGS REQUIRES BETTER EVIDENCE THAN DOES RECOGNITION OF DECREASES THAT IS EXPENSESRECOGNITION OF DECREASES THAT IS EXPENSES

REALISATION CONCEPTREALISATION CONCEPT: RECOGNITION OF AMOUNT OF : RECOGNITION OF AMOUNT OF REVENUE THAT HAS CERTAINTY OF REALISATIONREVENUE THAT HAS CERTAINTY OF REALISATION

MATCHING CONCEPTMATCHING CONCEPT: RECOGNITION OF REVENUES AND : RECOGNITION OF REVENUES AND EXPENSES FOR A CERTAIN EVENT.EXPENSES FOR A CERTAIN EVENT.


CONSISTENCY CONCEPTCONSISTENCY CONCEPT: ONCE A CERTAIN METHOD IS : ONCE A CERTAIN METHOD IS DECIDED UPON FOR ALL SUBSEQUENT EVENTS OF THE DECIDED UPON FOR ALL SUBSEQUENT EVENTS OF THE SAME CHARACTER THE SAME METHOD SHOULD BE USED SAME CHARACTER THE SAME METHOD SHOULD BE USED UNLESS THERE IS A SOUND REASON TO CHANGEUNLESS THERE IS A SOUND REASON TO CHANGE

MATERIALITY CONCEPT: MATERIALITY CONCEPT: DEPENDING UPON JUDGEMENT DEPENDING UPON JUDGEMENT AND COMMON SENSE IMMATERIAL EVENTS / TRIVIAL AND COMMON SENSE IMMATERIAL EVENTS / TRIVIAL MATTERS SHOULD NOT BE GIVEN MORE IMPORTANCE THAN MATTERS SHOULD NOT BE GIVEN MORE IMPORTANCE THAN WARRANTED.WARRANTED.

HISTORICAL COSTS: HISTORICAL COSTS: COST OF ACQUISITION – DISCOUNTS, IF COST OF ACQUISITION – DISCOUNTS, IF ANY, + COSTS INCIDENTAL TO BRINGING THE ASSET/ ANY, + COSTS INCIDENTAL TO BRINGING THE ASSET/ ERECTING THE ASSET.ERECTING THE ASSET.

BILLS OF EXCHANGEBILLS OF EXCHANGE

BILL OF EXCHANGEBILL OF EXCHANGE IS THE VEHICLE FOR CREDIT IS THE VEHICLE FOR CREDIT TRANSACTIONS IN BUSINESS; HAS 3 PARTIES:TRANSACTIONS IN BUSINESS; HAS 3 PARTIES:

DRAWER DRAWER – WHO MAKES THE BILL/ CREDITOR;– WHO MAKES THE BILL/ CREDITOR;

DRAWEEDRAWEE – ON WHOM THE BILL IS DRAWN; – ON WHOM THE BILL IS DRAWN;

PAYEE PAYEE -- WHO RECEIVES THE MONEY; -- WHO RECEIVES THE MONEY;

SOMETIMES DRAWER & PAYEE ARE THE SAME.SOMETIMES DRAWER & PAYEE ARE THE SAME.

ACCEPTANCE TO PAY BY THE DRAWEE IS ESSENTIAL.ACCEPTANCE TO PAY BY THE DRAWEE IS ESSENTIAL.

. .


. . PROMISSORY NOTEPROMISSORY NOTE IS SIMILAR ; HAS ONLY 2 PARTIES IS SIMILAR ; HAS ONLY 2 PARTIES

BUT SIGNED BY DEBTOR; NOTING NECESSARY.BUT SIGNED BY DEBTOR; NOTING NECESSARY.

. . ACCOMODATION BILLACCOMODATION BILL : THERE IS NO TRANSACTION; : THERE IS NO TRANSACTION;

THE BILL IS DISCOUNTED TO RAISE MONEYS FOR THE BILL IS DISCOUNTED TO RAISE MONEYS FOR

BOTH PARTIES, WHO SHARE THE AMOUNT. BOTH PARTIES, WHO SHARE THE AMOUNT.


TYPICAL ENTRIES:TYPICAL ENTRIES:. THE ENTRIES IN THE BOOKS OF DRAWER ‘A’ ARE:. THE ENTRIES IN THE BOOKS OF DRAWER ‘A’ ARE: DIRECT BILL TRANSACTIONDIRECT BILL TRANSACTION BILLS RECEIVABLE a/c DR.BILLS RECEIVABLE a/c DR. TO DRAWEE ‘B’TO DRAWEE ‘B’

. CASH a/c DR.. CASH a/c DR. TO BILLS RECEIVABLETO BILLS RECEIVABLE ( BILL IS MET ON DUE DATE) ( BILL IS MET ON DUE DATE)


BILL ENDORSED TO CBILL ENDORSED TO C. C’s a/c DR.. C’s a/c DR. TO BILLS RECEIVABLETO BILLS RECEIVABLE

( NO ENTRY WHEN BILL IS MET)( NO ENTRY WHEN BILL IS MET)

BILL SENT FOR COLLECTIONBILL SENT FOR COLLECTION

. BANK FOR BILL COLLECTION a/c DR.. BANK FOR BILL COLLECTION a/c DR. TO BILLS RECEIVABLETO BILLS RECEIVABLE

. CASH a/c DR.. CASH a/c DR. TO BANK FOR BILL COLLECTIONTO BANK FOR BILL COLLECTION ( BILL SENT FOR COLLECTION IS MET)( BILL SENT FOR COLLECTION IS MET) . . . . . .


IN CASE OF DISCOUNTINGIN CASE OF DISCOUNTING CASH a/c DR.CASH a/c DR. DISCOUNT a/c DR.DISCOUNT a/c DR. TO BILLS RECEIVABLE TO BILLS RECEIVABLE ( NO ENTRY WHEN BILL IS MET)( NO ENTRY WHEN BILL IS MET) THE ENTRIES IN THE BOOKS OF DRAWEE ‘B’:THE ENTRIES IN THE BOOKS OF DRAWEE ‘B’: .. A’s a/c DR... A’s a/c DR. TO BILLS PAYABLETO BILLS PAYABLE

. BILLS PAYABLE a/c DR.. BILLS PAYABLE a/c DR. TO CASH TO CASH ( BILL IS PAID)( BILL IS PAID)


THERE ARE CASES WHEN BILLS ARE DISHONOURED.THERE ARE CASES WHEN BILLS ARE DISHONOURED. IN THAT CASE THE ENTRIES ARE AS FOLLOWS:IN THAT CASE THE ENTRIES ARE AS FOLLOWS: IN A’s BOOKSIN A’s BOOKS:: BILL DIRECTLY SENT FOR PAYMENTBILL DIRECTLY SENT FOR PAYMENT B’s A/C DR.B’s A/C DR. TO BILLS RECEIVABLETO BILLS RECEIVABLE TO CASHTO CASH ( CASH IS THE NOTING CHARGE)( CASH IS THE NOTING CHARGE) DISHONOUR OF DISCOUNTED BILLDISHONOUR OF DISCOUNTED BILL

. BILLS RECEIVABLE A/C DR.. BILLS RECEIVABLE A/C DR. NOTING CHARGES A/C DR.NOTING CHARGES A/C DR. TO CASHTO CASH (CASH (notary charges) IS PAID TO THE BANK)(CASH (notary charges) IS PAID TO THE BANK)


-- B’s a/c DR.-- B’s a/c DR. TO BILLS RECEIVABLETO BILLS RECEIVABLE TO NOTING CHARGESTO NOTING CHARGES (BILL RETURNED TO ‘A’)(BILL RETURNED TO ‘A’)

DISHONOUR OF BILL SENT BY BANK FOR PAYMENT

BILL RECEIVABLE a/c DR.BILL RECEIVABLE a/c DR. NOTING CHARGE a/c DR.NOTING CHARGE a/c DR. TO CASHTO CASH TO BANK FOR BILL COLLECTIONTO BANK FOR BILL COLLECTION ( DISHONOUR OF BILL FOR COLLECTION)( DISHONOUR OF BILL FOR COLLECTION)

. B’s a/c DR.. B’s a/c DR. TO BILLS RECEIVABLETO BILLS RECEIVABLE TO NOTING CHARGESTO NOTING CHARGES (BILL RETURNED TO B)(BILL RETURNED TO B)


DISHONOUR OF ENDORSED BILLDISHONOUR OF ENDORSED BILL

. BILLS RECEIVABLE a/c DR.. BILLS RECEIVABLE a/c DR. NOTING CHARGES a/c DR.NOTING CHARGES a/c DR. TO CTO C

B’s a/c DR.B’s a/c DR. TO BILLS RECEIVABLE TO BILLS RECEIVABLE TO NOTING CHARGESTO NOTING CHARGES (BILL RETURNED TO B)(BILL RETURNED TO B)

CONSIGNMENT ACCOUNTCONSIGNMENT ACCOUNT

WHEN OWNER SENDS GOODS TO HIS AGENT FOR THE WHEN OWNER SENDS GOODS TO HIS AGENT FOR THE PURPOSE OF SELLING THEN IT IS CALLED CONSIGNMENT.PURPOSE OF SELLING THEN IT IS CALLED CONSIGNMENT.

IT IS DIFFERENT FROM SALE IN THAT THE CONSIGNEE IT IS DIFFERENT FROM SALE IN THAT THE CONSIGNEE CANNOT DISPOSE OFF THE GOODS ACCORDING TO HIS CANNOT DISPOSE OFF THE GOODS ACCORDING TO HIS CHOICE; DOES NOT RECEIVE ANY RISK FROM THE CHOICE; DOES NOT RECEIVE ANY RISK FROM THE CONSIGNOR; CAN RETURN THE GOODS IF NOT CONSIGNOR; CAN RETURN THE GOODS IF NOT MARKETABLE. MARKETABLE.


IN CONSIGNMENT ACCOUNTING THERE ARE 3 ACCOUNTSIN CONSIGNMENT ACCOUNTING THERE ARE 3 ACCOUNTS::

CONSIGNMENT ACCOUNT; WHICH SHOWS GOODS/STOCK CONSIGNMENT ACCOUNT; WHICH SHOWS GOODS/STOCK AT COST INCLUDING EXPENSES INCURRED IN SENDING AT COST INCLUDING EXPENSES INCURRED IN SENDING THE GOODS.THE GOODS.

CONSIGNEE ACCOUNT; WHICH IS NET OF HIS SELLING CONSIGNEE ACCOUNT; WHICH IS NET OF HIS SELLING PRICE AND THE NON-RECURRING OR DIRECT EXPENSES PRICE AND THE NON-RECURRING OR DIRECT EXPENSES INCURRED BY HIM.INCURRED BY HIM.

GOODS SENT ON CONSIGNMENT ACCOUNT. GOODS SENT ON CONSIGNMENT ACCOUNT.

CONSIGNMENT ACCOUNT CONSIGNMENT ACCOUNT

A TYPICAL CONSIGNMENT ACCOUNT WILL APPEAR AS A TYPICAL CONSIGNMENT ACCOUNT WILL APPEAR AS FOLLOWS:FOLLOWS:

DR. CRDR. CR To goods sent on by consigneeTo goods sent on by consignee consignment (goods sold by consignment (goods sold by (invoice value) consignee)(invoice value) consignee) To bank by closing stockTo bank by closing stock (all expenses incurred by (all expenses incurred by Consignor in transporting)Consignor in transporting) To consigneeTo consignee (all expenses incurred by(all expenses incurred by Consignee in selling)Consignee in selling) To profit & loss a/cTo profit & loss a/c


NOTES: NOTES: CLOSING STOCK IS VALUED AT COST/INVOICE PRICE + CLOSING STOCK IS VALUED AT COST/INVOICE PRICE +

PROPORTIONATE AMOUNT OF COST INCURRED BY CONSIGNOR PROPORTIONATE AMOUNT OF COST INCURRED BY CONSIGNOR IN TRANSPORTING.IN TRANSPORTING.

IF GOODS ARE LOST IN TRANSIT THE SAME METHOD OF IF GOODS ARE LOST IN TRANSIT THE SAME METHOD OF COSTING IS APPLIED AND THAT AMOUNT IS CREDITED TO THE COSTING IS APPLIED AND THAT AMOUNT IS CREDITED TO THE CONSIGNMENT ACCOUNT.CONSIGNMENT ACCOUNT.

NOMINAL LOSSES ARE PROPORTIONATELY CHARGED TO ALL NOMINAL LOSSES ARE PROPORTIONATELY CHARGED TO ALL STOCK WHETHER SOLD OR NOT. ABNORMAL LOSS IS DIRECTLY STOCK WHETHER SOLD OR NOT. ABNORMAL LOSS IS DIRECTLY CHARGED TO P&L A/C. CHARGED TO P&L A/C.

APART FROM FIXED RATE OF COMMISSION ON THE GOODS APART FROM FIXED RATE OF COMMISSION ON THE GOODS

SOLD AN ADDITION ‘ DEL CREDERE’ COMMISSION IS PAID TO SOLD AN ADDITION ‘ DEL CREDERE’ COMMISSION IS PAID TO THE CONSIGNEE FOR ENCOURAGING SALES ON CREDIT BASIS.THE CONSIGNEE FOR ENCOURAGING SALES ON CREDIT BASIS.

HOWEVER THE INHERENT RISKS REMAIN WITH THE CONSIGNEE.HOWEVER THE INHERENT RISKS REMAIN WITH THE CONSIGNEE.

JOINT VENTUREJOINT VENTURE JOINT VENTURE ACCOUNTS ARE TEMPORARY IN NATURE ; JOINT VENTURE ACCOUNTS ARE TEMPORARY IN NATURE ;

FOR THE AD HOC PURPOSE OF AN ASSIGNMENT FOR THE AD HOC PURPOSE OF AN ASSIGNMENT UNDERTAKEN.UNDERTAKEN.

IT IS SIMILAR TO A PARTNERSHIP EXCEPT SUCH IT IS SIMILAR TO A PARTNERSHIP EXCEPT SUCH ASSOCIATIONS ARE TEMPORARY IN NATURE.ASSOCIATIONS ARE TEMPORARY IN NATURE.

ALSO IN PARTNERSHIP THE ACCOUNTING IS ON ACCRUAL ALSO IN PARTNERSHIP THE ACCOUNTING IS ON ACCRUAL BASIS WHILE IN JOINT VENTURE ACCOUNTING IS ON CASH BASIS WHILE IN JOINT VENTURE ACCOUNTING IS ON CASH BASIS.BASIS.

JOINT VENTUREJOINT VENTURE

THERE ARE 3 ACCOUNTS:THERE ARE 3 ACCOUNTS:

-- JOINT BANK WHICH SHOWS EACH CO-VENTURER’S-- JOINT BANK WHICH SHOWS EACH CO-VENTURER’S INVESTMENT;INVESTMENT;

-- CO-VENTURER’S ACCOUNT-- CO-VENTURER’S ACCOUNT

-- JOINT VENTURE INTO WHICH THE FINAL -- JOINT VENTURE INTO WHICH THE FINAL PROFIT/LOSS IS TRANSFERRED. PROFIT/LOSS IS TRANSFERRED.

LEASING AND HIRE PURCHASELEASING AND HIRE PURCHASE

LESSOR (OWNER) GIVES HIS ASSETS TO LESSEE (USER) LESSOR (OWNER) GIVES HIS ASSETS TO LESSEE (USER) FOR USE; RECEIVES LEASE RENTALS IN RETURN, AN FOR USE; RECEIVES LEASE RENTALS IN RETURN, AN AMOUNT WHICH INCLUDES COST OF DEPRECIATION, COST AMOUNT WHICH INCLUDES COST OF DEPRECIATION, COST OF FINANCE, AND ADMINISTRATIVE EXPENSES OF THE OF FINANCE, AND ADMINISTRATIVE EXPENSES OF THE LESSOR.LESSOR.

. LEASING HELPS IN IMPROVING SALES VOLUME OF GOODS; . LEASING HELPS IN IMPROVING SALES VOLUME OF GOODS; REDUCES CAPITAL INVESTMENT FOR LESSEE, INCREASES REDUCES CAPITAL INVESTMENT FOR LESSEE, INCREASES HIS BORROWING CAPACITY, REDUCES TAX LIABILITY AS HIS BORROWING CAPACITY, REDUCES TAX LIABILITY AS RENTALS ARE FULLY TAX DEDUCTABLE, HOWEVER RENTALS ARE FULLY TAX DEDUCTABLE, HOWEVER BURDENSOME.BURDENSOME.


FINANCIAL LEASE IS THE MOST POPULAR, LONG TERM IN FINANCIAL LEASE IS THE MOST POPULAR, LONG TERM IN NATURE, GENERALLY USEFUL FOR PLANT AND MACHINERY.NATURE, GENERALLY USEFUL FOR PLANT AND MACHINERY.

OTHER TYPES ARE OPERATING AND SERVICE LEASES.OTHER TYPES ARE OPERATING AND SERVICE LEASES.

LESSOR RECEIVES LEASE RENTALS, CLAIMS LESSOR RECEIVES LEASE RENTALS, CLAIMS DEPRECIATION.DEPRECIATION.

LESSEE CHARGES THE LEASE RENTALS PAID TO THE P & L LESSEE CHARGES THE LEASE RENTALS PAID TO THE P & L ACCOUNT.ACCOUNT.


THE LESSOR BREAKS UP THE RENTALS RECEIVEDTHE LESSOR BREAKS UP THE RENTALS RECEIVED INTO FINANCE INCOME AND ANNUAL LEASE CHARGE.INTO FINANCE INCOME AND ANNUAL LEASE CHARGE.

FINANCE INCOME = TOTAL RENTALS OVER THEFINANCE INCOME = TOTAL RENTALS OVER THE

LEASE PERIOD + RESIDUAL VALUE OF LEASED ASSETLEASE PERIOD + RESIDUAL VALUE OF LEASED ASSET

-- COST OF LEASED ASSET-- COST OF LEASED ASSET ( FAIR VALUE ). ( FAIR VALUE ).


USE SUM OF DIGITS METHOD TO FIND ANNUAL FINANCE USE SUM OF DIGITS METHOD TO FIND ANNUAL FINANCE INCOME.INCOME.

ANNUAL LEASE CHARGE = ANNUAL LEASE RENT – ANNUAL ANNUAL LEASE CHARGE = ANNUAL LEASE RENT – ANNUAL FINANCE INCOME. FINANCE INCOME.

ANNUAL LEASE CHARGE = STATUTORY DEPRECIATION + ANNUAL LEASE CHARGE = STATUTORY DEPRECIATION + LEASE EQUALISATION CHARGE.LEASE EQUALISATION CHARGE.

LEASE EQUALISATION CHARGE IS DEDUCTED FROM THE LEASE EQUALISATION CHARGE IS DEDUCTED FROM THE LEASE RENTALS OR THE PROFIT & LOSS ACCOUNT. LEASE RENTALS OR THE PROFIT & LOSS ACCOUNT.

LEASING & HIRE PURCHASELEASING & HIRE PURCHASE

SOMETIMES THE ANNUAL LEASE IS LESS THAN STATUTORY SOMETIMES THE ANNUAL LEASE IS LESS THAN STATUTORY DEPRECIATION; THEN THE LEASE EQUALISATION CHARGE IS DEPRECIATION; THEN THE LEASE EQUALISATION CHARGE IS ADDED TO THE PROFIT & LOSS ACCOUNT.ADDED TO THE PROFIT & LOSS ACCOUNT.

THE LEASE EQUALISATION CHARGE ACCOUNTED THROUGH THE LEASE EQUALISATION CHARGE ACCOUNTED THROUGH THE LEASE TERMINAL ADJ. A/C WHICH FINALLY IS DEDUCTED THE LEASE TERMINAL ADJ. A/C WHICH FINALLY IS DEDUCTED FROM THE WRITTEN DOWN VALUE OF THE ASSET.FROM THE WRITTEN DOWN VALUE OF THE ASSET.

IN CASE OF OPERATING LEASE IF THE PERIOD IS LESS THAN 1 IN CASE OF OPERATING LEASE IF THE PERIOD IS LESS THAN 1 YEAR ( WHICH IS GENERALLY THE CASE ) THEN THE ENTIRE YEAR ( WHICH IS GENERALLY THE CASE ) THEN THE ENTIRE AMOUNT IS TAKEN TO THE PROFIT & LOSS ACCOUNT. AMOUNT IS TAKEN TO THE PROFIT & LOSS ACCOUNT.

IF THE PERIOD IS MORE THAN 1 YEAR AND THE ENTIRE IF THE PERIOD IS MORE THAN 1 YEAR AND THE ENTIRE RENTAL IS TAKEN INTO A LEASE RENT SUSPENCE ACCOUNT RENTAL IS TAKEN INTO A LEASE RENT SUSPENCE ACCOUNT AND YEARLY RENTALS ARE CHARGED TO IT.AND YEARLY RENTALS ARE CHARGED TO IT.

LEASING & HIRE PURCHASE LEASING & HIRE PURCHASE

NOTES: NOTES:

FINANCE INCOME IS THE PERCEIVED RETURN ON LEASED FINANCE INCOME IS THE PERCEIVED RETURN ON LEASED ASSET.ASSET.

LEASE EQUALISATION CHARGE IS THE EXCESS OF LEASE LEASE EQUALISATION CHARGE IS THE EXCESS OF LEASE RENT AFTER DUE WEIGHTAGE IS GIVEN TO THE RETURN ON RENT AFTER DUE WEIGHTAGE IS GIVEN TO THE RETURN ON THE LEASED ASSET AND THE EXTENT OF DEPRECIATION THE LEASED ASSET AND THE EXTENT OF DEPRECIATION CHARGED.CHARGED.

THIS AMOUNT IS CARRIED FORWARD IN THE BALANCE THIS AMOUNT IS CARRIED FORWARD IN THE BALANCE SHEET TO BE CHARGED AGAINST THE WRITTEN DOWN SHEET TO BE CHARGED AGAINST THE WRITTEN DOWN VALUE OF THE ASSET.VALUE OF THE ASSET.


Explanation Explanation The concept of lease equalisation account is an The concept of lease equalisation account is an

equaliser between the capital recovery inherent equaliser between the capital recovery inherent in lease rentals and the depreciation chargeable in lease rentals and the depreciation chargeable as per Companies Act.as per Companies Act.

The objective of the lessor is to write-off an The objective of the lessor is to write-off an

amount equal to the capital recovery inherent in amount equal to the capital recovery inherent in lease rentals, so as to leave in the revenue lease rentals, so as to leave in the revenue statement only the financing charges statement only the financing charges

LEASING AND HIRE PURCHASE LEASING AND HIRE PURCHASE

HIRE PURCHASE IS DIFFERENT IN THAT THE HIRER IS THE HIRE PURCHASE IS DIFFERENT IN THAT THE HIRER IS THE OWNER FOR THE PURPOSE OF DEPRECIATION. ALTHOUGH OWNER FOR THE PURPOSE OF DEPRECIATION. ALTHOUGH ACTUAL OWNERSHIP PASSES ON THE DATE OF PAYMENT OF ACTUAL OWNERSHIP PASSES ON THE DATE OF PAYMENT OF LAST INSTALMENT.LAST INSTALMENT.

THE HIRE PURCHASE PRICE CONSISTS OF CASH PRICE AND THE HIRE PURCHASE PRICE CONSISTS OF CASH PRICE AND INTEREST.INTEREST.

INSTALMENT SALE IS SIMILAR EXCEPT THAT OWNERSHIP INSTALMENT SALE IS SIMILAR EXCEPT THAT OWNERSHIP PASSES ON TO BUYER AS SOON AS THE 1PASSES ON TO BUYER AS SOON AS THE 1STST INSTALMENT IS INSTALMENT IS PAID.PAID.

THE 1THE 1STST INSTALMENT IN BOTH CASES IS CALLED DOWN INSTALMENT IN BOTH CASES IS CALLED DOWN PAYMENT.PAYMENT.

THE SELLER OF THE ASSET IS CALLED VENDOR THE SELLER OF THE ASSET IS CALLED VENDOR


A TYPICAL LEASE TRANSACTION IN THE BOOKS OF THE LESSOR:A TYPICAL LEASE TRANSACTION IN THE BOOKS OF THE LESSOR: Bank a/c dr.Bank a/c dr. to lease rentto lease rent (lease rent received)(lease rent received)

Lease rent a/c dr.Lease rent a/c dr. to P & L a/c to P & L a/c (lease rent transferred to profit) (lease rent transferred to profit)

Depreciation a/c dr.Depreciation a/c dr. to asset to asset (annual depreciation(annual depreciation Of the asset)Of the asset)

P & L a/c dr.P & L a/c dr. to depreciation to depreciation (depn. Charged to P & L a/c) (scroll down)(depn. Charged to P & L a/c) (scroll down)

if annual lease charge>depn.if annual lease charge>depn. Lease equalisation a/c dr.Lease equalisation a/c dr. to lease terminal adj.to lease terminal adj. P & L a/c dr.P & L a/c dr. to lease equalisationto lease equalisation

if annual lease charge<depnif annual lease charge<depn Lease terminal adj. a/c dr.Lease terminal adj. a/c dr. to lease equalisation charge.to lease equalisation charge.

. P & L a/c dr.. P & L a/c dr. to other expensesto other expenses (all other expenses debited) (all other expenses debited)

. .


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

P & L a/c dr. P & L a/c dr. to lease rentto lease rent (lease rent charged to P & L)(lease rent charged to P & L)

IF LEASE RENT IS PAID FOR THE ENTIRE PERIOD THE SAME IF LEASE RENT IS PAID FOR THE ENTIRE PERIOD THE SAME IS ACCOUNTED FOR IN BANK A/C AND AN ANNUAL AMOUNT IS ACCOUNTED FOR IN BANK A/C AND AN ANNUAL AMOUNT IS CHARGED TO P & L A/C EVERY YEAR IS CHARGED TO P & L A/C EVERY YEAR


A TYPICAL TRANSACTION IN THE BOOKS OF THE HIRER:A TYPICAL TRANSACTION IN THE BOOKS OF THE HIRER:

Asset a/c dr.Asset a/c dr. to vendor to vendor (purchase of asset on H P basis-(purchase of asset on H P basis- to the extent of the amount agreed)to the extent of the amount agreed). Vendor a/c dr.. Vendor a/c dr. to bank to bank (down payment/instalment)(down payment/instalment). Depreciation a/c dr.. Depreciation a/c dr. to assetto asset (depn. Of asset)(depn. Of asset). P & L a/c dr.. P & L a/c dr. to depreciation scroll downto depreciation scroll down (depn. Charged to P & L)\(depn. Charged to P & L)\. P & L a/c dr.. P & L a/c dr. to expensesto expenses (any other expenses charged to P & L)(any other expenses charged to P & L)

IN THE BOOKS OF LESSEE:IN THE BOOKS OF LESSEE:

. Hirer a/c dr.. Hirer a/c dr. to sales to sales (sale of asset on H P basis)(sale of asset on H P basis) Bank a/c dr.Bank a/c dr. to hirerto hirer (instalment received)(instalment received)

NON-TRADING ORGANISATIONSNON-TRADING ORGANISATIONS

NON-TRADING ORGANISATIONS ARE NON PROFIT MAKING NON-TRADING ORGANISATIONS ARE NON PROFIT MAKING BODIES, RENDERING SERVICES TO PUBLIC, COLLECTING BODIES, RENDERING SERVICES TO PUBLIC, COLLECTING MONEYS BY WAY OF MEMBERSHIP FEES, SUBSCRIPTIONS, MONEYS BY WAY OF MEMBERSHIP FEES, SUBSCRIPTIONS, DONATIONS. HOWEVER TO PREVENT MISUSE OF FUNDS, DONATIONS. HOWEVER TO PREVENT MISUSE OF FUNDS, ACCOUNTS ARE MAINTAINED.ACCOUNTS ARE MAINTAINED.

RECEIPTS & PAYMENTS STATEMENT CONTAINS REALRECEIPTS & PAYMENTS STATEMENT CONTAINS REAL ACCOUNTS, ACTUAL RECEIPTS AND PAYMENTS, BOTH ACCOUNTS, ACTUAL RECEIPTS AND PAYMENTS, BOTH

CAPITAL AND REVENUE ITEMS.CAPITAL AND REVENUE ITEMS.

. INCOME & EXPENDITURE STATEMENT CONTAINS. INCOME & EXPENDITURE STATEMENT CONTAINS NOMINAL ACCOUNTS, OF REVENUE ITEMS OF INCOME & NOMINAL ACCOUNTS, OF REVENUE ITEMS OF INCOME &

EXPENSES FOR A FIXED PERIOD.EXPENSES FOR A FIXED PERIOD.

NON-TRADING ORGANISATIONSNON-TRADING ORGANISATIONS

A TYPICAL WAY OF CONVERTING RECEIPTS & PAYMENTS A TYPICAL WAY OF CONVERTING RECEIPTS & PAYMENTS STATEMENT INTO INCOME & EXPENDITURE STATEMENT IS STATEMENT INTO INCOME & EXPENDITURE STATEMENT IS TAKE THE RECEIPTS/PAYMENTS OF THE CURRENT YEAR TAKE THE RECEIPTS/PAYMENTS OF THE CURRENT YEAR SUBTRACT THE OPENING BALANCE OF THE CURRENT YEAR SUBTRACT THE OPENING BALANCE OF THE CURRENT YEAR AND ADD THE CLOSING BALANCE ( IF ANY ).AND ADD THE CLOSING BALANCE ( IF ANY ).

THE CLOSING BALANCES WILL CONSTITUTE THE BALANCE THE CLOSING BALANCES WILL CONSTITUTE THE BALANCE SHEET. SHEET.

DEPRECIATIONDEPRECIATION

DEPRECIATION IS A CHARGE ON PROFITS, TO ACCOUNT DEPRECIATION IS A CHARGE ON PROFITS, TO ACCOUNT FOR THE FALL IN THE VALUE( NOTIONAL OR OTHERWISE ) FOR THE FALL IN THE VALUE( NOTIONAL OR OTHERWISE ) OF AN ASSET DURING THE PERIOD OF USE. OF AN ASSET DURING THE PERIOD OF USE.

DEPRECIATION OR WRITING OFF OF A CERTAIN PORTION OF DEPRECIATION OR WRITING OFF OF A CERTAIN PORTION OF AN ASSET ON AN ANNUAL BASIS IS A PRUDENT WAY OF AN ASSET ON AN ANNUAL BASIS IS A PRUDENT WAY OF SAVINGS FOR REPLACEMENT OF THE ASSET AFTER ITS SAVINGS FOR REPLACEMENT OF THE ASSET AFTER ITS USEFUL LIFE IS OVER.USEFUL LIFE IS OVER.

SINCE DEPRECIATION IS AN OPERATING COST AND SINCE DEPRECIATION IS AN OPERATING COST AND THEREFORE TAX DEDUCTIBLE, EACH YEAR THE SAVING IS THEREFORE TAX DEDUCTIBLE, EACH YEAR THE SAVING IS TO THE EXTENT OF (TAX RATE)* ANNUAL DEPRECIATION. TO THE EXTENT OF (TAX RATE)* ANNUAL DEPRECIATION.


DEPRECIATION CAN ALSO BE LOOKED IN A DIFFERENT WAY.DEPRECIATION CAN ALSO BE LOOKED IN A DIFFERENT WAY.

DEPRECIATION IS AN ACCOUNTING PROCESS FOR THE DEPRECIATION IS AN ACCOUNTING PROCESS FOR THE GRADUAL CONVERSION OF THE CAPITALIZED COST OF GRADUAL CONVERSION OF THE CAPITALIZED COST OF FIXED(TANGIBLE) ASSETS INTO EXPENSE.FIXED(TANGIBLE) ASSETS INTO EXPENSE.

SIMILARLY, INTANGIBLE ASSETS ARE CONVERTED INTO SIMILARLY, INTANGIBLE ASSETS ARE CONVERTED INTO EXPENSE BY AMORTISATION.EXPENSE BY AMORTISATION.

WHILE ASSETS SUCH AS NATURAL RESOURCES ARE WHILE ASSETS SUCH AS NATURAL RESOURCES ARE CONVERTED BY PROCESS CALLED DEPLETION. CONVERTED BY PROCESS CALLED DEPLETION.


WHAT CAUSES DEPRECIATIONWHAT CAUSES DEPRECIATION ? ?

SIMPLY WEAR AND TEARSIMPLY WEAR AND TEAR

MISHAPSMISHAPS

OBSOLESCENCEOBSOLESCENCE

PASSAGE OF TIMEPASSAGE OF TIME

FALL IN VALUEFALL IN VALUE


IN ORDER TO CALCULATE DEPRECIATION THERE ARE BASIC IN ORDER TO CALCULATE DEPRECIATION THERE ARE BASIC ISSUES TO BE ASCERTAINEDISSUES TO BE ASCERTAINED : :

-- ESTIMATED USEFUL LIFE OF THE ASSET(YEARS).-- ESTIMATED USEFUL LIFE OF THE ASSET(YEARS).

-- THE RESIDUAL VALUE OF THE ASSET.-- THE RESIDUAL VALUE OF THE ASSET.

-- METHOD TO BE USED FOR PROVIDING-- METHOD TO BE USED FOR PROVIDING DEPRECIATION.DEPRECIATION.


METHODS OF DEPRECIATIONMETHODS OF DEPRECIATION : : . STRAIGHT LINE METHOD. EQUAL FRACTION OF THE NET . STRAIGHT LINE METHOD. EQUAL FRACTION OF THE NET

COST(COST OF THE ASSET LESS THE RESIDUAL VALUE) IS COST(COST OF THE ASSET LESS THE RESIDUAL VALUE) IS CHARGED EACH YEAR.CHARGED EACH YEAR.

WRITTEN DOWN VALUE METHOD. EQUAL PERCENTAGE OF WRITTEN DOWN VALUE METHOD. EQUAL PERCENTAGE OF THE WRITTEN DOWN VALUE IN THE BOOKS OF THE THE WRITTEN DOWN VALUE IN THE BOOKS OF THE COMPANY IS CHARGED EACH YEAR.COMPANY IS CHARGED EACH YEAR.

SINKING FUND METHOD. IT IS STRAIGHT LINE METHOD BUT SINKING FUND METHOD. IT IS STRAIGHT LINE METHOD BUT THE DEPRECIATION CHARGED OR A PORTION OF IT IS KEPT THE DEPRECIATION CHARGED OR A PORTION OF IT IS KEPT AS A RESERVE, INVESTED IN MARKETABLE SECURITIES. THE AS A RESERVE, INVESTED IN MARKETABLE SECURITIES. THE FUND GROWS INTO REPLACEMENT VALUE OF THE ASSET.FUND GROWS INTO REPLACEMENT VALUE OF THE ASSET.

FINAL LEGFINAL LEGTHANK YOU VERY MUCH FOR YOUR THANK YOU VERY MUCH FOR YOUR PATIENCE; I TRUST IT WAS USEFUL. PATIENCE; I TRUST IT WAS USEFUL. BEFORE WE DISPERSE LET US GO BEFORE WE DISPERSE LET US GO THRU’ A SET OF QUESTIONS WITH THRU’ A SET OF QUESTIONS WITH MULTIPLE CHOICE ANSWERS,WHICHMULTIPLE CHOICE ANSWERS,WHICH WILL COVER THOSE ASPECTS OF WILL COVER THOSE ASPECTS OF

ACCOUNTING THAT MAY NOT BEEN ACCOUNTING THAT MAY NOT BEEN TOUCHED UPON.TOUCHED UPON.

E N DE N D ANY QUERIES MAY BE ADDRESSED ANY QUERIES MAY BE ADDRESSED

TOTO

[email protected]@rediffmail.com

accounting and finance bankers j a i i b paper-2 special accounts - module ‘ c ‘

Documents