Jaiib Made Simple-paper 2

JAIIB MADE SIMPLE

ACC A CCOUNTING OUNTING AND FINANCE FINANCE FOR BANKERS BANKERS ( JAI JAIIB IB PAP APER ER -2) -2) Version 2.0 (FOR MAY- JUNE 2016 EXAM.)

( A Very useful book for Day to Day Banking and all Knowledge Based Examinations )

COMP CO MPIL ILED ED BY Sanjay Kumar Trivedy (Divisional Manager ) Canara Bank, Government Link Cell, Nagpur, PGNS Complex, Modi No. 3, First Floor, Sitabuldi, Nagpur-440012,: 0712 – 2522271,2522272 / 07774069639 E-mail: E-mail: [email protected]; [email protected]

Preface Dear Friends, Banking/Financial sector in our country is witnessing a sea change & banker’s business has be co me m or e co mpl mp l ex & di f fi c ul t in th i s dr i ve n er a of kn owl ow l e dg e & t ec hn ol og y. Th er e a re mass retirements happening due to super annuation & many new recruits are joining the Bank. More than 40% staff strength is newly recruited recruited in last three to four years. An official working in the Banking sector has to keep pace with Updated knowledge, skills & attitude, as the same is required required everywhere. everywhere. There is need to issue a comprehensive comprehensive book covering all the aspects so that new recruits get updated very fast without without referring many voluminou voluminouss book bo ok s. This book book titled “ JAIIB MADE MADE SIMPLE SIMPLE ” has many unique unique features features to its its credit & consists consists of all topics topics/syllab /syllabus us required required for JAIIB JAIIB examination examination with clear concept concept & simple simple language language with latest changes changes during during 2015-16 2015-16 ( upto 31.12.2 31.12.2015 015 as per IIBF/ IIBF/ JAIIB exams. requireme requirement nt ) also included. included. This Book Book is divided into four Modules Modules namely namely A,B,C & D & Practice Teat Papers / Teat Yourself based on latest IIBF syllabus for JAIIB examination. The Book also covers the full syllabus syllabus ( latest ) of JAIIB examination examination and also recalled recalled questions questions ( one one line approach approach & MCQ ( based based on IIBF IIBF examination examination Pattern ) will will be helpful helpful to all aspirants aspirants who are taking taking up JAIIB examination examination During During preparatio preparation n of this this book, book, I have received received tremendous tremendous support support from from many friends friends & colleagues colleagues especially my wife Mrs Renu, who is also a banker, my son Master Ritwiz Aryan & our clerk Mr Sanjeev V Karamchandan Karamchandani. i. Special thanks to Sri B P Desai Sir (Our Ex. AGM & now Faculty Faculty on Contract at RSTC, RSTC, Mumbai ) for vetting & compilation compilation of this book. As any work work

will have have scope for some some improvemen improvement, t, I shall be grateful grateful if any feedback feedback is

pr ovi ov i de d fo r im pr ov e me nt i n co nt ent en t s of th e book bo ok . I wish you all the best for the written test & hope the study material material will help in achieving achieving the goal.

Place : Mumbai Date : 16.05. 16.05.2016 2016

SANJAY KUMAR TRIVEDY Divisional Manager, Government Link Cell, Nagpur

Comp Compil iled ed by Sanja anjay y Kumar umar Triv Trived edy, y, Divis ivisiional onal Mana Manag ger, Govt. ovt. Lin Link Cell, ell, Nag Nagpur pur

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Preface Dear Friends, Banking/Financial sector in our country is witnessing a sea change & banker’s business has be co me m or e co mpl mp l ex & di f fi c ul t in th i s dr i ve n er a of kn owl ow l e dg e & t ec hn ol og y. Th er e a re mass retirements happening due to super annuation & many new recruits are joining the Bank. More than 40% staff strength is newly recruited recruited in last three to four years. An official working in the Banking sector has to keep pace with Updated knowledge, skills & attitude, as the same is required required everywhere. everywhere. There is need to issue a comprehensive comprehensive book covering all the aspects so that new recruits get updated very fast without without referring many voluminou voluminouss book bo ok s. This book book titled “ JAIIB MADE MADE SIMPLE SIMPLE ” has many unique unique features features to its its credit & consists consists of all topics topics/syllab /syllabus us required required for JAIIB JAIIB examination examination with clear concept concept & simple simple language language with latest changes changes during during 2015-16 2015-16 ( upto 31.12.2 31.12.2015 015 as per IIBF/ IIBF/ JAIIB exams. requireme requirement nt ) also included. included. This Book Book is divided into four Modules Modules namely namely A,B,C & D & Practice Teat Papers / Teat Yourself based on latest IIBF syllabus for JAIIB examination. The Book also covers the full syllabus syllabus ( latest ) of JAIIB examination examination and also recalled recalled questions questions ( one one line approach approach & MCQ ( based based on IIBF IIBF examination examination Pattern ) will will be helpful helpful to all aspirants aspirants who are taking taking up JAIIB examination examination During During preparatio preparation n of this this book, book, I have received received tremendous tremendous support support from from many friends friends & colleagues colleagues especially my wife Mrs Renu, who is also a banker, my son Master Ritwiz Aryan & our clerk Mr Sanjeev V Karamchandan Karamchandani. i. Special thanks to Sri B P Desai Sir (Our Ex. AGM & now Faculty Faculty on Contract at RSTC, RSTC, Mumbai ) for vetting & compilation compilation of this book. As any work work

will have have scope for some some improvemen improvement, t, I shall be grateful grateful if any feedback feedback is

pr ovi ov i de d fo r im pr ov e me nt i n co nt ent en t s of th e book bo ok . I wish you all the best for the written test & hope the study material material will help in achieving achieving the goal.

Place : Mumbai Date : 16.05. 16.05.2016 2016

SANJAY KUMAR TRIVEDY Divisional Manager, Government Link Cell, Nagpur


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CONTENTS

TOPIC

1.

PAGE NO.

ABOUT JAIIB EXAMINATION EXAMINATION ……………………. …………………….……03……03-04 04

2.

MODU MODULE LE : A ( B. MATH MATHEM EMAT ATIC ICS S & FINA FINANC NCE) E)…. ….…0 …055-21 21

3.

MODU MODULE LE : (B (BOO OOK K KEEI KEEING NG & ACCO ACCOUN UNTAN TANCY CY ) .... .... 22-50 22-50

4.

MODU MODULE LE : C ( FINAL FINAL ACCO ACCOUN UNTS TS ) ... .......... .......... .......... .......... .......... ..... 51-7 51-74 4

5.

MODULE : D ( BANKING ING OPERATI ATIONS ONS )

6.

PRACTICE PRACTICE TEST PAPERS PAPERS ............... ....................... ............... .............. .........116-147 ..116-147


...... ..... 75-115

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ABOUT JAIIB EXAMINATION OBJECTIVE: JAIIB aims at providing required level of basic knowledge in banking and financial services,

banking technology, customer relations, basic accountancy and legal aspects necessary for carrying out day to day banking operations. MEDIUM OF EXAMINATION : Either in Hindi or English

Cut-off Date of Guidelines / Important Developments for Examinations In respect of the exams to be conducted by the Institute during May / June of a calendar year, instructions / guidelines issued by the regulator(s) and important developments in banking and finance up to 31st December of the previous year will only be considered for the purpose of inclusion in the question papers. In respect of the exams to be conducted by the Institute during November / December of a calendar year, instructions / guidelines issued by the regulator(s) and important developments in banking and finance up to 30 June of that year will only be the considered for the purpose of inclusion in the question papers. Reference: IIBF MonthlyMagazine : VISION.

PATTERN OF EXAMINATION : Each Question Paper will contain approximately 120 objective type multiple choice questions, carrying 100 marks including questions based on case study / case lets. The Institute may, however, vary the number of questions to be asked for a subject. There will NOT be negative marking for wrong answers.

TYPES OF QUESTIONS 120 Objective Type Multiple Choice Questions - carrying 100 marks – 120 minutes and question will be based on Knowledge Testing, Conceptual Grasp, Analytical / Logical Exposition, Problem Solving & Case Analysis. Type of Questions – Basically four types of Multiple Choice Questions asked in Exam of Which Type – A : Concept based Straight Questions ( 70-71 QUES - 0.5 MARKS EACH ) ; Type – B : Problems & Solutions (20-25 QUES - 1.0 MARKS EACH); Type – C : Applied theory based Questions (10-15 QUES - 2.0 MARKS EACH) ; Type – D : Case Study & Caselets based Questions ( 10-15 QUES - 2.0 MARKS EACH )

QUESTIONS MODELS : TYPES OF QUESTIONS Type – A : MULTIPLE CHOICE – QUESTIONS & ANSWERS The Best Method for assessing working capital limit used by the bank for seasonal Industries is : 1. Operating Cycle Method, 2. Projected Networking Method, 3. Projected Turn over Method & 4. Cash Budget Method Type – B : MULTIPLE CHOICE – PROBLEMS & SOLUTIONS Mr. Ram Kumar is having overdraft account with Canara bank upto Rs.100,000. The present Debit Balance in the account was Rs. 80550.00. The bank has received attachment order from Income tax deptt. For Rs. 16,200.00. What can the bank do in this situation ? Unless the bank is a debtor, there can be no attachment and an unutilized overdraft account does not render the bank a debtor ( but creditor ) & hence can not attach. Type – C : MULTIPLE CHOICE – APPLIED THEORY – QUES. & ANS Financial Institution wish to have the money lent by them repaid in time. Secured advances sanctioned by banks possess what kind of security ? Secured Advances have impersonal security i.e. Tangible Security Type –D : MULTIPLE CHOICE – CASE STUDIES & CASE LETS (PROBLEMS & SOLUTIONS ) Economic development of a country to a large extent depends upon Agril. & Industrial sectors. Development of agril. Depends upon irrigation facilities while industrial development on availability of power,good transport and fast communication facilities. All these are called infrastructure. Read the caselet & explain which industries constitute infrastructure ? a. Energy, Transport & Communication b. Irrigation, construction of bridges & dams over Rivers & stable govt. at Centre. Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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c.

Availability of Funds for PMEGP , SJSRY & Indira Awas Yojana

DURATION OF EXAMINATION: The duration of the examination will beof 2 hours. JAIIB EXAMINATION – May 2016 (Last date for applying for examination : 15.03.2016 ) ONLINE MODE Examination DATE

TIME

SUBJECTS

15.05.2016 Sunday

ONLINE - Will be given in the admit Letter

Principles & Practices of Banking

22.05.2016 Sunday


Accounting & Finance for Bankers

29.05.2016 Sunday


Legal & Regulatory Aspects of Banking

Last Date for receipt of Change of Centre Requests at the respective Zonal Offices for the JAIIB Examination scheduled for May 2016 : 31.03.2016 ( Examination fee Inclusive Service Tax @14.50% wef 15.11.2015 - Eligible for Members Only ) Sr. No.

Name of the Exam

Attempts

Fee (Rs)

1

JAIIB

First Block of 2 attempts

2748

Second Block of 2 attempts

2748

PERIODICITY AND EXAMINATION CENTRES ; The examination will be conducted normally twice a year in May / June and November / December on Sundays. Pass : Minimum marks for pass in every subject - 50 out of 100 marks. Candidate securing at least 45 marks in each subject with an aggregate of 50% marks in all subjects of JAIIB examination in a single attempt will also be declared as having passed JAIIB Examination. Candidates will be allowed to retain credits for the subject/s they have passed in one attempt till the expiry of the time limit for passing the examination as mentioned bellow: TIME LIMIT FOR PASSING THE EXAMINATION Candidates will be required to pass JAIIB examination within a time limit of 2 years (i.e. 4 consecutive attempts). Initially a candidate will have to pay examination fee for a block of one year i.e. for two attempts. In case a candidate is not able to pass JAIIB examination within 1st block of 2 attempts, he / she can appear for a further period of 1 year (2nd block) i.e. 2 attempts on payment of requisite fee. Candidates who have exhausted the first block of 2 attempts, should necessarily submit the examination application form for the next attempt, without any gap. If they do not submit the examination form immediately after exhausting the first block, the examination conducted will be counted as attempts of the second block for the purpose of time limit for passing. Candidates not able to pass JAIIB examination within the stipulated time period of two years are required to re-enroll themselves afresh by submitting fresh Examination Application Form. Such candidates will not be granted credit/s for subject/s passed, if any, earlier. Attempts will be counted from the date of application irrespective of whether a candidate appears at any examination or otherwise. “CLASS OF PASS” CRITERIA The Institute will consider the FIRST PHYSICAL ATTEMPT of the candidate at the examination as first attempt for awarding class. In other words, the candidate should not have attempted any of the subject/s pertaining to the concerned examination any time in the past and has to pass all the subjects as per the passing criteria and secure prescribed marks forawarding class. Candidate re-enrolling for the examination afterexhausting all permissible attempts as per the time limit rule will not be considered for awarding class. First Class : 60% or more marks in aggregate and pass in all the subjects in the FIRST PHYSICAL ATTEMPT. First Class with Distinction : 70% or more marks in aggregate and 60 or more marks in each subject in the FIRST PHYSICAL ATTEMPT. Candidate who have been granted exemption in the subject/s will be given "Pass Class" only. Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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Module: A BUSINESS MATHEMATICS AND FINANCE Syllabus Calculation of Interest and Annuities :Calculation of Simple Interest & Compound Interest; Calculation of Equated Monthly Instalments; Fixed and Floating Interest Rates; Calculation of Annuities; Interest Calculation using Products/Balances; Amortisation of a Debt; Sinking Funds Calculation of YTM : Debt- Definition, Meaning .& Salient Features; Loans; Introduction to Bonds; Terms associated with Bonds; Cost of Debt Capital; Bond value with semi-annual Interest; Current Yield on Bond; Calculation of Yield-to Maturity of Bond; Theorems for Bond Value; Duration of Bond; Properties of Duration; Bond Price Volatility Capital Budgeting : Present Value and Discounting; Discounted Technique for Investment Appraisal; Internal Rate of Return (IRR); Method of Investment Appraisal; NPV and IRR compared; Investment Opportunities with Capital Rationing; Investment Decision making under condition of uncertainty; Expected NPV Rule; Risk Adjusted Discount Rate Approach for NPV Determination; Sensitivity Analysis for NPV Determination; Decision Tree Analysis for NPV Estimation; Payback Methods; ARR. Depreciation and its Accounting :Depreciation, its types and methods; Comparing Depreciation Methods

Foreign Exchange Arithmetic :Fundamentals of Foreign Exchange; Forex Markets; Direct and Indirect Quote; Some Basic Exchange Rate Arithmetic — Cross Rate, Chain Rule, Value date, etc.; Forward Exchange Rates — Forward Points; Arbitrage; Calculating Forward Points; Premium/discount; etc.

Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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CALCULATION OF INTEREST Banking business mainly consists of accepting deposits and lending. Bank pays interest to the depositors On lending to customers, the bank charges a certain interest at a specified rate. The interest is payable either at periodic intervals or at the end of a loan period. The calculation of the interest will be based on the terms of agreement, i.e. whether at a definite interval or at the period end. Sometimes, it also happens that the customer is interested in paying a part of principal along with interest. As the customers pay the principal in instalments, the impact of the interest gets reduced over the tenure of loan. It may also happen that the bank may want to recover the loan in equal instalments called annuities. Annuities are essentially a series of fixed payments required to be paid at a specified frequency over the course of a fixed period of time. Payment of annuities may be at the beginning of each period or at the end of each period. The calculations of annuities are different for each situation. Sometimes, the bank also needs to make a cost-benefit analysis of the series of annuities and is required to calculate the present value of all the annuities by suitably discounting the annuities receivable at the end of each period. The sums of the present value of the annuities are compared with the cash outflow to reach certain decisions. Simple interest : Simple interest is paid by the borrower at the end of each year at a fixed rate (called rate of interest). In other words no interest is paid on the amount of interest. The simple interest can be calculated as: Interest = principal x rate x time i.e. I=PRT (where P is principal, R is rate of interest and T is time). Example : A lends Rs.30000 to B at 8% interest rate. The annual interest would be Rs.2400 i.e. (30000 x 1 x 8)1100. Total amount payable by the borrower to the lender = Principal + interest. Amount of instalments: Repayment of the loan can be made on a yearly, half-yearly, quarterly, monthly or even weekly periodicity. Hence the total amount repayable can be divided by the units of time period in a year. For example in the above case, the total loan repayable is Rs.32400 (30000 + 2400). If repayment is half-yearly, the amount of instalment would be Rs.16200 (32400/2), if it is quarterly it would be Rs.8100 (32400/4), if it monthly the amount would be Rs.2700 (32400/12) and so on. Compound interest : When interest is paid by the borrower not on the amount of principal only but on the interest amount that has accrued also (i.e. accumulated portion of interest), it is called compound interest. In this case, the formula for calculation of interest is not that simple as in case of simple interest, Formula for calculation of amount due after a certain period on compound rate of interest is: A= P (1+R)n where 'A' is total amount due after n years., 'P' is the principal amount and 'R' is rate of interest per annum expressed as fraction. Formula for half yearly compounding will be modified by reducing rate of interest to half its original value and multiplying time by 2. Likewise for compounding of interest at quarterly rests, the rate of interest will, be divided by 4 and time period multiplied by 4. So the formulae under such dispensation will be:- A=P(1+r/2)2n for half yearly compounding and A=P(1+r/4)4n, for quarterly compounding. For monthly compounding, the annual rate will be_divided by 12 and time period multiplied by12 making the formula as A=P(1+r/12)12n Compound interest will be CI =A-P where CI stands for compound interest, A for total amount due and P for principal amount. Q. 1 The simple interest in 3 years and the compound interest in 2 years on a certain sum at the same rate are RS. 1,200 and RS. 832 respectively. Find (i) the rate of interest, (ii) the principal, (iii) the difference between the C.I. and S.I. for 3 years. Ans. Let the principal be RS. P and rate of interest be R per cent p.a. According to the first condition of the question, (p x R x 3)/100 = 1200, P x R= 40,000 According to the second condition of the question, (P+ 832) = P(1 + R/100)2, or, (P+ 832)/P= (1 + Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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R/100)2= (100)2(1 + 832/P) = (100 + R)2 or, (100)2 + 832(100)2/P= (100 + R)2, By putting P= 40,000/R from equation 1, we get, [832*R*(100)2]/40,000 = (100 + R)2— (100)2 4[(100)2 + R2 + 2*100*R — (100)2] = 832 R , R2+ 200 R = 208 R = R2+ 200 R — 208 R = 0 R2— 8R = 0,R(R — 8) = 0, Either R = 0 or R — 8 = 0 Either R = 0 or R = 8, but R cannot be Rs.ero. Hence the rate of interest = 8% p.a. On using (1), we get P x 8 = 40,000, so P = 5,000 (iii). Rate of compound interest = 8% p.a. and principal = RS. 5,000 Amount due after 3 years = RS. 5,000 x (1 + R)3,= RS. 5,000 x 1.2597 = RS. 6,298.56 Hence, C.I. for 3 years = A— P= RS. 6,298.56 — RS. 5,000 = 1,298.56 The difference between the C.I. and Si. for 3 years = RS. 1,298.56 — RS. 1,200 = RS. 98.56 Amount becoming double of the amount lent : On a compounded basis, when the amount is lent it becomes double after different time periods depending upon the rate of interest at which it has been borrowed. For this purpose the Rule of 72 can be used. According to this rule, to find out the time period during which the amount would become double, the number 72 is divided by the rate of interest. For example, the money lent at 9% would become appx. double in 8 years and the money lent at 8% would become appx. double in 9 years. A depositor deposits Rs.20000 with the bank at prevailing interest rate of 12%. He wants to take back nearly double the amount of the deposit. After how many years, he would get the amount as per his desire: 6 years (72/12). He would get Rs.19738 with annual compounding and Rs.20327 with quarterly compounding. Rule of '72' enables us to calculate the period during which our deposit or loan will become double. It is to divide'72' by annual rate of interest and the result will be the period during which the amount will become double. For example if you availed a personaloan @12% as per rule of '72' it will double in 6 years (72/12). Likewise if you have placed deposit with a bank at 8% rate of interest, the amount of deposit will be double in 9 years (72/8). There is a modified version of rule of '72' which is referred to as rule of '69' .It says that period during which the amount will double will be calculated by dividing 69 by the rate of interest +0.35. To illustrate with 9% rate of interest the period will be 69/9+0.35 i.e. 7.67+0.35 years i.e. around 8.02 years. Q 2 You borrowed RS. 1,000 at 6 per cent interest. Then, 72 divided by 6 is 12. That makes 12 the approximate number of years it would take for your debt to double to RS. 2,000, if you did not make any payment. Ans Similarly, a saving account with RS. 500 deposited in it, earning 4 per cent interest and compounded yearly, will take 18 years for RS. 500 to double to RS. 1,000 if you do not make any further deposit, as 72 divided by 4 is 18. FIXED AND FLOATING INTEREST RATES : There are two different modes of interest. They are 1.Fixed Rates & 2. Floating Rates also called as variable rates. 1. Fixed Rate: In the fixed rate, the rate of interest is fixed. It will not change during entire period of the loan. For example, if a home loan, taken at an interest rate of 12 per cent, is repayable in 10 years, the rate will remain the same during the entire tenure of 10 years even if the market rate increases or decreases. The fixed rate is, normally, higher than floating rate, as it is not affected by market fluctuations. 2.Floating Rate: In the floating rate or variable rate, the rate of interest changes, depending upon the market conditions.Under floating rate, the interest rate is usually linked to a benchmark rate which could be the base rate of the bank or any other benchmark rate of the banking industry. It may increase or decrease depending upon the change in the benchmark rate.For example, if a home loan is taken at an interest rate of 12 per cent, repayable in 10 years, inApril 2014, and if the benchmark rate increases to 12.5 per cent in April, 2015, the interest rate of this loan will also be increased to 12.5 per cent. If the loan is under an EMI system, depending upon the change in interest rate, the repayment period varies, but equated monthly instalment remains Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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the same. However, the borrower may choose to have the repayment period same and pay a higher EMI. FRONT-END AND BACK-END INTEREST RATES If the interest is deducted from the principal amount and only the net amount is disbursed, it is called front-end interest. For example when the bank discounts a bill, the interest applicable for the tenure of the bill is calculated and is deducted from the bill amount along with other charges and the net amount is paid to the customer. However, the normal practice in banking industry is to charge back-end interest rate which means that the full amount of the loan is disbursed and the interest is charged subsequently on monthly/quarterly/agreed basis. For example, in a term loan, the interest is calculated on the actual daily balances in the account during a period and applied at the end of the period. Obviously, the front-end interest application results in effective interest rate being more as the borrower gets less amount for use whereas, the interest is applied on the full amount. CALCULATION OF INTEREST USING PRODUCTS/BALANCES Calculation of front end interest like in bill discounting is easy as the amount is assumed to be constant over the entire period. For example, if the tenure of the bill of 2 lac is 3 months and the rateof discount is 16% p.a., the interest amount will be 8000. In banks, many of the cases of deposit and loan accounts involve calculation of interest on the basis of daily balance in the customer's account. While this method was prevalent in case of the loan accounts, even in case of Savings Account, the interest is now required to be calculated on the basis of daily balances. In this method, the closing balance in the account is multiplied by the number of days for which that balance remains unchanged . ANNUITIES : At some point in your life, you may have had to make a series of fixed payments over a period of time — such as rent or car payments — or have received a series of payments over a period of time, such as bond coupons. These are called annuities. If you understand the time value of money and have an understanding of the future and present value, it would be easy to understand annuities. Annuities are essentially a series of fixed payments required from you or paid to you at a specified frequency over the course of a fixed period. The most common payment frequencies are yearly (once a year), semi-annually (twice a year), quarterly (four times a year), and monthly (once a month). There are two basic types of annuities: ordinary annuities and annuities due. O r d i n a r y A n n u i t y : Payments are required at the end of each period. For an illustration, straight bonds usually make coupon payments at the end of every six months until the bond's maturity date. A n n u it y D u e: Payments are required at the beginning of each period. Rent is an illustration of annuity due. You are usually required to pay rent when you first move in at the beginning of the month, and then on the first of each month thereafter. Since the present and future value calculations for ordinary annuities and annuities due are slightly different, we will first discuss the present and future value calculation for ordinary annuities. Time value of money : The money has a time value. Rs.5000 in hand with a person as at present and an amount of Rs.5000 coming in his hand after, say a year, would carry different values. The same amount of money received in future carries less value because of time element, during which the money can earn interest. The present value of Rs.5000 to be available after a year, would be less at present. Hence the concept of future value of an annuity and present value of annuity comes in. Future value of an Ordinary annuity : A depositor depositing a fixed sum of amount in his account regularly till the end of pre-determined period at a given interest rate, can find out how much money he would get at the end of the period he has chosen for deposit. Calculation of Future Value of Annuities Future Value (FV) for Ordinary Annuity =C X [{(1+i)n. -1}/i] where 'C' stands for cash flow per period,'I is the rate of interest , 'n' stands for number of payments. Since in case of annuity due each payment is received, one period sooner, the formula stands modified. Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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Future Value of Annuity Due will be = C X [{(1+i)n-1}-1} X (1+i) Calculation of Present Value of Annuities n Present Value (PV) for Ordinary Annuity= C X [{1- (1+i) }/i] n Present Value (PV) for Annuity Due = C X [{1- (1+i) }/i] x (1+i) For payment made at the end of 4 th year = 10000 (1 r)1 = 10000 (1 + 0.05)1 = 10500 For payment made at the end of 5th year = 10000 (1 + r)1 = 10000 (1 + 0.05)1 = 10000 Total = 55256,The above value can be worked out on the basis of formula: FV = C * [(1 +i)" -11 Where C=Cash flow i=intt.rate n=no. of payments. 55256 = 100000 * [(1 +0.05)5-11=0.05 Present value of an Ordinary annuity : Where a person is receiving regular payment of Rs.10000 per annum for 5 years at 5% interest rate, he can also calculate the present value of the cash flows he is to receive over the next 5 years as under: For amount received at the end of 11 year = 10000 (1 + r)1 = 10000 (1 + 0.05)1 = 9524 For amount received at the end of 2"d year = 10000 (1 + r)2 = 10000 (1 + 0.05)2 = 9070 For amount received at the end of 3'11 year = 10000 (1 + r)3 = 10000 (1 0.05)3 = 8638 For amount received at the end of 4th year = 10000 (1 + r)4 = 10000 (1 + .05)4 = 8227 For amount received at the end of 5111 year = 10000 (1 + r)5 = 10000 (1 + 0.05)5 = 7835 Total = 43294, The above value can be worked out on the basis of formula: PV = C * [(1-(1+in Where C=Cash flow i=intt.rate n=no. of payments PV = 10000 * [(1-(1+0.05)0= 10000 * 4.3294 = Rs.43294 0.05 Future value of an annuity due : A depositor depositing a fixed sum of amount in his account in the beginning of a particular period at regular intervals at a given interest rate can find out how much money he would get at the end of the period he has chosen for deposit. Similarly if a borrower is making regular payment of a loan in equal instalments, he can find the cost of loan. For an amount of Rs.10000 to be paid every year (for 5 years), the future value would be Rs.58019 at 5% interest rate, as under: For payment made in the beginning of 15' year = 10000 (1 +r )4 = 10000 (1 + 0.05)4 = 12763 For payment made in the beginning of 2nd year = 10000 (1 + r)4 = 10000 (1 + 0.05)3= 12155 For payment made in the beginning of 3rd year = 10000 (1 + r)3 = 10000 (1 + 0.05)2= 11576 For payment made in the beginning of 4th year = 10000 (1 + r)2 = 10000 (1 + 0.05)1= 11025 For payment made in the beginning of 5111year = 10000 (1 + r)1 = 10000 (1 + 0.05)1= 10500 Total = 58019 The above value can be worked out on the basis of formula: FV = C * [(1 +i)n -11 * (1+i) where C=Cash flow i=intt.rate n=no. of payments FV = 10000 * [(1 +0.05)"-11 * (1+0.05) = 10000 * 5.53 * 1.05 = Rs.58019 0.05 Present value of an annuity due : Where a person is receiving regular payment of Rs.10000 per annum for 5 years at 5% interest rate, he can also calculate the present value of the cash flows he is to receive over the next 5 years as under: For amount received at the end of 51h year = 10000 (1 + r)° = 10000 (1 + 0.05)° = 10000 For amount received at the end of 4`h year = 10000 (1 + r)1 = 10000 (1 + 0.05)1= 9524 For amount received at the end of 3 rd year = 10000 (1 + r) 2 = 10000 (1 + 0.05)2 = 9070 For amount received at the end of 2 nd year = 10000 (1 + r) 3 = 10000 (1 + 0.05)3 = 8638 For amount received at the end of 1 51 year = 10000 (1 + r) 4 = 10000 (1 + 0.05)4 = 8227 Total = 45459 The above value can be worked out on the basis of formula: PV = C * [(1-(1+I )n* (1+i), where C=Cash flow i=intt. rate n=no. of payments PV =10000 * [(1-(1+0.05)51* (1+0.05) =10000 * 4.33 * 1.05 = 100000 * 4.5459 = Rs.45459 Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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0.05 AMORTISATION OF DEBTS : Amortisation means liquidation (repayment) of an interest bearing loan through periodic payments. With payment of each instalment, the interest liability comes down. When the loan is amortised through equal payments, the debt becomes the discounted value of an annuity. The total time period during which this repayment is made is called term of the annuity. The regular time periods, during which the repayment is affected, are called payment periods. Present value of annuity: When an investor expects the rate of return on purchase of a bond, equal to the coupon rate, the value of the bond is equal to its par value. On the other hand when an investor expects the rate of return on purchase of a bond, more than the coupon rate, the value of the bond is, less than its par value. Similarly, when an investor expects the rate of return on purchase of a bond, less than the coupon rate, the value of the bond is more than its par value. When the required rate of return is more than the coupon rate and as the maturity approaches the discount on bond declines. When the required rate of return is less than the coupon rate and as the maturity approaches, the discount on bond increases. The bond price is inversely proportional to its yield to maturity. Future value of annuity : The future value of annuity can be worked out with the help of the following formula. This helps us to understand as to how much amount is required to be invested at a regular interval to get a targeted consolidated amount, at the end of a particular period. Sr (S=value at the end of the period. R = --------- (R= Periodic payment) {(1+r)"-1} ( r= rate per period) SINKING FUND : A fund created, by gradual periodic deposits, with the objective of getting a targeted amount to pay off future debts, is called a sinking fund. The sinking funds can be created for a no. of purposes such as repayment of debt in lump sum, redemption of bonds, replacement of a worn out equipment, buying of a new equipment etc. This can be done by knowing the future value of an annuity, by using the following formula:

(1+i)" -1 F= A

(F=Future value of an annuity) ,(A= Annuity) ( r=rate of interest)

Test your self 1. A student purchases a computer by obtaining loan on simple interest. The computer costs Rs 15000 and the interest rate on the loan is 12 per cent. If, the loan is to be paid back in weekly instalments over two years, calculate the following a) The amount of interest paid over the two years , b)The total amount to be paid back c)The weekly payable amount 2. Ramesh has one saving account with interest rate of 3.3% and one money market account with interest rate of 5.1% in a bank. If he deposits Rs 1200 to the savings account and Rs 1800 to the money market account, how much money will he have after 6 years? 3. Your friend borrows Rs 1000 from you for purchase of a sofa. The loan will be repaid in a year. She wants to pay the principal in 12 equal monthly instalments and interest as applicable on monthly basis. How much amount will be payable at the end of the first month and second month if interest rate is 8% p.a. (or 0.667% per month) 4. What will be the EMI for a loan of Rs 100,000 at an interest rate of 12% p.a. to be repaid in 12 months 5. You have deposited Rs 100,000 in the bank. You want that it should be deposited for such a period that it is doubled. For how long you will have to deposit if interest rate is 9% assuming that there is no TDS 6 A person deposits Rs 1000 at the end of each year for 5 years. If the interest rate is 5% per annum, how much amount will he have at the end of 5 years? (Ordinary Annuity) 7.A person receives Rs 1000 at the end of each year for 5 years. If interest rate is 5% per annum, what will be the present value of total amount received by him? (Ordinary Annuity) 8. In question no 6 if the amount is deposited at the beginning of each year, what amount will he Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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have at the end of 5 years 9. In question no 7, if the amount is received at the beginning of each year, what will be present value of total amount received by him (Annuity due) 10. The population of an industrial town is increasing by 5 per cent every year. If the present population is 1 million, estimate the population five years hence. Also estimate the population three years ago. 11. Rama publishers buy a machine for Rs 20,000. The rate of depreciation is 10%. Find the depreciated value of machinery after 3 years. Also find the amount of depreciation. What is the average rate of depreciation?

BONDS AND DEBENTURES The mix of debt and equity of a company is called capital structure of a company. Debt capital is preferable to equity capital both to the company and the investors as the bond holder gets interest on the bonds irrespective of the amount of profit. He can also force the company to go in for liquidation. For the company, the debt capital is preferable, due to tax planning, as interest paid is an expenditure on which no tax is required to be paid. The debt capital has normally the lower overall cost compared with the equity capital. Main components of the debt capital are bonds and debentures. The buyers of the bonds and debentures, issued by a company are called creditors of the company, who lend money to the company. The specific interest rate that is carried by a bond is called 'coupon rate'. Various terms are used in the context of bonds that include face value, redemption value, redemption at discount, redemption at a premium etc. Rate of interest on bonds is fixed. Face value of a bond and the maturity : The value that is written on the face of the bond is called face value. This value represents the amount that a company has to return to the bond holder after the specified time period. A specified time period at the end of which the repayment of the face value is to be made is called 'maturity'. Redemption and value for redemption : The bonds are repayable according to the terms on which these are issued. The value of bond, that the bond holders get on maturity of the bond, is known as 'redemption value'. The bonds can be redeemed at a premium or at a discount. Bond redeemable at premium means the value to be returned to the bond holder would be higher than the face value. Bond redeemable at discount means the value to be returned to the bond holder would be lower than the face value. Failure of a company to redeem the bonds : If a company fails to make payment of interest or principal, the company may be forced to in to bankruptcy as per the prevailing provisions of the law including liquidation. YIELD TO MATURITY : YTM is the rate of return that an investor can earn, when he purchases a bond and holds it till its maturity. In other words, it is the discount rate, which equals the present value of the expected cash flows to the current market price or the purchase price. When an investor expects the rate of return on purchase of a bond, equal to the coupon rate, the value of the bond is equal to its par value. On the other hand when an investor expects the rate of return on purchase of a bond, more than the coupon rate, the value of the bond is, less than its par value. Similarly, when an investor expects the rate of return on purchase of a bond, less than the coupon rate, the value of the bond is more than its par value.When the required rate of return is more than the coupon rate and as the maturity approaches the discount on bond declines. When the required rate of return is less than the coupon rate and as the maturity approaches, the discount on bond increases. The bond price is inversely proportional to its yield to maturity.

Test your self 1. A Bond whose par value is Rs 1000 bears a coupon rate of 12 per cent and has a maturity period of 3 years. The required rate of return on the bond is 10 per cent. What is the value of this bond if (PVIFA 10% 3 years is 2.487 and PVIF 10% 3 years is 0.751) 2. If a bond of face value Rs 1000 carrying a coupon interest rate of 8% is quoted in the market at Rs 800, then what is the Current yield on the bond? Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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3.There is a bond with par value of Rs 1000. The market value of the bond is Rs 850. The bond carries a coupon rate of 8% and has maturity period of nine years. What would be the rate of return that an investor earns if he purchases the bond and holds until maturity? 4.There is a bond with a face value of Rs 1000, coupon rate is 10 per cent and period of maturity is ten years. If the current market rate 10 per cent is changed to 11 per cent, the price of the bond changes to In the above question, what is the interest rate elasticity? 5.The face value of the bond is Rs 100,000. The coupon rate is 8%. The YTM is 6%. The time to maturity is 5 years. Interest payments are made annually. What will be the Duration of the Bond? What is Modified Duration? Calculate the percentage change in price of the bond if the YTM falls by 100 basis points or 1% from 6% to 5%. 6.There are two bonds with the following features: Bond A Bond B Rs 100 Rs 100 Face Value Coupon Rate 14% 14% Current Market Price Rs 100 Rs 100 7 years 4 years Term to maturity Coupon payment Annually Annually (a) Compute the YTM of Bond A and B (b) If the interest rate falls by 1% what would be the new market price of bonds (c) What is the percentage change in the price of two bonds (d) If interest rates increased by 1% what will be the current price of Bond A?

CAPITAL BUDGETING DISCOUNTED CASH FLOW TECHNIQUES Financing fixed assets either by replacement of existing assets or addition of new assets forms part of any company's overall capital budget and this kind of budgeting is extremely difficult due to uncertainties of future economic conditions and need for ensuring reasonable return on the long term investment. The capital budgeting decisions are based on (a) conventional method of (i) return on capital or investment and (ii) payback period and (b) discounted cash flow methods of (i) net present value and (ii) internal rate of return. CONVENTIONAL METHODS - RETURN ON CAPITAL OR INVESTMENT This is calculated as a percentage of operating profit on total investment and is a crude method of estimating financial viability of the project and suffers from following: a the percentage indicator will vary from year to year in view of the variations in operating profit. It may be difficult to identify one figure which correctly represents the return on the total capital employed. b The term capital is vague and is subject to more than one interpretation. It is not clear whether the return should be calculated on the equity capital or total owned resources plus borrowed funds. C it is not clear as to what should be operating period of the project on which the return on capital should be calculated. There is no basic assumption regarding the total economic life of the project in this technique. d It ignores the time value of money concept. A rupee earned tomorrow is worth fess than a rupee in hand today. Earlier we get the return, it carries greater value to us. CONVENTIONAL METHODS - PAYBACK METHOD , It is commonly used method of investment appraisal in view of the simple mode of its calculation. The payback period represents the number of years it takes for the operating earnings from a project to recoup the total investment on the project and is computed taking into account: Net investment / Profit before depreciation and tax = Payback period (years).

The method is useful both for firms with plenty of investment opportunities but limited financial resources and for those projects which have obsolescence risk i.e. larger wear and tear. The method has following limitations: a It can lead to incorrect ranking of industrial projects as the method ignores return of the project after the payback period. Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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b The method does not give us any objective cut-off criterion. What should be the minimum or maximum payback ? c The projects which have low return initially but a longer economic life may be preferable to those projects which have high earning capacity initially but have shorter life span. d This method like return on investment ignores the time value of money. eThis method attaches undue importance to the quick yield and gives the impression that the projects have little or no development significant. It is a not enough to recoup the investment. The principal concern of the investor is to optimise the return/benefits. In view of the aforesaid limitations, the payback method is better accepted as a secondary method of investment appraisal rather than the final criterion for investment. The calculation is made from the year investment is made to the period when the capital has been recovered plus the project has yielded a minimum return on the investment. This can be examined in the light of the following: Discounted Cumulative

present value Year Cash flow

Present value of Re.1 at 11%

cash flow

0 (2500) 1.000 (2500) 1 1000 0.901 1599 2 1000 0.812 787 3 1000 0.731 56 4 1000 0.659 603 The payback of 3.1 years in the above project = 3 + 56/659 = 3.085 (say 3.1 years) DISCOUNTED CASH FLOW METHODS It is stated to be realistic and rational method of investment appraisal and takes into account the actual timing of cash outgo and cash inflow. It is rational as it fulfills the needs of modern financial management and economic analysis of projects. Any investment appraisal technique should serve the objective that it should help the analyst in ranking projects in order of preference and it should give a cut-off criterion which should be used to accept or reject the project. The DCF techniques can meet these objectives. The technique involves discounting cash flows at discount rate carefully selected taking into account the prevailing cost of credit or the return from competing projects within the frame-work of undernoted assumptions: a DCF technique clearly recognises the time value of money. Both the compounding and discounting processes may be used to express the time value of money. In compounding, the present sum grows as the interest at a given rate is added. Discounting is reverse of compounding. From a future value the present value is determined at a discount rate. b DCF focus attention on cash receipts and expenditures as against profits after depreciation on accrual basis of receipts and expenses. c it is assumed that all operating cash inflows or outflows are assumed to take place at the end of the year in question, for simplifying the calculations. d The cost of capital, opportunity cost of capital or discount rate is selected by the management having regard to various relevant factors. DCF criteria is based on total cash flow over the life of the project and as such it is independent of annual variations of cash flows. The important rules regarding application of DCF techniques are as under: a Higher the rate of discount applied in calculation, the less point there is in spreading the exercise over distant years. This may be 50% for 7-8 years, 20% for 16-17 years and 12% for 25-26 years. b Higher returns in later years of project's life do not materially affect the DCF rate. What really matters is the cash flow during the early years. Or shorter the period during which positive returns are received, higher would be rate of return. c Higher the rate of discount, the more important are the returns earned during the early years of an assets life. Limitation of DCF a The application of DCF technique has become primarily the function of the finance manager. Other Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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departments of a project have little say in assumptions selected for DCF calculations. This adversely affects the reliability of the DCF criterion. An acceptable DCF rate of return is one which is the result of a composite managerial, economic and technical assessment of the project over a fairly long period. Such an integrated forecast is the dream of every project analyst which is rarely realised. b The external effects of the project such as pollution, noise congestion etc. are not ordinarily accounted for in DCF calculations for financial analysis. As a result, the economic cost-benefit analysis is necessary. The full utility of DCF therefore depends on the fact whether or not the exercise is comprehensive one including economic cost-benefit analysis, particularly in case of large and complex projects. c Future being uncertain, no investment appraisal technique can accurately forecast the future viability of projects. Reliability of DCF, as such, is no better than other conventional methods. d It is difficult to estimate the economic life of a project. Some assets depreciate faster than others. Some projects need major replacement or renovation within 4-5 years of their working. No general rule such as assumption of project life of 15 years in all cases, would yield a helpful solution. e Irregular cash flows including a negative cash flow following some positive flows, pose a problem, which would yield more than one IRR. f There is an unresolved controversy whether or not inflation should be taken into account while finalising cash outlays for DCF. it is claimed that inflation has come to stay and any financial forecasting which does not take into account the impact of inflation is by and large meaningless. g It is difficult to forecast the future salvage/terminal value of assets. The current practice of valuing fixed assets only at 5% of their original value is somewhat arbitrary. There are two principal measure of DCF, namely Net Present Value and Internal Rate of Return: DISCOUNTED CASH FLOW (DCF) METHODS DCF takes into account the actual timing of cash outgo and cash inflow. It is based on total cash flow over the life of the project. There are two principal measures of DCF, i.e. NPV & IRR. Net present value (NPV) : NPV is the difference between cash outflows at base period and present value of future cash inflows. It helps the bank to ascertain, whether a oroject should be taken up for financing or not. Project A Project B Year Discount rateCash inflow NPV (DCF) 10% Cash inflow NPV

0 5000 1 0.91 2 0.83 3 0.75 4 0.68 5 0.62 Total

- 5000 1100 1210 1330 1460 1500 6600

-5000 1000 1000 999 997 931 4927

- 5000 1125 1235 1355 1485 1525 6725

1024 2025 1016 1010 945 5020

Net present value

4927 - 5000

= (-) 73

5020-5000

= 20

This is initial investment in the project is an outflow. In project A while the cash outflow is 5000 (original investment), the future cash inflow is 6600 and its net present value at 10% discount rate is 4927. Hence the NPV is less than Zero (i.e. — 73). On the other hand, for project B, against cash outflow of 5000, the net present value of the inflow of 6725 is 5020 which is more than Zero. Hence, the project B can be taken up for financing. If the above project had positive NPV and many other projects also had positive NPVs the choice would be limited by raising the discount rate and by selecting that project which has the highest present value relative to investment expenditure. For calculating NPV, we require a statement of cash outgoes and inflows, assumptions regarding total economic life of the project and a rate of discount. The selection of Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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economic life and rate of discount can pose certain problems. In the case of industrial projects, it is customary to assume a working life of 10-20 years depending upon the expected life of the equipment. The selection of rate of discount depends on a composite of factors such as: a Weighted average of the borrowing rate for funds. b The expected rate of return from the competing projects. c The company's internal record of growth. d An acceptable price earnings ratio for equity shares and e The industrial growth rate assumption accepted by the government or planning authorities. Internal rate of return (IRR) IRR is the rate of discount at which the net present value is ZERO. In the following example it is 34.62%. At this discount rate the discounted value of the net cash flow from a project is equal to the amount which has been invested to obtain that net cash flow (in the following case, the investment is 1500. At 30% discount, the NPV of cash inflow is 1633 and at 35% it is — 11, but at 34.62%, it will be 1500, making the net value as Zero). Illustration: The exact IRR would be 34.62% which can be worked out as under, at which the net present value of the cash Inflow would be Zero which is (-) 11 at 35% and 133 at 30% discount rate.

(Lower discount rate + difference between two discount rates) X Net present value of the cash flow at lower discount rate / absolute difference between the NPV of cash flow stream at two discount rates. = 30 + 5 (133/144) i.e. = 30 + 5 (.924) = 34.62% Year Cash flow DCF-30% Discounted DCF-35%

0 1 2 3 4 5

500

750 1000 1000 3250

0.769 0.592 0.455 0.350

Net position 1633-1500 = 133

Cash flow (-)1500 384

Discounted

cash flow (-)1500

444 455 350 1633

0.741 370 0.549 412 0.406 406 0.301 301 1489

1489-1500 = (-)11This is initial investment. Hence an outflow.

Test your self 1.What is the discounting factor for 1 year % at 10rate? What is the discounting factor for 2 year and 3 year at 10% rate? 2. Company A is considering a new piece of equipment. It will cost Rs 6000 and will produce a cash flow of Rs 1000 every year for the next 12 years (The first cash flow will be exactly one year from today). What is the NPV if appropriate discount rate is 10%?

DEPRECIATION Depreciation means reduction in the value of a fixed asset over the years. This is a continuing process due to which the book value of the assets declines. The rate at which this value declines varies from asset to asset depending upon a number of factors such as wear and tear, passage of time, obsolescence, fall in market price etc. Charging depreciation is a process of distribution of cost of the fixed assets over the useful life of the asset. Objective of charging depreciation The depreciation is charged in order to ascertain the profit and loss appropriately, record proper value of the assets and retain profits for replacement of the asset. Basis for charging depreciation: The elements that are taken into account for fixation of rate of depreciation and charging the depreciation are (a) the original cost of the assets (including installation etc), (b) the expected time period for commercial use of the asset and (c) expected sale value (called scrap value) at the end of the commercial use of the asset. The depreciation is debited to the profit and loss account and credited to Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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respective fixed asset account. Methods of charging depreciation Though there are a number of methods for charging depreciation, but two methods are very common. These are straight line method (SLM) also called fixed instalment method and written down value (WDV — which is recognised by Income Tax department) also called diminishing balance method. Other methods include annuity method, depreciation fund method, insurance policy method, depletion method and machine hour rate method. Depreciation = (Original cost— scrap value) / estimated life (Scrap value is the sale price of the asset after it is estimated useful value ) Name of the method How charged

Fixed instalment or SLM

Details given below

WDV

Details given below

Annuity method

Calculated from annuity table and is different according to rate of interest and according to the period over which asset is to be written off Kept as fund and usedwhen asset is to be replaced. It is invested in securities and rate of interest is provided in sinking fund table. It is similar to depreciation fund method but investment is made in insurance company to which premium is paid. After fixed period the maturity amount is received. Premium is equal to annual depreciation Suitable for mines, queries etc as after extraction of the entire quantity, the mine loses value. It is calculated as per tonne by dividing the cost of mine by total quantity of mineral available.

Depreciation fund Insurance policy

Depletion method

Machine hour rate

Life of machine is fixed in hours of work and depreciation is calculated by dividing cost of machine by total no. of hours of which machine is expected to be used.

Straight Line Method or fixed instalment method Under SLM method, the depreciation is charged on the original value of the asset inclusive of its installation and transportation cost but excluding scrap value, if any. For example, an asset has been purchased for Rs.2 lac including tax and Rs.10000 has been incurred on its installation and another Rs.5000 on its transportation etc. If it is also estimated that its scrap value is Rs.35000, at the end of 4 years' commercial use, the amount of annual depreciation would be Rs.45000 ((200000+10000+500035000)/4). Written down value method or diminishing balance method Under WDV method depreciation is charged at fixed rate on the reducing balance (called written down balance i.e. original cost less depreciation). This also means that the cost of the asset reduced by the scrap value is to be written off over its expected commercial life. In the above example, the rate of depreciation of 25% will be applied on Rs.180000 during the first year, while during the 2114 year it will be on Rs.135000 (180000-45000), when the amount of depreciation would be Rs.33750 (25% of Rs.135000). Change in method of depreciation from one method to another: The method of depreciation can be changed both with prospective effect (for future) or with retrospective effect (from past date). In case of retrospective effect, it will be essential to adjust the depreciation already charged till the date of change. For that purpose, we have to calculate the amount of depreciation according to the old method, and as per proposed method. The difference in both the calculations will be adjusted by debiting or crediting the asset account and crediting and debiting the depreciation head in the profit and loss account. In the subsequent period, the depreciation will be charged according to the new method. For instance, for a machinery purchased for Rs.2 lac (commercial life 5 years and no scrap value), when depreciation method during the 15' two years is SLM and subsequently changed to WDV, the following adjustment would be needed. Amount of depreciation for 15' two years would be Rs.40000 x 2 = Rs.80000 and written down value of Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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the asset Rs.120000 (2 lac — 80000). The amount of depreciation for the 3rd year would be Rs.30000 (25% of WDV of Rs.120000). This will result in increase in profit by Rs.10000 in the 3k1 year because in the SLM, the amount of depreciation would have been Rs.40000. Effect of shift from one method to another : Whenever there is shift in method of depreciation from SLM to WDV, the amount of depreciation declines, due to which the profit increases along with increase in the written down value of the asset. This also increases the net worth of the promoters of the business. On the other hand, a shift from WDV to SLM method increases the amount of depreciation and reduces the profit, book value of the assets and net worth. Journal entries : Depreciation Dr , To fixed asset account Cr. Illustrations: 1. Machinery worth Rs.82000 is purchased and the firm spent Rs.8000 on its installation. Its effective commercial life is estimated as 10 years and scrap value Rs.10000. What will be written down value at the end of 3rd year, under straight line method?.

Answer The amount of annual depreciation would be Rs.8000 (82000+8000-10000, divided by 10). For 3 years it will be Rs.24000 (8000 x 3).The WDV would be Rs.66000 (90000-24000). 2. In the above question, if the method would have been written down value method, what would be the amount of depreciation for 3 years and WDV of the machinery?

Answer — For 151 year the amount of depreciation would be Rs.8000, for 2nd year Rs.7200 (80000-8000 x 10%) and for 3rd year Rs.6480 (72000-7200 x 10%). The total depreciation for three years would be Rs.21680. There would be saving of Rs.2320 (24000-21680) on account of change in the method of depreciation. To that extent profit would increase along with the WDV of the fixed asset. 3 A firm purchased machinery worth Rs_76000 on January 01, 2003 and its life is expected to be 8 years, with scrap value at the end Rs.12000. What is amount of depreciation.

Solution — Depreciation = (Cost-Scrap value) / no. of years of expected economic life = 76000-12000 / 8 = Rs.8000 per annum 4 A company purchased machinery worth Rs.4.00 lac on July 1st, 1999 and depreciation was provided at 10% p.a. on SLM basis with yearly closing of Dec 315t. The company changed the method of depreciation wef Jan 01, 2001 from SLM to WDV with change in depreciation rate to 15%. On July 01, 2002 the machinery was sold for Rs.2.40 lac. What is the amount of loss or profit to the company ? Solution Original value = Rs.4.00 lac De reciation u to 31.12.1999 = 20000for1/2 ear De reciation for the ear ended Dec 00 = 40000 De reciation for .e. Dec 2001 15% wdv =51000 for Rs.340000 De reciation for 6 m ended June 30, 02 = 21680 for Rs.289000 Sale rice realised = 240000 = 372680 Total of all items above Loss on sale

= 27320

Total = 400000 5. A firm purchased certain machinery on January 01, 2003 for Rs.1 lac. It added more machinery on July 01, 2003 for Rs.50000. 1/2 of the machinery purchased on January 01, 2003 was sold for Rs.25000 on Dec 31, 2004. The rate of depreciation is to be assumed 20% and the annual closing of accounts as on Dec 31. Find the value of machinery as on Dec 31, 2004. Solution : WDV of 1st machine as on Dec 31, 2004 would be Rs.30000 as under: Original value = 1,00,000 2 years' depreciation @ 20% = 40000 Hence, WDV = 60,000 Sale of IA of machinery : Rs.25000 Loss on sale of machinery = 30000-25000 = 5000 Hence WDV = 600000-30000= 30000 WDV of 2nd machinery : Original value = 50,000 — depreciation of 1-1/2 year i.e. Rs.5000 + 10000 = 15000. Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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WDV = 50000 —15000 Total WDV : 30000 + 35000

= 35000 = 65000

FOREIGN EXCHANGE ARITHMETIC DIRECT QUOTATION In a direct quotation, there is a variable unit of the home currency and fixed unit of the foreign currency. When it is quoted that 1 US = Rs.49.10, it is a direct quotation. With a view to make profit, the rule followed for quotation is buy low and sell high. For instance, if the US $ is purchased at Rs.48.90 and sold at Rs.49.10, there will be gain to the dealer. By buying low, the dealer will be required to pay lesser units of home currency and by selling high, he would receive more units of home currency. INDIRECT QUOTATION In an indirect quote, there is fixed unit of home currency and a variable unit of foreign currency. When Rs.100 = US $ 2.04 is quoted, it is a case of indirect quotation. The principle followed in indirect quotation to earn profit is to buy high and sell low. By buying high, the dealer will get more US $ per Rs.100 and by selling low he would have to part with lesser US $. Direct Rates 1 US $ = Rs.49.40

Indirect Rates Rs.100 = US $ 2.51

TWO WAY QUOTATIONS : Banks quote two rates in foreign exchange quotation out of which one is for buying and the other for selling. For instance, when the quotation is US $ 1 = Rs.48.90 - 49.10, the buying rate on the basis of principle of buy low and sell high, would be Rs.48.90 and the selling rate Rs.49.10. The buying rate is also called a 'bid rate' and the selling rate as 'offer rate'. CROSS RATES OR CHAIN RULE : When rate between two currencies is not directly available, it has to be calculated through a 3rd currency which is called cross rate. This is done by using chain rule. For example, US $ 1 = Rs.50.00 and US $ 1 = Euro 0.7500. Euro 1 = 50 / 0.75 = Rs.66.67 A bank is offered to purchase an export bill of Pound 100000 and the inter-bank rates are US $ 1 = Rs.50.00/10 and Pound 1 = US $ 1.5000/10. In this case, the bank will purchase pounds at given US $ rate of Rs.50 and deliver rupees to exporter. Bank will sell pounds in London in inter-bank market at US $ 1.50. The amount will be worked with chain rule. Pound 1 = 1.50 x 50 = Rs.75. SPOT TRANSACTIONS & FORWARD TRANSACTIONS In a contract, the actual payment in rupees and receipt in say US $ may take place on the same day, two days later or a month later. Value date : While quoting the rates, the banks take into account the time factor i.e. how much is going to be taken to get the purchased currency credited to the NOSTRO account abroad. This date is known as value date. There are three time frames for this i.e. cash value, torn value and spot value. Cash Value : When the payment is rupees and receipt in US $ takes place on the same day, it is called a cash transaction or value today. Tom value and spot value When the payment is rupees and receipt in US $ takes place after some time (due to time involved in administration of the transaction) it may be torn rate (where deal is settled on the immediately succeeding working day) and spot transaction when it is settled within 48 hours. Date of Contract Delivery Date / settlement Rate to be used Oct 12, 2015 Oct 12, 2015 Cash/ Ready Rate Oct 12, 2015 Oct 13, 2015 Tom Rate Oct 12, 2015 Oct 14, 2015 TT or Spot Rate Exchange margin — While selling or buying foreign exchange banks retain sufficient margin to cover the administrative cost, cover the exchange fluctuation and also to make some profit on the transaction. This is Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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done by adding or reducing the margin from the prevailing market rate. The exchange margins were previously prescribed by FEDAI. These were (a) 0.025% to 0.080% for TT purchase rate (b) 0.125% to 0.150% for bills purchase rate (c) 0.125% to 0.150% for TT selling rate and (d) 0.175% to 0.200% for bills selling rate. Fineness of the quotation : At the time of calculation of merchant rates, the calculation can be up to 5 decimal places which are rounded off to the nearest multiple of 0.0025. A dollar rate of 42.12492 will be rounded off as 42.1250 Problem-I: A mail transfer is received on June 15, by International Bank from its correspondent bank in New York for $ 10000 which is to be paid to saving bank customer of the bank. The correspondent bank has credited the International Bank's account for an equal amount. Calculate the exchange rate assuming that (a) inter-bank spot rate is 1$ = 42.25/42.27 (b) bank requires an exchange margin of 0.080% (c) rounding to be done in nearest rupee. Solution : (1) Rate to be applied = TT buying rate (bank has received the foreign exchange)= 42.2500(2) Less exchange margin @ 0.080% on the rate of 42.25 = 00.0338 Rate payable (1 — 2) = 42.2162 Amount payable for $ 10000 = Rs.422162 Forward rate calculation : Premium is added to the spot rate to work out the forward rate. Discounted is deducted from the spot rate. This makes the transaction beneficial to the bank. The forward premium includes interest differential. While calculating the bills buying rate, where the forward is at a premium, the bank will round off the transit and usance period to the lower month. While calculating the bills buying rate, where the forward is at a discount, the bank will round off the transit and usance period to the higher month. Forward rates are quoted though forward margins or forward differentials (which can be either premium or discount). For example Euro 1 = US $ 1.2000/10. One month forward 30-28, 2 month forward 60-55 and 3 months forward 95-90. In this case Euro is at a discount and in that case, the US $ is at a premium. In this case, the one month forward US $ can be purchased at the following rate: Spot Euro 1 = US $ 1.2010 — 0.0028 = 1.1982 In this case, the one month forward Euro can be sold at the following rate: Spot Euro 1 = US $ 1.2000 — 0.0030 = 1.1970 





Premium or discount on forward transactions The forward rate of a currency is normally either costlier or cheaper than its spot rate. The difference between the spot rate and forward rate is called forward margin or swap points. When the forward margin is at premium the forward rate will be higher/costlier than the spot rate. Similarly, if the forward margin is at a discount, the forward rate shall be lower or cheaper than the spot rate. Under a direct quotation, the premium is added to the spot rate for reaching the forward rate and discount is deducted from the spot rate to arrive at the forward rate. If US $ is quoted on a particular day as spot at US $ 1 = Rs.48.90/49.10, this would be interpreted as buying rate of Rs.48.90 and selling rate as Rs.49.10. Factors such as (a) rate of interest prevailing at home centre and the concerned foreign currency centre, (b) demand and supply position of the foreign currency, (c) speculation about spot rates and (d) exchange control regulations generally determine the premium or discount. Forward Premium Forward discount Spot rate 1 US $ = Rs.48.10 Spot rate 1 US $ = Rs.48.10 Forward 1 US $ = Rs.48.30 Forward 1 US $ = Rs.48.00 Forward Points: Forward rate comprises spot rate and forward points being interest rate differentials. For example if spot rate is Euro 1 = US$ 1.4000 and 3 months forward is 1.4300, the difference of 200 points is called forward point. The forward point is determined by (a) Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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supply and demand position of the currency (b) market expectation (c) interest rate difference between two countries. How to calculate forward differential : Euro 1 = US $ 1.40, Euro Interest rate is 6% and US$ rate is 12%. If a person borrows Euro 100 for year and by converting these into US$ invests as deposit for one year, the flow will be as under: Euro — Spot borrowing 100 + interest 6. Total outflow = 106 (1) US $ - Gets 140 US$ (for 100 Euro at 1.40) + get interest of 12 for one year = 152 (2) If US $ 152 are converted into Euro at 1.40 = 108.57. Hence gain (1) — (3) = US$ 2.57 (3) In this case the Euro 106 = US$ 152. Hence Euro 1 = 1.4340 Here the difference between the spot rate 1.40 and 1.4340 = 0.340 is the forward differential. How to calculate forward points (or the SWAP cost) : Euro 1 = US $ 1.40, Interest rate differential is 6%. For a 90 days forward calculate the forward points. Spot rate = 1.40. Int differential = 6% Forward period = 90 days (no. in a year to be taken

360 days) Forward points = (Spot rate x interest rate differential x forward period) I no. of days in the year x 100 = (1.4000 x 6 x 90) / 360 x 100 = 0.0210. How to calculate interest differential from forward points : In the above example, the calculation can be made with the help of formulae: Interest rate differential = (forward points x no. of days in the year x 100) / (Spot rate x forward period) = (0.0210 x 360 x 100) / 1.40 x 90 = 6% How to quote forward rate:The forward can be at premium or forward can be at a discount. In case of direct quotation, the premium is added in the spot rate and discount is deducted from the spot rate both in the buying or selling rate. When there is premium : Let us take an example. Euro/US$ spot rate = 1.3200/20 and forward differential one month 20-25, 2 months 40-45 and 3 months 60-65. This shows that Euro is at a premium here. A. 2 month Euro buying rate (bid rate) = 1.3200 + 0.0040 = 1.3240 and selling rate (offer rate) = 1.3220 + 0.0045 = 1.3265. Hence, the bid and offer rate would be = 1.3240/65 When there is discount : Let us take an example. Euro/US$ spot rate = 1.3200/20 and forward differential one month 25-20, 2 months 45-40 and 3 months 65-60. This shows that Euro is at a discount here. A 2 month Euro buying rate (bid rate) = 1.3200 - 0.0040 = 1.3160 and selling rate (offer rate) = 1.3220 - 0.0045 = 1.3175. Hence, the bid and offer rate would be = 1.3160175

Test your self 01 Which of the following is a direct quote: a 1 Pound sterling = US $ 1.70 b 1 US $ = Rs.48.90 c Rs.100 = US $ 2.10 d a and b 02 Which of the following is a direct quote: a 1 Pound sterling = US $ 1.70 b 1 US $ = Rs.48.90 c Rs.100 = US $ 2.10 d a and c 03 A person wants to remit Euro and there is no quotation with the bank for Euro. Bank works out the rate through Re/$ rate and $/Euro rate. This is called: a bid rate b offer rate c cross rate d floating rate 04 Forex rate in Delhi is 1 US $ = 48.80/90. In London the 1 US $ = 0.60 pound sterling. What is the buying rate for Re/Euro. a 81.51 b 81.33 c 80.67 d 80.34 (Hint-48.80 / 0.60) 05 Forex rate in Delhi is 1 US $ = 48.80/90. In London the 1 US $ = 0.60 pound sterling. What is the selling rate for Re/Euro. a 81.51 b 81.33 c 80.67 d 80.34 (Hint-48.90 / 0.60) 06 Forex rate in Delhi is 1 US $ = 48.80/90. In London the 1 Euro = US $ 1.60/65 pound sterling. What is the cross rate for Euro. a 78.08 b 77.92 c 77.65 d 77.02 Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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07 Forex rate in Delhi is 1 US $ = 48.80/90. In London the 1 Euro = US $ 1.60/65 pound sterling. An exporter wants an export bill of Euro 50000 to be purchased by the bank. E-low much amount will be given to the exporter in domestic currency. a 3851000 b 3882500 c 3904000 d 3896000 08 If the exchange of currencies (delivery) is to be completed on the same date, which of the following rates will be used: a cash or ready rate b TOM rate c Spot rate d Forward 09 if the exchange of currencies (delivery) is to be completed on the next date i.e. tomorrow, which of the following rates will be used: a cash or ready rate b TOM rate c Spot rate d Forward 10 If the exchange of currencies (delivery) is to be completed on the 2 rid working day, which of the following rates will be used: a cash or ready rate b TOM rate c Spot rate d Forward 11 If the exchange of currencies (delivery) is to be completed after the spot date, which of the following rates will be used: a cash or ready rate b TOM rate c Spot rate d Forward 12 Spot rate is 1 US $ = 48.10 and 2 months forward is available at 1 US = 48.50. a Forward is at a premium b Forward is at a discount c Spot is at a premium d Spot is at a discount 13 A foreign exchange sale purchase agreement is made on January 04, 2009 and deliveries are completed on Jan 05, 2009. Which of the following rate will be applied: a cash or ready rate b TOM rate c Spot rate d Forward 14 1 Euro = US $ 1.3280/90. One month forward = 36-33, 2 month forward = 73-71. If bank has to buy one month forward, the rate will be: a 1.3158 b 1.3212 c 1.3257 d 1.3299 (HintHere the Euro is at a discount i.e. $ at a premium. To purchase the base rate would be 1.3290 less premium 0.0033) 15 1 Euro = US $ 1.3280/90. One month forward = 36-33, 2 month forward = 73-71. If bank has to sell one month forward, the rate will be: a 1.3244 b 1.3208 c 1.3158 d 1.3136 (Hint-Here the Euro is at a discount i.e. $ at a premium. To sell the base rate would be 1.3280 less premium 0.0036) 16 1 Euro = US $ 1.3280 spot and forward rate is US $ 1.3480. The difference of 200 points in this case is called: a exchange difference b forward discount c forward premium d forward points 17 1 Euro = US $ 1.60. Interest for Euro is 4% and for US $ 6%. A person borrows Euro$ 100 one year. Assuming that there is no change in Euro and $ rate, what will be gain of the person borrowing in Euro and converting them in $ and after one year converting $ into Euro. a Euro 1 b Euro 2 c Euro 3 d inadequate information (Hint-On 100 Euro interest for one year is Euro 4 hence total outflow of Euro is 104. On the other hand, on $ 160 interest at 6% will be $ 9.60. Hence total $169.60 which at exchange rate of 1.60 is converted into Euro 106. Accordingly gain is Euro 2 i.e. 106-104) 18 In the above problem, what will be Euro-$ rate (i.e. forward rate). a 1 Euro = $ 1.6403 b 1 Euro = $ 1.6352 c 1 Euro = $ 1.6308 d 1 Euro = $ 1.6286 (Hint-169.60/104) 19 In the above problem what is the forward differential between spot and one year forward: a 0.0308 b 0.0312 c 0.0326 d 0.0343 (Hint-Forward rate - spot rate = 1.6308 - 1.6000) 20 1 Euro = US $ 1.40. Interest for Euro is 3% and for US $ 6%. A person borrows Euro$ 100 one year. Assuming that there is no change in Euro and $ rate, what will be gain of the person borrowing in Euro and converting them in $ and after one year converting $ into Euro. a Euro 1 b Euro 2 c Euro 3 d inadequate information 1

B

2

C

3

C

4

B

5

A 6 A

7

C

8

A

9

B

10

C

11 D 12 A

13

B

14

C

15

A

16

D

17 B 18 C

19 A 20 C


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MO D U L E B PRIN PRINC CIPLE IPLES S OF BO BOOK OK-K -KEE EEPI PING NG & AC ACCO COUN UNTA TANC NCY Y Syllabus Defi Definit nitio ion, n, Scope Scope and Accou Accounti nting ng Stand Standard ardss : Nature and Purpose of Accounting; Historical Perspectives; Origins of Accounting Principles; Accounting Standards in India and its Definition and Scope; Generally Accepted Accounting Principles of USA (US GAAP); Transfer Pricing; Overview of IFRS; Difference between GAAP & IFRS.

Basic Bas ic Acco Account untanc ancy y Pro Proce cedu dure ress : Concepts of Accountancy; Going Concern Entity; Double Entry System; Principle of Conservatism; Revenue Recognition and Realisation; Accrual and Cash Basis. Maintenance of Cash/Subsidiary Books and Ledger Record Keeping Basics; Account Categories; Debit and Credit Concepts; Accounting and ColumnarAccounting Mechanics; Journals; Ledgers; subsidiary books; etc.

Bank Bank Reco Reconci ncili liati ation on State Statemen mentt : Need for Bank Reconciliation; Causes of Differences; Preparation of Bank Reconciliation Statement; How to prepare a Bank Reconciliation Statement when Extracts of Cash Book and Pass Book are given; Adjusting the Cash Book Balance; Advantages of Bank Reconciliation Statement.

Tria Triall Ba Bala lanc nce, e, Rect Rectif ific icat atio ion n of Er Erro rors rs and and Adju Adjust stin ing g & Clos Closin ing g En Entr trie iess : Meaning of a Trial Balance; Features and Purpose of a Trial Balance; Types of Trial Balance and Preparation of a Trial Balance; Disagreement of a Trial Balance; Classification of Errors; Location of Errors; Rectification of Errors; Suspense Account and Rectification; rectification of Errors when Books are closed; Adjusting and Closing Entries.

Capit Capital al and Reven Revenue ue Expen Expendi ditur ture e : Expenditure; Distinction between Capital and Revenue Expenditure; Deferred Revenue Expenditure; Receipts; General Illustrations.

Bill Billss of Excha Exchang nge e : Types of Instruments of Credit; Term and Due Date of a Bill; Certain Important Terms; Accounting Entries to be Passed; Accommodation Bill etc.


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DEFINITION, DEFINITI ON, SCOPE AND ACCOU ACCOUNT NTING ING STAND STANDAR ARDS DS Accounting : An art of recording, classifying and summarising in a significant manner and in terms of money, transactions and events, that are, in part at least, of a financial character and interpreting the results thereof. Financial Statement: A set of documents documents that shows the result results s of business business operation operations s during a period, how the results were achieved and the position of assets and liabilities on a given date. It normally means the balance sheet, profit and loss account, statement of changes in the financial position (which may be either a fund flow statement or a cash flow statement), explanatory statements, notes and relative schedules forming part of financial statement. BOOK-KEEPING BOOK-KEEPING : Book Book-k -kee eepi ping ng means maintenance of a proper prop er and systematic record of books b ooks of account by a business enterprise, which means that it is a process of making original records. All transactions are recorded in the books of the business in terms of their monetary value after proper verification. It involves 4 activities i.e. (a) identifying the transactions of financial character from amongst various other transactions, (b) measuring them in terms of money, (c) recording them in the books of primary primary entry and then (d) classifying classifying them. It has nothing to do with the interpretation of such accounting and is different from accounting. ACCOUNTING : ACCOUNTING : Acco Accoun unti ting ng on the other hand has a large scope and begins where the book-keeping book-keeping ends. It is a long process which begins with summarizing summarizing the already recorded recorded transactions, transactions, interpretation interpretation of all business transactions transactions or statement and communicati communicating ng the results results to the interested parties. Accounting can be classified as (a) financial accounting, (b) cost accounting and (c) management accounting. mainta tain in reco record rds s of busi busine ness ss,T ,To o make make calc calcul ulat atio ion n of prof profit it or loss loss Basic Basic obj objec ectiv tive e of accoun accountin ting g : To main To depic depictt the financ financia iall posit position ion,, To make make the the fina financ ncia iall infor informa mati tion on avai availa labl ble e to the the mana managem gemen entt and and othe otherr inte intere rest sted ed grou groups ps of user users s of the the info inform rmat atio ion. n. VARIOU VARIOUS S KINDS KINDS OF ACCOU ACCOUNTI NTING NG Financi Financial al Account ccounting ing : This accounting system is concerned with the financial state of affairs of a business. business. The results results of the financial financial operations are called called Financial Financial Accounting. Accounting. It includes includes working out the profits or losses and net worth. Financial accounting is done more for the use of the owners, creditors, creditors, regulatory authorities, authorities, taxing authorities and investors investors etc. and is done on a post-facto post-facto basis. Further it should be accurate as it is subject to audit. estimating the cost in advance. advance. This accounting accounting helps in analyzing analyzing the Cost Cost Accou ccount ntin ing g : It involves estimating expenditure expenditure involved with a view to ascertain ascertain the cost of various various products produced by an organisation organisation for the purpose of fixation of their prices and exercising proper control over the cost being incurred. Management Accounting : Management : Management accounting is the process of identification, measurement, classification, analysis, preparation, interpretation and communication of information that assists the management management of a business business in taking decisions decisions for fulfillment fulfillment of business business objectives. objectives. It is meant for the business managers who require detailed meaningful information for decision making and is prospective in nature i.e. estimates estimates for future. BASIC ACCOUNTING ACCOUNTING CONCEPTS CONCEPTS The accounting framework on the basis of which the statements are prepared is based on certain elements elements which are popularly popularly known as concepts as concepts or or principles or rules, such as: conceptt a: Entity concep measureme ement nt concept concept b: Money measur A going-co going-concer ncern n concept concept c: conceptt d: Cost concep Conservatism Conservatism concept e: Dual Dual aspec aspectt conce concept pt f: Accounting Accounting period concept g: Accrual concept concept h: Accrual I: Real Realiisati sation on conc concep eptt J: Matchi tching ng conc oncept k:: k:: Mater ateriiali ality conc concep ept. t. Comp Compil iled ed by Sanja anjay y Kumar umar Triv Trived edy, y, Divis ivisiional onal Mana Manag ger, Govt. ovt. Lin Link Cell, ell, Nag Nagpur pur

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l: m:

Consistency concept Full Full disc discllosur osure e conc concep eptt

For the the purp purpos ose e of acco accoun unti ting ng,, a busi busine ness ss conc concer ern n is cons consid ider ered ed to be an enti entity ty,, sepa separa rate te from from the the Entity Entity conce concept pt : For prom promot oter ers, s, owne owners rs,, shar sharee-ho hold lder ers, s, inve invest stor ors s etc. etc. For For exam exampl ple, e, when when A puts puts in Rs. Rs. 1 lac lac in a busi busine ness ss,, it woul would d be cons consiidere dered d that that he has has giv given Rs. Rs. 1 lac lac to his his busi busine nes ss, whi which his his busin usines ess s woul ould show how as an amo amount unt paya payabl ble e (or (or liab liabililit ity) y) to A. In othe otherr word words s the the acco accoun unts ts are are main mainta tain ined ed for for this this enti entity ty as dist distin inct ct from from the the pers person on(s (s)) conn connec ecte ted d with with it. Alth Althou ough gh this this dist distin inct ctio ion n is easi easily ly unde unders rsta tand ndab able le in case case of comp compan any y case cases, s, but but at time times s conf confus usio ions ns get get crea create ted d in resp respec ectt of prop propri riet etar ary y or part partne ners rshi hip p conc concer erns ns.. Whate Whateve verr the the posi positi tion on,, the the reco record rdin ing g of tran transa sact ctio ions ns has has to be in term terms s of their their effec effectt on the busi busine ness ss entit entity y consi conside deri ring ng the the owner owners, s, credi creditor tors, s, suppl supplier iers, s, custo customer mers s etc. etc. as the the partie parties s transa transacti cting ng busin busines ess s with with the the entit entity. y. Accoun unti ting ng is done done for for thos those e tran transa sact ctio ions ns only only whic which h can can be expr expres esse sed d in mone moneta tary ry Money Money measur measureme ement nt concept concept : Acco terms and this makes the heterogeneous elements such as land, plant, machinery, building, stocks etc. comparable meaningfully. The aspects or the events which cannot be expressed in monetary terms cannot be accounted for, hows howsoe oeve verr impor mporta tant nt thos those e may may be. be. For For insta nstanc nce, e, the the qual qualit ity y of the the oper operat atiions ons (a liabi iabilility ty if poor poor and and an asse assett if good good)) or the the qual qualit ity y of effor fforts ts of the the staf stafff and and dedi dedica cati tion on with with whi which thes these e are are put put in (li (liabi ability lity if put put in with withou outt dedi dedica cati tion on but but an asset if put in with complete dedication) cannot be recorded in monetary terms, hence, do not find place in the accounting. This concept also becomes important in understanding the state of affairs of the business. For instance, if two business concerns have the piece of land of the same size but located at different places and purchased on the same date, it may be taken as an asset having equal value unless value is specified. But when monetary value is expr expres esse sed, d, the the fina financ ncia iall wort worth h of the the enti entiti ties es may may come come out out to be diffe differe rent nt.. e acco accoun unti ting ng is base based d on the the prem premiise that that the the enti entity ty would ould rema remaiin a goi going (con (conti tinu nue e to Going concern concept : Th : The be in busi busine ness ss)) conc concer ern n for for an indef ndefin init itel ely y long long peri period od and and not not a conc concer ern n which hich is like likely ly to be wound ound up in near near futu future re and and the the prom promot oter ers s or any any one one else else,, has has no inten ntenti tion on to liqui iquida date te the the busi busine ness ss in a fore forese seea eabl ble e futu future re.T .Thi his s is esse essent ntia iall because the assets are normally recorded and carried in the books at their cost less depreciation and not at their liquidation (realisable) value. For a concern which is to continue in business, the value is equal to the cost less depreciation, if any. Similarly the liabilities are carried at values that reflect what the business owes and not at values for which the creditors would settle for, in case of liquidation.As a matter of exception, at times the business enti entity ty refl reflec ects ts cert certai ain n sign signal als s whic which h poin pointt out out that that the the conc concer ern n is unli unlike kely ly to rema remain in a goin going g conc concer ern n or like likely ly to ceas cease e its its activ activit itie ies. s. The acco accoun untin ting g for such such busine business ss conc concer ern n has to be done takin taking g into into accou account nt the fact fact that that it is ceasi ceasing ng to be a goi going conc concer ern n and and the the asse assets ts hav have to be take taken n at real realiisabl sable e value alue.. Cost Cost conce concept pt : Assets which a business entity may acquire would generally be recorded at their cost i.e. the amount amount or the price price at which which the acqui acquisi sitio tion n has been affecte affected. d. This This cost cost become becomes s a refere reference nce point for all all subsequent accounting and a small example would clarify the matter. An asset purchased at Rs. 1 lac would be recorded in the books at Rs. 1 Rs. 1 lac lac in spite of its value increasing or decreasing for any reasons, over a time period. The The conc concep eptt of cos cost, t, brin brings gs in obje object ctiv ivit ity y in reck reckon onin ing g the the valu value e of the the asse assets ts in the the abse absenc nce e of whi which ch subj subjec ecti tivi vity ty can can infl influe uenc nce e the the acco accoun unti ting ng.. For For inst instan ance ce,, in the the abov above e exam exampl ple, e, the the value alue of the the ass asset for for A coul could d be Rs. Rs. 9000 90000 0 and and for for B (depending upon his own information, perception or consideration) it may be Rs.1.20 lac. In the preparation of acc accoun ounts by A, he is likel kely to take take into acc account ount the the asse assett at Rs. 900 90000 whi while by B, the the value alue may be take taken n at Rs. 1.20 1.20 lac. Similarly the inflationary or deflationary conditions may create accounting problems in respect of the assets held by the the busi busine ness ss for for use use over over a long ong peri period od.. Conservatism concept: Closely concept: Closely related to the cost concept is the concept of conservatism which modifies the cost concept in respect of current assets. The concept stipulates that no profits should be anticipated (as these may materiali materialise se or not and may result result in non-acceptan non-acceptance ce of accounti accounting ng figures by the users), users), but all possible possible losses must be acco accoun unte ted d for. for. The The curr curren entt asse assets ts,, as per per this this conc concep ept, t, are are gene genera ralllly y value alued d at cost cost pric price e or mark market et pri price, ce, whi whichev chever er is lower ower.. The The conc concep eptt itse itsellf may may appe appear ar to be not not in line line with with the general accountin accounting g principle principle of consiste consistency ncy on the basis basis of cost or market value, value, but the practice practice followed followed by the accountants is generally conservative even at the cost of consistency. The adoption of this principle also helps in creation of secret reserves and to that extent it may be said that the financial statements do not reflect or depict the true true positi position on of the busin business ess.. Howeve However, r, when when the conser conserva vatis tism m is applied applied with with due cauti caution, on, care care and sound sound just justif ific icat atio ions ns,, the the posi positi tion on beco become mes s more more acce accept ptab able le.. Dual aspect concept : This : This concept of accounting is the most fundamental and provides the conceptual basis for accounting mechanics. Because of this concept the resources owned by an entity should be equal to the liability, sinc since e each each tran transa sact ctio ion n has has two two aspe aspect cts. s. A simp simple le exam exampl ple e woul would d clar clarif ify y the the matt matter er.. Let Let us assu assume me that that Z cont contri ribu bute tes s Comp Compil iled ed by Sanja anjay y Kumar umar Triv Trived edy, y, Divis ivisiional onal Mana Manag ger, Govt. ovt. Lin Link Cell, ell, Nag Nagpur pur

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Rs. 50000 as cash to his business which is placed by the business entity in a bank. The accounting records of the transaction reflect this amount as owner's equity on the liability side and the deposit in the bank, as the asset. If a sum of Rs. 10000 is spent out of the above amount to purchase stocks, the amount of Rs. 50000 would still be shown as the liability and Rs. 40000 as bank deposit and Rs. 10000 as stocks on the assets' side. If a loan of Rs. 15000 is raised to acquire fixed assets worth Rs. 35000 (and a part of bank deposit is used to purchase these fixed assets), the position would be reflected as under: Owner's equity Rs. 50000 Fixed Assets Rs. 35000 Loan raised Rs. 15000 Stocks Rs. 10000 Bank deposit Rs. 20000 Total Rs.65000 Rs.65000 This also is known as the principle of double entry, in book keeping. Accounting period concept :Though a business continues indefinitely according to the going concern concept,. but its performance measurement has to be done after a reasonable time period and not after a long or uncertain period of time, which would not be desirable since it may create a position of uncertainty. Hence, the business is segmented into appropriate parts for judging the performance shown in each such identified segment. Such segment is known as an accounting period, say of a year or a quarter or an half-year. At the close of such accounting period, financial statements are prepared. Accrual concept :This concept takes into account the accounting of receipt or payment or otherwise recording a transaction (which actually might have taken place/ materilised or not), to be considered as part of and relating to the accounting period. For example, the business may raise a loan from a bank, the interest on which is payable to the bank immediately after the close of the accounting period. In the accounting period, a provision on accrual basis would be required to be made irrespective of the fact that the payment would be made after the close of accounting period. This is generally done in respect of profit and loss or trading and manufacture account. A payment or receipt account on the other hand, reflects actual receipt and payment and does not generally take into account the accrual. Realisation concept :This concept gives recognition to a particular transaction as having been complete at a particular point of time, when the benefit is actually passed on to the party to whom it is due. For instance, if Z, in order to sell goods to Y purchases raw material, the goods would not be considered to be have passed on to Y unless these are actually delivered. Matching concept : This concept stipulates that all the transactions relating to a particular aspect of the business should be taken into account to reach the correct position. For instance, if we have to work out the profit or loss position, all the revenue income items and all the revenue expenditure items must be taken into account. Adjustments, if any, are required to be made for all the expenses which have not become due or for income which has not been received but has become due or has accrued. Materialityconcept : According to this concept, while preparing the accounts, all the material details must be taken into account which may influence the decision of the investor when that comes to his notice. The insignificant items, however, can be ignored. It also needs to be taken into account that the identification of an item/information being material or non-material, is a very subjective term and needs to be used very carefully.

Consistency concept : The concept of consistency stipulates that accounting practices must remain the same for all the periods if the accounts are to reflect the true and comparable position. For example, if the depreciation has been charged in one particular year on straight-line method, for the next accounting period it should not be charged on a written-down value basis by shifting from straight line method, since it would effect the cost pattern in the manufacturing account. Full disclosure concept : The information must be disclosed fully and fairly as the person preparing it believes to be correct in terms of accepted and established norms. Adequate information must be provided for the users to get appropriate benefit from that information. It should not lead the user to draw the conclusions, which he would not accept in case he comes to know that it is not correct. Hence, a true and fair view of the accounts must be reflected by the financial statements. Many times, it becomes difficult to incorporate the full information within the body of the financial statements and in such circumstances, the information can be given in the shape of annexures or appendices. Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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INDIAN ACCOUNTING STANDARDS The Accounting Standards are issued under the authority of the Council of the ICAI. The Accounting Standards Board (ASB) was constituted by the Institute of Chartered Accountants of India in April, 1977 with a view to harmonise the diverse accounting policies and practices in India. The main function of the ASB is to formulate Accounting Standards. ASB determines broad areas in which Accounting Standards need to be formulated. While formulating the Accounting Standards, ASB gives consideration to the International Accounting Standards issued by the International Accounting Standards Committee and integrates them in the light of applicable laws, customs, usages and business environment prevailing in India. ASH also issues Guidance Notes on the Accounting Standards and gives clarifications on issues arising there from. ICAI has issued the Compendium of Accounting Standards (ASs) as on July 1, 2003, covering ASs 1-28, Accounting Standards Interpretations and General Clarifications. It is expected by ICAI that the Accountants responsible for preparation of the financial statements must prepare the same with prudence and taking into account the guidelines and suggestion of the Accounting Standards Board. No.

Title of the accounting Disclosure of accounting policies

Date from which mandator AS 1 1-4-1991 —companies.1-4-1993 - forall AS 2 (Revised) Valuation of inventories 1-4-1999 AS 3 (Revised) Cash flow statements 1-4-2001 AS 4 (Revised) Contingencies and events occurring after the balance 1-4-1995 AS 5 (Revised) Net profit or loss for the period, prior period items and 1-4-1996 changes in accounting policies AS 6 (Revised) Depreciation accounting 1-4-1995 AS 7 (Revised) Construction contracts 1-4-2003 AS 8 Accounting for research and development withdrawn wef date of applicability of as 26 AS 9 Revenue recognition as in case of as 1 above AS 10 Accounting for fixed assets as in case of as 1 above Accounting for the effects of changes in foreign AS 11 (Revised) 1-4-1995 AS 12 Accounting for government grants 1-4-1994 AS 13 Accounting for investments 1-4-1995 AS 14 Accounting for amalgamations 1-4-1995 AS 15 Accounting for retirement benefits in the financial 1-4-1995 statements of employers AS 16 Borrowing costs 1-4-2000 AS 17 Segment reporting 1-4-2001 AS 18 Related party disclosures 1-4-2001 AS 19 Leases assets teased during periods commencing on or after 1.4.2001 AS 20 Earnings per share 1-4-2001 AS 21 Consolidated financial statements 1-4-2001 AS 22 Accounting for taxes on income see note 5 AS23 Accounting for investments in associates in 1-4-2002 consolidated financial statements AS 24 Discontinuing operations 1-4-2004/ 1-4-2005 AS 25 Interim financial reporting 1-4-2002 AS 26 Intangible assets 1-4-2003 / 1-4-2004 AS 27 financial reporting of interests in joint ventures 1-4-2002 AS 28 Impairment of assets 1-4-2004/1-4-2005 Provisions, contingent liabilities and contingent AS 29 In the process of being finalised assets INTERNATIONAL ACCOUNTING STANDARDS Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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At international level, the International Accounting Standards Board (earlier International Accounting Standards Committee — IASC, till the year 2000) has been prescribing in public interest, the standards to be observed in the presentation of audited financial statements. It is also promoting their world-wide acceptance and observance. ACCOUNTING GLOSSARY Asset Any thing which enables the firm to get cash or some benefit in future, is an asset which include fixed asset, current assets. Accrued Liabilities

Also known as outstanding liabilities or expenses. For example, accrued wages, accrued rent, accrued taxes and accrued interest and so on. They typically represent obligations for certain services for which payments are yet to be made and are indirect source of financing.

Annuity

A series of receipts or payments of a fixed amount for a specified number of years. Alternatively, a pattern of cash flows that are equal in each year, i.e. equal annual cash flows. Statement of assets and liabilities at a specific date. This is part of final accounts of a firm.

Balance Sheet Bonus Shares

Dividend paid in form of equity shares and not in cash.

Book Value

The value of an asset, a liability or equity, as recorded in the accounts of a firm. The book value of an ordinary share is equal to the paid-up capital plus retained earnings i.e. net worth. The amount that the promoter invests in the business, which he can claim from the business, as it is liability of the business and asset for the promoter. It can be called net worth or owner's equity.

Capital

Current liability Capital Expenditure Collection Period

The liabilities which are payable in the near future say during the next 12 months and include liabilities such as creditors, bank overdraft, expenses payable etc. Outlay required for acquiring an asset from which benefits would be available beyond one year. The average period taken to collect receivables. It is equal to the average credit sales divided by the number of days in a year.

Credit Period

The time given to a buyer to make full payment for credit purchases beyond the expiry of which the payment becomes outstanding.

Current Assets

Assets which can be converted into cash within a year.

Current Liabilities Creditors

Liabilities that are payable within a year. The persons to whom the money is owing by the firm, when goods are purchased by the firm on credit.

Debtors

The persons who owes money to the firm to whom the goods have been sold by the firm on credit.

Drawings

It represents the amount of money or value of goods which the promoters withdraw for personal use.

Discount (Trade discount)

It is allowed when a buyer purchases goods above a certain quantity or certain amount. It is deducted from the invoice.

Discount (Cash It is allowed when payment is made before a certain date. It is not deducted from discount) invoice. Equity Capital Long-term funds provided by the owners of a firm and consists or ordinary share capital and retained earnings. Financial Analysis The use of financial data to evaluate the financial position of a firm. Fixed Assets

Long-term assets that would be in use for longer than one year.

Income Statement Purchase

It presents the net income of a firm for a period of time (say a quarter of year). Purchase means purchase of goods only (and not the capital goods i.e. fixed assets) either in cash or on credit.


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Revenue Expenditure Revenue

The expenditure which is incurred on purchase of goods or availing of services for running the business, whose benefit is available during the short period and only once. It is the result of operations and increases the inflow of assets and also the increase in owner's equity, if the net result is profit.

Sales

It stands for sale of goods only and not other assets.

SYSTEMS OF BOOK-KEEPING While recording business transactions, the organisations follow different kinds of account systems. Broadly, there are two systems of book keeping: Single entry system, where the transactions have only single effect. Double entry system, where each transaction has two aspects.  

SINGLE ENTRY BOOK-KEEPING SYSTEM Under this system, both the aspects (debit and credit) of a transactions may not be recorded nor set rules are followed. Normally under this system, the cash book and personal ledgers are kept (i.e. real and nominal accounts are not maintained). For example, when cash is paid to a creditor, it may be recorded on the credit side (payment) of the cash book and on debit side of the customer's personal account. But when rent is paid, it will be recorded on the credit side of cash book without making any entry in the rent account, as the nominal accounts are not maintained. Similarly, for depreciation no entry is made either on debit or on credit side, because depreciation is a nominal account and fixed asset is a real account, which are not maintained. This system is also called as the system of ' accounts from incomplete records'. DOUBLE ENTRY BOOK-KEEPING SYSTEM Double entry book keeping means that each debit in an account will have a matching credit to another account. A transaction is not complete till there is a credit based on a matching debit. For recording a transaction properly, the knowledge of the rules of 'Debit' and 'Credit' is essential. When to debit and when to credit depends upon the nature of a transaction. It can be observed that following types of transactions are common to almost every type of business, viz.: business enters into dealings with a number of persons or firms for sale and purchase of goods and services, for loans, borrowing etc; business possesses some property, e.g., cash, furniture, stock, etc., to carry on the business; business pays certain expenses, e.g., rent of the shop or factory, salaries, wages, printing and stationery, advertisement, commission, electricity charges, etc., and that there are certain sources, sale of goods, commission earned, interest earned etc. from which the income of the business is derived. In order to keep full record of transactions, the business has to keep: 

 

the account of each person or firm with whom it deals, which are calledpersodal accounts; the account of each property in the business, which are known asreal accounts; and the account of each head of expense or income callednominal accounts. Their detailed study follows : PERSONAL ACCOUNTS Personal accounts can be of the following form : (i) Natural persons' accounts. For example, proprietor's account, suppliers' accounts, receivers' accounts (like Mohan's A/c, Sunil's A/c). (ii) Artificial persons' and body of persons' accounts. For example, any limited company's account, bank account, insurance company's account, any firm's account, any government's account, any institution's account, any club's account. Representative personal accounts. When an account represents certain person or persons, it is called a representative personal account. In the books of account, the name of the actual parties appear, but the amounts outstanding against these accounts are added and put under one common title (since they are of the same nature). For example, if a business is not able to pay salary for the last two months to all the workers or some of them, the workers will be treated as the creditors of the business (since they have given the services but in exchange they have not been paid for). The amount due to these employees will be added and put under one common title "Salaries Outstanding Account", which becomes a personal account representing the employees. Similarly, if a business is not able to get rent of (say) 20 shops, all tenants of those shops stand as debtors and the amount due to them is added and put under common head "Rent Receivables Account", which is again a personal account representing so many tenants. Other examples of the personal accounts of this nature are:   


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Unexpired insurance account, Rent prepaid account. (c) Interest outstanding account. (d) Interest prepaid account. (e) Interest received in advance account. (a) (b)

REAL ACCOUNTS Real accounts are of the following two forms : (i) Tangible real account. Tangible real account are the accounts of such things which can be touched, felt, measured, purchased, sold, etc. Examples - land account, building account, furniture account, stock account, cash account (Please note that bank account is a personal account and not a real account because bank account is the account of some banking company which is an artificial person). (ii) In t a n g i b l e r e al a c c o u n t . They are the accounts of such things which can not be touched, felt, measured, etc. Examples are - goodwill, trade marks, patent rights etc.

NOMINAL ACCOUNTS Nominal accounts are those accounts which are in name only. They are simply used to define the nature of transactions. Examples of such accounts are, the salary of a manager in a factory, the commission given to a commission agent, the wages paid to a worker, the freight paid to carrier of goods, the interest paid to lender of money. In fact, they all get cash in lieu of services rendered by them. Cash is the real thing which exists and salary, commission, wage, carriage, interest, etc. are only away of describing the nature of head for which cash has been paid. Similarly, if a business received interest, dividend, or discount, the interest, dividend and discount accounts are nominal accounts because they describe the heads from which business has gained. Hence, all accounts representing expenses and incomes are nominal accounts. In the absence of these nominal heads, it will be very difficult for the management to know the amount paid separately on account of salary, wages, commission and on what head of expense, the money spent is unreasonable and what steps should it take to avoid it.

PRACTICE EXERCISE FOR IDENTIFICATION OF A/CS You have given the following items from the account books of a firm. Please classify them under various heads of accounts: 1 Land & Building 2 Loan account with bank 3 Vehicle Account 4 Partners' capital account 5 Expenses payable 6 Expenses paid on account of salary 7 Expenses paid in advance 8 Sales account (i.e. stock account) 9 Rent paid 10 Rent payable Personal accounts : 2, 4, 5, 7, 10, Real Accounts : 1,3, 8 Nominal accounts : 6, 9

ACCOUNTING EQUATIONS It may be understood that the assets of the business should always be equal to the liabilities (i.e. capital + outside liabilities) and the total revenue minus total expenses would result either in profit or loss and this profit or loss would become part of the capital. Capital or owner's equity = Assets — outside liabilities Asset = Capital + outside liabilities Outside liabilities = Assets-capital Income i.e. profit = Revenue — Expenses Revenue = Expenses + profits A caselet would clarify the above equations, as under: A business has cash balance of Rs.37000, furniture worth Rs.1000, goods Rs.6000 and debtors nil which are financed by creditors of Rs.4000 and promoter's capital of Rs.40000. Out of the available goods, the business sells goods valuing Rs.5000 for Rs.8000. The accounting equation will be as under: Assets = Liabilities Transaction Cash Furniture Goods Debtors = Liabilities Capital 40000 Old balance 37000 1000 6000 0 = 4000 Transaction 0 0 -5000 8000 = 0 3000* Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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New balance 37000

1000

1000

8000

= 4000 43000 "Goods have been sold on profit of s. which is credited to capital account of the promoter From the goods account, the value will be reduced to the extent of their cost price only. Examples on equation Examine the following transactions and state whether the statement is correct or incorrect: 1. Assets = Liabilities + capital, is the basic equation in a balance sheet. 2. Capital — liabilities = Assets 3. A firm has assets worth Rs.24000 and liabilities of Rs.6000. The capital would be equal to Rs.30000. 4. A balance sheet which does not have any outside liability would have the same amount of capital and assets. 5. When a firm increases its term loan from the bank, its capital is reduced to that extent. (Answer: 1 & 4 are correct and 2,3 &5 incorrect)

ACCOUNTING CONVENTIONS While recording the transactions, the following general traditions are followed: For Assets : Any increase in assets is recorded on the left-hand side (i.e. by debiting the asset account) and decrease on the right hand side (i.e. by crediting the account). Hence increase in the amount of an asset is the result of debit to the account and decline in the balance is due to credit to the account. For example, with purchase of machinery worth Rs.2 lac, the machinery account would be debited which will increase the balance to that extent. Subsequently, when the depreciation amount is credited in the account, the balance in the account would decline. For liabilities : Any increase in liabilities is recorded on the right hand side (i.e. by crediting the liability account) and the decrease on the left hand side (i.e. by debiting the account). Hence, the increase in the amount of a liability account is due to credit to the account and decrease in balance due to debit to the account. Bank loan of Rs.3 lac obtained by the firm, would be credited to the bank account and would increase the balance payable to the bank. The payment of annual instalment of the loan would be posted on the debit side and would reduce the balance in this account. Profit or loss : The profit would be credited to the capital account and loss would be debited to the capital account. This will affect the balance in the capital account, accordingly.

INCREASE AND DECREASE OF ASSETS AND LIABILITIES Type of Transaction Increase in one or more assets and decrease in another asset Decrease in asset and decrease in capital

Example Use of cash for purchase of an assets e.g. purchase of machinery for cash which increases the balance in machinery account and reduces the balance in cash account. With this only the asset side of the balance sheet undergoes change. Withdrawal of cash by the promoter of the firm which reduces the balance of cash and also reduces the capital. This changes the composition of both sides of the balance sheet

Decrease in asset and decrease in liability

Payment of dues payable to creditors of the firm which reduces the cash balance on the one hand and the balance in the creditor's account on the other hand (both sides effected)

Increase in asset and increase in liability

Purchase of an asset on credit say stocks of goods, which will increase the stocks and also the amount of creditors (both sides effected).

Increase in asset and increase in capital

Introduction of additional capital by the promoters of the business which increase balance in the capital account and also the cash account (both sides effected)

COMPARATIVE POSITION OF NOMINAL AND PERSONAL ACCOUNTS At times, for the new learners of book keeping it becomes difficult to make a distinction between a nominal account and personal account, due to use of similar kind of names. For example, the amount of interest when paid, becomes a nominal account but when it is still payable or has been received in advance, it is part of the personal account. The following example would clarify the position further. Transaction

Nominal account

Personal representative account


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Interest/Rent Payment

Interest/Rent paid

interest/rent outstanding

Interest/Rent receipt

Interest/Rent received

Salary payment

Salary paid

Salary receipt

Salary received

prepaid ORinterest/rent

Interest kent received in interest/rent outstanding for receipt

advance OR

Salary paid in advance OR salary outstanding for payment Salary received in advance ORsalary outstanding for receipt

Commission or Discount Commission/discount

Commission/discount payable OR commission

payment

paid Commission or Discount Commission/discount received receipt

outstanding for payment Commission/discount due but not received OR commission/discount received in advance

Any other income receipt

Income received

Income due but not received & outstanding OR received in advance

Any other expenditure

Expenditure incurred

Expenditure due but not incurred & outstanding OR incurred in advance

RULES FOR 'DEBIT' AND 'CREDIT' By relating the nature of account with the rules of debit or credit, no difficulty is faced in properly debiting or crediting an account. For three types of accounts - personal, real and nominal - the rule of debit and credit in each type of account has been laid down as under: Personal account Debit the receiver (on sale of goods on credit to a person, his account would be debited) Credit the giver (on purchase of furniture on credit, the seller's account is credited) Real account Debit what comes in (when cash is received, cash account is debited) Credit what goes out (when furniture is purchased for cash, the cash account is credited) Nominal account Debit all losses and expenses (when salary is paid to an employee instead of his personal account, the salary expenses account is debited) Credit all gains and income (when commission is received, the commission account is credited rather than the person, from whom the commission is received) It may be repeated that the "receiver" and "giver" in the case of a personal account ; the "coming in" and "going out" in the case of a real account ; and "expenses" and "gains" in the case of nominal account - all are to be judged from the business point of view and not from the owners' point of view.  

 





Exercise for application for rule, for debit or credit What rule will be used for debit or credit of the following transactions:

1

Receipt of cash

2

Sale of goods on credit

3 Introduction of more capital by the promoter 4 Payment of wages 5 Withdrawls of funds by the promoter 6 Purchase of goods on credit Answers: 1 Debit the cash, as real account is debited for what comes in. 2 Credit the goods account and goods have parted with — credit what goes out in case of real account 3 Credit the capital account — Credit the giver, the promoter is giver of the capital 4 Debit the wages account — Debit all expenses 5 Debit promoter's drawing account — Debit the receiver, the promoter is the receiver of the withdrawn amount , 6 Credit the seller— Credit the giver. SUMMARY OF EFFECT OF DEBIT & CREDIT TO VARIOUS ACCOUNTS Name of the account Effect on balance when Effect on balance when account account is debited is credited Asset Accounts Liability Accounts

Balance Increases Balance Decreases

Balance Decreases Balance Increases


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Capital account Expenses account Income or revenue a/c

Balance Decreases Balance increases Balance Decreases

Balance Increases Balance Decreases Balance Increases

MEANING OF DEBIT AND CREDIT BALANCE IN ACCOUNTS -Accounts such Cash in hand, current account with bank, fixed assets, sundry debtors, drawings,' other assets including stocks,losses, prepaid expenses,expenses of all kinds, have debit balance. - Amount is due to the firm i.e. it is from others such Sundry debtors. - Firm has some property or asset equal to the balance in the account like machinery.. -Firm has incurred loss or expenditure which is shown as intangible asset like accumulated loss or patent. A debit balance is either an asset such as cash, furniture OR it is loss or expense such as rent paid, salary paid etc.

- Accounts such as capital, loan obtained from banks, institutions, friends/relatives, creditors, bills payable, overdrafts, profit from business, outstanding expenses, interest on drawing, have credit balance. - Amount is due to be paid to the promoters of the firm, such as capital. - Amount is payable by the firm to outsiders such as long term liability or short term liability - Firm has earned profit which will become part of the capital. A credit balance means that it is either a liability such as promoters' capital or sundry creditor or income earned, such as interest

BOOKS OF ACCOUNTING : JOURNALS & LEDGERS A business has to maintain books which can be either the books of original entry or the principal books. While a journal is a book of prime or original entry, the ledger is a principal book. In addition to journals, a business may use certain other books such as sales book or purchase books and such other books which are called subsidiary books. In fact these subsidiary books are used in a large business where every entry is not possible to be routed through the journal process, due to large volume of transactions. Books of original entry or subsidiary books, are by themselves not complete. After preparation of ledger accounts only, the information recorded in these books becomes meaningful. The principal books or ledgers are used to record the transactions relating to that particular aspect of business and also to prepare a trial balance and final accounts.

JOURNALISING Business transactions are recorded on the basis of various documents such as cash memo, invoice or bill, receipts, pay-in-slips, cheques, debit and credit notes etc. Depending on the nature of transactions, the accounts are debited or credited by following the debit credit rules. The process of recording the transaction at first stage through a book called JOURNAL, is called journalizing. Journal reduces the possibility of errors, it provides an explanation of the transaction and it makes available, the chronological record of all transactions. Steps in Journalising : For the purpose of journalizing the following steps are followed: 1. Ascertaining whether there is increase or decrease in the asset or liability. 2. Deciding whether the amount will be written on debit side or credit side and of which account. 3. Recording the transaction accordingly. Date

Particulars

FORMAT FOR JOURNAL Ledger Folio Debit Amount

Credit Amount

For example, if a person starts business by contributing Rs.50000 as cash, this will create a balance of Rs.50000 in cash account and also similar balance in the capital account. If the business already exists, this transaction would increase the balance in these two accounts. The journal entry Would take place in the following manner. Cash account Dr. Rs.50000 To Capital account Cr. Rs.50000 if out of the available cash balance, a sum of Rs.20000 is used to purchase furniture, the cash balance will be reduced and balance in the furniture account would be created and the entry would be recorded as under: Furniture account Dr. Rs.20000 To cash account Cr Rs.20000 At times there may be complex entries involving more than one debit or credit. For example if a creditor (say B) permits discount of Rs.300 for a cash payment made against his dues of Rs.6000, the entry would be recorded as Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

32 | P a g e

under: B's account To cash account To discount account

Dr Cr Cr

Nature of Transaction Commencement of business with cash Purchase of assets or goods out of cash Purchase of assets or goods on credit Sale of assets or goods for cash

Rs.6000 Rs.5700 Rs. 300 IMPORTANT JOURNAL ENTRIES Account to be debited Account to be credited Cash account Capital account or any other Asset account or Cash account purchase Asset account or Seller'saccount or purchase Creditor's Cash account Asset or sale account

Sale of assets or goods on credit

Buyer's or Debtor's account

Asset or sale account

For any type of expenses which are due within the accounting

Expenses account (respective head)

Cash account for cash payment. In case of on credit, account of the supplier of the service

For any type of income due within Cash account for cash entry or the accounting period account of the buyer of services for on-credit entry For outstanding expenses For pre-paid expenses

Expenses account (respective Pre-paid expenses account

For outstanding or accrued income Account of the person from whom such income is to be received For income received in advance Income account (respective head of account)

Income Account (respective head)

Outstanding expenses a/c Expenses account (respective Income account (respective head) Income

received advance

in

Depreciation on fixed assets

Depreciation account

Asset account on which depreciation charged

For goods taken for personal use

Drawing account

Respective asset account

made by cheque to creditors Payment received by way of cheque from debtors

Creditor's account

Bank account

Bank account

Debtor's account

For transfer of opening stock

Trading account

Opening stock account

Payment

For transfer of Closing stock Closing stock account Trading account More examples of 'how to journalize' are available in the Final Accounts section of this book, which may be referred by the readers for better understanding.

LEDGER A ledger is a set of accounts in which various accounts are opened. It is a book or register which contains permanent record of all transactions in a summarized manner. This is also called the Principal Book. Ledgers are used for preparing the final accounts with the help of trial balances. The ledger contains all the three types of accounts namely personal accounts, real accounts and nominal accounts. A ledger has two sides i.e. debit side and credit side. Each side contains information such as date, particulars, folio and amount. For preparing a ledger, following steps are essential: 1. Passing the journal entries relating to business transactions; 2. Posting of opening balance, if any and then posting the journal entries according to their debit or credit aspect, in the respective account. 3. Working out the closing balance, after posting of all entries, which is called balancing of ledger accounts Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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FORMAT OF LEDGER Debit Transactions : Date Particulars

Folio

Credit Transactions Amount Date

Particulars

Folio

Amount

This process has been shown in the following exercise. EXERCISE FOR JOURNALISING & LEDGER PREPARATION Please journalise the following entries and post them for preparation of ledger account: 1Purchased goods on credit from Ramesh Chander Rs.15000 2 Sold goods to Harish on Credit for Rs.10000 3 Purchased machinery for cash Rs.25000 Rs.12000 4 Sold goods for cash to Manish for Solution: Journal entries: 1 Goods account Dr. 15000 To Ramesh Chander Cr 15000 2 Harish D r. 10 000 To Goods account Cr 10000 3 Machinery account Dr 25000 To cash account Cr 25000 4 Cash account Dr. 12000 To goods account Cr 12000 It may be assumed that the cash account has opening balance of Rs.50000 and goods account Rs.25000. For the above entries, the following ledger accounts can be prepared: Dr. Cash account Date Particulars Folio Amount Date Particulars Folio Amount To balance b/d 50000 By 25000 machinery account 37000 To sales 12000 By balance account c/d Total 62000 Total 62000 r. Cr Goods account Date Particulars Folio Amount Date Particulars Folio Amount 25000 10000 To opening By Harish balance b/d account 15000 To Ramesh By cash 12000 Chander account

Total Dr. Date

Particulars Folio To balance c/d Total

Dr. Date

15000

Total

18000 40000 Cr Folio

Particulars Folio To goods accoun

Harish account Amount Date Particulars Folio 10000 By balance c/d

Total

10000

Dr . ate

By balance c/d 40000 Total Ramesh Chancier account Amount Date Particulars 15000 By goods account

Machinery I Particulars I Folio To cash accoun t

I Amount 25000

[Date

Amount 15000 15000 Cr

Amount 10000

Total

10000

account

Cr I Amount 25000

Particulars I Folio balance By c/d


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Total

25000

Total

25000

For more on ledger accounts, the readers may refer the Section 'Final Accounts'. On the above pattern, the readers may prepare the ledger account after journalising for the following case:. Practical case: Journalise and prepare ledger accounts for the following transactions. April 01, 2004 Opening balance in cash account Rs.40000, in bank account Rs.50000, goods account Rs.4 lac, Machinery account Rs.3 lac, creditors Rs.10000 and bank loan account Rs.20000, capital Rs.7.60 lac July 12 Sold Goods to Ramesh for Rs.18000 and trade discount allowed 10% July 12 Purchased goods from Harish for cash Rs.28000 Aug 16 Rent of office paid for Rs.2500 in cash Sept 28 Cash withdrawn from bank for personal use Rs.7500 Sept 30 Charge depreciation @ 5% on machinery Answer : The closing balance in these accounts would be as under: Cash account: 17000 Bank account 42500 Goods account 410000 Machinery 285000 Creditors: 10000 Bank /oan:20000 Ramesh account : 16200 Discount : 1800 Rent account : 2500 Capital Rs.740700 Depreciation: 15000

CASH BOOK Cash book may be defined as the record of transactions concerning cash receipts and payments. Transactions involving cash, cheques, bank drafts, postal orders, notes etc. which are considered like cash, are routed through cash book. This is designed in such a way that this serves the purpose of journal transactions as well as ledger. This is divided into two parts - the left-hand side is used to record cash receipt (by following the rule applicable for real account - debit what comes in) and the right-hand side is used for recording payments (real account-credit what goes out). By giving the cash book the shape of a ledger account the fundamental rule, that every entry must first be recorded in the book of prime entry and then posted to ledger, has been discarded. Cash book may be a single column cash book, double column cash book (i.e. cash book with discount column) and three column cash book (i.e. with discount and bank column). Cash book can also be maintained as a petty cash book. Format for all kinds of cash books are given as under:

Practical case for Cash book entries Enter the following in the cash book with discount and bank columns. 1 Cash book is showing opening balance of Rs.14800 and bank balance of Rs.11000 2 Firm paid Rs.660 for purchase of goods and Rs.600 for purchase of stationery. 3 A cheque has been received from Mr. Ramesh for Rs.1100 and another cheque has been received from Mr. Suresh for Rs.900. He has been allowed discount of Rs.100. 4 Cash has been received from Mr. Munish Rs.3000 which along with cash from cash in hand for Rs.1000 deposited in the bank. 5 Staff paid salary by way of cheque Rs.3000 6 Promoter withdrew Rs.4000 from bank for personal use.

Important points to be remembered: 1 When a cheque is received as payment, it is debited to bank column. But if it is not deposited on the same day, on date of receipt, it will be debited to cash column and on date of actual deposit, cash account would be credited and bank account debited. 2 Cash column always carry debit balance but bank column can have debit balance (in case of current account) and credit balance, when there is overdraft position. 3 If a cheque is received and then endorsed in favour of anyone else, it will be posted as debit and as credit entry, to keep the record of the entry.

PETTY CASH BOOK Petty cash book is maintained for day to day small expenses such as payment on account of postage, stationery, conveyance, travelling, cartage etc. For incurring these expenses, an advance is allowed to the petty cashier called 'lmprest'. Out of this, imprest advance, expenditure is incurred and record is maintained as per following format. The total of each column of expenses is directly posted to the ledger, by treating the Petty cash book as a journal. Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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SUBSIDIARY BOOKS A business organisation has to maintain various subsidiary books which include the following. By maintaining separate books in this manner, the accounting work can be divided amongst various persons, there is saving of time, proper information is available to the business organisation and it facilitates the checking work. Purchase book : It is used to record credit purchases (and not cash purchases) of goods or material or stores, which are to be used for production or trading purposes. Purchase of fixed assets such machinery etc. is not be routed through this book. This book will show debit balance. The amount of purchases, in case of discount, is arrived at, after deducting the trade discount. Purchase returns book or returns outwards: This book is required to record the return of goods and material, which was purchased earlier and has been returned for various reasons. This book shows, credit balance. Sales book : In this book, all credit sales (and not cash sales) of goods and material relating to the manufacturing or trading activity is recorded. Sale of machinery or other fixed assets is not to be recorded in this book. This books shows credit balance. Entries in the sale book are made on the same pattern as in case of purchase book (i.e. after accounting for the trade discount). Sales returns book or returns inward : When goods sold by a firm are returned to it by its customers, such entries are recorded in this book. It shows debit balance. Bills receivable book : In this book, receipt of promissory notes or hundies, in favour of the firm are recorded. It shows debit balance. Bills payable book : It his book, record of issue of promissory notes by the firm or hundies drawn on the firm and accepted for payment are recorded. It would show credit balance. Cash Book : In this book, a business firm records receipts and payments of cash including those with the bank. Details about this have been given above. Journal proper : Any entry which could not be recorded in any of the above books is recorded in this book. Posting Posting is the process of entering in the ledger, the information given in the journals (both special and general). Posting from the journal or cash book is done periodically, may be, weekly or fortnightly or monthly as per the requirement of the business or volume of transactions. Where the amount is to be debited, it would be written on the left hand side after entering the date and particulars (beginning with the word 'To' from the journal. The amount would be written on the right hand side for the credit entries, beginning the particulars with the word 'by'. However, for the sake of simplification at certain places, we have used a different format for ledger posting which is similar to the saving bank ledger being used in banks.

RELATIONSHIP BETWEEN JOURNAL AND LEDGER The journal and the ledger are the most important books of the double entry system of accounting and are indispensable for a systematic system. Following are the points of comparison between these two types of books : The journal is the book of first entry (book of original entry) ; the ledger is the book of second entry (subsidiary book). The journal is the book for chronological record ; the ledger is the book for analytical record. The journal, as a book of source entry, ordinarily has greater weight as legal evidence than the ledger. The unit of classification of data within the ledger is the accounts and the unit of classification of data within the journal is the transaction. 

  

TRIAL BALANCE When all the accounts of a business concern are balanced off, they are put in a statement, debit balances on one side and credit balances on the other side. The statement so prepared is called a Trial Balance. The total of the debit side of trial balance must be equal to that of its credit side. This is based on the principle that in double entry system, for every debit there must be a credit. The preparation of a trial balance is an essential part of the process because if the total of both the sides is the same, it is proved that books are at least arithmetically correct. It must be remembered that equalizing the two sides of a trial balance is not the sole and conclusive proof of the complete correctness of books. It is prepared as on a particular date when balances of all ledgers are transferred to the trial balance. Objectives: To ascertain arithmetic accuracy of ledger accounts; To help in preparation of final accounts;  


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

To help in locating errors FORMAT FOR TRIAL BALANCING

Ledger accounts

-

Debit Balance

Name of the account It generally contains the balances of cash, bank, opening stock, fixed assets, discount allowed, debtors, bills receivables, all kinds of expenses paid, drawings, purchase, sales returns, bad debts, depreciation etc.

Credit Balance It generally contains the balance in capital, creditors, all kinds income accounts, discounts received, bills payable, bank overdrafts, purchase returns, sales, reserves etc.

Methods : There are four methods for preparing a trial balance: Totals method : Total of each side of debit or credit of an account is used. Balance method : Where onlythe balance in the account is placed Totals & Balance method : Where both these are placed simultaneously Totals excluding closed a/cs : Where total is placed for running accounts. Limitations of Trial balance: Agreement of trial balance is not a proof of accuracy. lnspite of agreement of balance certain errors may still be there such as transaction not entered in the journal, wrong amount has been written on both sides of the journal, wrong amount has been posted in the ledger, an entry has been omitted from posting in the ledger, altogether or an entry has been posted twice in the ledger.

DISPOSAL OF TRIAL BALANCE ITEMS The balances appearing in the trial balance must go either to the income statement i.e. trading & manufacturing account OR profit and loss account OR to the balance sheet. In order to decide the place where a particular balance should be taken, following rules may be utilised: (i) Debit side of trial balance - Balance appearing on the debit side of the trial balance may either be a loss or expense or an asset. If the debit balance of the account represents such an item that it is likely to benefit over a period of time in future, it is an asset and is taken to the asset side for the balance sheet. Land, building, machinery, tools, bills receivable, debtors balances, bank and cash balance, and balance of stock-intrade, are examples of assets. Besides, there are some more items like preliminary expenses, development expenditure, heavy amount spent on advertisement etc. which are shown in the balance sheet as assets (as the benefit from such activities normally continues to come to the business for more than one year). If the nature of the account is such that the benefit out of it has already expired then it is an expense, and is taken to the debit side of trading account or profit and loss account as the case may be. Cost of goods sold, wages, cartage, freight, commission rent, salary, insurance, stationery, postage and carriage are examples of expenses. (ii) Credit side of trial balance - When the balance appearing on the credit side of the trial balance of the account is payable to a party, may be immediately or in future, it is a liability and is taken to the balance sheet. Examples are : capital of partners/promoters, share capital, loans obtained, creditors, outstanding expenses. If the balance is not payable, it is a gain or revenue and is taken to the income statement. Examples are - sale of goods or services, income from interest, rent, dividend etc. Nature of account Personal account

Disposal If debit balance, asset in the balance sheet and If credit balance, liability in the balance sheet

Real account Nominal account

Asset in the balance sheet, as it will have only debit balance If debit balance it will be expense either in the trading & manufacturing account or profit & loss account. And If balance is credit, it will be income in any of these account.

DIFFERENT TYPES OF ERRORS EXAMPLES OF DIFFERENT TYPES OF ERRORS: Error Error of principle

Explanation and example When a real or personal account transaction is treated as a nominal account item. Machinery installation charges debited to wages, as installation was done by the factory labourers


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Error of omission

When there is complete omission to record a transaction e.g. cash sales of Rs.5000 not recorded. Neither cash account debited nor sales account credited. OR Though cash has been debited but sales not posted to the sales book.

Error of commission

-Where posting has taken place but there is some mistake. The example for each case above, are given as under: -Sales of Rs.5670 recorded as Rs.6570 -Sales of Rs.5670 recorded in the purchase book -Balance of Rs.34000 in the sales book taken as Rs.43000 in the trial balance -In the debtors' ledger, debited an amount of Rs.5400 as Rs.4500 to the debit of buyer of goods on credit -The amount of Rs.2000 on account of goods sold to one Mr.Ramesh on credited, credited to his account instead of debiting his account -While balancing the account of Mr. Ramesh the balancing was done for an amount of Rs.8500 instead of Rs.9500

Compensating error

Cash received from Ramesh Rs.2500 debited to cash account for Rs.2000 and cash paid to Mr. Dinesh Rs.2500 recorded in the cash book as Rs.3000.

How the errors affect Trial Balance Error at the time of posting to ledger Error in carry forward

The ledger account would reflect wrong balance due to which the trial balance will not tally - Due to wrong carry forward, the balance in the ledger account would be different from what it should be. Hence trial balalice will not tally

Error inbalancing the account

If a ledger is not balanced correctly, it will show a different balance due to which trial balance will not tally

Error in casting trial balance

If debit or credit balance from a ledger account is not taken correctly to the trial balance both sides will not agree

Error inpreparing schedules

When there is any mistake in preparing creditors' or debtors' schedules, the total will be carried to trial balance incorrectly, due to which the trial balance will not tally.

Errors not disclosed by trial balance that donot effect the trial balance: (a) Omission of any entry altogether from the subsidiary books (b) Making an entry of a transaction in a wrong subsidiary book (c) Posting of an amount in a wrong account on correct side (d) Some error of principle (e) Some compensating error Errors disclosed by trial balance that effect the trial balance: The trial balance, in general, discloses any error which affects one side of the account. Some of the examples are as follows : (a) Error in casting the book of subsidiary records. (b) Error in carrying forward the total of one page to another page. (c) Error in posting from the books of original record to ledger. (d) Error in balancing the account. (e) Error in preparation of debtors' schedule and creditors' schedule. (f) Forgetting to carry forward a balance of an account to the trial balance. (g) Posting an amount on the wrong side of the account (h) Omitting to post an amount from a subsidiary book ( i) Omitting to post the totals of subsidiary books into the ledger ( j ) Omission in writing the cash book balance in the trial balance (k) Writing a balance in the wrong column of the trial balance (I) Totalling the trial balance wrongly RECTIFICATION OF ERRORS During the process of accounting, it is possible that certain errors creep in un-intentionally which may result in nonCompiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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tally of the trial balances or problem in reflection of a fair account of profit, assets and liabilities. In order to see that the final compilation of accounts is error free, these errors are to be located and then removed. Detection of errors and correction: After identification of various errors, one can proceed with rectification of these errors, depending upon the nature of the error having taken place and when it is detected. If an error has been detected immediately after the transaction, it can be corrected immediately by neatly deleting the entry without any over-writing. But if the error is detected at a later stage, it will have to be seen whether it is onesided or two-sided. One sided error effect one account and can be corrected without any journal entry. For instance, if the purchase book is undercast by Rs.15000, the error affects only the purchase book and can be rectified by debiting Rs.15000 to the purchase account by making an entry reading 'to under-casting of purchase book Rs.150000'. Similarly if commission of Rs.300 paid to Mr. X has not been posted to commission account, the entry can be made reading as 'by omission of posting of commission Rs.300'. Illustrations: a Sales book has been undercast by Rs.30000 (The sales book should be credited by Rs.30000 as it was credited short earlier by that amount by writing the narration by undercasting of the sale book Rs.30000) b Depreciation of Rs.1000 on machinery has been debited twice to the depreciation account. (The depreciation account would be credited as "by double posting of depreciation ... Rs.1000) Two side error affect two or more account and can be corrected by a journal entry. For instance, the sale of machinery for cash for Rs.2 lac has been posted in the sales book. The error would be rectified by debiting the sale account and crediting the machinery account. The following illustration would clarify the matter: Wrong entry that has been made : Cash Dr To sales Cr Correct entry that should have been: Cash Dr To machinery Cr Entry for rectification : Sales a/c Dr To machinery Cr Illustration: a Minor repairs to machinery debited to machinery account Repairs account Dr To machinery account Cr b

Rent paid to landlord debited to landlord's personal account Rent account Dr To landlord's account Cr

Suspense account : It is also possible that the business has not been able to locate the difference in the totals of trial balance and he wants to prepare the final accounts. In such circumstances, the difference is adjusted in the suspense account. It may be noted that this is only a temporary measure and this will make the trial balance appear to have tallied. This is used to rectify all one-sided errors and those not affecting the trial balance cannot be rectified by opening suspense account. For example, if the purchase book has been cast short by Rs.2000, the trial balance debit side would also be Rs.2000 short. To rectify this, the following entry would be passed: Purchase account Dr.2000 To suspense account Cr.2000.

Different kinds of errors and method to rectify those errors Where omission has taken place : Entry will be passed by way of journal and then accounted for. Where error of principle has occurred : Head of account wrongly debited or credited would be credited or debited accordingly and the head which was to be actually debited or credited would be debited or credited. For example if the sale of machinery has been credited to goods account, the entry will be rectified by debiting the goods account and crediting the machinery account. In case of compensating error : In case of such errors which may be posting on the wrong side of the same account or to a wrong account. If it is on the wrong side of the same account, it will be rectified by debiting or crediting the account to the credit or debit of suspense account (for example rent paid account instead of being debited has been credited error would be rectified by debiting the rent account and crediting suspense account.. Where it affects two accounts, rectification should be done by debiting and crediting the respective account (e.g. if goods sold to Ramesh have been routed through purchase account, Ramesh account Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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would be debited and purchase account would be credited). In case of over-casting or under-casting : Where an account is over-cast or under-cast, the rectification would be done through suspense account. If purchase is overcast, suspense account would be debited and purchase account would be credited. For under-cast purchase account, purchase account would be debited and suspenSe account would be credited. Steps to be taken for rectification of errors The following steps are required to be taken: A identify the error and understand the nature of the error (for instance, the wages of labourer of the production unit of a factory, charged to wages account although his services have been used for construction of factory building — error of principle) B identify the heads of accounts which have been affected due to this error (building account should have been debited instead of the wages account in the above case); C entry to be passed or action to be taken to rectify the error (debit the building account and credit the wages account, which will not only reflect the true position of profits but also record the actual position of building account in the above case)

BANK RECONCILIATION Reconciliation is a statement with the help of which a party reconciles its cash book with the bank pass book based on certain causes of different between these two books. Why need for reconciliation? The need for reconciliation of cash book with the pass book or vice versa arises due to the fact that two different Organisations i.e. the firm and the bank, maintain, in their books, accounts of each other, which are operated by them at different times. Certain transactions take place first at the end of the firm while other transactions take place first with the bank. For example, when a cheque is received by the firm from some of its debtors, it deposits the same in the bank. While depositing the cheque with the bank, the firm debits bank's account where as bank credits firm's account only on its collection. Till the time, the cheque is credited by the bank, the balance in the firm's cash book and balance in the bank account would be different. This will have to be tallied with each other through the process of reconciliation. Similarly there are certain debits or credits which bank enters first in its books, for instance, the monthly interest or collection charges, which party responds after receipt of statement of account. Hence there is always some disagreement in the cash book (where the firm records transactions with bank) and in the pass book (where the bank records transactions with the firm). Reasons for the difference: 1 cheques issued by the party but bank has not paid any of those cheques to the debit of party's account, which may be on account of non-presentation by the payee or dishonour of the cheque. 2 cheques or cash or other instruments deposited with the bank which bank has not credited so far either because of non-collection so far or dishonour or credit to some other account 3 Error in recording the transaction in the cash book 4 Credits allowed by the bank to party's account say for interest or dividend payment 5 Deposit of money by some customer of the party directly into the bank 6 interest and other charges debited by the bank 7 debit by the bank on the basis of standing instruction already given 8 other direct payments made by the bank such as subscriptions, insurance payment etc. 9 dishonour of bills or cheques discounted/purchased by the bank. 10 Bills under collection collected by the bank and credited to the account Nature of balances - The credit balance in the pass book means that party has a credit balance, like in case of current account, with the bank and debit balance means that the party owes money to the bank e.g. cash credit or overdraft account. In the books of the party (i.e. cash book), this position is opposite i.e. a credit balance in cash book means that party owes money to the bank and a debit balance in the cash books means that the bank is debtor and owes money to the firm. We can also say that a debit balance in cash book and a credit balance in the pass book represents current account with the bank and credit balance in cash book and debit balance in pass book represents overdraft or cash credit. Nature of transactions - Various transactions between a firm and bank can be categorized into 4 segments: A Debit of bank account in cash book by the party : For instance deposit of the cheques/other instruments by the firm with the bank for collection, when the party debits the bank in its books but bank credits the firm's account after collection. Similarly if the cash is deposited with the bank, the bank might have credited the amount to some other account. B Credit of bank account in cash book by the party : For instance issue of cheque by the party when the firm credits the bank account but the bank debits party's account, after presentation of the cheque for payment Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

40 | P a g e

by the payee (e.g. debit of interest, incidental or other charges or some wrong debit relating to another account). C Debit of firm's account in pass book by the bank : For example, certain direct debits by the bank on the basis of agreement/arrangement at the time of opening of the account or subsequent authority in the form of standing instructions. Here the bank debits first and party credits the bank after receipt of statement of account or even some wrong credit relating to some other account. D Credit of firm's account in pass book by the bank : For example, direct credits by the bank on account of deposit of money by the customers of the firm directly into the bank or receipt of dividend etc. directly in the bank, to be credited to firm's account. It needs to be noted that all transactions between the firm and the bank can be covered under the 4 above categories to make the task of reconciliation easy. For example, the cheques deposited by the firm and dishonoured on sending for collection by the bank are part of Item A above. Similarly a cheque issued by the firm and dishonoured on presentation by the bank, can be classified under B. A cheque issued by the individual partner of a firm and through mistake debited to firm's account can be categorized as direct debit under C. Cash deposited by the partner in his personal account and wrongly credited in the firm's account can become part of category D. Category

MASTER RECONCILIATION TABLE I II III

Balance as per/ Nature of transaction Cheques, cash or other instrument deposited by the party but not credited by the bank as yet in party's account due to nonrealisation or dishonour or credit to some other account**

Cash book Debit

IV

(-)

Cash book Cr (means overdraft) (+)

Pass book Cr Pass book (means Dr (means current a/c) overdraft) (-) (+)

Cheques issued by the party bank has not paid it so far due to nonpresentation by the payee or dishonour of the cheque**

(+)

(-)

(-)

(+)

Amount directly debited by the bank for charges, interest, subscription insurance, compliance of some standing instructions etc or debit of amount relating to some other account***

(-)

(+)

(+)

(-)

Amount directly credited by Bank on account of refund, receipt of dividend, realisation of some bills sent for collection etc. or credit of some account relating to another account***

(+)

(-)

(-)

(+)

(the sign (+) means add the amount of the transaction, in the opening balance of the related book and the sign(-) means subtract from the opening balance)

Important Note : ** These are the transactions where the party makes the entry first and bank responds subsequently. *** These are the transactions where the bank makes the entry first and customer responds the entry subsequently.

Procedure for reconciliation: Whenever the task of reconciliation is taken in hand, the following procedure can be adopted: a Make comparison of two books i.e. cash book and pass book to locate the transactions which appear in Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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b

c d e

one of books and not the other Take balance of one book as starting point, say balance as per cash book or pass book. This balance can be credit balance or debit balance. This gives rise to four situations (debit or credit balance as per cash book or as per pass book), as given in the table below. Adjust the balance with starting point by adding the amount of transaction or deducting the amount of transaction depending upon the nature of the transaction as indicated in the table below. The opposite balance at the end of these adjustment will be answer (if balance is credit in cash book it will be debit in pass book and vice versa) Make use of the following table to place various items to find out the balance

Illustration on reconciliation 1 The debit balance as per firm's cash book is Rs.5877. Cheques worth Rs.3000 were issued but out of that cheques worth Rs.987 only have been presented. Further cheques worth Rs.1419 deposited in the bank have not been collected so far and bank has debited Rs.225 on account of incidental charges. What will be balance as per pass book. Solution — In this problem, we are given situation at Category l above i.e. debit balance with the bank (or a current account). Hence it can be solved in the following manner: Balance as per cash book Rs.5877 Dr A Cheques issued, not presented + 2013 Rs.7890 Dr (at the time of issue, bank would have been credited due to which debit balance in cash book with the bank would have been reduced. By adding the amount, the balance as per cash book and bank pass book will tally). B Cheques deposited, not credited 1419 Rs.6471 Dr (at the time of deposit of the cheque, the bank would have been debited due to which debit balance in cash book with the bank, would have been increased. By deducting the amount, the balance as per cash book and bank pass book will tally). Rs.6246 Dr C Charges debited by the bank- 225 (with this debit at the bank, the credit balance in pass book would have declined. In order to tally the same with cash book its amount will also have to be reduced in the cash book). Balance as per pass book Rs.6246 Cr (The balance in the pass book will be just opposite of the balance in cash book) 2 In the above question, if the balance would have been overdraft in cash book (i.e. credit balance as per cash book), the reconciliation would have been as under: Solution — This case falls in Category-II above, where the credit balance as per pass book has been given. It can be placed in the following manner: Balance given as per cash book: Rs.5877 Cr A Cheque deposited, not credited + 1419 Rs. 7296Cr B Cheque issued, not presented - 2013 Rs.5283Cr C Amount debited by the bank + 225 Rs.5508 Cr Balance as per cash book Rs.5508 Dr 3 The bank pass book had shown credit balance of Rs.10500 and on scrutiny it has been found that the cheque amounting to Rs.750 deposited with the bank has not been collected as yet and cheque issued for Rs.1200 has not been presented so far. Bank debited Rs.35on account of a subscription and credited Rs.800 on account of cash deposited by a customer of the firm directly into the bank and Rs.130 on account of dividend collection. What will be the balance as per cash book? Solution — This case falls in Category - III above, where the credit balance as per pass book (current account) has been given. It can be placed in the following manner: Balance given as per pass book: Rs. 10500 Cr A Cheque deposited, not credited +750 Rs. 11250 Cr B Cheque issued, not presented -1200 Rs. 10050 Cr C Amount debited by the bank + 35 Rs. 10085 Cr D Amount credited in bank - 800 & 130 Rs. 9155 Cr Balance as per cash book Rs. 9155 Dr 4 In the above question, if the balance would have been overdraft (i.e. debit in the pass book), the reconciliation would have been done in the following manner: Solution — This case falls in Category - IV above, where the debit balance (overdraft) as per pass book has been given. It can be placed in the following manner: Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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Balance given as per pass book: Rs.10500 Dr A Cheque deposited not credited - 750 Rs. 9750 Dr B Cheque issued not presented + 1200 Rs.10950 Dr C Amount debited by the bank - 35 Rs.10915 Dr D Amount credited by bank + 800 & 130 Rs. 11845 Dr Balance as per cash book Rs.11845 Cr 5 On Dec 31, 2003, the bank column of the cash book of a firm had shown a debit balance of Rs.4610 and on scrutiny it is found that: a cheques amounting to Rs.6300 which were issued to creditors and entered in the cash book before 31 st December, were not presented for payment until that date. b cheques amounting to Rs.2500 had been recorded in the cash book as having been deposited into the bank on Dec 31, but were entered in the bank statement on January 01, 2004 c cheque of Rs.730 paid into the bank was dishonoured before Dec 31, but no intimation was sent by the bank to the firm. d A dividend of Rs.380 paid direct to the bank had not been recorded in the cash book. e Bank interest and charges amounting to Rs.420 had been charged in the bank statement, but not entered in the cash book f No entry has been made in the cash book for a trade subscription of Rs.100 made by the bank, to the debit of firm's account. g A cheque issued for Rs.10 has been entered in the cash book twice. h A cheque of Rs.270 drawn by proprietor had been charged to firm's account erroneously. What will be balance as per pass book? Solution — This case falls in Category-I above, where the debit balance (i.e. current account) as per cash book has been given. It can be placed in the following manner: Balance given as per cash book: Rs.4610 Dr A Cheque deposited not credited- 2500, 730 Rs. 1380 Dr B Cheque issued, but presented+ 6300,10* Rs. 7690 Dr C Amount debited by the bank- 420,100,270 Rs.6900 Dr D Amount credited in the bank + 380 Rs. 7280 Dr Balance as per pass book Rs.7280 Cr *This amount to non-presentation of cheque issued once but recorded twice, as the cheque will never presented 2nd time once it is paid.. 6 The balance in the cash book of a firm is Rs.4200 credit and on receipt of the bank statement, the following items are not matching. What will be the balance as per pass book? a cheque deposited and dishonoured Rs.1452 b an amount of Rs.212 relating to some other account has been credited in firm's account by the bank c bank returned a cheque through mistake which the firm had issued for Rs.2042 for discharging its liability towards a creditor. Solution — This case falls in Category- II above, where the overdraft balance as per cash book has been given. It can be placed in the following manner: Balance given as per cash book: Rs.4200 Cr A Cheque deposited, not credited + 1452 Rs. 5652 Cr B Cheque issued, not presented - 2042 Rs. 3610 Cr C Amount credited by bank - 212 Rs. 3398 Cr Balance as per pass book Rs.3398 Dr

CAPITAL EXPENDITURE AND REVENUE EXPENDITURE Capital expenditure is the kind of expenditure which provides benefit over a long period. The expenses that can be taken as capital expenditure include the expenses connected with purchase/creation of a fixed assets, which result in acquisition of a permanent asset, OR incurred for improvement of a fixed asset, that help in acquiring the rights to carry on business or acquire a tangible asset. (For example, the expenses relating to purchase of land, building, plant and machinery, equipment, acquiring licences or patents etc.) There are certain expenses which appear to be revenue expenses but actually these are capital expenditure and include expense incurred in Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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connection with repairs of old building for the first time, wages paid to a factory worker to produce tools or to fix a machinery, legal charges in connection with the purchase of land or building, interest paid on capital for acquiring an asset till it is ready for use, pre-operative and preliminary expenses etc. Revenue expenditure is the expenditure, the benefit of which will not be available for a period of more than one year. In other words, the expenses incurred in regular course of a business i.e. day to day running of the business, upkeep of fixed assets, purchase of stocks and goods, depreciation etc. Distinction between capital andrevenue expenditure Capital expenditure Revenue expenditure Incurred for acquisition of fixed asset Incurred for conduct of business Increase the earning capacity of the business Incurred for maintenance of fixed asset Benefit available for more than one year

Benefit available during the year only

Shown in the balance sheet

Shown in trading/profit & loss account

Deferred revenue expenditure is unusually heavy expenditure of revenue nature, the benefit of which would be available to the business for a period of more than one year but no tangible asset has been created. For example, the expenses incurred in connection with marketing of a product including advertising, voluntary retirement scheme. These assets are written off over a period of times (say 3-5 years).

CAPITAL RECEIPT AND REVENUE RECEIPT Capital receipts are the amounts that are received in the form of capital introduced by the promoters, term loan received from banks and the sale proceeds from fixed assets. Such receipts do not affect the profit or loss. These either increase the liability or reduce the assets. Revenue receipt on the other hand is the amount received in normal and regular course of business such as by sale of goods and service. These affect the profit and loss position. There are shown on the credit side of the profit and loss account. Implications of classification of capital expenditure as revenue expenditure or vice versa:When such classification takes place, this is called error of principle and it results in understatement of assets and also of profits or overstatement of losses, when a capital expenditure is categorized as revenue expenditure. On the other hand, where a revenue expenditure is treated as capital expenditure, it may become cause of overstatement of capital, assets and profits and understatement of losses, if any.

ADJUSTMENT ENTRIES After completion of the process of trial balancing or drawing final accounts, at times, subsequently, it may come to the notice of the management that certain expenses which were to be incurred have not been paid and certain expenses have been paid in advance. Similarly there may be some income which was due to be received, but has not been received so far and some income which was still not due has been received. As a result, the actual position of profit or loss may not be reflected unless these are adjusted in the final accounts. The summary of some of the adjustments is given as under:

Nature of transactions

SUMMARY OF ADJUSTMENT ENTRIES FOR VARIOUS KINDS OF TRANSACTIONS Account to be debited Account to be credited (along with name of financial (alongwith name of financial statement) statement)

Outstanding/unpaid expenses (like rent, wages, depreciation etc)

Respective expenses a/c (profit and loss account)

Expenses outstanding (balance sheet)

Prepaid expenses Prepaid expenses (balance sheet) Respective expenses a/c (profit (such as insurance, commission etc) and loss account) Income accrued/due not received (Any kind Accrued income (balance sheet) Respective income account (profit of income) and loss account) income received in advance (any kind of Respective income a/c (profit and Income received in advance income) loss account) (balance sheet) Provision against doubtful debts

Expenses provisions — doubtful Provision for doubtful debts debts (profit and loss accounts) (balance sheet)


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More provisions for doubtful debts (for the additional amount only)

Expenses provisions — doubtful Provision for doubtful debts debts (profit and loss accounts) (balance sheet)

Writing-off of bad debts (when no provision is already available)

Expenses : write-off bad debts (profit and loss account)

Respective party's account (balance sheet)

Write-off of bad debts (when provision is already held) Write-off of bad debts (when adequate provision is not held)

Provision for doubtful debts (balance sheet) Provision for doubtful debts (balance sheet) Expenses writeoff of bad debts for shortfall amount ( P & L Account)

Respective party's account (balance sheet) Respective party's account (balance sheet)

Excess provision on doubtful debts

Provision for doubtful Expenses provisionsdebts (balance sheet) doubtful debts (profit and loss account)

Interest on capital not paid

Expenses: Interest on capital (Profit and loss account)

Capital account /balance sheet)

Interest on drawings

Capital or drawings account (balance sheet)

Income-interest on drawings (profit and loss account)

HOW VARIOUS ADJUSTMENTS AFFECT DIFFERENT ACCOUNTS Transaction Closing

Trading account Credit Side

Depreciation

Expenses outstanding Prepaid expenses

Profitiloss account

Debit side

Addition to related exp. Addition to related a/c debit side exp. a/c debit side

Balance Sheet Asset Side

Reduction from Fixed To be shown as liability

Reductionfrom related Reductionfrom related To be shown as an asset exp. a/c exp. a/c

Accrued income

Addition to related To be shown as an asset income account

Income received in advance

Reductionfrom related To be shown as liability income a/c

Interest on capital

Int account to be Add to amount of capital debited

Interest on drawing

intt account to be Reduction from capital credited

Provision for bad debts

Debit to P&L account

Reduction from amount of debtors

Discount on debtors

Debit to discount account to P&L a/c

Reduction from amount of debtors

Commission payable to Manager* *If commission is to be calculated before charging such commission = Net profit before such commission x rate / 100 If commission is to be calculated after charging of such commission = Net profit before such commission x rate / 100+rate.

SUMMARY OF ADJUSTMENTS WITH JOURNAL ENTRIES Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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Nature of transaction Closing stocks Outstanding expenses Prepaid expenses Accrued or outstanding income Income received in advance Depreciation Interest on capital Interest on drawings Interest on loan Bad debts Making provision for bad debt

Account to be debited Closing stocks Concerned Expenses account Prepaid/unexpired expenses account Accrued income Concerned income account Depreciation account Interest on capital a/c Capital account Interest account Bad debt provision account Profit and loss account

Provision for discount on debtors Provision for discount on creditors Accidental loss, say fire

Discount allowed a/c Provision for discount on creditors Loss by Fire

Commission payable on profits

Expenditure Commission on profits Commission payable on profits

Drawings of goods by the promoter Goods received but bill not received Claim admitted by insurance company but money not received Returns inwards Returns outward

Drawings account Purchase account

Purchase account Suppliers account

Insurance company

Trading account

Returns inward Creditor concerned

Debtor's account Returns outward account

Account to be credited Trading account Outstanding expenses a/c Concerned expenses account Concerned income account Income received in advance Asset account Capital account Interest on drawings a/c Interest outstanding a/c To debtor's account To provision for bad and doubtful debt account To provision on debtor's account To profit and loss account To trading account for stock of goods or other asset's account which has BEEN damaged

PRACTICAL CASES FOR PREPARATION OF LEDGER ACCOUNTS AND FINAL ACCOUNTS In the following cases, the readers will be able to understand as to: How the individual transactions are journalized? How they are to be posted in the ledger accounts? How ledger accounts are to be balanced? How the outstanding balances in individual accounts are to be treated in trial balance? How the trial balances are to be disposed off? How the trading& manufacturing account and profit & loss account and balance sheet is to be prepared?    

 

Case -1 The readers may journalise and do the ledger posting on the pattern of case No.2. The trial balance, profit & loss account and balance sheet based on this case are given hereunder: A partnership firm undertakes following transactions in their business during a particular period. 1. Introduces capital of Rs. 54,500/- and purchases goods worth Rs. 4,000/-, Furniture Rs. 500/- and balance keeps as cash in hand. 2. An amount of Rs. 10,000/- out of the cash balance is used for construction of building. 3. Goods worth Rs. 3,000/- are purchased and payment is made out of balance in the Bank account 4. Goods worth Rs. 25,000/- are purchased from Ashok on credit. 5. A sum of Rs. 200/- is paid as carriage in cash. 6. Goods worth Rs. 2,600/- are sold for cash. 7. Goods worth Rs. 4,600/- are sold to Mahender on. credit. 8. A sum of Rs. 1,200/- is paid as freight in cash. 9. A sum of Rs. 8,000/- is deposited with the Bank. 10. Salary to an employee for Rs. 600/- is paid in cash. 11. Rs. 2,000/- are withdrawn from the Bank. 12. A sum of Rs. 3,000/- is brought in cash as capital. Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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13. An interest of Rs. 2,000/- is paid on the capital.

Cash

Trial Balances 37600 Capital

59500

Debtors

4600

25000

Stocks Furniture Building Bank Account Carriage inward Carriage outward Salary Interest Total

24900 500 10000 3000 200 1200 500 2000 84500

To gross loss To salary To carriage-outward To Intt on capital Total

Total

Trading & Manufacturing account 321500 By sales 200 Closing stocks Gross loss 32200 Total

To purchases To carriage inward Total

Creditors

84500

7100 24900 200 32200

Profit and loss account 200 500 1200 2000 By net loss 3900 Total

3900 3900

Capital

BALANCE SHEET 59500 Stocks

24900

Less loss

3900

Building

10000

Net amount of Capital Creditors

55600 25000

Bank Cash Debtors Furniture Total

3000 37600 4600 500 80600

Total

80600

BILLS OF EXCHANGE Bill of exchange: As per Sec 5, BoE is an instrument in writing, containing an unconditional order, signed by maker, directing a certain person to pay a certain sum of money only or to the order of a certain person or to the bearer of the instrument In a Bill of Exchange, the person ordering for payment is called Drawer and the person directed to pay is called Drawee. The beneficiary is called payee. Demand Bill: A bill Of exchange payable on demand or at sight or on presentment is called Demand Bill. Usance Bill: A bill of exchange payable after some time is called Usance Bill. Documentary bill: which is accompanied by document of title to goods like railway receipt, bill of lading, etc. Clean bill: is one which is not accompanied by any document of title to goods. Inland bill: which is drawn or made in India and is either payable in India or on a person resident in India. Foreign bill: is one which is not an Inland Bill i.e. it is drawn outside India or if drawn in India is payable outside India on a person resident outside India. Foreign Bills are issued in more than one part. Accomodation Bill: means a bill issued without consideration and dealing in such bills is called kite flying. Interest Rate: If in a bill of exchange or promissory note, interest rate is not mentioned, it will be 18% p.a. Calculation of Due Date Usance bills should be presented for acceptance within a reasonable time. o


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The reasonable time is given under section 105 of NI Act. As per section 105, reasonable time means as per usage and practice of the area. The drawee is allowed 48 hours excluding public holiday to accept the bill. If a Usance bill is payable after date, its due date is calculated from date of the bill and if it is payable after sight, its due date is calculated from the date of acceptance. As per section 22 of the N l Act, three days of grace are allowed in the case of Usance bills and Usance promissory notes. But if the due date is fixed on a particular day or days of grace are specifically prohibited, the same need not be given. Days of grace are allowed only in case of Usance Promissory Note or Usance Billof Exchange and not in the case of demand bill or demand promissory note. As per Section 25 of the Act, if a bill or promissory note matures for payment on public holiday under NI Act, 1881 (Sunday or any day declared to be public holiday by the Central Government) it falls due on immediate next preceding business day. Since 26th Jan, 15th August and 2nd October are national holidays and if the bill falls due on any of these dates, then preceding business day will be the due date. If the period of usance is given in days, then the day from which due date is to be calculated is excluded. Due consideration should be given to leap year in which February has 29 days. • If the period of usance is given in months and there is no corresponding day in the month in which bill matures, last day of the month is taken into account. For example, a bill dated 31 stDec payable two months after date will fall due on 31 st Feb without grace period. But since February has only 28 days, 28th February will be considered and after 3 days of grace, 3td March will be due date. Dishonour of a Bill, Noting and Protesting and Liability of Parties  If the drawee does not accept the bill within stipulated period it is treated as dishonoured by non acceptance.  If a bill after being accepted is not paid on due date, it is said to have been dishonoured due to non payment.  When a promissory note or bill of exchange has been dishonoured by non-acceptance or nonpayment, it may be got noted or protested with Notary Public.  Provisions relating to noting and protesting applicable only in case of dishonor of promissory note or bill of exchange whether payable on demand or usance bill or usance promissory note.  Noting and protest is optional in case of Inland bills.  If a bill is dishonoured by non acceptance, then the drawer will be primarily liable on the bill.  If a bill is dishonoured due to non-payment (it means it was accepted), acceptor (drawee) will be primarily liable on the bill and drawer's liability will be secondary.  In the process of business, an organisation has to draw bills on the buyers of the products or have to accept the bills drawn by the creditors from whom the material has been purchased. Under the bills there are various parties such as the drawer (who makes the bill), the drawee (who is liable on the payment of the bill) and the payee (who is entitled to receive the payment). A drawee becomes !labile for payemtn only on acceptance of the bill. The bills may be demand bills (payable on demand) or usance bills (payable after some time after acceptance). The bills may be classified as trade bills (where actual sale/purchase transaction takes place) or accommodation bills (where actual sale or purchase transaction does not take place).  Following journal entries are required to be passed in the case of bills. In the books of the drawer A When goods are sold: Drawee account Dr To Sales account Cr B. When bills are made and accepted by the drawee: Bills receivables account Dr To drawee's account Cr C When payment is received: Cash account Dr To bills receivables Cr. When bill is discounted with the bank: D Bank account Dr Discount account Dr To bills receivable Cr 6d When bill is endorsed to 3 parties: E Endorsee's account Dr To bills receivable Cr

o

o o

o

o

o

o

o


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F If discount is allowed to buyer and he retires at a discount:

Bank account Dr Rebate account Dr To bills receivable Cr When bill is dishonoured for non payment & it was not discounted G Drawee account Dr To bills receivable account Cr. When bill is dishonoured and it was discounted with bank H Drawee account Dr To bank account Cr I When bill is dishonoured and it has been endorsed Drawee account Dr To endorsee's account Cr. Goods sent for collection: J Bills for collection account Dr To bills receivables Cr. K On realization: Bank account Dr To bills for collection Cr Inthe books ofthe drawee A When goods are purchased:: Purchase account Dr To Drawer account Cr B. When bills are accepted by the drawee: Drawer account Dr To bills payable account Cr C When payment is made: Bills payable account Dr To cash account Cr. D When payment is made on rebate: Bills payable account Dr To bank account Cr To rebate account Cr E When bill is dishonoured whether discounted by the drawer with his bank or endorsed or not:

Bills payable account To drawees account

Dr Cr

In the books of endorsee A When bill is received: Bills receivable account Dr To drawer's account Cr B When bill is paid or cash received Cash account Dr To bills receivable account Cr C When bill is dishonoured: Drawees account Dr To bills receivable account Cr

Illustration: X has drawn two 60 days bills of exchange on Y for Rs.3000 and for Rs.4000. Y accepts these bills for payment and X discounts the bill of Rs.3000 with its bank at a discount rate of 5% and endorses the 2114 bill of Rs.4000 in favour of Z. Y meets the payment liability of bill of Rs.3000 but bill of Rs.4000 is returned unpaid and dishonouned. Pass journal entries in the books of X and Y. Book of X At the time of acceptance: Bills receivable account Dr Rs.3000 Bills receivable account Dr Rs.4000 To Y's account Cr Rs.7000 At the time of discount: Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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Bank account Dr Rs.2850 Discount account Dr. Rs. 150 To bills receivable Cr Rs.3000 At the time of endorsement: Z's account Dr. Rs.4000 To bills receivable Cr Rs.4000 On dishonour of bill: Y's account Dr. Rs.4000 To Z's account Cr Rs.4000 Books of Y : On acceptance X's account Dr. Rs.7000 To bills payable Cr Rs.7000 On payment and dishonour: Bills payable Dr Rs.7000 To cash account Cr Rs.3000 (for payment) To X's account Cr Rs.7000 (for dishonour)

Average Due date When a person owes a no. of debts due on different dates and instead of settling these accounts on their respective due dates, he may propose to settle all the debts on a particular date. An average due date is an equated date on which a single payment may be made in lieu of several payments due for payment on different dates so that none of the parties is put to loss of interest. Let us assume that 5 payments are due on different dates say on Oct 08 for Rs.5000, for Nov 11 Rs.3000, for Nov 12 Rs.2250, for Dec 10 Rs.6000 and for Dec 18 for Rs.400. The average due date would be worked out as under: Due date Amount Product No. ofdays from starting from duedate 0 5000 0 34 3000 102000 44 2250 99000 6000 63 378000 4000 71 284000 20250 863000 No. of days = 863000 / 20250 = 43 days appx. Hence the average due date would be Oct 08 + 43 days = Nov 20th.


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MODULE C FINAL ACCOUNTS Syllabus Balance Sheet Equation : Balance Sheet Equation; Computation of Balance Sheet Equation.

Preparation of Final Accounts : Preparation of Trading A/C; Profit and Loss A/C; Profit & Loss Appropriation Account; Balance Sheets

Ratio Analysis: Meaning of Accounting Ratios; Classification of Ratios; Uses of Accounting Ratios; Limitations of Accounting Ratios; Calculation and interpretation of various Ratios; Different Users and their Use of Ratios.

Final Accounts of Banking Companies : Definition and Functions of a Bank; Requirements of Banking Companies as to Accounts and Audit; Significant Features of Accounting Systems of Banks; Principal Books of Accounts; Preparation and Presentation of Financial Statements of Banks; CMA Format; Accounting Treatment of Specific Items; Preparation of Profit and Loss Account; Comments on Profit and Loss Account; Important Items of Balance Sheet; Disclosure Requirements of Banks, Additional Disclosures prescribed by RBI; Disclosures required under BASEL norms. Company Accounts I & II

Definition and Types of Companies : Distinction between Partnership and Limited Liability Company; Classes of Share Capital; Issue of Shares; General Illustrations Non-voting Shares; Form of Balance Sheet; Legal Requirements forAssets; Legal Requirements for Liabilities; Legal Requirements for Profit & Loss A/c; Preparation of Final Accounts

Accounting in a Computerized Environment : Meaning, Features of and Terms used in Computerized Accounting; Difference between Computerized and Manual Accounting; Advantages and Disadvantages of Computerized Accounting; Functions performed by Computerized Accounting Softwares available in the Market; Computerization — Scope and Experiences in Banking; The Core Banking Components; Information Security; Internet and World Wide Web — Influences on Banking.


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BALANCE SHEET 1. A Balance Sheet /Financial Statement is organized collection of information or data prepared as per certain acceptable accounting norms & procedures. Financial statement mainly consists of Balance sheet (the position of assets and liabilities as on particular date), Profit and loss account (the income and expenditure statement for a Particular period), Funds flow statement & cash Flow statement. 2. Balance Sheet /Financial Statements : 3 stage process - Classification of assets and liabilities ( as per RBI guidelines ),Calculation of financial ratios Interpretation of ratios. 3. Audited Balance sheet : For credit limit ( FB + NFB ) upto Rs. 20 lacs no ABS, only unaudited BS but over Rs.20 lacs ABS is must but for Agril. Related loans no ABS upto Rs. 100 lacs & only above Rs. 100 lacs ABS in Agril. Credit ( FB + NFB ) is required. For company & other statutory body ABS always required irrespective of Quantum of limit and similar in the case in business enterprises where turn over is Rs. 100 lacs or more- ABS. Gross receipt of Profession exceeds Rs.25 lacs- ABS required. As per IT rules Form 3CB & Form 3CD also required where ever it is applicable. In case of sticky accounts S-3, a special audit report is required. Penal Interest of 2% on the outstanding liability shall be collected if ABS is not submitted before 31st oct. every year ( within 07 month from closing year ) or within a fortnight from the date of Audit of financial accounts of business unit which ever is earlier. Terms used inFinancial statement analysis Net Sales Gross Sales minus returns, discounts, excise duty. 1 Raw Materials consumed Opening Stock of raw materials plus purchases of raw materials less 2 Dosing stock of raw material . 3 Cost of Production Raw materials consumed, stores and spares consumed, power and fuel, direct labour, repairs and maintenance, other manufacturing expenses and depredation plus opening stock of stock in process minus dosing stock of stock in process. 4 Cost of Sales Cost of production (3) plus opening stock of finished goods minus dosing stock of finished goods. 5 Gross Profit Net Sales - Cost of Sales (Item 1 minus Item 1) 6

Operating Profit

Gross Profit (5) minus interest, selling general and administrative expenses.

7

Net Profit before tax

Operating profit plus other incomes minus other expenses

8

Net Profit after tax

Profit before taxation minus provision for taxes.

9

Retained Profit

Net profit minus dividend paid / dedared

10

Cash Profit

Profit before charging Depreciation (Net Profit + Depredation)

11 _12 13 14

Cash-Loss Assets Fixed Assets . Current Assets

15

Intangible Assets

Loss before charging Depredation (Net Loss — Depredation) Things owned by a business Not converted into cash in normal course of business, These are acquired to use them in the production of other goods and services. Assets which are meant to be converted into cash or consumed in normal course of business say within 1 year. These are also called as gross working capital. Expenditure on invisible assets, likely to yield benefit to the company in future e.g. goodwill, patent, trade marks, designs.

16 17

Fictitious Assets Miscellaneous Assets Non current assets

18

Tangible Assets

Total asset side of balance sheet minus intangible assets.

19

Quick Assets

20

Liabilities Owners Equity (Net Worth)

Assets which can be converted to cash quickly. Cash, bank balances, marketable investments, bills receivables and sundry debtors considered goal. (Current Assets minus-Inventories & Prepaid Expenses) Things owed by the business. Paid up share capital, reserves and surplus, preference shares with more than 12 years maturity.

21

.

Which have notional value only e.g. losses, preliminary expenses. or Which can't be classified as current, fixed or intangible e.g. inter Corporate investment


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22

Long term liabilities or Debt Outsiders funds, payable in more than 12 months. Term loan (exduding instalment payable within 12 months) plus debentures maturing within more than one year, preference shares redeemable within 12years, deposits payable beyond one year.

23

Current Liabilities

Liabilities which are payable in less than one year e.g. sundry creditors, unsecured loans, advances from customers, interest accrued but not due, dividends payable, statutory liabilities, provisions, Bank borrowings for working capital etc

24

Total Outside Liabilities

Total of the liability side of balance sheet minus net worth

25

Tangible Net Worth

26 27

Gross Working Capital Net Working Capital

Total tangible assets minus total outside liabilities. Owner's funds minus Intangible & Fictitious assets ; Paid up capital plus reserves minus intangible assets Total of Current Assets Current assets minus total current liabilities. Long Term Sources minus long term uses

28 29

Working Capital gap Long term sources

30 31

Short Term Sources Long Term Uses

32 33

Short Term Uses Contingent Liabilities

Current Assets minus current liabilities other than Bank Borrowings. Paid up capital, reserves and surplus (excluding specific reserves) i.e. Net Worth and long term liabilities. Current Liabilities Fixed Assets, Miscellaneous or Non. current assets, Intangible and Fictitious Assets (assets other than current assets) Current Assets Likely liability which may or may not arise on the happening or non happening of an event

(i) As per RBI guidelines, installments of term loans due within 12 months are not to be treated as current liability for calculation of Net Working Capital and Working Capital Gap. (ii) Overdue instalments and Interest on term loan is treated as current liability. (iii) Sundry Debtors/ Book debts older than 6 months are treated as Non current assets. (iv) Loans from friends and relations are normally treated as Long term liability but if these are secured by Demand Promissory Note i.e. payable on demand then the same should be treated as Current Liability. (v)Reserves except which are in the nature of provisions like Depreciation Reserve are part of net worth.

Format of Balance sheet Liabilities Previous Year Capital Add/deduct net profit/loss – Interest on capital -Drawings Reserves -Capital reserves -Other reserves Sinking funds Loans andborrowings: Loans from financial institutions Loans and borrowings from banks Fixed deposits Others Current liabilities: Sundry creditors for goods supplied Sundry creditors (others) Advances/progress payments from customers/deposits from dealers or selling agents -Interest and other charges accrued but not

Current Year



   

  


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due for payment -Bills payable Statutory liabilities Other current liabilities Provisions: -Taxation (less advance tax ax paid) -Provident fund -Contingencies -Others Assets Fixed assets: -Goodwill -Land Building Leaseholds -Railway sidings -Plant and Machinery -Furniture and fittings Development of property -Patents, trademarks and designs Livestock -Vehicles (cost less depreciation) Advances and deposits on capital a/c Investments: -Shares and debentures or bonds Immovable properties Capital of partnership firms Others Loans Current assets : Stocks of raw material, stock in process, finished goods Suppliers and sundries -Receivables -Instalments of deferred receivables due within one year -Debts considered bad or doubtful -Amount due from proprietors, partners associate concerns -Bills of exchange Advances -Suppliers of raw material/stores/ spares/consumables -Advance payment of taxes (in excess of tax payable)  

 



 

 

-Pre-paid expenses -Others Cash and banks balances: -Fixed deposits -Current/saving account -Cash on hand Misc. expenditures to the extent not written off Accumulated losses


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Liabilities Net worth/Equity Funds brought in by the promoters as their investment in business or generated by and retained in business Share capital/partner's capital/ Paid up equity share capital,/owners funds Reserves & Surplus e.g. General Reserve, CapitalReserve, Revaluation Reserve and Other Reserves),Retained Earnings Undistributed Profits,Preference share capital (not redeemable within 12 years)

Assets Fixed Assets :Assets which are purchased for long term and not meant to be sold but used for production. Land & Building,Plant & Machinery Vehicles,Furniture & Fixture Office equipment,Capital Work in Progress These are represented as under: Original value (Gross Bock) Less depreciation Net Block or book value or written down Value Method

Long term liabilities: Liabilities which are not due for payment within 12 months from the date of the Balance Sheet) Term loans from financial institutions; Term loan from banks; Debentures/Bonds; Deferred payment liability;Preference Shares redeemable within 12 years; Fixed Deposits maturing after one year; Provision for gratuity; Unsecured Loans

Non Current Assets: Assets which cannot be classified as current or fixed or intangible assets Book Debts or Sundry Debtors more than 6 months old/ Disputed Debts, Investment of long term nature in shares, govt. securities, associates or sister firms or companies. Long term security deposits. Unquoted investments; Investments in subsidiaries or sister concerns; Loans & Advances to directors, officers; Accounts receivables in respect of sale of plant & machinery; Advances to concerns in which directors are interested; Deposits with customs port trust etc Intangible & fictitious Assets Which do not have physical existence. For example: Goodwill, Patents, Trade Mark, Copy Right, Preliminary or pre operative expenses, other formation expenses, debit balance of P & L account, accumulated losses, bad debts, Capital issue expenses e.g. discount on issue of share & debentures, commission on underwriting of shares & debentures; Deferred revenue expenditure e.g. Advertisement Current Assets : Cash in hand, Bank balance including fixed ,deposits with banks. Stocks/inventory (such as raw material, stock in process, finished goods, consumable stores and spares),Book debts/Sundry debtors/Bills Receivable/ Accounts receivable/ debtors, Government and other trustee securities (other than for long term purposes e.g. sinking funds, gratuity funds etc.),Readily Marketable/quoted govt. or other securities meant for sale,Interest accrued and receivables,Advance payment of taxes, pre-paid expenses,Advance payments for merchandise; unexpired insurance

Short term for CurrentyLiabilities Liabilities which are due for payment within 12 months from the date of the balance sheet and are to be repaid out of proceeds of current assets,Short term borrowings from banks (C/C, 0/D or B/P, B/D limits) for working capital.,Sundry/trade creditors/creditors/ Account payable,Bills Payable / trade acceptances Fixed Deposits from public payable within one year,Short duration loans or deposits Provision for taxation, Proposed Dividends, Provision for bonus, unclaimed dividend. Deposits from dealers, selling agents etc. Advance payments from customers, outstanding expenses and Accruals e.g. wages & salaries, rent; expenses payable


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TOTAL TOTAL Contingent Liabilities: which may or may not arise. For example: aairns against the company not acknowledged as debts; Arrears of fixed cumulative dividends; Bills discounted but not matured and shown in the Balance Sheet; Letter of Credit; Guarantees given by the company on behalf of its subsidiary company, employees etc.

BALANCE SHEET EQUATIONS The assets of the business should always be equal to the liabilities (i.e. capital + outside liabilities) and the total revenue minus total expenses would result either in profit or loss and this profit or loss would become part of the capital. Capital or owner's equity = Assets — outside liabilities Asset = Capital + outside liabilities Outside liabilities = Assets-capital Income i.e. profit = Revenue — Expenses Revenue = Expenses + profits The following case-let would clarify the above equations, as under: A business has cash balance of Rs.37000, furniture worth Rs.1000, goods Rs.6000 and debtors nil which are financed by creditors of Rs,4000 and promoter's capital of Rs.40000. Out of the available goods, the business sells goods valuing Rs.5000 for Rs.8000. The accounting equation will be as under: Assets Liabilities Transaction Cash Furniture Goods Debtors Total = Liabilities Capital Old balance Transaction

37000 0

1000 0

6000 -5000

0 8000

44000 3000

= .--

4000 0

40000 3000*

New balance

37000

1000

1000

8000

47000

=

4000

43000

"Goods have been sold on profit of Rs.3000 which is credited to capital account of the promoter. From the goods account, the value will be reduced to the extent of their cost price only.

Examples on equation Examine the following transactions and state whether the statement is correct or incorrect: 1. Assets = Liabilities + capital, is the basic equation in a balance sheet. 2 Capital — liabilities = Assets 3 A firm has assets worth Rs.24000 and liabilities of Rs.6000. The capital would be equal to Rs.30000. 4 A balance sheet which does not have any outside liability would have the same amount of capital and assets. 5 When a firmincreases its termloan fromthe bank, its capital isreduced tothatextent. (Answer : 1 & 4 are correct and 2,3 &5 incorrect)

Equation of Trading Account The purpose of preparing the Trading Account is to calculate the Gross Profit orGross Loss of a concern during a particular period. The following equations are useful for determination of Gross Profit or Gross/ Loss : Gross Profit = Sales - Cost of Sales Sales = Cost of Sales + Gross Profit (or) Sales = Stock in the beginning + Purchases + Direct Expenses - Stock at the end + Gross Profit

summary Assets are equal to the liabilities. The liabilities consist of claims of owners and claims of outsiders. The claims of the owners mean the paid up capital plus balance of reserves and surplus. The total of the capital and the reserves and surplus is called the net worth. For the business, net worth is the liability of the business towards the owners. Net worth is the claim of the owners against the assets of the business. As per Business Entity Concept, the business and its owners are considered as two separate and distinct entities. 8. All the transactions of the business are recorded in the books of the business from the perspective of the business, not its owners. 1. 2. 3. 4. 5. 6. 7.

Computation of Balance Sheet Equation If there is any change in the assets or the liabilities, the owners' claim or the capital will change correspondingly. If assets increase and liabilities do not, the capital will increase 2. If there is a reduction in the amount of assets or an increase in the amount of liabilities it will 1.


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result in reduction in the amount of capital. Examples: 1. A firm commences business with Rs 20,000 as capital. It means capital is Rs 20,000 and assets in the form of cash are also Rs 20,000. 2.

If the firm purchase furniture of Rs 1900, cash will decline by Rs 1000, and a new asset in he form of furniture will emerge. The total of the assets will be Rs 19000 + Rs 1000 = Rs 20,000. Thus there is no change in Balance Sheet Equation as Capital (Rs 20,000) = Assets ( Rs 19000 + Rs 1000 i.e. Rs 20000)

Assuming that firm's capital is Rs 20,000 and asset is in the form of cash of Rs 20,000. The firm purchases goods for Rs 3,000 on credit. The cash will remain same, goods will increase by Rs 3,000 and total assets will be Rs23,000. On liability side, Rs 3,000 is payable to the supplier of goods i.e. creditor. Therefore, the balance sheet after this transaction will be Capital - Rs 20,000 + Creditor — Rs 3000 = Cash Rs 20,000 + Goods Rs 3000 1. Thus, the total assets will be equal to the total of liabilities and the capital. 2. The left hand side shows the total liabilities of the firm or shows the sources from which the funds have been obtained. 3. The other side of the balance sheet, i.e. asset side, shows how the funds have been invested by the business. 3.

RATIO ANALYSIS How ratios are expressed : Ratios can be expressed in the following different ways: In %age terms such as net profit to sale ratio (being 23%),In proportion such as current ratio (being 2:1),In no. of times such as stock turn over ratio (being no of times )

Classification of ratios Theratios can be classified as (a)Traditionalratios (b)Functional ratios: 1. Traditional classification —It is based on the source of information fromfinancial statements. It can be (a) Profit and loss account ratios (where information is taken from P & L account (b) Balance sheet ratios (where the source of information is balance sheet and (c) Composite ratios or inter-statement ratios (where the information is taken from profit and loss account and the balance sheet. 2. Functional classification : When ratios are classified on the basis of how they serve as a tool for analysis. This can be: (a) Profitability ratios (b) Activityratiosorturnoverratios (c) Solvencyorleverage ratiosor financial ratios. These can be short termsolvency ratioslike current ratio or long term solvencyratios like debt equity ratio.

Types of ratios As a banker, one would normally dependuponfour types ofratios namely: Liquidityratios, a: Leverageorsolvencyratios, b: Profitabilityratios, c: Activityratios. d:

LIQUIDITY RATIOS The ratio which indicate the liquidity of the firmare current ratio,acidtestratio orquickratio and net working capital. 1. Current Ratio The current ratio isthe relationshipbetween the current assetsand current liabilities.The ratio helps inknowing about the liquiditypositionofa firmduringthe courseof a year.Itcan be worked out asunder: Current assets / Current liabilities 2. Acid Test or Quick Ratio or Liquidity ratio Thequickratio isthe ratio betweenquickcurrent assetsandcurrent liabilities.The ratio measures thecapacity of the organisation topayoffcurrent liabilities of the urgent natureimmediately. Quick assets include cash/bank balances + receivables upto 6 months + quickly realisable securities such as govt. securities or quickly marketable/quoted shares and bank fixed deposits. It can be worked out as under:


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Quick assets I Current liabilities If the cash and bank balances are Rs.2 lac, receivables Rs.5 lac, quickly realisable securities Rs.1 lac and current liabilities Rs.10 lac, the quick ratio would be 0.8:1. LEVERAGE OR SOLVENCY RATIOS The long term solvency can be judged by solvency ratios, most importance of which, is debt-equity ratio and debt service coverage ratio (DSCR). 1. Debt Equity ratio

The ratio is important one since it shows the dependence of the unit on outside long term finance. A debt-equity ratio of 2:1 is considered desirable by the banks and Reserve Bank. It can be worked out as under: Long term outside liabilities/Tangible net worth (Where long term outside liabilities are liabilities of long term nature and tangible net worth is total of capital and reserves and surplus reduced by intangible assets. Interpretation — Higher the ratio, more the pressure on the liquidity of the organisation, when repayment of liabilities falls due. Lower the debt equity of a firm compared to another firm, the better it is. For instance, if a firm is having capital of Rs.200 lac, the free reserves and surplus of RS.300 lac and long term loans or liabilities of Rs.800 lac, the debt equity ratio would be 1.6:1. Similarly when the Debt equity ratio for a firm declines say from 1.6 : 1 to 1.2:1, it is considered better. 2.

Fixed Assets Ratio: Ratio is calculated as : Fixed Assets / Long term funds.(Fixed assets include net fixed assets and trade investments and Iong term funds include capital, reserves and long term loans) 3. Debtor service coverage ratio (DSCR)

The ratio explains the relationship between the funds available for servicing the long term outside liabilities (where servicing means regular payment of interest on long term liabilities and also payment of due amount of principal on year to year basis) on the one hand and amount of interest and instalment of long term outside liabilities on the other side. This ratio is used for judging repayment capacity and fixing the repayment schedules for term loans in banks and financial institutions. It could be worked out by taking into account net profit + depreciation + annual amount of interest charged (or chargeable) on the long term liabilities / annual amount of interest charged (or chargeable) on the long term liabilities + annual amount of instalment payable on the long term liabilities. For instance, if a firm's net profits are R..5.3 lac, depreciation Rs.2 lac, interest payment Rs.1 lac and the annual instalment Rs.2 lac, the DSCR would be 2 ( (3+2+1) / (1 + 2) Generally the banks or financial institutions consider a DSCR at 2 as comfortable. Tangible net worth = Net worth less intangible assets Tangible assets = Total assets less intangible assets ACTIVITY RATIOS These ratios measure the efficiency of the organisation in using deploying the available funds, particularly the funds raised on short term basis. The following ratios could be worked out: a: Inventory turnover: Sales / Averagestocks (average of opening and closing stocks) (it can also be calculated ascostof sales / average stock) b: Debtor turnover : Sales / average debtors (average of opening and closing receivables) (it can also be calculated as credit sales / average debtors). c: Fixed assets turnover : Sales / Fixed assets. d: Current assets/ working capital turnover Net sales / average working capitali.e. current assets If the amount of net sales in firm is Rs.200 lac and the average working capital Rs.50 lac, the working capital turnover ratio would be 4 (200/50). In the following year if the ratio comes down to, say 3, it reflects inefficiency in use of working capital by the firm. e: Debtors' velocityor debt collection period Average Book-debts / sales x 12 (can be calculated as average Book-debts / credit sales x 12) This ratio indicates as to how much time the firm is taking in recovering the amount of credit sales. Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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PROFITABILITY RATIOS Profitability indicates the efficiency of the organisation in generation of income and surplus out of the operations of main business. Return on investment or Return on capital employed or Overall Profitability Ratio) This is the basic profitability ratio and can let us know, as to how much the organisation is earning on its capital employed. The ratio can be worked out as under: Profit before tax and interest / Investment (or capital employed) x 100 Where, the 'return' is net profit before interest & tax and `investment or capital employed' means tangible net worth of the share holders' funds and outside term liabilities. For example, if the net profits before tax are Rs.30 lac and the investment Rs.120 lac, the return on investment shall be 25% (30 / 120 x 100). 1.

2. Return on equity

This ratio provides information about the earnings, which the funds put in by the promoters/shareholders or the ones retained in the business, generate. The ratio can be worked out as under: Net profits / owned funds (or tangible net worth) x 100 For example if the net profits are Rs.3 lac and tangible net worth Rs.10 lac, the return on equity would be 30%. Gross Profit & Net Profit Ratio The gross profit is considered to be the surplus of sales over the cost of goods sold and the ratio can be worked out as under: Gross Profit / Net Sales x 100 3.

The net profit is the surplus of gross profit after meeting other expenses. This can be before tax or after tax and is finally appropriated to meet the tax liability (if taken before tax provisions), dividend payment or drawings and to retain a part in the business, which is converted into the capital employed. The ratio can be worked out as under: Net profit* / Sales x 100 (*The net profit could be before or after tax. ) 5. Operating Profit ratio The ratio denotes the margin of profit on the main operations revealing the operational efficiency of the unit. The ratio is worked out, to see that the main activity remains viable for long time, as under: Operating Profit / Sales x 100 where the operating profit represents profit minus net other income or profit from un-related activity. 4.

6. Earning Per Share (EPS) :

The ratio denotes per share profit of a company. It can be used to compare 2 different companies" profitability. To calculate the ration only the no. of equity share is taken (and not of preference shares). It can be calculated as under: Net profit after tax and preference dividend/ no. of equity shares. It help in understanding market pricing of the equity share. 6. Price Earning Ratio (PER) The ratio indicates the current market price vis-a-vis the earning per share. It can be calculated as under: Market price of the equity share / earning per share

Different users of ratios Long term creditors Fixed charges cover = Income before interest and tax / Interest charges Debt service coverage ratio = Cash profit for debt service / annual interest and principal

Short term lenders (Banks)

Shareholders

Quick ratio-- Earning per share = Quick assets / current liabilities Profit available for equity holders / no. of equity shares Current ratio = Current assets / current liabilities

Dividend Yield ratio = Dividend per share / market price per share

WHAT THE CHANGE IN RATIOSMEAN If a firm realises book debts in cash — No change in current assets, quick ratio, current ratio or net working capital. If a firm realises old assets or non current assets in cash orsell fixed assets in cash: current assets, Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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quick ratio, current ratio or net working capital willall improve If a firm issues bonus shares — There is no change in any ratios If a firm issues rights shares — Current ratio, quick ratio, net working capital, debt equity ratio, net worth will improve If a firm revalues its fixed assets and creates revaluation reserve: Net worth and tangible networth increase. Debt equity ratio declines / improves. There is no effect on current assets or quick assets or current ratio and quick ratio. If increase in long term sources is more (say 125%) than increase in long term uses during a year liquid asset would increase, liquidity would improve. If increase in long term is uses more (say 125%) than increase in long term sources during a year — liquid asset would decrease, liquidity would decline. Lower and higher break even point : A firm with lower break even point has better chances for earning profits. A firm with higher break even earns lower profits. If break-even point of a firm goes up — It is an indication of dedine in profits If break-even point of a firm goes down — It is an indication of increase in profits If debtor-turnover ratio increase — It shows efficiency in recovery If debtor-velocity ratio decrease — It shows firm is allowing credit to buyer of its products for a lesser period If stock-turnover ratio increase — It is better use of stocks If current ratio increases and quick ratio remain constant — It shows higher %age of stocks in or lower %age of receivables in total current assets. If current ratio is constant and quick ratio increases — It shows lower %age of stocks or higher %age in receivables in total current assets.

PRACTICE TEST Classify the following assets and liabilities for Balance Sheet of M/s ABC Company for the year as on 31.3.2016. Cash 200 Good will 300 200 Capital 2000 Provision for Expenses Vehicles 1000 Sundry Debtors 1600 Unsecured loans (Long term) 800 Term Loan 2000 Investment in other firms 300 Plant and Machinery 2500 Pre Operative Expenses 200 Sundry Creditors 1200 Stocks 2000 Reserves 1000 200 200 Prepaid expenses Expenses payable Security Deposit 200 Bank Borrowings / cash credit 1400 Land and building 1500 Debentures 1200 Sales 10000 Net profit 500 Interest on Term Loan 300 Depreciation 200 Calculate Current Ratio / Quick Ratio / Net working Capital / Debt Equity Ratio / Debt Service Coverage (consider that installment during the year is 400) Ratio / Stock turnover ratio / Debtor Turnover ratio / Debtor velocity ratio / Net profit %. Answer: LIABILITIES ASSETS ` OWNERS FUNDS FIXED ASSETS 2000 1500 Capital Land and Building Reserves 1000 2500 Plant and Machinery Vehicles 1000 B TOTAL(Net Worth) 3000 LONG TERM LIABILITIES SUB TOTAL(Fixed Assets) 5000 Unsecured Loans 800 NONCURRENTASSETS (NCA) Term Loan 2000 Investment in Firms 300 Debentures 1200 200 Security Deposit Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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SUB TOTAL(TermLiabilities) CURRENTLIABILITIES Provision for Expenses Sundry Creditors Expenses Payable

Bank Cash Credit SUB TOTAL(Current Liabilities)

GRAND Liabilities)

TOTAL

(Total

of

4000 SUB TOTAL (Total Non Current Assets) INTANGIBLEASSETS 200 Goodwill 1200 Pre Operative Expenses 200 SUB TOTAL(Total Intangible Assets) 1400 CURRENTASSETS 3000 Cash Sundry Debtors Stocks Prepaid Expenses Total Current Assets - Subtotal TOTAL (Total of 10000 GRAND Assets)

500

300 200 500

200 1600 2000 200 4000 10000

Calculations: Networth Intagible assets Tangible NW

Capital + Reserves

2000+1000

NW - Intangibles

3000 – 500

3000 500 2500

Long Term Liabilities Long Term Sources

Outside Liabilities

3000 3000

(=LTL+ CL)

Current Assets Gross Working Capital

(= Total CA)

Short Term Uses

(CA)

Net Working Capital

7000

(= Current Liabilities)

Term (= Fixed Assets+ Intangible Assets

Quick Assets

4000+3000

LTL + Networth

Current Liabilities Short Term Sources

Long Uses

4000

CA – CL

CA –Stocks& Prepaid Exp

NCA+

4000+3000

7000

5000+500+500

6000

4000 4000

4000 4000-3000

1000

4000-2200

1800

Current Ratio

CA ÷ CL

4000 ÷ 3000

1.33:1

Quick Ratio

QA ÷ CL

1800 ÷3000

0.66:1

Debt Equity Ratio

LTL ÷ TNW

4000 ÷ 2500

1.66:1

DSCR

(Profit + Depreciation + TL Interest) ÷ (TL Installment + TL Interest) 500+200+300 = 1000 1.4 (1000÷700) 400+300 = 700


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Stock Turnover Sales ÷ Stocks Ratio Drs T/o Ratio Sales ÷ Sy Debtors

10000 ÷ 2000

5 times

10000÷1600

6.3 times

Debtors Velocity Ratio Net Profit % Return on NW

(Sy Drs÷Sales) x 12

(1600÷10000) X 12

(NP ÷ Sales) x 100 (NP ÷ TNW) x 100

(500 ÷ 10000) x 100 500 ÷ 2500 x 100

1.92 months 5% 20%

FINAL ACCOUNTS Final accounts, which include trading & manufacturing account, profit & loss account and balance sheet, are prepared to know the financial position of a business organisation. These accounts include the closing balances in various personal, real and nominal accounts and are prepared with the help of trial balance. While the personal and real accounts are recorded as assets and liabilities in the balance sheet, the nominal accounts are included in the trading & manufacturing and profit & loss account. A trading & manufacturing and profit and loss account is divided generally in two parts : a A trading and manufacturing account(for trading concerns only trading account), b A profit and loss account,

Trading and manufacturing account

1: 2: 3: 4: 5: 6: 7: 8: 9:

It is an account which shows the result of the buying, manufacturing and selling of goods. It summarises all the transactions occurred during a trading/manufacturing period which have direct relationship to the goods dealt in by the business. The various items (also referred to as Direct Cost) in a trading & manufacturing account could be: Opening stocks (of raw material, stock in process, finished goods & consumables) Purchases less returns: Duties and clearing charges Wages (manufacturing) Freight and carriage Power and fuel Factoryrent Misc. manufacturing expenses Repairs to factory land and building 10: Maintenance charges of factory land and building 11: Gross profit transferred to Profit/Loss account 12: Sales less returns 13: Closing Stocks (raw material, stock in process & finished goods, stores and spares and consumables) 14: Gross loss transferred to profit/foss account

Profit and loss account It takes into account those revenue and expenditure items which are related to management of the business (excluding the items included in trading and manufacturing account — also referred to as Indirect Cost). These expenses are directly related to conduct of the business other than manufacturing or trading aspects. The items which are taken into account in a profit and loss account (and which would increase/ reduce the quantum of net profit or increase/reduce the level of losses) are as under: Gross profit brought forwards 1: Selling and distribution expenses 2: Packing charges 3: Carriage outwards 4: 5: Publicity Commission paid to sales-men 6: 7: Provision for bad debts Administrative expenses (such as salaries, rent and taxes, lighting & insurance, printing & 8: stationery, telephone charges, postage and telegram, legal expenses, directors' fees, auditors' fees and other general expenses) Financial expenses (such as Discounts allowed, interest on term loans, working capital and other 9: Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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10: 11: 12: 13: 14: 15: 16: 17: 18: 19:

borrowings such deposits and unsecured loans and preliminary expenses written off) Repairs and maintenance Depreciation Gross profit brought over Discounts earned Income from investments Commission received Interest received Rent received Income from any other sources Net loss transferred to profit/loss appropriation account

Closing entries in respect of trading accounts: 1 For opening stock : debit trading account and credit stock account 2 For purchase returns : debit returns outward and credit purchase account 3 For sale returns : debit sales account and credit returns inward account 4 For purchases account : debit trading account and credit purchases account for net amount after returns. 5 For expenses : debit trading account and credit the concerned expenses account such as wages, custom duty, freight 6 For sales : debit sales account with net amount and credit trading account Closing entries in respect of profit and loss accounts: 1 For expenses : debit profit and loss account and credit the concerned expenses account such as salaries, insurance, depreciation etc. 2 For items of incomes : debit respective income accounts and credit profit and loss account 3 Transfer of profit to capital : debit profit and loss account and credit capital account 4 Transfer of loss to capital : debit capital account and credit profit and loss account. Traditional & Manufacturing Account for the period ended : To Opening stocks: By Sales :Raw material less returns :Stock in process by Closing Stocks: :Finished goods :Raw material " Purchase : :Finished goods less returns by Gross loss transferred to profit/loss account (in case of loss) " Wages (manufacturing) Freight and carriage Gas, water etc. " Power, fuel " Factory rent " Misc. manufacturing expenses " Repairs to factory land and building Maintenance charges of factory land and building " Gross profit transferred to ( Profit/Loss account ) Total

Total

Profit and Loss account for the period ended …………. To Gross profit brought forward (in case of loss) " Selling and distri-bution expenses " Packing charges " Carriage outwards " Publicity " Commission paid to sales-men " Provision for bad debts Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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" Administrative expenses: :Salaries :Rent and taxes :Lighting & insurance :Printing & stationery :Telephone charges :Postage and telegram :Legal expenses :Directors' fees :Auditors' fees :Other general expenses " Financial expenses: :Discounts allowed :Interest on loans :Preliminary expenses written off " Repairs and maintenance " Depreciation " Net profit transferred to appropriation a/c Total

Total

ACCOUNTS OF COMPANIES A joint stock company is formed by way of incorporation under the provisions of Companies Act 1956. Such companies are artificial legal persons, having their own legal entity separate from members. It could be private company or a public company or a govt. company. While a private company has minimum of 2 members and maximum 50, a public or govt. company should have minimum 7 members without any upper ceiling. in case of public company the minimum capital should be Rs.5 lac with minimum holding of shares of 25%, from members of the public. The important documents which a company must have are Memorandum of Association, Memorandum of Association, Certificate of Incorporation and Certificate of Commencement of business. Whenever a company wishes to raise capital it has to issue shares by way of a prospectus. Prospectus is an invitation to the public to subscribe to the shares or debentures which is signed by directors. So far as share capital is concerned, it may be categorized as Authorised, issued, subscribed or paid up capital. Nature of Capital Authorised capital Issued capital Subscribed capital Paid up capital

Description Maximum amount of capital, that a company could raise and is stated in the capital clause in MOA of the company The amount which has been offered to public forsubscription. It can be maximum up to the authorized capital The no. of shares and the face value of the shares which the prospective shareholders want to take up. The amount actually received from the shareholder against the allotted shares.

Illustration : The capital clause in Memorandum of Association of a company states its authorised capital comprising 7 lac shares of Rs.10 each. Company has decided to raise capital from public to the extent of 4 lac shares of Rs.10 each. It also decides to invite Rs.5 per share for the time being. Company receives applications for 10 lac shares at Rs.5 per share. The company has allotted 4 lac shares of Rs.10 each against part payment of Rs.5 per share. In this case, Authorised capital = Rs.70 lac Issued capital = Rs.40 lac Subscribed capital = Rs.40 lac (subscribed capital cannot be more than the issued capital) Paid up capital = Rs.20 lac Equity share capital and preference share capital : The company can raise either equity shares or preference shares. Equity : While the equity shares have voting rights and they are entitled for varying rate of dividend subject to availability of profits and declaration of dividend by the company but they are paid the dividend after the preference share holder. Preference shares: The preference share holders get a fixed rate of dividend and get the dividend before the equity shareholders subject to availability of profits for distribution. They have only special voting rights and do not participate in the management of the company. Preference shares can be cumulative or non-cumulative, redeemable or non-redeemable, convertible or non-convertible and participating or non-participating. Issue of shares : Shares can be issued by a company at par, i.e. at the face value or at a premium i.e. in addition to face value, some additional amount equivalent topremium or at a discount. Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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For instance, if a company issues a Rs.10 share at Rs.10, it is at par. But if the same share is issued at a face value in addition to Rs.5 as a premium, it would be called at a premium. When a company agrees to issue a share of Rs.10 for say Rs.8, it is called to have been issued at a discount. Section 79 of Companies Act stipulates that the rate of discount should not be more than 10% unless the Company Law Board approves and shares must be issued within 2 months of sanction of Company Law.Board and one year should have lapsed since last issue of such shares, when company wants to issue such shares again. Application money : The amount which the shareholders send along with the share application at the time of applying for a share is called application money. Allotment money and call money : A company can call the amount due on shares in instalment i.e. at the time of application and subsequently after allotment or in further instalments called calls. When after allotment of the shares by the company, it calls the money, this is called allotment money. Similarly, if the entire money has not been called by the company at the time of calling allotment money, then any money called there after would be known as call money. Call money may be called in one call or in more than one calls. Calls in advance and calls in arrear : Where a shareholder makes payment of money when the amount has not been called as yet by the company (say payment of call money along with allotment money), this is called call in advance. Such amount is a liability of the company which is to be shown separately than the subscribed capital. In the absence of any provisions in the Articles of Association, company is required to pay interest @ 6% on this amount. On the other hand, when the company has already called the money, but the shareholder has not paid the money, this becomes calls in arrear, on which the company can charge interest @ 5% p.a. To find the exact amount of paid up capital, this amount would be deducted from the share capital. Over-subscription and under-subscription : When a company receives subscription from public more than the issued amount, it is called over-subscription. If a company decides to retain the over-subscription or part thereof, this can be done by exercising 'Green shoe option'. On the other hand when the company receives the money which is less than the issued amount of share capital, this is a situation of under-subscription. Illustration : Against issued capital of 5 lac shares of Rs.10 each, if a company receives applications for 6 lac shares, it is a situation of over-subscription while if the company receives applications for 4 lac shares only, it is a situation of undersubscription. The company cannot proceed with allotment in case of under-subscription if the amount is less than 90% of the issued capital. Under-writing : In order to save itself from such a situation, the companies normally approach the underwriters to support the issue, which means that in the event of under-subscription, the amount of shortfall would be subscribed by the underwriters to the extent of their under-writing commitment. Forfeiture and re-issue of shares : When a shareholder fails to pay the due amount on the shares subscribed by him, the company has the right to forfeit the share capital and also forfeit the amount already deposited by the shareholder. It may be noted that in the process of forfeiture, it is the amount of share capital i.e. face value of the share, that is forfeited. Before forfeiture, a reasonable notice of 14 days is required to be given to the shareholder. After forfeiture, the company may proceed with re-issue of the same share which can be done at par, at a premium or at a discount. Bonus shares and rights shares : When a company issues shares out of its free reserves it is done by way of issue of bonus shares. This increases the share capital of the company and to that extent reduces the free reserves. As a result, there is no change in the net worth of the firm with issue of bonus shares. But when a company issues additional capital and gives the option to existing shareholders to subscribe, failing which offer would be given to prospective shareholders, this is called rights issue. Rights issue results in increase in the paid up capital. Issue of shares for cash and for a consideration other than cash : A company normally issues shares on receipt of cash. But shares can be issued to the vendors (fixed assets suppliers) of the company in lieu of making payment to them. These may be issued to existing promoters in consideration of goodwill. These shares can be issued at par or at a premium or at a discount.

ISSUE OF DEBENTURES A company can also raise money from sources other than shareholders by borrowing the money through another instrument called debenture. A debenture holder is a creditor of the company, he gets fixed interest stated before the word debentures (say 6% debentures or 10% mortgage debentures). The debentures are issued for a fixed period after which they are paid, which is known as redemption period. The debentures can be redeemable or non redeemable, convertible or non-convertible, secured or unsecured. They are shown as a liability of long term nature by the company, in its balance sheet. Debentures can be issued at par or at a premium or discount, redeemable at par or redeemable at a premium or at a discount. Premium on debentures is shown as a reserve while discount on debentures is shown as an asset. Premium on redemption of a discount is shown as a liability. The debentures are paid/redeemed by the company on maturity either by issue of new shares or debentures or by creating a sinking or insurance fund or by creating a debenture redemption reserve. Any profit earned by a company on redemption is shown as part of the capital reserve of the company. But if there is any loss on redemption, it is debited to profit and loss account.

Important facts about company accounts

The following facts must be kept in mind, while dealing with a company's accounts relating to issue of shares by a company: 1. An equity share carries the voting rights. Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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Preference share holders have voting right when the dividend is outstanding for more than 2 years for cumulative preference shares and for 3 years in case of non-cumulative preference shares. 3. Forfeited shares when reissued can be issued at a discount provided the reissue price plus the amount already received from defaulting shareholder is not less than the amount credited as paid up on reissue of the share. 4. It is mandatory to cancel the discount on issue of shares account at the time of forfeiture of shares which were issued at a discount. 5. Preference share enjoys the preferential right only in respect of return of capital on winding up of the company. It does not have a right to get the dividend. 6. Entries for surrendering the shares are the same as are applicable in case of forfeiture of shares. 7. Capital redemption reserve is available for declaring fully paid bonus shares. 8. A company can purchase its own shares as well as debentures. 9. A convertible preference share can be converted into equity shares. 10. At the time of issue of shares, an applicant is required to pay minimum 5% of the nominal value of the share as application money. 11. Face value is the value of a share stated on the share certificate. Paid-up value represents the amount called by the company and paid by the shareholder, which may be or may not be equal to the face value. 12. Shareholders are not entitled to get dividend on the amount paid as calls-in-advance. 13. Unless permitted by the Central Govt. a share cannot be issued at a discount exceeding 10% of the nominal value. A company can issue shares at a discount when minimum one year has lapsed since commencement of business. A partly paid preference share cannot be redeemed. 14. 15. Balance of share forfeited account after reissue of the forfeited shares is transferred to capital reserve. 16. Transfer to capital redemption reserve account is permitted from profit and loss account and dividend equalization account. 2.

ISSUE OF SHARES BY COMPANIES : A PRACTICE CASE A newly promoted company has recently raised capital through a public issue, the particulars of which are given as under. You are requested to make journal entries and also prepare ledger accounts and balance sheet. 1 No. of sharei offered 10000 2 Face value of the share Rs.10 3 No. of share for which applications received - 20000 4 Amount payable with application Rs.3, on allotment Rs.2 and on first and final call Rs.5. 5 No. of share for which applications are not eligible at all — 1000 for which amount will have to be refunded immediately. 6 No. of shares for which allotment money when called not received — 1000 7 No. of shares for which 151 /final call money not received when called * - 1000 8 The company subsequently forfeits partly paid shares on which allotment money and 1st call money has not been received and forfeits the amount already received for these shares. 9 Later on the company reissues the forfeited shares at a discount of Re.1 per share. Discount is allowed to the debit of forfeited account. *It is assumed that shares are the same on which the allotment money has not been received. Journal entries On Receipts of application money Bank Dr. 60000 To share application account. Cr. 60000 (with actual amount received irrespective of shares offered) On allotment of shares Share Application account. Dr.30000 To share capital account. Cr. 30000 (application money on 10000 shares allotted at Rs.3 per share received.) When allotment money becomes due Share allotment account Dr. 20000 To share capital account. Cr.20000 (sum due on allotment on 10000 shares at Rs. 2 per share allotted.) On receipt of allotment money Bank account Dr.18000 Share allotment account Cr. 18000 (for 9000 shares @ Rs.2 per share — not received on 1000 shares) On refund of ineligible application Share application account. Dr.3000 To Bank account. Dr.3000 (being the full amount received and returned) On refund of un-allotted application Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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Share application account. Dr.27000 To Bank account. Dr.27000 (being the excess amount received and returned) 1st & final Call Dr.50000 Share 1st call account To share capital account. Cr.50000 (amount due on first call on 10000 shares at Rs.5 per share) On receipt of call money Bank account. Dr. 45000 To share 1st call account. Cr.45000 (amount received against first call for 9000 shares @ Rs.5) On transfer of amount in arrears on a/c of allotment of 1 5t call to a separate a/c Calls in arrears Dr.7000 To share allotment account Cr.2000 To share 1st call account. Cr. 5000 (amount still due on these calls for 1000 shares) On Forfeiture of partly paid shares Share capital account Dr.10000 (1000 share forfeited ) To calls in arrear account Cr.7000 (for amount that remained unpaid) To share forfeited a/c. Cr.3000 (for amount already received for 1000 shares @ Rs.3 per share as application money) On reissue of forfeited shares Cash / bank account Dr.9000 (for actual amount received @ Rs.9 per share) Share forfeited account. Dr.1000 (for discount allowed at Re.1) To share capital Cr. 10000 (amount credited as paid up or called up on the reissued shares) On transfer of balance in share forfeited account to capital reserves Share forfeited account To share reserve account

Dr.2000 Cr.2000

Share capital account Date

Particulars By share application By share allotment By share 1*call To forfeited account By Bank — share application

Dr

Cr 30000 20000 50000

100.00

10000

Bank Account Dr

Date

Particulars To share application 60000 By share application By share application To share allotment 18000 To share 1* call 45000 To share capital 9000 Capital reserve account Particulars Dr

Date

Balance 30000 50000 100000 90000 100000

Cr 3000 27000

Cr

By share forfeited a/c

Balance 60000 57000 30000 48000 93000 102000

Balance 2000

2000

Balance Sheet Liabilities

Amount

Assets


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Share capital Capital reserve

100000 2000

Total

102000

Bank

102000 102000

FINAL ACCOUNTS OF BANKING COMPANIES Definition and Functions of a Bank Definition of Banking : (Section 5-b of Banking Regulation Act 1949) Banking means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise. As per Section 7, no firm, individual or group of individuals and no company other than a banking company shall use, as part of its name or, in connection with its business, any of the words "bank", "banker" or "banking" and no company shall carry on the business of banking in India unless it uses as part of its name, at least one of such words. Banks in India fall in 3 categories that include: 1. Banks being body corporates constituted under special Acts of the Parliament such as SBI 2. Banks being companies registered under Companies Act 1956 or a foreign company such as Axis Bank Limited 3. Banks registered as Cooperative Societies under Central or State Act.

Functions of a Commercial Bank Section 6 of the Banking Regulation Act, 1949 specifies the forms of business in which a banking company may engage. These are: (a) Receiving of money on deposit and providing facilities to constituents for payments by cheque. (b) Dealing in securities on its own account and on account of customers. (c) Lending of money by - (i) making loans and advances, (ii) purchasing or discounting of bills. (d) Transferring money from place to place by - (i) the issue of demand drafts, telegraphic transfers, traveller's cheques, etc., (ii) collection of bills. (e) Issuing letters of credit. (f) Safe custody of securities and valuables. (g) Issuing guarantees. (h) Acting as executors and trustees sometimes through subsidiary companies formed for that purpose. (i) Buying, selling and dealing in foreign exchange. (j) Acting as managers for issue of capital by companies and performing functions incidental thereto. A banking company cannot directly or indirectly deal in the buying or selling of goods. However, it may buy, sell or barter in connection with the bills of exchange received for collection or negotiation or can undertake the administration of estates as executors, trustees or otherwise.

Requirement of Banking Companies as to Accounts and Audit Date of final accounts of banking companies : As per Govt. notification, the accounts of banking companies shall be closed as on March 31 every year (till 1989, these were closed as on December 31). Requirement of preparation of final accounts: Section 29 of Banking Regulation Act 1949 stipulates that every banking company shall prepare financial statements comprising Profit & Loss Account and Balance Sheet as at the close of March 31 every year on the format prescribed for this purpose. RBI has prescribed Form A for balance sheet and Form B for Profit and loss account as per 3rd Schedule. With effect from the year ended March 31, 2002 onwards, the balance sheet has to be prepared on the revised form, as given in this chapter. Statutory Audit of final accounts: Under Section 30 of the Act, these accounts must be got audited by a person qualified under any law for the time being in force, to be an Auditor of a company. Banking companies have to seek permission of RBI for appointing, re-appointing or removing any auditor. Submission of audited final accounts to RBI: U/s 31 a banking company is required to submit the balance sheet and auditors' report within 3 months from the end of the period to which they refer. RBI may extend this period, on an application from the bank concerned, by 3 months. Publication of final accounts: Banking companies are also required to publish the final accounts and auditors' report within 6 months from end of the period to which they relate, under Rule 15 of Banking Regulations (Companies) Rules 1949. Types of books maintained by banks: For their day to day operation and control purpose banks maintain various kinds of books. These books include cash books, ledgers, registers etc.

Significant Features of Accounting Systems of Banks The book-keeping system of a banking company is different from that of a trading or manufacturing enterprise. A bank maintains a large number of accounts of various types for its customers. As a safeguard against any payment being made in the account of a customer in excess of the amount standing to his credit or a cheque of a customer being dishonoured due to a mistake in the balance in his account, it is necessary that customers' accounts should be Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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kept up-to-date and checked regularly. A bank has to enter into the ledgers. every transactions as soon as it takes place. The main characteristics of a bank's system of book-keeping are as follows: (a) Voucher posting — Vouchers are loose leaves for recording entries in to journals or cash books, on which transactions are recorded as they occur. Entries in the personal ledger are made directly from vouchers, in banks, instead of being posted from the books of prime entry i.e. journal or cash book. (b) Voucher summary sheets - The vouchers entered into different personal ledgers each day are summarised on summary sheets, totals of which are posted to the control accounts in the general ledger. (c) Daily trial balance - The general ledger trial balance is extracted and agreed every-day. checks - All entries in the detailed personal ledgers and summary sheets are checked by persons other than those who have made the entries. A considerable force of such check is employed, with the general result that most clerical mistakes are detected before another day begins. (e) Control Accounts - A trial balance of the detailed personal ledgers is prepared periodically, usually every two weeks, agreed with general ledger control accounts. (f) Double voucher system - Two vouchers are prepared for every transaction not involving cash - one debit voucher and another credit voucher. (d) Continuous

Principal Books of Accounts

Banks maintain different type of books, which fall in the following categories: a) The General ledger contains accounts of all personal ledgers, the profit and loss account and different asset accounts. The accounts in the general ledger are arranged in such an order that a balance sheet can be readily prepared there from. There are certain additional accounts known as contra accounts which are a feature of bank accounting. These are kept with a view to keep control over transactions which have no direct effect on the bank's position e.g., letters of credit opened, bills received or sent for collection, guarantees given, etc. . b) Profit and loss ledger So rne banks keep one account for profit and loss in the General Ledger and maintain separate books for the detailed accounts. These are columnar books having separate columns for each revenue or expense head. Other banks maintain separate books for debits and credits. These books are posted from vouchers. The total of debits and credits posted are entered into the Profit and Loss Account in the General Ledger. In some banks, the revenue accounts are also maintained in the General Ledger itself, while in some others, broad revenue heads are kept in the General Ledger and their details are kept in subsidiary ledgers. For management purposes the account heads in the Profit and Loss ledgers are more detailed than those shown in the published Profit and Loss Account of the bank. For example, there will be separate accounts for basic salary, dearness allowance and various other allowances, whicl) are grouped together in the final accounts. Similarly, various accounts concerning general charges, interest paid, interest received, etc., are maintained separately in the Profit and Loss ledgers. Subsidiary Books (a) Personal Ledgers (b)

Bill Registers

Other Subsidiary Registers There are different registers for various types of transactions. Their number, volume and details will differ according to the individual needs of each bank. For example, there will be registers for :(a) Demand Drafts, Telegraphic Transfers and Mail Transfers issued (drawn) on Branches and Agencies. (b) Demand drafts, Telegraphic Transfers and Mail Transfers received from Branches and Agencies. (c) Lettersof Credit. (d) Letters of Guarantee. Departmental Journals Each department of the Bank maintains a journal to note the transfer entries passed by it.Other Memorandum Books a) Cash Department b) Teller Payment System Clearing transactions Outward Clearing: d) Inward Clearing e) Loans & Overdraft Departments f) Deposits Department g) Establishment department h) General The Banking Regulations Act, 1949 prescribes Schedules 1 to 16 only. Any other schedule prepared by a Banking company besides what is specified in the Third schedule of the Banking Regulations Act, 1949, is only for better understanding of their financial statements. Accordingly, banks in addition to the above 16 schedules, may prepare : Schedule 17 for Notes on Accounts and (i) Schedule 18 for Disclosure of Accounting Policies. (ii) Summary of disclosures (RBI Master Circular Jul 01, 2014) There are 3 groups of disclosures, namely (1) General disclosures, (2) Disclosures related to Accounting Standards and Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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(3) Additional disclosures.

In addition there are Basel Committee disclosures.

Accounting Treatment of Specific Items

1. Discounting, Collection & Acceptance of Bills 1Rebate on Bills Discounted: When a bank discounts a bill of exchange, the full amount of the discount earned is credited FRONT END to the discount account. But all bills discounted may not mature for payment by the close of the year (i.e. 31st March). Hence, the unexpired portion (unearned portion) of such discount account is carried forward by debiting the Discount A/c and crediting Rebates on Bills Discounted A/c. The Rebate A/c is shown on the liability side of the Balance Sheet as income received, which has not accrued before the close of the year. Collection of Bills: As an alternative, the bank can collect a bill for a customer. The particulars will be recorded in a separate book called Bills for Collection Register. Bills sent for collection have to be shown by way of Note as per Third Schedule. Two Accounts have to be opened. They are mirror images of each other. They are: (i) Bills for Collection (Asset) (ii) Bills for Collection (Liability) Acceptance and Endorsement: Such Acceptance (Liabilities) which are outstanding at the close of the year and the corresponding asset (security) is disclosed as Contingent liability. As a safeguard against the customer not being able to meet the demand of the bank in this respect, usually the bank requires the customer to deposit a security equivalent to the amount of the bill accepted on his behalf. If the bill, at the end of its term, has to be retired by the bank and the amount cannot be collected from the customer on demand, the bank reimburses itself by disposing of the security deposited by the customer. Drafts and telegraphic Remittances: When a bank issues a bank draft on another bank or on its branch, it credits the account of the bank or that of the branch with amount of the draft. The corresponding debit is raised in the account of the customer. His account is also debited with the remittances. A similar procedure is adopted in case of telegraphic transfer made on account of customers. Letters of Credit and Travellers' Cheques: These are issued as a facility to travellers within the country or abroad. In either case, the person desiring such instruments of credit, to be issued in his favour or some other party is made to deposit the full value of the letter of credit or travellers' cheques issued in his favour. The amount deposited by the customer is placed to the credit of Letters of Credit Account or Travellers' Cheques Account, as the case may be. When the bills of Exchanges drawn against the Letters of credit are received for payment, the amount is debited to the Letter of Credit Account. Similarly, the travellers' cheques, when presented are debited to the Travellers'

FINAL ACCOUNTS OF BANKING COMPANIES Preparation of Financial Statements and Accounting Date (Section 29) 1. A Company registered under the Companies Act, 2013 is required to present its financial statements, i.e. balance sheet and profit and loss account in the formats laid down in the Schedule III annexed to the Companies Act. 2. The format of the balance sheet and the profit and loss account in which the accounts of bank should be presented is given in the third schedule of the Banking Regulation Act. Form A is for proforma balance sheet and form B for proforma profit and loss account. The accounts of the banking companies shall be closed on 31st March every year. Signatures: As per Section 29 of the B R Act, the financial statements of banking companies incorporated in India should be signed by the manager or principal officer of the banking company and by at least three directors (or all the directors in case the number is less than three). The provisions of section 29 are also applicable to nationalised banks, State Bank of India, its subsidiaries, and regional rural banks. Audit: As per Section 30 of the B R Act, accounts must be audited by a person, duly qualified under any law, to be an auditor of companies. However, every banking company is, required to obtain the prior approval-of the Reserve Bank of India before appointing, reappointing or removing any auditor. Submission of Accounts (Sees 31 and 32) As per Section 31 of the B R Act, three copies of the balance sheet and profit and loss account together with auditors' report must be submitted to RBI within three months from the end of the period to which they refer. It can be extended by RBI up to a further period of three months. As per Section 32 of the B R Act, a banking company (but not other types of banks) to furnish three copies of its annual accounts and auditor's report to the Registrar of Companies at the same time when it furnishes these documents to the RBI. Accounts and auditors' report shall be published in a newspaper circulating in a place where a banking company has its principal office, within six months from the end of the period to which they Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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relate.

Accounting System in Banks 1. Banks, follow the mercantile system of accounting as followed by other firms. 2. However, in the case of banks, ledger containing accounts of customers

must be kept up to date and every transaction must be entered into the ledgers as soon as it takes place. 3. In the case of banks, lesser emphasis is placed on books of prime entry such as cash books or journals. 4. Banks follow the accounting procedure of voucher posting'. Bankers' Books: 1. As per Bankers' Books Evidence Act, 'Bankers' Books' include ledgers, day book, cash books, account books and all other books used in the ordinary business of a bank. 2. Cash Book: All cash receipts and payments are recorded in the receiving cashier's cash book and paying cashier's cash book respectively. After this, on the basis of pay in slips received by the receiving cashier and cheques and withdrawals by the paying cashier, transactions are entered first in the accounts of customers and after that Day Books are written. This is called the 'Slip System' of posting. 3. Ledger Book: General Ledger contains the total accounts of each ledger. Besides GL, other ledgers are 1.Current Accounts Ledger; 2.FD Accounts Ledger; 3. RD Accounts Ledger; 4. Saving Bank Ledger; 5. Loan Ledger; 6. Investment Ledger 7. Bills discounted and purchased Ledger 4. Other Books: 1. Clearing Register; 2. Securities Register; 3. Draft Register; 4. Bills for collection Register; 5. Safe deposit vault Register; 6. Dishonoured cheques Register; 7.Letter of credit Register; 8. Bank Guarantee Register; 9. Standing Instructions Register.

Principal Books of Account

General Ledger: 1. contains the control accounts of all personal ledgers, the profit and loss account and asset and liability accounts. 2. Contra accounts are also kept to keep control over transactions which have no direct effect on the assets and liabilities of the bank e.g. letters of credit opened, bills received or sent for collection, guarantees given, etc. Profit and Loss Ledger 1. Generally, banks maintain a profit and loss account in the general ledger and separate books for each revenue or expense head/sub-head. 2. These books are prepared from vouchers. The totals of debits and credits each day are posted to the profit and loss account in the general ledger from voucher summary sheets. Generally, broad revenue heads are kept in the general ledger and their details are kept in subsidiary ledgers. 3. The account heads in the profit and loss ledgers of a branch are more detailed than those shown in the published profit and loss accounts of banks. Subsidiary Books Personal Ledgers: In respect of control accounts relating to accounts of customers, subsidiary ledgers are maintained for various types of deposit accounts containing accounts of individual customers and various types of loan and related accounts (cash credit, term loans, demand loans, bills purchased and discounted, letters of credit, bank guarantees issued etc.). Generally, separate ledger is not maintained for overdraft accounts which are part of current account. Bills Registers Details of different,types of bills are kept in separate registers like bills purchased, inward bills for collection, outward bills for collection register etc.. Entries are entered serially on a daily basis in separate registers. For bills purchased or discounted, party-wise details are also kept separately to ensure that the sanctioned limits of parties are not exceeded. In respect of bills for collection, contra vouchers reflecting both sides of the transaction are prepared at the time of the original entry, and this entry is reversed on realisation. Other Registers/Records: These registers/records do not form part of the books of account but support the entries/balances in the various accounts. For example - (a) Drafts issued; (b)Drafts paid; (c) Issue and payment of Bankers cheques/Pay orders/Traveller's cheques/Gift cheques; (d) Letters of credit; (e) Letters of guarantee.

Financial Statements of Banks

A banking company is required to prepare financial statements in accordance with Schedule Ill of the Companies Act, 2013. Banking Regulation Act has prescribed Form A, the format of a balance sheet and form B, the format of a profit and loss account. Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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Capital and Liabilities side Capital Reserves and Surplus Deposits Borrowings Other Liabilities and Provisions (including Bills Payable, Inter Office (or Branch) Adjustments (Net), Interest Accrued, Others (Including Provisions) Total Assets side Cash and Balance with RBI Balances with Banks and Money at Call and Short Notice Investments Advances Fixed Assets Other Assets Total

Contingent Liabilities Claims against the bank not acknowledged as debts (I) Outside India Liability for partly paid investments (II) Liability on account of outstanding forward exchange (III) contracts Guarantees given on behalf of constituents: (i) In India; (ii) (IV) Acceptances, endorsements and other obligations (V) Other items for which the bank is contingently liable Total: (VI)

Preparation of Profit and Loss account Form 'B' Third Schedule Form of Profit and Loss Account Profit and Loss Account Income: Interest Earned Other Income I.

II. Expenditure:

Interest Expended Operating Expenses Provisions and Contingencies Total III. Profit/Loss:

Net ProfiV(Loss) of the Year Total IV Appropriations: Transfer to Statutory Reserves Transfer to other Reserves Transfer to Government Proposed Dividend Balance Carried over to Balance Sheet

Total

ACCOUNTING IN A COMPUTERISED ENVIRONMENT A large no. of business firms and organization maintain their accounts on a computer system. The performing of accounting functions through computers is called Computer Accounting. The computer performs a large no. of accounting functions the important among them being:  

Capturing of business transactions as accounting entries Use of accounting entries for final accounts preparation


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Preparation of final accounts as per Accounting Standards prescribed by the ICAI Generation of analytical information. Accounting software : For the purpose of computer accounting, various kinds of software and operating languages, are available that range from COBOL to FOXPRO and ready made software such as Tally, spread sheets, data base software. Essential requirement for computerized accounting: Computerized accounting is possible with the availability of qualified staff, well versed with such operations. Computer hardware, software and stationery are very costly and result in higher cost if level of operations is small. There is apprehension of data or information loss, if proper back up is not created. Data and information available in the computer system can get corrupted or even lost, due to virus. Various accounting functions in computerized accounting : The computer can take care of following types of accounting functions: Maintenance of books Inventory and receivable management Generation of various types of reports Preparation of final accounts Networking for various locations  





 

    

USE OF COMPUTERS FOR BANKING A combination of computers and communication technologies is at present enabling international banks and financial institutions to expand their reach and offer technology based products to a wide spectrum of clientele which was unthinkable in olden days. Banks being essentially the processors of information in large quantities, use the information technology (IT) to achieve the: ability to handle larger volumes of business with the desired level of efficiency; maximising profitabilityof operations and exercising a strict vigil on costs. International banks have achieved the above objectives while Indian banks have started entering recently in the areas such as: collection, storage and processing of information in administrative offices toning up book-keeping efficiencyat branches by computerising back office operations full branch computerisation setting up automated teller machines (ATMs). VARIOUS BANKING SERVICES THROUGH COMPUTERS Faster remittance services Anywhere banking and ATMs Tele-Banking Home banking Cash management   

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Role of computers in accounting The most popular system of recording of accounting transactions is manual which requires maintaining books of accounts such as Journal, Cash Book, Special purpose books, ledger and so on. The accountant is required to prepare summary of transactions and financial statements manually. The advanced technology involves various machines capable of performing different accounting functions, for example, a billing machine. This machine is capable of computing discount, adding net total and posting the requisite data to the relevant accounts. Components of Computerised accounting software: 1. Preparation of accounting documents 2. Recording of transactions 3. Preparation of Trial Balance and Financial Statements

Computerised Accounting Transaction processing system (TPS) is the first stage of computerized accounting system. The purpose of any TPS is to record, process, validate and store transactions that occur in various functional areas of a business for subsequent retrieval and usage. TPS involves following steps in processing a transaction: (1) Data Entry, (2) Data Validation, (3) Processing and Revalidation, (4) Storage, (5) Information and (6) Reporting. It is one of the transaction processing systems which is concerned with financial transactions only. When a system contains only human resources, it is called manual system; when it uses only computer resources, it is called Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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computerized system and when it uses both human and computer resources, it is called computer-based system. NEED AND REQUIREMENTS OF COMPUTERSIED ACCOUNTING The need for computerized accounting arises from advantages of speed, accuracy and lower cost of handling the business transactions. Numerous Transactions, Instant Reporting, Reduction in paper work, Flexible reporting, Accounting Queries, On-line facility, Scalability, Accuracy, Security 

Difference between Manual accounting and Computerised accounting Point of Difference Manual Accounting Computerised Accounting 1. Recording Recording of financial Data content of these transactions transactions is through books is stored in well designed data base. of original entry 2. Classification

3. Summarising

4. Adjusting

Entries 5. Financial

Transactions recorded in the books of original entry are further classified by posting them into ledger accounts. This results in transaction data duplicity Transactions are summarised to produce trial balance by ascertaining the balances of various accounts. Adjusting entries are made to adhere to the principle of matching. The preparation of financial Statements statements is independent of roducin the trial balance.

No such data duplications is made. In order to produce ledger accounts the stored transaction data is processed to appear as classified so that same is presented in the form of report. The generation of ledger accounts is not necessary condition for trial balance. There is nothing like making adjusting entries for errors and rectifications. The preparation of financial statements assumes the availability of trial balance.

Advantages and Disadvantages of Using Computerized Accounting Advantages : Speed ,Automatic document production, Accuracy ,Up-to-date information ,Availability of information Management information, Tax return, Legibility, Efficiency, Staff motivation, Cost savings, Reduce frustration, The ability to deal in multiple currencies easily Disadvantages : Cost, Reliance, Fraud , Additional software, Human error, Training, Time 

Functions performed by Accounting Software available in the market Most of the accounting software applications on the market provide the following features and capabilities, to improve all facets of financial planning, management, control, and analysis. The most basic features include: General Ledger Management , Controlling and Budget Management, Cash Management, Financial Forecasting, Fixed Asset Management, Compliance Management 


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MODULE D BANKING OPERATIONS Syllabus Banking Operations & Accounting Functions Preparation of Vouchers, cash receipt and payment entries, clearing inward and outward entries, transfer debit and credit entries, what is KYC and what are the different documents to satisfy KYC, verify KYC and authenticity of documents, operational aspects in regard to opening of all types of accounts, scrutiny of loan applications/documents, allowing drawals and accounting entries involved at various stages, operational aspects of CBS environment etc., Back office operations in banks, handling of unreconciled entries in banks.


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BANKING OPERATIONS The Banking Regulation Act 1949 (Section 5-c) defines a banker as a person, undertaking business of banking. Banking means (Section 6) accepting deposits from public, for the purpose of lending, repayable on demand or otherwise, withdrawable by cheque, draft, order or otherwise. Definition of Bank & Banking: Bank is one which conducts business of banking. Banking has been defined in Section 5 of Banking Regulation Act. CUSTOMER : There is no legal definition of a bank customer. When customer tenders an account opening form to open the a/c and banker accepts it, a contractual relationship is established. KYC definition of customer: As per RBI, for KYC policy purpose, a 'Customer may be defined as a person or entity that maintains an account with the bank and/or has a business relationship with the bank; FUNCTIONS OF A BANK: Main functions: As per section 5 of the Banking Regulation Act, Banking means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, and order or otherwise. The Act further says that any company which is engaged in the manufacture of goods or carries on any trade and which accepts deposits of money from public merely for the purpose of financing its business shall not be deemed to transact the business of banking within the meaning of this clause. Incidental business: As per Section 6 of the Banking Regulation Act, 1949, banks can engage in certain classes of business which are incidental to the business of banking like Lockers, Safe custody, Collection of cheques etc. Prohibitions: As per Section 8 of B R Act, a bank is prohibited from buying, selling or dealing in goods except in connection with the realisation of a security held by it or for collection or negotiating bills of exchange. Main function of a bank are: (a) Accepting Deposits of money from public; (b) Granting loans and advances Deposits 1. Deposit accounts is the core activity of the bank. Deposits are major resource of the bank.

Banks accept demand deposits which are withdrawable on demand, Saving Deposits, Term deposits and open current accounts. Loans and advances :

2.

Banks grant advance through Overdraft, Cash credit, Demand Loan, Term Loans, Purchase or Discounting of Bills. 2. Loans are given mainly to corporates, businessmen and small borrowers. 3. Loans are given against securities created from out of bank funds, personal security or goods, movable or immovable in nature. 4. Type of advances: Advances on the personal security of the debtor, or and for which no tangible or collateral security is taken; Advances which are covered by tangible or collateral security; Loans against the security of Fixed Deposit receipts; Housing Loan; Educational Loan; Loans against Shares/Securities/debentures; Loans against National Savings Certificates, KVPs, etc; Consumer Loans; securitization of Loans; venture capital advances, gold loans, etc. Other functions of banks: 1. Dealing in securities, on its own account or on behalf of its customers. . 2. Opening letters of credit/issuing guarantees. 3. Dealing in foreign exchange. 4. Remittances: through demand drafts, RIGS, NEFT, etc. 5. Collection of cheques, drafts, pay orders, travellers cheques, dividend and interest warrants, tax refund orders, 6. Collection of trade bills 7. Receipt of Foreign Contribution on behalf of the registered persons/Organization 8. Cash Management Product 9. Automated Teller Machines (ATMs) 10. Depository Participant (DP) Services 11. Handling Government Business 12. Acting as trustees and executors. 13. Merchant banking, i.e. acting as managers to a public issue, etc. 14. Safe-keeping Services 15. Lockers 16. Credit Cards/Debit Cards 17. Securitisation of future lease rentals 18. Derivatives 19. Prepaid Payment Instruments 1.

Para Banking services performed by banks Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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Equippament Leasing, Hire Purchase and Factoring Services through subsidiary companies Investment in Venture Capital Funds (V CFs) Mutual fund business: sponsoring mutual funds and marketing the mutual fund units. 4. Money Market Mutual Funds (MMMFs) which come under the purview of SEBI regulations but RBI approval required before approaching SEBI for registration. 5. Portfolio Management Services: Though banks can not undertake Portfolio Management Services on their own, bank-sponsored NBFCs can offer PMS to their clients subject to following conditions - (a) Funds accepted for portfolio management from their clients, should not be entrusted to another bank for management; (b) 'PMS' should be in the nature of investment consultancy/management, for a fee, at the customer's risk without guaranteeing, a pre-determined return. 6. Primary Dealership Business. 7. Retailing of Government Securities 8. Underwriting of Corporate Shares and Debentures 9. Underwriting of bonds of Public Sector Undertakings 10. Sponsors to Infrastructure Debt Funds (IDFs) 11. Insurance business: Through risk participation or Bancassurance or Insurance broking 12. Pension Funds Management through subsidiaries (not departmentally) with prior approval of RBI and as per eligibility criteria prescribed by Pension Fund Regulatory and Development Authority (PFRDA). 1.

2. 3.

FRONT OFFICE AND BACK OFFICE IN A BANK Front office: Refers to bank's departments that come in contact with clients. Front office include the marketing, sales, and customer relations operations of the bank. The front office staff directly produces the revenue. Generally, the branches of banks perform the function of the front office by receiving deposits and making loans and advances - as well as providing other banking services. 5. _Due to computerization in banks, many of the front office functions like fund withdrawal/transfer, accepting cheque book request, balance inquiry, statement of account have been converted into back office functions by using ATM/Internet banking/Mobile banking. Use of technology, to replace front office activities, results in cost savings and economies of scale. 1. 2. 3. 4.

Back Office: 1. 2. 3. 4. 5.

6.

Back office staff, perform administrative and other support functions for the front office. Although the operations of a back office are not prominent, they are a major contributor to the banking business. Back offices may be located other than the bank branch with cheaper rent and lower labour costs. Back office functions can be outsourced to consultants and contractors, including ones in other countries. The Head office and the' Regional/Zonal offices do not conduct any banking business and are generally responsible for administrative and policy decisions. But, accounting for treasury functions (viz., investments, funds management, bill re-discounting) is usually carried out at the head office. Specialised activities like merchant banking are carried on by separate divisions which operate at the head office and/or at large designated branches. Specialised branches: Banks have set up branches exclusively for a specified segment of their clients like Personal Banking branches (catering to the needs of individual customers), Commercial or Industrial Finance branches (catering to the needs of industries in the small, medium and/or large sectors), Recovery branches (focusing on reduction of non- performing assets of the bank).

OUTSOURCING OF SERVICES BY BANKS "Outsourcing" is defined as "a bank's use of a third party (either an affiliated bank within a corporate group or a bank that is external to the corporate group) to perform activities on a continuing basis that would normally be undertaken by the bank itself, now or in the future". 'Continuing basis' would include agreements for a limited period. Advantages of Outsourcing :Reduction in costs as well as use of expertise not available internally. Scope of RBI guidelines on outsourcing: (a) Activities that should not be outsourced (b) Bank's role and regulatory and supervisory requirements (c) Risk management practices for outsourced financial services (d) Role of Board of Directors and senior management (e) Evaluation of risks (f) Evaluating the capability of the service provider (g) Outsourcing agreement (h) Confidentiality and security (i) Responsibility of DSA/DMA/Recovery Agents (j) Monitoring of outsourced activities (k) Redressal of grievances related to outsourced services (l) Reporting of transactions to Financial Intelligence Unit (m) Off-shore outsourcing of financial services Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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Activities which cannot be outsourced: Core management functions including internal audit, compliance function and decision-making functions like, determining compliance with Know Your Customer ('KYC') norms for opening deposit accounts, according sanction for loans (including retail loans) and management of investment portfolio. Operational Risk Associated with Outsourcing of Activities 1. Requirement to process high volumes of transactions within a short time through the large-scale use of IT. 2. Use

of electronic funds transfer (EFT) or other telecommunication system to transfer large sums of money, with the resultant risk arising from payments to incorrect parties. 3. Conduct of operations in many geographically dispersed locations, dispersion of transaction processing and internal controls. This may result in control breakdowns which may remain undetected or uncorrected. 4. Intra-day payment risk. 5. Handling of large volumes of cash and financial instruments, which are subject to the risk of loss, arising from theft and fraud by employees or other parties. 6. The need to adhere to differing requirements, thereby, leading to risk that operating procedures may not comply with regulations in all the jurisdictions. OPERATING INSTRUCTIONS IN BANKS: Banks should establish formal operating procedures, welldefined limits for individual discretion and rigorous systems of internal control as banks are exposed to exceptional risks like 1. Custody of large volumes of cash and other monetary items, like negotiable instruments requiring physical security in the storage and the transfer of these instruments-with a scope for frauds. 2. Large number of transactions involving large amounts requiring complex accounting and internal control systems. Though manual operations replaced by technology driven processes, but checks required to avoid frauds. 3. Transactions are initiated, recorded and managed at different locations. 4. Geographically dispersed wide network of branches and departments, involving foreign offices also requiring greater decentralisation of authority and control functions with difficulties in maintaining uniform operating practices and accounting systems. 5. 'Off-balance sheet' items, may not involve accounting entries and may be difficult to detect. 6. Completion of transactions directly by the customers, over the Internet, mobile banking or through Automated Teller Machines (ATMs). 7. As the banks are linked to national and international settleMent systems, they could pose a systemic risk. BANKING OPERATIONS MANUAL Objective: To provide a ready guide to the front office functionaries in - in day-to-day banking operations. Used for standardizing the procedures. Provides up-to-date instructions on Banking operations. Basis of Manual: Extant banking law practices. It needs frequent updating to cover RBI guidelines and for implementation of Core Banking Solutions. Coverage: 1. Each bank has its own Banking Operations Manual. While the basic structure of the manual ofeach bank is similar, as it is based on the same legal framework and RBI guidelines, the differences are because of specialized products and policies/practices based on the peculiar conditions of each bank. For example, activities like opening of accounts, compliance with KYC norms, handling cash, clearing, loans and advances, remittances, etc are undertaken by every bank 2. Mainly covers the aspects which are currently relevant to the Bank. 3. Not a document to provide any full- fledged legal framework of banking operations and not a rigorous substitute for extant circular instructions. 4. Contains important aspects of Banking operations for reference of the functionaries at the delivery point of the customer services in the Bank. 5. The customer relationship policy of the Bank and also the customer service norms of the Bank.

Preparation of vouchers There are 2 types of transactions in a bank, cash and non-cash. The non-cash transactions also called 'transfer transactions'. In various transactions, one or both of the accounts concerned may be of the customers or the internal accounts of the bank. For example, if 2' deposit a cheque drawn in his favour by 'Y' who is also a customer of the branch, the accounts of the two customers will be affected. On the other hand, if deposits draft drawn on the branch, the Draft, account, an internal account of the bank, will be debited. Likewise, on payment of interest on deposit accounts, the 'Interest Account' at the branch will be debited and many personal accounts credited. VOUCHERS : The debit as well as the credit operations in different accounts, either by customers or by the bank itself, are made by means of vouchers. There are two kinds of vouchers (1) which evidence only debit or credit to an account, and (2) which contains both debit and credit to different accounts. The 2nd category of vouchers may be called 'composite vouchers'.

Types of debit vouchers :

The debit vouchers are created out of the following transactions: 1. Cheques issued by the customers. Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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Cheques/pay orders issued by the bank. Withdrawal forms received from the savings bank account holders. Drafts issued by other branches, of the bank payable at the branch. Draft issued by other banks on the branch, in terms of an approved arrangement between the two banks. Dividend/interest warrants issued by the bank's customers and payable by the branch in terms of an approved arrangement. 7. Traveller's cheques issued by any branch of the bank which are presented to the branch for payment. 8. Drafts/pay orders issued by the branch itself which are cancelled at the request of the customer and amount is refunded to him. 9. Instruments like traveller's cheques/gift cheques, etc., of other banks which are paid by the branch in terms of an approved arrangement. 10. Letters of authority signed by the customers, containing standing instructions 11. Debit vouchers prepared by the branch on its printed stationary which are authorised by designated official of the bank and may also carry authority from the customers in some cases if the debit is to his account at the branch. 12. In respect of realization of collection instrument sent to other branches of the bank, a debit advice (which may be known by different names in different banks) prepared by the other branch may itself as a debit voucher. 13. In case of remittance of funds by one branch to the other by means of telegraphic transfer or a mail transfer. The bank may treat the advice of transfer itself as debit voucher or may prepare a separate debit voucher. Credit vouchers: The credit vouchers are created out due to the following transactions: 1. Pay-in-slips filled up the customers (depositors as well as borrowers) for deposit of amounts in their accounts. Generally, the pay-in-slips are in a standard format adopted by the bank but there may be cases of a special kind of pay-in-slips in respect of some customers pursuant to a formal agreement between the bank and the customer. 2. Applications for issue of demand drafts, mail transfers, telegraphic transfers, banker's cheques pay orders, gift cheques, traveller's cheques and other similar instruments. Some of these applications may be made on behalf of the branch itself for the payments it has to make. 3. Challans for deposits into the accounts of Central/State Government, e.g. on account of direct/indirect taxes or under schemes like public provident fund, etc. 4. Credit vouchers prepared by the branch on its printed stationary which are authorised by an official of the bank. Normally, these vouchers are signed on behalf of the branch only but there may be some instances where the customer concerned also signs on the voucher as evidence that the transaction actually pertains to him. Examples are: deposit of locker charges (credit to an income account of the bank), deposit of money with the bank for purchase of non-judicial stamps required for execution of documents in favour of the bank, etc. 5. On payment of collection instruments form other branches of the bank, a credit advice (which may be known by different names in different banks) or a copy of the collection schedule received from the other branch may itself be treated as a credit voucher. 6. In case of debits or credits of similar nature to a large number of accounts in the same ledger or group of ledgers (e.g. debit on account of periodic interest, inspection charges etc. or credit on account of periodic payment of interest to depositors), it is a common practice among banks to prepare a consolidated voucher on their stationary and enclose thereto a list containing details of accounts to be debited/credited and the amount of debit/credit. 7. Examples of composite vouchers : in addition to debit vouchers and credit vouchers, there is a category of 'composite vouchers' also. These vouchers record the particulars of both debit and credit accounts. Most of the transactions covered by composite vouchers pertain to the internal accounts of the bank, i.e. non-customer accounts. 8. Examples : bills received for collection, letters of credit issued by the branch, guarantees issued by the branch, etc. 9. Such vouchers may also be prepared to rectify an error while debiting or crediting an account. For example, in case the current account is debited in general ledger instead of cash credit account by mistake, the composite voucher will show debit to cash credit account with a corresponding credit to current account. 10. Multi-level authentication (checking): All entries in the personal ledgers and the summary sheets are checked by persons other than those who have made the entries. Most clerical errors are thus detected immediately. 11. Balancing of books : A trial balance of the personal [edgers is prepared periodically, usually every two weeks, and agreed with general ledger control accounts. In banking parlance, this exercise is referred to as 'balancing of books'. 2. 3. 4. 5. 6.

KYC GUIDELINES 

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Money laundering: activities by which the proceeds of illegal acts are converted into proceeds from legal acts. These guidelines have been issued by RBI under Section 35A of the Banking Regulation Act, 1949. Objective of KYC guidelines: -To prevent banks from being used, intentionally or unintentionally, by criminal elements for money laundering or terrorist financing activities. KYC procedures also enable banks to know/understand their customers and their financial dealings which in turn help them manage their risks prudently_ Customer: For the purpose of KYC policy, a 'Customer' is defined as a person or entity that maintains an account and/or has a business relationship with the bank.


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Components of KYC Policy: Banks should frame their KYC policies incorporating the following four key elements: Customer Acceptance Policy; Customer Identification Procedures; Monitoring of Transactions; and Risk management. Customer acceptance policy: Norms to be fulfilled for acceptance of a customer establishing a banking relationship, carrying out a financial transaction or when the bank has a doubt about the authenticity/veracity or the adequacy of the previously obtained customer identification data. The bank must be satisfied about the proper identity, standing and residential address of the prospective customer. Customer identification procedure: To be followed while opening the account of the prospective customer. Customer is required to furnish proper proof of identity through photo identity card and address proof. Documents required from various types of customers are given below. The original documents are to be verified, copies taken and duly authenticated by the officer of the Bank stating 'verified with the original'. Type of customer Documents Accounts of individual For proof of identity, only the documents mentioned below would be accepted for opening accounts of individuals. They are: the passport, the driving license, the Permanent Account Number (PAN) Card, the Voter's Identity Card issued by Election Commission of India, job card issued by NREGA duly signed by an officer of the State Government, the letter issued by the Unique Identification Authority of India containing details of name, address and Aadhaar number. It is a) Certificate of incorporation; b) Memorandum and Articles of Association; c) A Accounts of Companies: Name, resolution from the Board of Directors and power of attorney granted to its managers, officers or employees to transact Principal place of Business; Mailing on its behalf; and d) An officially validdocument in respect of managers, officers or emplo address; Phone no holding an attorney to transact on its behalf; (e) Copy of PAN Allotment letter; (f) Copy Accounts of a) Registration certificate; b) Partnership deed; and c) An officially valid document in Partnership respect of the person holding an attorney to transact on its behalf; (iv) Any officially valid document identifying the partners and the persons holding the Power of Attorney and their addresses; (v) Telephone bill in the name of firm/partners a) Registration certificate; b) Trust deed; and c) An officially valid document in Trusts respect of the person holding a pbwer of attorney to transact on its behalf. Proprietorship at least two of the following documents (i) Proof of the name, address and activity of concern the concern; (ii) Registration certificate (in the case of a registered concern); (iii) Certificate/licence issued by the Municipal authorities under Shop & Establishment Act, (iv) Sales and income tax returns; (v) CST/VAT certificate; (vi) Certificate/registrationdocume Tax/Professional Tax authorities; (vii) Licence issued by the Registering authority like Certificate of Practice issued by Institute of Chartered Accountants of India, Institute of Cost Accountants of India, Institute of Company Secretaries of India, Indian Medical Council, Food and Drug Control Authorities, registration/licensing document issued in the name of the proprietary concern by the Central Government or State Government Authority/ Department, etc or IEC (Importer Exporter Code) issued to the proprietary concern by the office of DGFT; (viii) The complete Income Tax return (not just the acknowledgement) in the name of the sole proprietor where the firm's income is reflected, duly authenticated/ acknowledged by the Income.Tax Authorities; (ix) Utility 

Summary of RBI Guidelines on various aspects of Customer Acceptance Policy Banks' Board should clearly lay down policy relating to KYC taking into account the following: 1. No account is opened in anonymous or fictitious/ benami name(s); 2. KYC norms should be applicable on all accounts except Small accounts and on all persons authorized to operate the account. 3. Documentation requirements and other information to be collected for different categories of customers depending on perceived risk and as per requirements of Prevention of Money laundering Act, 2002 and guidelines issued by RBI. 4. Not to open an account or close an existing account where the bank is unable to verify the identity and /or obtain documents required as per the risk categorisation due to non cooperation of the customer or non reliability of the data/information furnished to the bank. 5. Documents for proof of identity and address of the customer: (i) Passport (ii) PAN card (iii) Voter Identity card (iv) Driving Licence (v) MANREGA Job Card (vi) Aadhar card issued by the Unique Identification Authority of India. Banks would not have the discretion to accept any other document for this purpose. Banks may maintain records of the identity of clients, and records in respect of transactions with its client in hard or soft format. 6. Time for completing KYC Norms: Where a customer categorised as low risk expresses inability to complete the documentation requirements on account of any reason that the bank considers to be genuine, and where it is essential not to interrupt the normal conduct of business, the bank may complete the verification of identity within a period of six months from the date of establishment of the relationship. 7. Non-compliance of KYC requirements: Banks should impose 'partial freezing' on such KYC non-compliant in a phased manner. The option of 'partial freezing' to be exercised after giving due notice of three months initially to the Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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customers followed by a reminder for further period of three months. Thereafter, banks may impose 'partial freezing' by allowing all credits and disallowing all debits with the freedom to close the accounts. If the accounts are still KYC non-compliant aftersix months of imposing initial 'partial freezing'banks may disallow all debits and credits from/to the accounts, rendering them inoperative. Further, it would always be open to the bank to close the account of such customers. 8. PAN No: Quoting of PAN number is not as per KYC norms. But as per Income Tax Rules, Quoting of PAN number is mandatory while opening an account or making a time deposit exceeding Rs. 50,000 and any person who has not been allotted a PAN number shall make a declaration in Form No. 60/61.

Simplified KYC Measures by RBI 1. Simplified

Measures for KYC: 'Simplified measures' may be applied to verify the identity of the tow risk' customers and in such cases it would be sufficient to obtain either (1) identity card with applicant's Photograph issued by Central/State Government Departments, Statutory/Regulatory Authorities, Public Sector Undertakings, Scheduled Commercial Banks, and Public Financial Institutions; or (ii) letter issued by a gazetted officer, with a duly attested photograph of the person above for the purpose of proof of identity and proof of address. 2. KYC once done by one branch of the bank should be valid for transfer of the account within the bank. Banks may transfer existing accounts at the transferor branch to the transferee branch without insisting on fresh proof of address and on the basis_ of a self-declaration from the account holder about his/her current address. . 3. Introduction not Mandatory for opening accounts: Sinc ie introduction is not necessary for openirig of accounts under PML Act and Rules or Reserve Bank's extant KYC instructions, banks should not insist oraffroduction for opening bank accounts of customers. 4. If the address on the document submitted for identity proof by the prospective customer is same as that declared by him/her in the account opening form, the document may be accepted as a valid proof of both identity and address. Customers may submit only one documentary proof of address (either current or permanent) while opening a bank account or while undergoing periodic updation. in case the address mentioned as per 'proof of address' undergoes a change, fresh proof of address may be submitted to the branch within a period of six months. In case the proof of address furnished by the customer is not the local address or address where the customer is currently residing, the bank may take a declaration of the local address on which all correspondence will be made by the bank with the customer. No proof is required to be submitted for such address for correspondence/local address. Verification of address by the bank through 'positive confirmation' has been dispensed with. In the event of change in this address due to relocation or any other reason, customers may intimate the new address for correspondence to the bank within two weeks of such a change. 5. Opening another account in the same bank: If an existing KYC compliant customer of a bank desires to open another account in the same bank, there should be no need for submission of fresh proof of identity and/or proof of address. Small account: "Small account" means a savings account in a banking company where- (i) the aggregate of all credits in a financial year does not exceed rupees one lakh, (ii) the aggregate of all withdrawals and transfers in a month does not exceed rupees ten thousand, and; (iii) the balance at any point of time does not exceed rupees fifty thousand. An individual who desires to open a small account in a banking company may be allowed to open such an account on production of a self-attested photograph and affixation of signature or thumb print, as the case may: be, on the form for opening the account provided: (i) The designated officer of the banking company, while opening the small account, certifies under his signature that the person opening the account has affixed his signature or thumb print, as the case may be, in his presence. "Designated Officer" means any officer or a class of officers authorized by a banking company, either by name or by designation, for the purpose of opening small accounts". (ii) a small account shall be opened only at Core Banking Solution linked banking company branches or in a branch where it is possible to manually monitor and ensure that foreign remittances are not credited to a small account and that the stipulated limits on monthly and annual aggregate of transactions and balance in such accounts are not breached, before a transaction is allowed to take place; (iii) a small account shall remain operational initially for a period of twelve months, and thereafter for a further period of twelve months if the holder of such an account provides evidence before the banking company of having applied for any of the officially valid documents within twelve months of the opening of the said account, with the entire relaxation provisions to be reviewed in respect of the said account after twenty four months. (iv) a small account shall be monitored and when there is suspicion of money laundering or financing of terrorism or other high risk scenarios, the identity of client shall be established through the production of officially valid documents. (v) foreign remittance shall not be allowed to be credited into a small account unless the identity of the client is fully established through the production of officially valid documents. 7. Accounts of Self Help Groups: KYC verification of all the members of SHG need not be done while opening the savings bank account of the SHG and KYC verification of all the office bearers would suffice. At the time of credit linking of SHGs, no separate KYC verification of the members or office bearers is necessary. 8. Foreign students have been allowed a time of one month for furnishing the proof of local address. 6.


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Periodical updation of KYC Data Updation of Customer Identification Data: Full KYC exercise will be required to be done at least every two years for high risk individuals and entities, at least every eight years for medium risk individuals and entities and at least every ten years for low risk individuals. Fresh photographs will be required to be obtained from minor customer on becoming major. Fresh proofs of identity and address will not be required from those customers who are categorised as 'low risk'. In case of change of address of such 'low risk' customers, they could merely forward a certified copy of the document (proof of address) by mail/post, etc. Banks may not insist on physical presence of such low risk customer at the time of periodic updation.

Risk Classification & Management 1. Customers

should be ategorized into low, medium and high risk (banks may choose any suitable nomenclature viz. level I, level lI and level Ill ); customers requiring very high level of monitoring, e.g. Politically Exposed Persons may, if considered necessary, be ategorized even higher. 2. Examples of low risk customers could be salaried employees whose salary structures are well defined, people belonging to lower economic strata of the society whose accounts show small balances and low turnover, Government Departments and Government owned companies, regulators and statutory bodies etc. 3. Examples of High risk customers include (a) nonresident customers; (b) 'high net worth individuals; (c) trusts, charities, NGOs and organizations receiving donations; (d) companies having close family shareholding or beneficial ownership; (e) firms with 'sleeping partners'; (f) politically exposed persons (PEPs) of foreign origin, customers who are close relatives of PEPs and accounts of which a PEP is the ultimate beneficial owner; (g) non-face to face customers and (h) those with dubious reputation as per public information available etc; (i) bullion dealers (including sub-dealers) & jewelers. However, only NPOs/NGOs promoted by United Nations or its agencies may be classified as low risk customer. 4. Bank should review the risk profile of the customer at least once in six months. 5. Concurrent/ Internal Auditors should specifically check and verify the application of KYC procedures at the branches and comment on the lapses observed in this regard.

Money Mules Third parties, called "Money mules" can be used to launder the proceeds of fraud schemes (e.g., phishing and identity theft) by criminals who gain illegal access to deposit accounts. In a money mule transaction, an individual with a bank account is recruited to receive cheque deposits or wire transfers and then transfer these funds to accounts held on behalf of another person. Money mules may be recruited by a variety of methods, including spam e-mails, advertisements on genuine recruitment web sites, social networking sites, instant messaging and advertisements in newspapers. Periodical updation of customer identification data can reduce risk of Money Mules.

Monitoring of Transactions Maintenance of records of transactions Banks should introduce a system of maintaining proper record of following transactions: 1. all cash transactions of the value of more than Rupees Ten Lakh or its equivalent in foreign currency; 2. Banks should maintain proper record of all series of cash transactions integrally connected to each other which have been valued below rupees ten lakhs or its equivalent in foreign currency where such series of transactions have taken place within a month and the. 3. all series of cash transactions integrally connected to each other which have been individually valued below Rupees Ten Lakh or its equivalent in foreign currency where such series of transactions have taken place within a month and monthly aggregate exceeds rupees ten lakhs or its equivalent in foreign currency. 4. all transactions involving receipts by non-profit organisations of value more than rupees ten lakh or its equivalent in foreign currency 5. all cash transactions where forged or counterfeit currency notes or bank notes have been used as genuine and where any forgery of a valuable security or a document has taken place facilitating the transaction and 6. All suspicious transactions whether or not made in cash and by way of as mentioned in the Rules. Integrally connected cash transactions Debit transactions are treated as integrally connected cash transactions if total cash debits during the calendar month exceeds Rs. 10 lakhs. Similarly Credit transactions are treated as integrally connected cash transactions if total cash credits during the calendar month exceeds Rs. 10 lakhs. However, the bank should not report a transaction which is less than Rs.50,000/-. Monitoring of High risk accounts 1. Banks should set key indicators for. risk sensitive (e.g.,high turnover accounts or complex or unusual transactions accounts) accounts, taking note of the background of the customer, such as the country of origin, sources of funds, the type of transactions involved and other risk factors. 2. Banks should put in place a system of periodical review of risk categorisation of accounts and the need for applying enhanced due diligence measures. 3. Banks should subject 'high risk accounts' to intensified transaction monitoring. High risk associated with such accounts should be taken into account by banks to identify suspicious transactions for filing Suspicious Transaction Reports (STRs) to FIU-IND. Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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4. Banks

should closely monitor the transactions in accounts where a large number of cheque books are sought by the company, there are multiple small deposits (generally in cash) across the country in one bank account and where a large number of cheques are issued bearing similar amounts/dates. In case of unusual operations in accounts, the matter should be immediately reported to Reserve Bank and other appropriate authorities such as Financial Intelligence Unit India (FIU-Ind) under Department of Revenue, Ministry of Finance. Maintenance and Preservation of record Banks should maintain for at least five years from the date of transaction between the bank and the client, all necessary records of transactions, both domestic or international, which will permit reconstruction of individual transactions (including the amounts and types of currency involved if any) so as to provide, if necessary, evidence for prosecution of person's involved in criminal activity. Banks should ensure that records pertaining to the identification of the customer and his address (e.g. copies of documents like passports, identity cards, driving licenses, PAN card, etc.) obtained while opening the account and during the course of business relationship, are properly preserved for at least five years after the business relationship is ended. Reporting to Financial Intelligence Unit – India :In terms of the PMLA Rules, banks are required to report information relating to cash and suspicious transactions and all transactions involving receipts by nonprofit organisations of value more than rupees ten lakh or its equivalent in foreign currency to the Director, Financial Intelligence Unit-India (FIU-IND).

Cash Transaction Report ( CTR ) 1. The

Cash Transaction Report (CTR) for each month should be submitted to FIU-IND by 15th of the succeeding month. It should include transactions where cash receipt or payment is more than Rs 10 lakh and integrally connected cash transactions where-cash debit or cash credit during the month exceeds Rs 10 lakh. 2. All Cash transactions where forged or counterfeit currency notes or bank notes has been used as genuine should be reported by the 15th day of the succeeding month. 3. While filing CTR, details of individual transactions below Rupees Fifty thousand need not be furnished. 4. CTR should contain only the transactions carried out by the bank on behalf of their clients/customers excluding transactions between the internal accounts of the bank.

Suspicious Transaction Reports (STR) While determining suspicious transactions, banks should be guided by definition of suspicious transaction contained in PMLA Rules. 2. Banks should make STRs if they have reasonable ground to believe that the transaction involve proceeds of crime generally irrespective of the amount of transaction and/or the threshold limit. 3. The Suspicious Transaction Report (STR) should be furnished within 7 days of arriving at a conclusion that any transaction, whether cash or non-cash, or a series of transactions integrally connected are of suspicious nature. 4. Banks should not put any restrictions on operations in the accounts where an STR has been made. Banks and their employees should keep the fact of furnishing of STR strictly confidential, as required under PML Rules. It should be ensured that there is no tipping off to the customer at any level. Cross border wire transfers: All cross border wire transfers of the value of more than rupees five Iakhs or its equivalent in foreign currency where either the origin or destination of fund is in India to be reported to FIU-IND. Non-Profit Organisation 1.

The report of all transactions involving receipts by nonprofit organizations of value more than rupees ten lakh or its equivalent in foreign currency should be submitted every month to the Director, FIU-IND by 15th of the succeeding month in the prescribed format.

Other Guidelines of RBI on KYC 1. Principal

Officer Banks should appoint a senior management officer to be designated as Principal Officer who should have timely access to customer identification data, CDD information, transaction records and other relevant information. The Principal Officer should be able to act independently and report directly to the senior management or Board of Directors. (September 11, 2009) . 2. KYC/AML guidelines issued by Reserve Bank of India shall also apply to their branches and majority owned subsidiaries located outside India, especially, in countries which do not or insufficiently apply the FATF Recommendations, to the extent local laws permit. In case there is a variance in KYC/AML standards prescribed by the Reserve Bank and the host country regulators, branches/overseas subsidiaries of banks are required to adopt the more stringent regulation of the two. 3. Reliance on third party due diligence: For the purpose of identifying and verifying the identity of customers at the time of opening account, banks may rely on a third party subject to the conditions that(a) the bank immediately obtains necessary information of such client due diligence carried out by the third party; (b) the third party is not based in a country or jurisdiction assessed as high risk; and (e) the bank is ultimately responsible for client due diligence and undertaking enhanced due diligence measures, as applicable. Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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Seeking additional information under KYC 1. Only

the mandatory information required for KYC purpose should be obtained at the time of opening the account/during periodic updation. The information sought from the customer should be relevant to the perceived risk, and in conformity with RBI guidelines. 2. Personal information/details like number of dependents, the names of sons and daughters, lifestyle, number of foreign visits undertaken during the last three years, details of family members/relatives settled abroad, assets and liabilities, name and date, of birth of spouse, wedding date, investments, etc, if required should be sought ; separately with his/her consent and after opening the account. 3. The customer should be advised about the information required under KYC and additional information sought by the bank that is optional. All details collected from the customer is to be treated as confidential and not to be divulged for cross selling or any other like purposes.

Aadhar Card for KYC Purposes

1. The

fetter issued by the Unique Identification Authority of India (UIDAI) containing details of name, address and Aadhaar number may be accepted as an 'Officially Valid Document'. Further, while opening accounts based on Aadhaar, if the address provided by the account holder is the same as that on Aadhaar letter, it may be accepted as a proof of both identity and address. 2. Banks may accept e-Aadhaar, downloaded from UIDAI website, as an officially valid document. If the prospective customer knows only his/her Aadhaar number, the bank may print the prospective customer's eAadhaar letter in the bank directly from the UIDAI portal; or adopt e-KYC procedure as prescribed by RBI or confirm identity and address of the resident through simple authentication service of UIDAI. 3. e-KYC service is accepted as a valid process for KYC verification under Prevention of Money Laundering (Maintenance of Records) Rules, 2005. Information containing demographic details and photographs made available from UIDAI as a result of e-KYC process ("which is in an electronic form and accessible ") may be treated as an 'Officially Valid Document' under PML Rules. The individual user has to authorize the =Ai, by explicit consent, to release her or his identity/address through biometric authentication to the bank branches/business correspondents (BCs). The UIDAI then transfers the data of the individual comprising name, age, gender, and photograph of the individual, electronically to the bank/BCs, which may be accepted as valid process for KYC verification. 4. RBI has advised the banks to have proper infrastructure in place to enable biometric authentication for eKYC.

CUSTOMER SERVICE IN BANKS (RBI guidelines) The guidelines are only illustrative and not exhaustive 1. Business and working hours: All customers who enter the banking hall before the close of business hours may be attended to by the branches. The working hours of the staff should be fixedly minutes before the start of business hours at all branches in metropolitan and urban centres so that job can be started at commencement of Banking Hours. 2. Display of time norms: Time norms for specified business transactions should be displayed prominently in the banking hall. so that it attracts the customers' attention as well as that of the employees for adherence. 3. Extension of business hours for non-cash transactions: Staff at the counters may undertake the following. transactions during the extended business hours (branches to indicate the timings): 1. non-voucher generating transactions: (i).issue of passbook/statement of accounts; (ii) issue of cheque book; (iii) delivery of term deposit receipts/drafts; (iv) acceptance of share application form; and (v) acceptance of clearing cheques/bills for collection 2. voucher generating transactions: (i) issue of term deposit receipts (TDR); (ii) acceptance of cheques for locker rent due; (iii) issue of travellers' cheques; (iv) issue of gift cheques; (v) acceptance of individual cheques for transfer credit 4. Uninterrupted Service: No counter remains unattended during the business hours. 5. May I Help -You counter: All branches, except very small ones, should have "Enquiry" or "May I help you" counters. Such counters may exclusively attend to enquiries or may be combined with other functions depending upon the requirement. Such counters should be near the entry point to the banking hall. 6. Ramps at Automated Teller Machines (ATMs)/branches: All existing ATMs/future ATMs to be provided with ramps so that wheel chair users/persons with disabilities can easily access them. The height of the ATM should be such that it does not create an impediment in its use by a wheelchair user_ Ramps to be provided at the entrance of the bank branches, so that the person with disabilities/wheel chair users can enter the bank branches and conduct business without much difficulty. 7. Identity badges: Each employee may wear on his person, identity badge with photograph and name. B. Complaint box and book: A Complaint cum Suggestion Box may be kept in the bank premises at a prominent place. Complaint Book with adequate number of perforated copies in each set may also be maintained to instantly provide the complainant with an acknowledged copy of the complaint. 9. Advisory Services on deposit schemes: The banks should provide assistance/guidance to customers in the area of investment of funds in the various deposit schemes vis-a-vis the requirement of the Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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customers 10. Brochures/pamphlets for guidance of customers: Banks may make available to the customers, brochures/pamphlets in regional language/Hindi/English giving details of various schemes available and terms and conditions thereof. Such brochures may also contain, among others, dos and don'ts for smooth handling of day-to-day banking transactions. 11. Banking facilities to the visually challenged: All the banking facilities such as cheque book facility including third party cheques, ATM facility, Net banking facility, locker facility, retail loans, credit cards etc to be provided to the visually challenged without any discrimination. From 1.7.2014, 100% of the new ATMs installed (earlier at least one third of new ATMs) as talking ATMs with Braille keypads. 12. Fair Practices Code - Display of Bank/Service Charges: Banks have the freedom to prescribe service charges with the approval of their Boards. However, the charges should be reasonable and not out of line with the average cost of providing these services. Banks should also take care to ensure that customers with low volume of activities are not penalized. Display of information - Comprehensive Notice Board: Banks should put-up on a notice board important aspects or indicators on 'customer service information', 'service charges', 'grievance redresser and 'others'. The notice board should be updated on a periodical basis. Banks should display information relating to interest rates and service charges in their premises as well as post it on their websites, to enable the customer to obtain the desired information at a glance. The banks should display at their offices/branches the service charges relating to the following services in the local languages: (a) Services rendered free of charge; (b) Minimum balances to be maintained in the SB account; (c) Charges leviable for non-maintenance of minimum balance in SB account; (iv) Charges for collection of outstation cheques; (v) Charges for issue of Demand Draft; (vi) Charges for issue of cheque books, if any; (vii) Charges for account statement; (viii) Charges for account closure, if any; (ix) Charges for deposit/withdrawal at ATM locations, if any; Cheque Drop Facility and the Facility for Acknowledgement of cheques: No branch should refuse to give an acknowledgement on cheques being tendered by customers at their counters.Customers should be made aware of both options available to them i.e., dropping cheques in the drop box or tendering them at the counters. Infrastructure provision: Banks should provide adequate space, proper furniture, drinking water facilities, clean environment, (which include keeping the walls free of posters) etc., in their premises. Term Deposit Maturity Intimation in Advance: Banks should send, as a rule, intimation for maturity dates of term deposits well in advance to their depositors in order to extend better customer service. Other areas in which RBI guidelines/operating instructions for the staff are issued: 1. Savings bank passbooks/statement of accounts 2. Furnishing remitter details in pass book/pass sheet/account statement for credits 3. Claims in respect of missing persons 4. Safe Deposit Lockers. 5. Enabled Financial Inclusion 6. Periodical visits by senior officials. 7. Security arrangements 8. Customer charges for use of ATMs for cash withdrawal and balance enquiry 9. Electronic Payment Products (RTGS, NEFT, NECS and ECS variants) account 10. Collection of account payee cheques - Prohibition on crediting proceeds to third party 11. Provision of Note Counting Machines on counters 12. Immediate Credit of Outstation Cheques 13. Time frame for collection of cheques 14. Additional Measures for Quicker Collection of Outstation Instruments 15. Issue of Cheque Books 16. Periodical Review and Monitoring 17. Issue of Duplicate Demand Draft 18. Nomination facility 19. Monitoring system of implementation of various instructions on customer service 20. Customer Service - Redressal of Grievances 13.

ATM Transactions & Customer service 1. 2. 3. 4. 5. 6.

The message regarding non-availability of cash in ATMs should be displayed before the Transaction is initiated by the customer. The ATM ID may be displayed in the ATM premises to enable a customer to quote the same while making a complaint/suggestion. Banks should make available the forms for lodging ATM complaints within the ATM premises and also display the name and phone number of the officials with whom the complaint can be lodged. Banks should provide sufficient toll-free phone numbers for lodging complaints/reporting and blocking lost cards. Banks may proactively register the mobile numbers/e-mail IDs of their customers for sending alerts. To prevent fraudulent withdrawal at ATMs, PIN entry should be must for each and every transaction, including balance enquiry transactions. Time limits should be prescribed for completion of transactions at ATMs. Time out sessions should be enabled for all screens/stages of ATM transaction.


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Latest Latest Chan Changes ges in area area of Cust Custome omerr Serv Service ice Banks should not levy penal charges for non-maintenance non-maintenance of minimum balances in any inoperative inoperative account. Minor accounts: accounts: A savings/fixed/ savings/fixed/recur recurringring-bank bank deposit deposit account can be opened by a minor of any age 2. Minor through his/her natural or legally appointed guardian. Minors above the age of 10 years may be allowed to open and operate savings bank accounts independently. Banks may, fix limits in terms of age and amount up to which minors may be allowed to operate the deposit accounts independently. On attaining majority, the erstwhile minor should confirm the balance in his/her account and if the account is operated by the natural guardian/legal guardian, fresh operating instructions and specimen signature of erstwhile minor should be obtained and kept on record for all operational purposes. Banks are free to offer additional banking facilities like like internet banking, mobile banking, ATM/ ATM/ debit card, cheque book facility etc., but minor acco account unts s shoul should d not not be allo allowe wed d to be over overdr draw awn n and and that that these these alwa always ys rema remain in in credi credit. t. 1.

Banks should leverage the technology available with them and the telecom service providers to ensure that SMS alerts charges are levied on all customers on actual usage basis.

BANKING CODES AND STANDARDS BOARD OF INDIA

Banking Banking Codes and Standards Standards Board of India (BCSBI) has been set up on the recommendatio recommendations ns of Tarapore Committee on Customer Service and Standards Board of India India functions as an independent and autonomous autonomous body. 2. The Banking Codes and Membership of BCSBI is voluntary and open to scheduled scheduled banks. Initially Initially the membership membership of BCSBI BCSBI 3. Membership was open to scheduled commercial banks and has now been extended to include Regional Rural Banks and select select Urban Co-operative Co-operative Banks. Objectives es of the BCSBI: BCSBI: (a) To plan, plan, evolve, evolve, prepare, develop, develop, promote promote and publish comprehens comprehensive ive 4. Objectiv Codes and Standards for banks, for providing for fair treatment to their customers; (b) To function as an independent and autonomous body to monitor, and to ensure that the Codes and Standards adopted by banks are adhered to, while delivering services to their customers. collaboration with the Indian Banks' Banks' Association Association (IB A), evolved evolved two 5. Types of Codes: BCSBI has in collaboration codes — (a) Code of Bank's Commitment to Customers and the Code of Bank's Commitment to Micro and Small Enterprises. Basic theme theme of Codes: Codes: Codes set minimum minimum standards standards of bankin banking g practi practices ces for member member banks to 6. Basic follow follow when when they are deali dealing ng with with indiv individu idual al custome customers rs and micro micro and small small enterpr enterprise ises. s. These These Codes are subject subject to periodical periodical review and revision. Objecti tive ve of Code Codes: s: Prom Promot otin ing g good good banki banking ng prac practi tice ces, s, sett settin ing g mini minimu mum m stan standa dard rds, s, incr increa easi sing ng 7. Objec transparen transparency, cy, achieving achieving higher higher operating operating standard standards s and promoting promoting a cordial cordial banker-cus banker-customer tomer relationshi relationship. p. transparency and full information information to the customer customer 8. Nature of Codes: (a) The Codes lay emphasis on transparency before a product or service is sold to him; (b) The Codes are not only commitments of banks to their cust custom omer ers s but but also also in a sens sense e a Chart Charter er of Right Rights s for the comm common on perso person; n; (c) (c) By settin setting g the the minimum standards of customer service, the Codes make the customer aware of what he can expect from banks. Methods for Monitori Monitoring ng of Codes Codes by BCSBI: (a)Obtaini (a)Obtaining ng an Annual Statement Statement of Compli Compliance ance (ASC) 9. Methods from member banks; (b) Visiting branches to find out the status of ground-level implementation of Codes; (c) Studying complaints received from customers and orders/awards issued by Banking Ombudsmen/ Appella Appellate te Authority Authority to find out whether whether there is any system-w system-wide ide deficien deficiency; cy; (d) Organizi Organizing ng an annualannualConference with Principal Code Compliance Officers of the Member banks to discuss implementation issues. 10. Other activities by BCSBI: (a) undertakes campaigns and initiatives to spread awareness of the Codes amongs amongstt custom customers ers and banks; banks; (b) provide provides s facul faculty ty suppor supportt to traini training ng establ establish ishmen ments ts of banks; banks; (c) participates in on-location workshops held by/for member banks to increase coverage; (d) associates with customer customer awareness awareness programmes programmes conducted by Banking Banking Ombudsmen; Ombudsmen; (e) provides provides credit credit counselling counselling services in Mumbai; (f) publishes quarterly newsletter entitled' Customer Matters', containing matters of inter interest est to-customers 11 Compla Complaint int Redres Redressal sal by BCSBI BCSBI:: BCSBI BCSBI is not a forum forum for redres redressal sal of indiv individu idual al grieva grievance nces. s. BCSBI BCSBI examines each complaint to identify any systemic issue that may exist and takes up the matter with the respective bank to ensure that systems and procedures are suitably amended so that such complaints do not recur. recur. 1.

OPERATIONAL ASPECTS OF ACCOUNTING ENTRIES Introduction In every every busine business, ss, the ultima ultimate te objecti objective ve of recordi recording ng the financi financial al transa transacti ctions ons is to prepare prepare the balance sheet and the P& L account to know results of the operations of the enterprise during the accounting period and the financial position at the end of the accounting period. financiall transact transaction ion is recorded recorded in the books of the enterprise enterprise by way of an accounting accounting entry entry and is 2. Any financia always in terms of number of monetary units like Rs 2000. The accounting entry could be a debit entry or a credit credit entry. entry. 1.


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In accounting, the double entry system is used which implies that every credit/debit credit/debit accounting accounting entry should have one or more correspondin corresponding g debit/credi debit/creditt entry. Normally in accounting accounting entries are first recorded in Journal and then posted in Ledger but in banks 4. Normally these are first entered in the ledger accounts concerned and then in the journal. 3.

Features Features of manual manual operations: operations: First, the entries entries are entered entered in the physical physical ledgers and then all the entries in a particular ledger head are entered in the journal (day book). Finally, the total is entered in the control account concerned of the General Ledger which is used in preparing the balance sheet and the P&L account. Any accounting entry in manual operations can only be made based on a physical voucher which is authenticated by the authorised authorised officer of the branch. 6. Feat Feature ures s of Comp Comput uter eris ised ed opera operati tions ons:: The acco account untin ing g entry entry in the syste system m is made made by the the staff staff concerned and authenticated by the official concerned. Remaining operations like day book and GL are taken care of by the system. 5.

Peculiar Features of Accounting System in Banks More focus on Ledger compared compared to Journal: In business enterprises enterprises other than banks, banks, books of prime entry i.e. i.e. Journal Journals s are kept kept up-to-d up-to-date ate while while ledgers ledgers,, includ including ing the general general ledger ledger and subsid subsidiar iary y ledgers ledgers for debt debtor ors, s, cred credit itor ors, s, etc. etc. are are writ writte ten n afte afterw rwar ards ds.. But But in case case of bank banks, s, more more emph emphas asis is is laid laid on ledg ledger er acco accoun unts ts and and rela relati tive vely ly less lesser er emph emphas asis is is plac placed ed on book books s of prim prime e entr entry y such such as cash cash book books s or jour journa nals ls.. Every transaction is entered in ledgers as soon as it takes place because in the case of banks, the need for the ledge ledgerr acco accoun unts ts of cust custom omers ers,, being being accu accura rate te and and up-t up-too-da date te is much much stron stronger ger.. Posting: Banks follow the accounting accounting procedure procedure of 'voucher 'voucher posting'. In this system, the vouchers 2. Voucher Posting: are straightaway posted to the individual accounts in the subsidiary ledgers. Then, at the end of the day, the debit and credit vouchers relating to a particular type of transaction (e.g. savings bank accounts, current accoun accounts ts,, dema demand nd loan loans, s, cash cash credi creditt acco account unts, s, etc.) etc.) are are enter entered ed on separa separate te vouc voucher her summ summar ary y shee sheets ts.. Total Total of various items of summary sheet is posted to the respective control account in the general ledger. The gener general al ledge ledgerr tria triall balan balance ce is prepa prepared red ever every y day. day. Types of Transactions: Transacti ctions ons in a bank bank are are of two two types, types, cash cash and non-ca non-cash. sh. 1. Transa transactions, are are also called called 'transfer 'transfer transactions'. transactions'. 2. Non cash transactions, transfer transacti transactions ons,, one or both both of the account accounts s concern concerned ed may be of the customer customers s or the 3. In transfer internal internal accounts of the bank. Vouchers: 1. Both debit- and credit operations on all on all accounts, either by customers or by the bank itself, are made by means of vouchers. 2_ Types of vouchers: (a) which evidences only debit or credit to an account; (b) composite voucher which contains both debit and credit to different different accounts. Debit vouchers Cheques s issue issued d by the custom customers ers;; 1. Cheque Cheque ues/ s/pa pay y orde orders rs issu issued ed by the the ban bank; k; 2. Cheq Withdrawa awall forms forms receiv received ed from from the saving savings s Bank Bank accoun accountt holder holders; s; 3. Withdr Drafts issued issued by other other branch branches es of the the bank bank payab payable le at the branch branch;; 4. Drafts Drafts ts issu issued ed by othe otherr bank banks s on the the bran branch ch,, as per per appr approv oved ed arra arrang ngem emen entt betwe between en the two two bank banks; s; 5. Draf Divide Div idend/i nd/inte nteres rest t warra wa rrants nts issued iss ued by the bank's ban k's custom cus tomers ers and payabl pay able e by the branch bra nch; ; 6. Travelle lers' rs'_ch _chequ eques es issued issued by any branch branch of the bank bank which which are presen presented ted to the branch branch for paymen payment; t; 7. Travel Draf Dr afts ts/p /pay ay orde or ders rs issu is sued ed by the th e branc bra nch h itse it self lf whic wh ich h are ar e canc ca ncel elle led d at the th e reque re quest st of the th e cust cu stom omer er; ; 8. Instrumen ments ts like like travel travelle ler's r's chequ cheques/ es/gif giftt cheque cheques, s, etc., etc., of other other banks banks which which are paid paid by the branch branch.. 9. Instru Letters of authority authority signed signed by the customers customers,, containing containing standing standing instructi instructions. ons. 10. 10. Letters 11. 11. Debit vouchers prepared printed stationery of the bank which may also carry debit authority from the customers in some cases if the debit is to his account at the branch. 12. 12. in respect of realisation of cheques/bills sent to other branches of the bank, advice prepared by the other branch may itself act as a debit voucher. presented for payment, payment, renewal or premature premature 13. 13. Term deposit receipts presented closure. Credit Vouchers Pay-in-slips s filled by the customers customers for deposit deposit of amounts in their accounts. accounts. 1. Pay-in-slip Applications s for issue of term deposits, demand drafts, RTGS/NEFT, RTGS/NEFT, banker's cheques, cheques, pay orders, orders, 2. Application gift cheques, traveller's cheques and other similar instruments. Challans s for deposit deposits s into the account accounts s of Central Central/St /State ate Govern Government ment,, e.g. on account account of direct/ direct/ indirect indirect 3. Challan taxes Credit vouchers on printed stationery stationery of the bank which which are authorised authorised by an official of the bank. Normally, Normally, 4. Credit these vouchers vouchers are signed signed on behalf of the branch branch only in some cases, cases, the customer customer concerned concerned also signs on the vouch voucher er as evide evidence nce that that the transa transacti ction on actua actually lly pertai pertains ns to him. him. 5. On payment of collection instruments from other branches of the bank, a credit advice from the other branch may itself be treated as a credit voucher. Consolidated Voucher: When debits or credits of similar nature are done to a large number of accounts in the same ledger or group of ledgers (e.g. debit or credit on account of periodic interest) generally, a 1.


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conso consolilidat dated ed vouc voucher her is prepa prepared red on bank' bank's s stati statione onery ry and and a list list conta contain inin ing g detai details ls of accou accounts nts debited/credite debited/credited d and the amount of debit/credit debit/credit is attached to voucher. voucher. Composite Voucher: These vouchers record the particulars of both debit and credit accounts and generally pertain to the internal accounts of the bank, i.e. non- customer accounts. Examples are: bills received for collection, letters of credit issued by the branch, guarantees issued by the branch, etc. Such vouchers may also be prepared to rectify an error while debiting or crediting an account. Check Checking ing of Vouc Voucher hers s and Balanc Balancin ing: g: All All entri entries es in the person personal al ledger ledgers s and the summa summary ry sheets sheets are checke checked d by person persons s other other than than those those who have have made made the entri entries. es. Thus, Thus, cleri clerical cal error errors s are detec detected ted immediately. A trial balance of the personal ledgers is prepared periodically, usually every two weeks, and agreed with general ledger control accounts which is called 'balancing of books'.

Accoun Accounting ting System System of Differen Differentt Banks Banks I. Accounting systems of different banks vary in terms of hardware configuration, software capabilities, levels levels of hardware hardware and software security, and nature of transactions transactions processed. processed. 2. The accounting system in a bank is designed keeping in view the nature and volume of operations and information needs of various interested parties. 3_ Every Every big big bank bank has cust custom omiz ized ed banki banking ng-s -sof oftw tware are as per per its its own own requi require reme ment nt and as such such,, the the accounting systems differ amongst different banks. OPERATIONAL ASPECTS OF HANDLING CASH/CLEARING Important operations conducted at a bank branch: cash, collection of local and outstation instruments and remittances on behalf of the customers. customers. Cash transactions: Branch has to deal with custody as well as inter office movement of cash, involving the aspects of security, misappropriation and-frauds. Instruments submitted by Customers for collection: cheques, drafts, pay orders, trade bills, dividend and interest interest warrants, warrants, NSCs, postal orders, orders, term deposit receipts, tax refund orders, etc. Type Type of instru instrument ments: s: Instru Instrument ments s payabl payable e The instrum instrument ents s payabl payable e locall locally y are collec collected ted through through the clearing clearing house. The instruments instruments payable outside are sent by the bank for collection. collection. Settlement Settlement of inter-bank inter-bank transactions transactions among the local banks: banks: Done through through clearing clearing house. Post offices may also also be memb member ers s of the clea cleari ring ng house. house. Ther There e may may be separ separat ate e clear clearin ing g house houses s for for MICR ICR (Magn (Magnet etic ic Ink Character Character Recogniti Recognition) on) and non-MICR non-MICR instrume instruments. nts. The accounts accounts of all all memb member er bank banks s are are main maintai taine ned d by the the cleari clearing ng house. house. Managem Management ent of Clearin Clearing g House: House: done done by RBI, RBI, State Bank Bank of India India or any other other bank nomina nominated ted by RBI. RBI. Nodal Branch: If a bank has many branches within the area of a clearing house, it nominates one branch to act as the nodal branch of that bank. Nodal branch handles the instruments to be presented by other branches also. Electronic Clearing Service (ECS): It is in addition to regular clearing. ECS is of two types- ECS credit or ECS debit. ECS Credit: Credit: is used used by an insti instituti tution on for affordi affording ng credi creditt to a large large number number of benefi benefici ciari aries es (for (for instan instance, ce, employees, investors etc.) having accounts with bank branches at various locations within the jurisdiction of a ECS Centre by raising a single debit to the bank account of the user institution. ECS Credit enables payment of amounts amounts towards towards distributi distribution on of dividend, dividend, interes interest, t, salary, salary, pension, pension, etc., etc., of the user insti institution tution.. ECS Debit: is used by an institution for raising debits to a large number of accounts (for instance, consumers of utilit utility y service services, s, borrowe borrowers, rs, investo investors rs in mutual mutual funds etc.) maintai maintained ned with with bank branche branches s at variou various s locations within the jurisdiction of a ECS Centre for single credit to the bank account of the user institution. ECS Debit is useful for payment of telephone / electricity / water bills, cess / tax collections, loan installment repayments, periodic investments in mutual funds, insurance premium etc., that are periodic or repetitive in nature and payable to the user institution institution by large number of customers customers etc. Speed Clearing: Speed Clearing refers to collection of collection of outstation outstation cheques (a cheque drawn on non-local bank branch) through the local clearing. It facilitates collection of cheques drawn on outstation corebanking-enabled branches of banks, if they have a net-worked branch locally. Speed Clearing covers all transaction transaction codes, other than those relating relating to govern g overnment ment cheques. Remittances: involve transfer of funds from one place to another. The common modes of remittance of funds are drafts, RTGS, NEFT etc. Drafts are issued by one branch of the bank and are payable by another branch of the bank. In case there is no branch of the bank at that place, the draft is issued at the branch of another bank with which the issuing bank has entered into necessary arrangement. RTGS and NEFT are other modes of remittance which facilitates almost instantaneous transfer of funds between two centres. centres.

Cheque Truncation System (CTS) 1.

What is Truncati Truncation: on: Process Process of stopping stopping the flow of the physical physical cheque cheque issued issued by a drawer drawer to the drawee drawee branch. The physical instrument will be truncated at some point en-route to the drawee branch and an electronic image of the cheque would be sent to the drawee branch along with the relevant information like the MICR MICR fields, fields, date date of present presentati ation, on, presenti presenting ng banks banks etc. etc. Thus with with the implem implement entati ation on of cheque cheque truncation, the need to move the physical instruments across branches would not be required, except in excep exceptio tional nal circ circum umst stanc ances es.. The bank banks s have have the freed freedom om to decid decide e the point point of trunc truncati ation. on.


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2.

3. 4.

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Benefits of Cheque Truncation: Cheque Truncation speeds up collection of cheques and therefore enhances customer service, reduces the scope for clearing related frauds, minimizes cost of collection of cheques, reduces reconciliation problems, eliminates logistics problems etc. Precautions to be taken by the bank customers to avoid frauds: Bank customers should use image friendly cheques. They should preferably use dark coloured ink while drawing the instruments. Grid System: The CTS is operated on grid basis. Under grid-based CTS clearing, all cheques drawn on bank branches falling in the grid jurisdiction are treated and cleared as local cheques on T+l basis. As such, under CTS, inward clearing is generally processed in a centralised manner by banks at the CTS location. Presentation of physical instrument: In case any drawee bank desires to verify the government cheque in physical form before passing it for payment, the image would be returned unpaid under the reason "present with documents". The presenting bank shall ensure that the instrument is presented again in the next applicable clearing session without any reference to the Account holder. Presentation of Non CTS 2010 cheques: Separate clearing session has been introduced in the three CTS centers (Mumbai, Chennai and New Delhi) for clearing of such residual non-CTS 2010 instruments (including PDC and EMI cheques). With effect from November 1, 2014, this separate clearing session will be held once a week (every Monday). If the identified day falls on a holiday under the N I Act, presentation session on such occasions will be conducted on the previous working day. If non CTS 2010 cheques are presented in the regular CTS clearing, drawee banks will return the same under the reason code '37Present in proper zone'. Such returned instruments will have to be re-presented by the collecting bank in the immediate next special clearing session for non-CTS-2010 instruments. Preservation of physical instrument: The presenting banks are required to preserve the physical cheques in their custody securely for a period of 10 years as required under CTS. In case some specific cheques are required for the purpose of any investigation, enquiry, etc., they may be preserved beyond 10 years. The images of all cheques paid should be preserved by the drawee banks likewise for a period of 10 years. Cheque Truncation of Government Cheques: Banks are required to forward the government cheques in physical form, after payment to the Government Departments. There were plans to adopt truncation of Govt cheques also. But revised guidelines which were to be effective fromJanuary 1, 2015 have been kept on hold and_RBI has decided to postpone the implementation of discontinuation of P2F vide circular dated 1 Jan 2015.

Collection of Instruments— RBI Guidelines 1. Formulating Cheque Collection Policies: Efficiencies in collection of proceeds and providing funds to customers in time are best achieved through a spirit of competition among the banks rather than through issuance of guidelines by RBI. Therefore, RBI withdrew guidelines regarding immediate credit of local /outstation cheques, time frame for collection of local/outstation instruments and interest payment for delayed collection leaving it to the individual banks to formulate policies in this regard. However, The National Consumer Disputes Redressal Commission had passed an order in 2006 on 'timeframe for collection of outstation cheques'. Accordingly RBI has advised as under: 1. Contents of Policy: Banks shall reframe their Cheque Collection Policies (CCPs) covering local and outstation cheque collection as per the timeframe prescribed by the Commission. It should also cover (a) Immediate Credit for Local / Outstation cheques; (b) Interest payment for delayed collection; (d) compensation payable for the delay in the collection of local cheques as well. Collection of local cheques: Credit and debit shall be given on the same day or at the most the next day of their presentation in clearing. Ideally, in respect of local clearing, banks shall permit usage of the shadow credit afforded to the customer accounts immediately after closure of relative return clearing and in any case withdrawal shall be allowed on the same day or maximum within an hour of commencement of business on the next working day. 3. Timeframe for collection of outstation cheques: Cheques drawn on State Capitals / major cities / other locations to be collected within 7/10/14 days respectively. The timeframe for collection specified by the Commission shall be treated as outer limit and credit shall be afforded if the process gets completed earlier. 4. Interest for delay in collection: If there is any delay in collection beyond 7110114 days, interest at the rate specified in the CCP of the bank, shall be paid. In case the rate is not specified in the CCP, interest should be paid as applicable on Fixed Deposits for the corresponding maturity. 5. Banks shall not decline to accept outstation cheques deposited by its customers for collection. 6. Banks shall give wide publicity to the CCP by prominently displaying in bold and visible letters on the notice board at their branches. 7. A copy of the complete CCP shall be made available by the branch manager, if the customers require so. 2. Broad Principles of Policy: 1. The policy should be comprehensive and transparent policy covering all the above aspects, taking into account their technological capabilities, systems and processes adopted for clearing arrangements and other internal arrangements for collection through correspondents. 2. Banks should work out a scheme for reduction in collection period. 3. Interests of the small depositors should be fully protected. 4. Liability of the banks should be clearly laid down by way of interest payments due to delays. 5. Compensation by way of interest payment, where necessary, should be made without any claim from 2.


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the customer. 3. Cheques/mstruments lost in transit/in clearing process/at paying banks branch In respect of cheques lost in transit or in the clearing process or at the paying bank's branch, the bank should immediately bring the same to the notice of the account holder so that account holder can inform the drawer to record stop payment and can also take care that other cheques issued by him are not dishonoured due to noncredit of the amount of the lost cheques/instruments. The onus of such loss lies with the collecting banker and not the account holder. The banks should reimburse the account holder related expenses for obtaining duplicate instruments and also interest for reasonable delays occurred in obtaining the same. If the cheque/instrument has been lost at the paying bank's branch, the collecting banker should have a right to recover the amount reimbursed to the customer for the loss of the cheque/instrument from the paying banker. 4. Bills for collection: Bills for collection including bills discounted required to be collected through another bank at the realising centre should be forwarded directly by the forwarding office to the realising office. The lodger's bank should pay interest to the lodger for the delayed period in respect of collection of bills at the rate of 2% p.a. above the rate of interest payable on balances of Savings Bank accounts. The delayed period should be reckoned after making allowance for normal transit period based upon a time frame of 2 days each for (i) Dispatch of bills (ii) Presentation of bills of drawees (iii) Remittance of proceeds to the lodger's bank (iv) Crediting the' proceeds to drawer's account. To the extent the delay is.attributing to the drawee's bank, the lodger's bank may recover interest for such delay from that bank. Collection of Account Payee Cheque - Prohibition on Crediting Proceeds to Third Party Account 1. As per RBI guidelines, Banks should not collect account payee cheques for any person other than the payee constituent. This has been done keeping in view the intent of the N I Act, to protect the banks from liabilities arising out of unauthorized collections, and in the interest of the integrity and soundness of the payment systems. These instructions shall also extend to drafts, pay orders and bankers' cheque. 2. Account payee cheques deposited with the sub-member for credit to their customers' account can be collected by the member bank (referred to as the sponsor member) of the Clearing House. However, there should be clear undertaking that the proceeds of the account payee cheque will be credited to the payee's account only. 3. To mitigate the difficulties faced by the members of co-operative credit societies in collection of account payee cheques, collecting banks may consider collecting account payee cheques drawn for an amount not exceeding Rs 50,000/- to the account of their customers who are co-operative credit societies, if the payees of such cheques are the constituents of such co-operative credit societies. 6. Payment of Cheques/Drafts/Pay Orders/Banker's Cheques: With effect from April 1, 2012, banks should not make payment of cheques/drafts/pay orders/banker's cheques if they are presented beyond the period of three months from the date of such instrument.

CASH OPERATIONS 1. Cash and its custody: 1. The Cash and Small Coin Balances must be kept in the Strong Room in the joint custody of the Head Cashier/Cashier and an authorised Supervising Official. 2. No member of staff other than the Cashier/Teller should receive money over the counter from depositors. Notices to this effect should be prominently displayed in English and also the regional language in two places, one near the cash department and the other near-the-entrance. 3. Strong Room/Safe: The Strong Room or Safe must be under the double lock of the Cashier and the Supervising Official in charge of cash. Both officials must be present when the Strong Room/Safe is opened. All receptacles in the Strong Room used for storing Cash and Small Coin balances must also be under the double lock of the Cashier and the Supervising Official, except receptacle used for the Cashier's hand balance. 3.Cash Balance of the Bank: 1. The bulk of the Cash Balance should always be in the Strong Room/Safe under joint custody 2. Only cash sufficient for the day's requirements will be withdrawn in the morning from joint custody. 3. Cashier's Hand Balance left with the Head Cashier/Cashier during the day for the day's transactions will be kept as low as conveniently possible. 4. The amounts of all notes and coins withdrawn from, or deposited in, the joint custody portion of the bank's Cash Balance (i.e. excluding the Head Cashier's/Cashier's hand balance) will be entered immediately in the Reserve Cash Register under the initials of the joint custodians. 5. The Reserve Cash Register must always remain in the Strong Room. 6. The amount will be recorded in the Cash Balance Book, which will be checked and signed by the Head Cashier/Cashier and the Supervising Official. 7. The Manager will also sign the Cash Balance Book after tallying the combined total of the 'Joint Custody' balance and the Head Cashier's/Cashier's Hand Balance with the Closing Balance of his Cash Scroll. 4. Checking of Cash Balance: 1. Before taking notes and coin into the 'Joint Custody' balance, the Supervising Official will check their Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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correctness. Supervising Official will personally count all notes of denominations above Rs 10/- and will verify a portion of all other notes on the 'clip system'. 3. Clip System: A few notes in each packet of notes are clipped together at the top. The remainder is counted by an employee other than the one responsible for its correctness in the presence of the Supervising Official who verifies the total by counting the clipped notes. 4. Notes of the same denomination are banded together into packets of one hundred pieces each. 5. Every ten packets (books) are further tied up into a bundle of one thousand pieces. 6. All bags of coins will be weighed in the presence of supervisor and a few number of bags emptied to verify that the contents are genuine coins. 7. R should be verified at the close of the working day that the 'Joint Custody Balance' gorresponds exactly with the entries in the Cash Balance Book. 8. The entire Head Cashier's/Cashier's hand balance of loose notes and loose packets in Hand Balance should be checked. 9. The notes and coins held in the Head Cashier's/Cashier's Hand Balance are kept in the Cash Box and locked. 10. Before the safe is closed, the Supervisor and Head Cashier should check the bundles kept in the vault and verify the same with the Reserve Cash Register. 11. At least once a week on different days, the officer holding charge of cash will check the whole of the bank Cash Balance by test check of different denominations and Register evidence of such check in the Cash Balance Book. 2.

5. Shortage or Excess in cash: 1. Any excess in the Cash Balance must be credited to Sundry Creditors Account on the same day itself. 2. Any shortage in the Cash Balance should be recovered the same day from the employee concerned of the Cash Department. 3. If recovery is not possible on the same day, the amount of shortage should be debited to the Suspense Account taking the signatures of the members responsible for the shortage on the reverse of the voucher 4. The incident will be reported to Controlling Office 5. The suspense account will be adjusted on recovery from the concerned members. Head Cashier/Cashier is responsible for any shortage either in Hand or Vault Balance . In case of any shortage in any book (packet) of notes, the Cashiers who have signed the Denomination Slips will be responsible for the shortage. 6. Remittance of Cash: 1. Physical cash remittances to branches outside the town should be undertaken only if transfers cannot be effected through the State Bank of India or any other Bank with which the Bank has an Account. 2. Guard: Cash remittances should always be entrusted to an authorised employee who should be accompanied by a reliable and experienced member of the subordinate staff and the armed guard. 3. Night journeys and unusual halts at junctions should be avoided. 4. Locking box to van: The remittance box should always be conveyed in the van provided by the Bank. The box should be securely chained and locked to a staple or other fixed object in the van by which the remittance is carried. 5. Cash Remittance Register: A Register should be maintained to record all cash remittances to and from local branches and other branches. 7. Insurance: 1. All cash remittances in transit are covered under the Blanket Insurance Policy obtained by the Bank. The maximum limit laid down for any one carriage should not be exce eded. 2. Cash in safe and on the counter should be kept within insured lim it. 8. Custody of Keys: 1. Key Register: should be maintained in which particulars of all important keys, including those of the Head Cashier/Cashier, must be entered. The Register should indicate existence of originals and duplicates and their location. . 2. Main keys of the branch should always be in the possession of the officials to whose charge they have been entrusted except when these will be taken over by another Bank official due to leave of the incharge etc. 3. The officials holding custody of the safe/strong room should not move freely to places other than the place of work or their residence while in personal possession of the keys. 4. Subordinate employees or other unauthorized persons should not be allowed to handle the keys of the Strong Room and safes for any purpose whatsoever. 5. If any important key shows signs of serious wear, the duplicate can be issued for the time being. The keywhich has worn out to be sent to controlling office in sealed packet and arrangements made for replacement of lock. No important key pertaining to cash counters, safes, lockers, strong rooms, almirahs, main entrance may be made and no repairs to such locks be got carried out without the prior permission of Controlling Office. All repairs, if permitted, must be carried out under the personal supervision of the Manager and the Head Cashier/Cashier if he has joint control over the Strong Room door or safe under Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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repair. 9. Duplicate Keys 1. The officials holding the keys of the Strong Room/safe room and safes/cupboards containing cash, gold ornaments under pledge to the Bank and other securities, should pack their duplicate keys individually in a strong cloth lined envelope which will be sealed by them with seals. Before they are packed the keys must be greased and labeled (the label indicating the lock to which thp key relates and the designation of the qfficial who holds the original). 2. The sealed packets must be placed in a strong wooden or tin box locked or otherwise secured and wrapped in water-proof cloth. 3. It must then be sealed in the presence of the officials concerned and the sealed box will be labeled with the name of the branch with the marking that "This packet contains duplicate keys of Branch of the ...... Bank and is deliverable against the joint signature of the Manager and Cashier of the branch ". 4. It should be signed by the Manager/Cashier or the Supervising Official whose keys are deposited therein. 5. The relative safe deposit receipt will be entered in the Branch documents Register and kept in the personal custody of the Manager in a safe or cabinet as the same will be required for issue of duplicate keys. 6. Duplicate keys must be withdrawn from safe deposit and the keys rotated once every year.

Cash replenishment at ATMs All the staff involved in cash transfers should be screened thoroughly and their photos and prints taken. In case of a contract with service vendor, the Bin filling exercise is normally done in the presence of at least two persons who should supervise each other to ensure that correct denominations are inserted in the correct bins. 3. The User report should be obtained and filed for future reference. This should record the time and date of opening the ATM machine to replenish it. The cash balance after replenishment should also be printed. 4. Cash shortages should be thoroughly investigated with full reference to the server report compared with the ATM's log available on site of ATM. 1. 2.

CLEARING OPERATIONS 1. General:

The "Service Branch" or a centralized clearing house functions as a Clearing Centre for all the instruments such as Drafts, Cheques etc. received from its customers and those_ of its branches.These instruments will have to be presented for collection through the "Clearing House". 2. Clearing House: The Clearing House functions during the stipulated hours. The realization of cheque may take 2/3 days depending on type of clearing - MICR inward Clearing, High Value Clearing (outward), . Returns Clearing (outward); ECS 3. Operations in the MICR Clearing at Branch: The payee's name on the instrument and on the pay-in-slip should be verified which should be same except when cheque is endorsed by the payee in some other person's favour. The amount on the instrument and that on the pay-in-slip should be same. The cheque should be drawn on a local branch. Cheque should be affixed with clearing/crossing stamp. Cheque should be sent for collection in the immediate next clearing.The information should be completely filled in, including the Bank and Branch Code while sending cheques for clearing. 4. Operations in the MICR Clearing at Service Branch: The instruments received from Branches are encoded in the machine after taking the information of that branch from the CBS and uploading into the MICR encoding batch. After consolidation of all the instruments and bundling bank-wise, the instruments are taken to the clearing house for presentation to various banks. Inward Clearing Cheques: The Head Office (clearing section) i.e. the service branch will arrange to collect the inward clearing instruments from the Clearing House and send to respective Branch through courier. The number of cheques received at service branch will be verified as per the claim slip received from Clearing House. The number of instruments and the total value against the respective branches will be recorded in the inward clearing Register and the respective Branch will be debited for the total value of the presentation on the Branch. The claim slip will be sent to the Branch along with the relative instruments. The branch will verify the inward clearing instruments with the Claim Slip received from the clearing section, Head Office, and difference if any will be notified to the Head Office clearing section. The branches will send the unpaid Return Cheques through the branch courier to reach the Head office (clearing branch) before stipulated time.

OPERATIONAL ASPECTS OF DEPOSIT ACCOUNTS Current Account: For whom: Current account is meant for Individuals/Institutions having large number/volume of transactions, mainly for meeting their day-to-day business and operational requirements for parking their operational fund balances. Who can open?: Accounts can be opened by Individuals, Sole Proprietary Concerns, Partnership Firms, Private/Public Sector Companies, Clubs, Associations, Trusts/Executors/Administrators, Govt/Local Bodies, Cooperative Societies, Religious/Educational/Charitable Institutions, Registered/Unregistered Societies, etc. Who cannot open current account?: Minors(accounts of minors to be operated by the natural guardian may be open e), Purdanashin women, Illiterate persons, Blind persons. Interest: Nil Restriction on maximum balance/ number and amount of transactions/withdrawal in a day/month: No limit. Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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Withdrawal from account: only through cheques. However for standing instructions, account can be debited without cheques. Overdrafts: can be allowed. Current accounts of Partnership Firms: Account opening form as prescribed for "Partnership account" should be taken which should be signed by all the partners. Besides AOF, following documents should be taken — (a) Specimen signature cards signed by all the partners; (b) Partnership letter signed by all the partners in their personal capacity and not under the seal of the firm; (c) Original Partnership Deed (for verification & return) with a certified copy; (d) Certificate of Registration, in case of a registered partnership firm; (e) Instructions regarding person(s) authorised to operate the account with specimen signatures of the authorised persons with their designation or capacity in which they will operate the account. Any partner has powers to countermand (stop) payment of a cheque drawn by another partner. Current account of a Hindu Undivided Family (HUF): (a) Submit application forms as per bank's format; (b) The current account opening form and the Joint Hindu Family letter have to be signed by all the adult members of the joint family; (c) if co parceners (members) are minor, then the Karta should sign the account Opening Form on behalf of the minors apart from signing in the capacity as Karta; (d) As Karta alone has the capacity to enter into contracts for a HUF, the name of the Karta who is authorised to operate the HUF account should be noted. Current account of Joint Stock Companies: Besides, getting the account opening application form as per bank's format, following documents should also be collected — (a) Certificate of Incorporation, (b) Copy of Memorandum and Articles of Association; (c) Certified copy of Board Resolution authorising the opening and operation of bank account signed by the Chairman of the meeting of the Board of Directors (d) A mandate regarding operations authority. Earlier Certificate of Commencement of Business was also required for Public Limited Companies but there is no such requirement as per Companies Act 2013. Current account of Clubs. Associations: (a) In the case of unregistered bodies like Clubs/Association/Committee, a resolution passed in the Management Committee/ Executive Committee as per their bye-laws regarding opening a bank account and persons authorised to operate such bank account should be obtained alongwith designation of such persons; (b) In all cases of registered/unregistered bodies like Clubs/Association etc. copy of their bye-laws/ Rules should be obtained to facilitate checking that the persons authorised to operate the account are as per their rules/bye-laws provisions. Accounts of Trusts: (a) Copy of Trust Deed be obtained and compared with the original; (b) A Trust Letter and resolution signed by all the trustees; (c) The account opening form should be signed by all the trustees and the account must be opened in the name of the trust. Executors/Administrators: 'Original will' and probate of the will, if any/Letter of administration should be asked for verification and certified copy be retained in bank's files. Account will be opened in the name of individuals but after the name of the individual, "Executor," "Administrator" must be added in the account. Government Departments: Copy of Government Order (G.O.) or Notification authorising the officers to open a bank account should be obtained. Temporary Overdraft (TOD): Temporary overdrafts (TOD) can be given to good and trustworthy customers against their written request within powers of the concerned official. Granting of TOD is at the sole discretion and risk and responsibility of sanctioning Officer/Manager.

Savings Bank Account Who can open SB accounts: Saving account can be opened in the name of individuals operating singly or.jointly with other individuals; Associations, clubs or similar other non-trading institutions; Minor above 10 years can open SB account operated independently; can also be opened in the names of institutions which are specifically approved by the RBI for maintaining savings bank accounts with banks. These accounts can not be used for business or trading. Organisations for which Saving Bank accounts can not be opened: Saving Bank accounts are opened for savings and not for any business. Therefore, such accounts can not be opened in the name of business concern. Further, as per RBI directives, Government Departments or Bodies who for performance of their functions depend on Budgetary Allocations cannot open Savings Bank Accounts. Thus, RBI has specifically asked banks not to open SB accounts in the name of (a) Govt. Departments (b) Municipal Corporations or Committees, (c) Panchayat Samitees, (d) State Housing Boards, (e) State Electricity Boards (f) Water and Sewerage Boards, (g) State Text Book Publishing Corporations or Societies, (h) Metropolitan Development Authorities, (i) State/District Level Cooperative Housing Societies (j) any bank including Land Development Bank . Organisations for which Saving Bank accounts can be opened: The above prohibition is not applicable for the following organizations/agencies and therefore banks can open SB account in their names — (i) Companies licensed under section 25 of Companies Act, 1956 which are permitted not to add to their names the word 'limited' (i.e. Non profit making companies). For example, Chamber of Commerce, Indian Bank Association, Lions Clus etc. (ii) Societies registered under Societies Registration Act, 1860 or any other corresponding law in force in any State/UT. (iii) Primary Cooperative Credit Society being financed by the bank (PACS) (iv) Institutions other than those mentioned above and whose entire income is exempt from payment of income tax under Income Tax Act, 1961. (v) Government departments (Central as well as State Government) /bodies/agencies in respect of grants/ subsidies released for implementation of various programmes/schemes Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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sponsored by the Central Government as well as State Government on production of an authorization to the bank from the respective Government departments certifying that the concerned Government department or body has been permitted to open savings bank account. Banks should keep on their record a copy of the authorization issued by the respective State Government departments. For example (a) Khadi and Village Industries Boards. (b) Agriculture Produce Market Committees (c) Distt Rural Development Agency (DRDA) (d) Integrated Tribal Development Agency (ITDA) (e) Draught Prone Area Development Programme (DPAP) (f) Member of Parliament Local Area Development Authority (MPLADS) (g) Small Farmers Development Agency (h) Marginal Farmers and Agricultural Laborer's Agencies (i) Nagar panchayats and palikas, Muncipal Bodies for credit of subsidy amount. (j) District Development Agency (DDA); (vi) Development of Women and Children in Rural Areas(DWCRA); (vii) Self-help Groups (SHGs), registered or unregistered, which are engaged in promoting savings habit among their members; (viii) Farmers' Clubs-Vikas Volunteer Vahini(VVV); (ix) Clubs, Associations, Society, Educational Institutions (x) Any other institution permitted by RBI provided it is a non trading institution. Documents required for opening a SB account in the case of Associations/Clubs etc: (a)Certified copy of Rules/Bye-laws/Memorandum and Articles of Association of the Institution; (b) Original certificate (to be verified and returned) of incorporation/ registration issued by appropriate authority along with a certified copy; (c) Certified copy of the General Body/Board/Committee resolution for opening of a bank account; (d) names and designation of persons authorised to operate the account; (e) Specimen Signatures of authorised persons duly attested by the Chief Executive of the Institution or the Chairman of the meeting wherein the relevant resolution was passed. Interest rate on Saving accounts was deregulated by RBI with effect from 25 th October 2011. Banks are free to determine their savings bank deposit interest rate, subject to the following two conditions: (a) Each bank will have to offer a uniform interest rate on savings bank deposits up to Rs.1 lakh, irrespective of the amount in the account within this limit. (b) For savings bank deposits over Rs.1 lakh, a bank may provide differential rates of interest, if it so chooses, subject to the condition that banks will not discriminate in the matter of interest paid on such deposits, between one deposit and another of similar amount, accepted on the same date, at any of its offices. With effect from 1.4.2010, interest rate on saving bank is payable on daily product basis. It can be credited at any interval. The interest should be calculated and provided for even in case of inoperative S.B. accounts. 1% additional rate of interest over the standard rate is allowed on deposits held individually or jointly with dependents in the case of employees of the bank/retired employees/widows of employees/widows of retired employees etc. and on deposits of an Association or a Fund, all the members of which are the members of the bank staff. Basic Saving Bank Deposit account: 'Basic Savings Bank Deposit Account' with following minimum common facilities should be offered to all their customers: (i) The 'Basic Savings Bank Deposit Account' should be considered a normal banking service available to all; (ii) This account shall not have the requirement of any minimum balance; (iii) The services available in the account will include deposit and withdrawal of cash at bank branch as well as ATMs; receipt/credit of money through electronic payment channels or by means of deposit/collection of cheques drawn by Central/State Government agencies and departments; (iv). There will be no limit on the number of deposits that can be made in a month, account holders will be allowed a maximum of four withdrawals in a month, including ATM withdrawals; and (v). Facility of ATM card or ATM-cum-Debit Card will be provided without any charges. Further, no charge will be levied for non-operation/activation of in-operative 'Basic Savings Bank Deposit Account'. The 'Basic Savings Bank Deposit Account' would be subject to Know Your Customer (KYC) guidelines. If such account is opened on the basis of simplified KYC norms, the account would additionally be treated as a 'Small Account'. Holders of 'Basic Savings Bank Deposit Account' will not be eligible for opening any other savings bank deposit account in that bank. If a customer has any other existing savings bank deposit account in that bank, he/she will be-required to close it within 30 days from the date of opening a 'Basic Savings Bank Deposit Account'. The existing basic banking 'no-frills' accounts should be converted to 'Basic Savings Bank Deposit Account'. Levy of penal charges on non-maintenance of minimum balances in savings bank accounts: Banks should inform customers regarding the requirement of minimum balance in savings bank account and levy of penal charges for non-maintenance of the same at the time of opening the account in a transparent manner. Banks are not permitted to levy penal charges for non-maintenance of minimum balances in any inoperative account. Further, no charge should be levied for non-operation/activation of Basic Savings Bank Deposit Accounts (BSBDAs). While levying charges for non-maintenance of minimum balance in savings bank account, banks shall adhere to the following guidelines from April 1, 2015: (i) In the event of a default in maintenance of minimum balance/average minimum balance as agreed to between the bank and customer, the bank should notify the customer clearly by SMS/ email/ letter etc. that in the event of the minimum balance not being restored in the account within a month from the date of notice, penal charges will be applicable; (ii) In case the minimum balance is not restored within a reasonable period, which shall not be less than one month from the date of notice of shortfall, penal charges may be recovered under intimation to the account holder; (iii) The penal charges should be directly proportionate to the extent of shortfall observed. In other words, the charges should be a fixed percentage levied on the amount of difference between the actual balance maintained and the minimum balance as agreed upon at the time of opening of account; (iv) Penal charges should be reasonable and not out of line with the average cost of providing the services; (v) The balance in the savings account should not turn into negative balance solely on account of levy of charges for non-maintenance of minimum balance. Further, as per direction from Bombay High Court, accounts of all Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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student beneficiaries under the various Central/State Government Scholarship Schemes should be free from restrictions of 'minimum balance' and 'total credit limit'. Thus, there would be no limit on total credits in such accounts. Transfer of accounts: At the written request of the customer his Savings bank account can be transferred from one branch to another branch of the bank free of any charges. The account holder must surrender all unused cheque leaves to the old branch. However, with the introduction of CBS and multi-city cheques, the same cheque books (multi-city) can be used.The account opening form and specimen signature card must be transferred to the branch where the account is being transferred by retaining a Photostat copy in the branch. Conversion of accounts: Conversion of individual account into joint account can be done by taking fresh account opening forms duly signed by all the proposed joint account holders along with a letter of request for such conversion into joint account from the existing single. account holder and operating instructions i.e. EorS, For S etc. Staff accounts: Number of savings bank accounts in the name of each staff member of the bank in his individual name or in joint names with family member(s) should be restricted. The savings bank accounts of staff members must be prominently marked/tagged as "Staff account". All cheques drawn by the staff members on their accounts when presented in clearing, should be personally scrutinized by the officer particularly with reference to the balance available in the account. Third party cheques/DDs should not be permitted to be collected in staff account. If the operation in the account are disproportionate to known source of income of staff, the account should be watched. Closing of account: Savings bank account may be closed at the request of the account holder in writing. In case of Joint accounts, all account holders will have to sign the request letter for closure of the account. The account holder must surrender all the unused cheque leaves. After closing the account the pass book, may be returned after making the entries up to date and marking "account closed" after the last entry. Other Rules: 1. Savings bank accounts can be operated either with cheque book facility or without cheque book facility. 2. Generally, there is a limit on the number of withdrawals in Savings bank account and these accounts are not meant for business or trading activities etc. 3. Except in case of Basic Saving Bank Deposit accounts, generally banks prescribe maintenance of minimum balance in the account failing which bank may charge for not maintaining minimum balance but only after alerting the customer. 4. Withdrawal from Savings bank account is allowed either by cheques or bank's withdrawal forms. The withdrawal forms cannot be issued in favour of third parties and should be used only for withdrawing cash by the account holder. Withdrawal form must be accompanied by the pass book to enable the assistant to properly identify/recognize the bearer/presenter. 5. Pass Books should be issued at the time of opening the account which should be presented to bank at frequent intervals to keep it updated. Banks should invariably offer pass book facility to all its savings banks account holders (individuals) and in case banks offer the facility of sending statement of account and the customer chooses to get statement of account, banks must issue monthly statement of account. The cost of providing pass book or statement should not be charged to customer.

Inoperative account 1. Banks

should make an annual review of accounts in which there are no operations (i.e. no credit or debit other than crediting of periodic interest or debiting of service charges) for more than one year. The banks may approach the customers and inform them in writing that there has been no operation in their accounts and ascertain the reasons for the same. In case the non- operation in the account is due to shifting of the customers from the locality, they may be asked to provide the details of the new bank accounts to which the balance in the existing account could be transferred. if the letters are returned undelivered, they may immediately be put on enquiry to find out the whereabouts of customers or their legal heirs in case they are deceased. In case the whereabouts of the customers are not traceable, banks should contact the account holder telephonically or through email or persons who had introduced the account holder, the employer/or any other person whose details are available with them. 2. A savings as well as current account should be treated as inoperative / dormant if there are no transactions in the account for over a period of two years. fn case any reply is given by the account holder giving the reasons for not operating the account, banks should continue classifying the same as an operative account for one more year within which period the account holder may be requested to operate the account. 3. For the purpose of classifying an account as 'inoperative' both the type of transactions i.e. debit as well as credit transactions induced at the instance of customers as well as third party should be considered. However, the service charges levied by the bank or interest credited by the bank should not be considered. Where the customer has given a mandate for crediting the interest on Fixed Deposit account or dividend on shares to the Savings Bank account, crediting the interest to the Savings Bank accounts as per the mandate of the customer, should be treated as a customer induced transaction. Such accounts should be treated as operative account as long as the interest on Fixed Deposit account or dividend on shares is credited to the Savings Bank account. 5. Operation in inoperative accounts may be allowed after due diligence as per risk category of the customer. Due diligence would mean ensuring genuineness of the transaction, verification of the signature and identity etc. There should not be any charge for activation of inoperative account. 4.


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There should not be any charge for activation of inoperative account. Interest on savings bank accounts should be credited on regular basis whether the account is operative or not. If a Fixed Deposit Receipt matures and proceeds are unpaid, the amount left unclaimed with the bank will attract savings bank rate of interest. 8. When account should not be classified as inoperative: (a) Banks should allot a different "product code" in their CBS to accounts opened by banks for beneficiaries under the various Central / State Government Schemes including scholarship schemes for students so that the stipulation of inoperative /dormant account due to non-operation does not apply; (b) Where operations in the account have been stopped under Garnishee order or any Court Order; (c) Where the account is under lien or charge for advances allowed to the same customer in another account; .(d) Where the account is showing debit balance. 9. Display list of Inoperative accounts: Banks should display the list of unclaimed deposits/inoperative accounts which are inactive/inoperative for ten years or more on their respective websites. The list so displayed on the websites must contain only the names of the account holder(s) and his/her address in respect of unclaimed deposits/inoperative accounts. However, the account number, its type and the name of the branch shall not be disclosed on the bank's website. 10.Depositor Education and Awareness Fund Scheme, 2014: As per section 26A of B R Act, RBI is empowered to establish The Depositor Education and Awareness Fund. The amount to the credit of any account in India with any bank which has not been operated upon for a period of ten years or any deposit or any amount remaining unclaimed for more than ten years shall be credited to the Fund. The Fund shall be utilized for promotion of depositors' interest. RBI has prepared Depositor Education and Awareness Fund Scheme, 2014. As per the scheme, banks shall transfer to the Fund the amounts becoming due in each calendar month, (i.e., proceeds of the inoperative accounts and balances remaining unclaimed for ten years or more), and the interest accrued on interest bearing accounts till the date of transfer, on the last working day of the subsequent month. The rate of interest payable by banks to the depositors/ claimants on the unclaimed interest bearing deposit amount transferred to the Fund shall be 4% simple interest per annum. The depositor would, however, be entitled to claim from the bank her deposit or any other unclaimed amount or operate her account after the expiry of ten years, even after such amount has been transferred to the Fund. The bank would be liable to pay the amount to the depositor/claimant and claim refund of such amount from the Fund. Where refund has been claimed from the Fund, banks shall preserve records/documents in respect of such accounts and transactions, for a period of at least five years from the date of refund from the Fund. 6. 7.

1. Minimum

Fixed Deposits

period as per RBI is 7 days. Maximum period as per IBA is 10 years. However, term deposits in the name of minors or as per court orders can be opened for more than 10 years. Fixed Deposits may be accepted for Days, Months, Years or their combination, as per request of customer. 2. Interest rate on term deposits is deregulated and is decided by Asset Liability Management Committee of the bank. Bank can not discriminate among customers regarding payment of interest except for single deposits of Rs 15 lac and above but the difference should be minimal. The interest is normally paid at quarterly rests for credit of the customer's Savings/Current account as per standing instructions or allowed to be withdrawn in cash by the customer or paid to him by way of NEFT/pay order/DD or by reinvesting the same. However, now RBI has allowed banks to decide periodicity of interest and banks can pay interest at monthly rests also. If due date of term deposit is on a holiday, banks will make payment on next working day or thereafter and 3. will pay the interest for the holiday to depositor at contracted rate irrespective of when the payment is taken. 4. In case of renewal of overdue term deposits, bank may decide the rate of interest payable for the overdue period. In case of payment of overdue fixed deposit, the amount left unclaimed with the bank will attract savings bank rate of interest. 5. Depositor can request for addition or deletion of names in the deposit but at least one of the original depositors must remain As per Section 269 T of Income Tax Act, if the principal plus interest of term deposit is Rs 20,000 or above, the payment should be made through credit to account or issuing account payee cheque or DD. It should not be paid in cash. In case, bank pays such term deposit in cash, penalty will be equal to amount paid. Similarly, payment of interest of Rs 10,000 and above should not be made in cash. 7. 'Bulk Deposits mean deposits of Rs 1 crore and above. Bank can refuse premature payment of Bulk deposits. In case of premature payment of FDR, penalty will be decided by the bank. However, penalty can not be charged in case of premature payment in case of death of depositor. Previously, banks were not allowed to charge penalty in case of premature 'renewal of term deposits. RBI has advised in April 2010, that banks can frame their own guidelines in this regard. 8. in case of death of depositor, interest for overdue period will be paid at saving rate if depositor died after maturity date. If depositor dies before maturity of FDR, interest for overdue period will be paid at FD rate as on date of maturity for the period overdue amount remained with the bank. 6.

9.

The account holders are permitted to make premature encashment of such deposits. In such cases, the principal amount is paid along with interest as applicable for the period for which the deposit was actually with the bank, less some penalty on the applicable rate of interest, as per bank's policy. Loans against the


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Fixed Deposit may be given to the customers. The rules relating to margin and interest rate are decided by the bank.

Recurring Deposits

In RD, fixed amounts are deposited by the depositor every month for a pre-determined period. Interest is generally cumulated at quarterly rests based on month-end balances in the account and pre-determined amount is fixed as payable at the end of the period of deposit. RD is not opened under FCNR(B) Scheme. 2. The rules relating to premature payment or foreclosure and grant of loan are similar to that under Fixed Deposit Other types of deposits Cash certificates: Cash certificates are issued at discounted value. Certificate of Deposit: The certificates of deposit are short-term negotiable money market instruments. Issuance of CDs attracts stamp duty. CDs are issued at a discount on face value. Minimum maturity 7 days and maximum maturity one year. Minimum amount of a CD should be Rs 1 lakh and in the multiples of Rs 1 lakh thereafter. 1.

Procedural aspects of Opening the accounts For opening various types of accounts, viz., Savings, Current and Fixed Deposits banks may use a single account opening form. At the time of opening the account, following documents are taken — (a) Photograph; (b) Proof of identity and address as per KYC norms; (c) Copy of Pan card or form no 60/61; (d) specific documents depending upon the constitution of the customer like copy of the partnership deed, copies of the memorandum and articles of association, certificate of incorporation, resolution passed by the board for opening the account/making the deposit. For opening accounts of individuals, introduction is not required. Accounts are opened by the bank at its discretion and upon satisfaction of the authorised official of the bank as to the bonafides of the prospective customer. Introduction of Customer accounts: As per RBI guidelines, introduction is not required for opening the accounts as proof of identity and photograph are sufficient for this purpose. Photographs: The banks should. obtain photographs of the depositors/account holders who are authorised to operate the accounts. The customers' photograph should be recent and the cost of photographs to beaffixed on the account opening forms may be borne by the customers. Only one set of photographs need to be obtained and separate photographs should not be obtained for each category of deposit. In the case of joint accounts, separate set of photographs of all joint depositors/partners should be obtained. In the case of institutional customers, photographs of all the officials authorized to. open and operate the account should be obtained. In the case of Savings bank accounts opened by minors of age 10 years and above, photographs of the account holder has to be obtained. In the case of minor's account, operated by the Guardian, photograph of the Guardian is also to be obtained. In the case of Hindu Undivided Family (HUF) accounts, photograph of the "Karta" has to be obtained. Where mandate/power of attorney has been granted, photo of mandate/POA holder should be obtained. Photographs of 'Pardanashin' women should also be obtained for opening the account. in case of accounts of illiterate persons and blind persons, passport size photograph of the depositor must be affixed on the pass book and the account opening form duly authenticated by the authorized officer. If any visible change in the resemblance of the photograph and the customer is noticed, a recent photograph should be obtained from the customer.

Nomination Facilities in Customers' Accounts 1. 2. 3.

4. 5. 6.

7.

8.

_In 1983, Section 45ZA to 45ZF were added to the Banking Regulation Act, 1949 providing for extension of nomination facilities in banks. However, the facility of nomination was started in banks w.e.f. 29.03.1985. Nomination facilities are available in deposit accounts (Sec 45 ZA & 45ZB), in respect of articles deposited for safe custody with the bank (Sec 45ZC & 45ZD) and in locker accounts (45ZE & 45ZF) Sections 45ZA, 45 ZC, 45ZE relate to nomination, change in nomination and cancellation of nomination. Sections 45ZB, 45 ZD, 45ZF state that bank will be discharged of liability by making payment/delivery to nominee. Where facility is available: Nomination facility is available in all types of deposit accounts likeGB, CA, FD, RD, foreign currency accounts of individuals and accounts of NRI like NRE, FCNR(B) and NRO. Who can nominate: Account should be in individual capacity or joint account of individuals or a sole proprietorship firm. Who can not nominate: The facility of nomination is not available in partnership accounts, HUF, deposit accounts of clubs/societies/limited companies/trusts. A minor can not appoint a nominee. On his behalf, nomination facility can be exercised by the person legally competent to act on behalf of the minor. Who can be nominee: Only an individual can be appointed nominee. He or She can be minor, very old person or even an insolvent person. If nominee is a minor, the depositor has to appoint a major person to receive deposit amount / articles in the safe custody / locker etc. on behalf of the minor nominee in the event of death of the depositor. Number of nominees:ln the case of deposit accounts there can be only one nominee irrespective of


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the fact whether deposit account is in single name or joint names and also irrespective of operating instructions in the joint accounts. 9. In the case of articles deposited for safe custody only one nominee is permitted if account is in the name of a single person. In case articles are deposited by more than one person, nomination facility is not available. 10.In the case of locker accounts in single names or in joint names where under contract of hire, operation is allowed to any one or more of locker holder(s)/survivor(s), nominee can be only one. However, in locker accounts in joint names where operations are 'jointly', by 2 or more of such hirers, more than one nominee can be appointed. (Though nomination rules allow more than one nominee in jointly operated locker accounts, as per IBA maximum number of nominees in such cases should be two). 11.Nomination once exercised can be changed, cancelled or modified by the depositor(s) at any time and any number of times. In case of more than one depositors, all such acts require their joint consent. Survivor of a joint account has the right to cancel an existing nomination, exercise fresh nomination where nomination was earlier not exercised or change nomination. 12.When does the right of nominee start?:Right of a nominee starts only after death of all depositors/locker holders/safe custody article lodger. The only exception is the nominee(s) in case of jointly operated lockers. In that case, right of nominee(s) starts immediately after the death of any of the hirers. 13.ln the case of illiterate account holder nomination is required to be witnessed by two persons. 14.Status of nominee:The status of nominee is just like trustee of legal heirs. He does not become absolute owner of the amount or items lying in safe custody or in safe deposit vault. Nominee can not get his name added or get his name substituted or renew FDR. He can not raise any loan against FDR. However, Nominee is entitled to premature payment of deposit and no penalty is levied in effecting premature payment to nominee. 15.Legal Heir versus nominee: When both nominee and legal heirs approach the bank for getting payment after the death of depositor or locker holder, bank will make payment to the nominee unless there is a court order to make payment to legal heirs. Bank gets a valid discharge by payment to nominee. 16.Formalities for making payment to nominee: In case of death of depositor, nominee has to submit following documents (a) Copy of death certificate (b) claim form (c) Identification which can be done by 15i class Magistrate or Gazetted officer or by a bank officer or any two persons known to bank. While delivering contents of locker or safe custody, if any sealed packet is found, the same should be delivered without opening the same. 17.1n case of term deposits, there is no need of fresh nomination in the case of renewal of FDR. 18.While making nomination, the thumb impression of the accountholder should be attested by two witnesses. However, signatures of the accountholders in forms DA1, DA2 and DA3 need not be attested by witnesses. 19.1n the case of accounts in the name of single persons, nomination must be obtained. If the depositor does not want to nominate any body, a written letter should be obtained from him in this regard. In case the person opening the account declines to give such a letter, the bank should record the fact on the account opening form open the account. 20. Banks should- acknowledge the receipt of the duly completed form of nomination, cancellation and / or variation of the nomination. Such acknowledgement should be given to all the customers irrespective of whether the same is demanded by the customers. 21.Banks should incorporate the legend "Nomination Registered' on every pass book or deposit receipt so as to enable the relatives to know that the nomination facility was availed of by the deceased depositor. 22.ln addition to the legend "Nomination Registered", banks should also indicate the name of the Nominee in the Pass Books / Statement of Accounts f FDRs, in case the customer is agreeable to the same.

Other Operational Guidelines Posting of Cheques for payment: Points to be considered 1. The cheque is from the drawer's current Cheque Book. 2. Date of the cheque: The cheque should not be post dated or stale cheque (i.e. 3 months old). 3. Amount written in words and figures should agree. The cheque has been properly signed by the account holder/authorised person. 4. 5. In the case of business/companies/firms their rubber stamp should be affixed and authorised officials should sign. 6. The balance in the account should be sufficient or within the sanctioned overdraft or CC limits. 7. All alterations, if any, on the cheque, should be duly authenticated by the drawer. 8. The payment of the cheque should not have been stopped. 9. itthe cheques bear the crossing, it must be presented through a banker; 10. If the crossing is "A/c Payee only", then the proceeds of the cheque has to be credited to the payee A/c only. Stop Payment: Banks cannot honour the cheque after getting the clear stop payment instructions from the customer.It should be verified whether the cheque for which stop payment is issued is already passed or not. If the cheque is unpaid as of the time of receipt of the stop payment instructions, all relevant particulars must be Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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entered into the system. The drawer of the cheque can give instructions for revoking the stop payment and ask the bank to honour the cheque when presented. Standing instructions: The customer can instruct the bank to carry out certain functions at fixed periodicity like transferring amount from SB A/c to RD A/c; transferring interest on Term Deposit to SB A/c or any other A/c; transferring amount from SB A/c to certain loan account etc; payment of Insurance Premium etc.

Various types of relationships Type of Transaction Deposit in the bank (CR balance in account) Loan from Bank (Debit balance in account) Safe Deposit Vault Safe custody issue of draft (after issue of draft) Payee of draft Collection of cheque & Standing instruction Goods left negligently by customer Purchase of cheque from customer Purchase/sale of securities on behalf of customer Currency Chest on behalf of RBI Money deposited. No instructions for its disposal

Bank Debtor Creditor Lessor (Licensor) Bailee Debtor Trustee Agent Trustee Holder for value Agent Agent Trustee

Customer Creditor Debtor Lessee (Licensee) Bailor Creditor Beneficiary Principal Beneficiary Endorser Principal RBI is principal Beneficiary

Banker's Obligations - Duty to maintain secrecy: A bank has duty to maintain secrecy of customer's account as per implied Contract.  The duty to maintain secrecy continues even after closure of account.  Balance in the account of an employee should not be disclosed to employer. Similarly balance in the account of wife not to be disclosed to husband and vice versa.  If bank discloses customer's affair (e.g. in case of insufficient balance in the account advising the presenter of cheque to deposit deficit amount), bank will be liable to customer for resultant loss. Exceptions to rule of secrecy: When information sought by Court for evidence or by In-charge of a Police Station, or by revenue authorities like Income Tax Authority, or RBI as per general practice (without any liability) or as per consent of customer (based only on records). The banks deal with different types of customers that include Individuals, partnership firms, companies, cooperative societies etc. In addition to complying with requirement of KYC of RBI, at the time of opening and in the conduct of accounts of these persons, the banks have to comply, the relevant law applicable to each of them. A brief of these requirements, for different customers, is given as under: Accounts of Minors  A minor is a person who has not attained the age of 18 years. A person will become major at the age of 18 whether guardian is natural or appointed by a court of law.  Guardians: There can be three types of guardians.  Natural guardians like father, mother.  Testamentary Guardian: A Guardian appointed by Will (Vasiyat). Natural guardian may appoint somebody to act as guardian after his or her death through will. But such guardian will come into picture only on the death of natural guardian (in case of Hindus on the death of father as well as mother). Legal guardians: A Guardian appointed by Court. If neither natural or testamentary guardian then appointed by court. 

Minor Guardian Hindu son, unmarried daughter Father and after father's death mother Husband. If husband is minor or has died, father in law and after his Hindu Married daughter Mohammdan minor Father After death of father, executor of fathers will. If no will, father's Christian or Parsi Father After death mother. When guardian of a Hindu minor ceases to be a Hindu or he becomes a hermit or sanyasi he ceases to be natural guardian. As per section 11 of the Indian Contract Act, 1872 a minor is not competent to enter into a contract and the contract entered into by him is void ab-initio. Loan to minor. Banks do not grant overdraft / loan to a minor, even if security is provided because a contract with minor is void, and the Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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bank will not be able to recover the loan. Loan against FD: No loan if account self operated. If under guardianship, loan can be granted to guardian for benefit of minor . Premature payment of FD: If account self operated, it is allowed as minor can give valid discharge. Addition of name: Even when loan has been raised on a term deposit in the name of a major person, the request for addition of the name of the minor cannot be entertained till loan is adjusted. Ratification of agreement by minor: A minor cannot ratify an agreement after attaining majority. Loan for education: A contract for the supply of necessities of life like food, clothes, education to a minor is a valid contract. Loan to minor against Guarantee: Cannot be recovered even from guarantor . Minor as Agent Minor cannot appoint an agent. However, a minor can be appointed as an agent and he can make principal liable by his actions. A minor cannot delegate authority in his self operated account. Issue of cheques etc: According to Section 26 of NI Act, a minor can draw or endorse or negotiate a cheque or a bill. He can make everybody liable except himself . Appointment of Nominee: A minor cannot appoint nominee. However, minor can be a- ppointed nominee. Minor as a partner: A minor cannot be full fledged partner in a partnership concern as he can not enter into a valid contract and partnership is created by agreement. A minor may be admitted to benefits of partnership with the consent of all partners. However, the liability of the partner will be limited to his share in the business of the firm and he will not liable personally for the acts of the firm. On attaining majority, a minor has to give public notice within six months of attaining majority or when it comes to his knowledge after becoming major which ever is later, whether he wants to continue as a partner. if he remains silent, it amounts to his implied consent. If he chooses to become a partner, he will be held liable as a partner from the date he has been admitted to the benefit of the partnership firm. As minor is not partner, he cannot give stop payment instructions on a cheque issued by partnership. Accounts of a minor: A minor can have account under guardianship as well as self operated account. Accounts under guardianship: The account will be operated by the guardian during minority of the child and once the minor becomes major, the debit in the account will be allowed only with the consent of minor who has become major even though the cheques might have been issued prior to his attaining majority. in case of death of minor; next guardian to operate the account. Minor's Account with Mother as Guardian: RBI has allowed mother to open and operate all types of deposit accounts even though the father is alive and no consent of father is required for such accounts. Self operated account of minor: A minor can open self-operated deposit account provided he has completed the age of 10 years and is literate. He cannot appoint nominee in this account. On his behalf nomination will be done by a person legally competent to act on his behalf. Joint account is also allowed in the name of two minors provided both are of 10 years of age, are belong to the same family and operation is jointly. In case of death of minor, payment to legal heirs of minor. A bearer cheque presented for cash payment by a minor may be paid as a minor can give a valid discharge in the capacity of the payee. Accounts of Visually Challenged (Blind) Persons 1 A visually challenged person is competent to the contract like any other person. 2 Signature or thumb impression of the blind person should be attested by an independent witness to the effect that all terms and conditions were properly explained to the blind person in his presence. 3 Cash deposit and withdrawal by blind person should be handled by the officer of the bank. 4 RBI has advised banks to ensure that all the banking facilities such as cheque book facility including third party cheques, ATM facility, Net banking facility, locker facility, retail loans, credit cards etc. are invariably offered to the visually challenged without any discrimination. Accounts of Illiterate Persons  An illiterate person is competent to contract like any other person.  Cheque book is not issued to illiterate depositor for cash payments.  Cheque book can be issued for making statutory payments, post dated cheques for repayment of instalments of loan. In such cases, the cheques will be crossed account payee and thumb impression of the illiterate depositor will be verified on such cheques at the time of issue of cheque book by competent authority of the bank. Joint accounts Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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Either or Survivor (E or S): It means anyone can operate the account till both are alive. After the death of either of them, the bank can pay the balance to the survivor without any formality.  To be operated jointly: Account will be operated by both jointly till both are alive and, if one of the two expires, the bank would pay the final balance to the survivor, along with all the legal heirs of the deceased.  Jointly or by Survivors: Account can be operated by both / all the person jointly during their lifetime and, in the event of death of any one, the balance is payable to the surviving persons jointly.  Former or Survivor: in such accounts, till the first named person is alive, the second named person has no right to withdraw/operate the account. After the death of the first named person, the payment will be made to second named person_  In case of "either or "either or survivor or 'joint" operation any one of the account holders can stop payment of the cheque. The revocation in case of either or either or survivor can be done by either but in case of joint operation, revocation has to be done by all jointly.  In case of former or survivor cheque can be stopped by former and revocation of stop payment can also be done by former only.  In case of either of survivor alteration on the cheque can be confirmed by any of the account holders. In - case of former or survivor it can be confirmed only by former and in case of joint operation by both.  If in a joint account any one becomes insane (Pagel), operation in the account will be suspended and balance will be payable to the other account holders alongwith guardian of insane appointed by court.  Any authority to a third party has to be with the consent of all joint account holders_  Premature payment of FDR: in all cases it will be consent of all account holders unless mandate has already been taken that any one take premature payment  Loan against FDR: In all cases it will be consent of all account holders unless mandate has already been taken that any one take raise loan singly.  Joint accounts are joint property. Therefore, unless there is clear mandate in the account opening form that any one can undertake the following functions, these should be done by all joint account holders jointly under signatures of all (a) opening the account (b) closure of account (c) making or altering nomination (d) raising loan against term deposit (e) premature payment of term deposit JOINT ACCOUNTS Transaction Either or survivor Former or survivor Joint operations Stop payment Any one Former Any one Request for loan All jointly All jointly All jointly Premature payment of All jointly All jointly All jointly Payment on death SB/CA Survivor Survivor Survivor with legal heirs Death - FDR Premature Survivor with legal heirs Survivor with legal heirs Survivor with legal heirs Closure of account All jointly All jointly All have to sign Nomination All to sign All to sign All to sign Payment in case of Survivor till any of them Survivor, till any of them Survivor & legal heirs till a Attachment order Each liable proportion- Each liable proportionEach of them liable -\ Garnishee order Order in joint names only Order in joint names Order in joint names 

Partnership Firms 1. As per section 4 of the Indian Partnership Act, 1932 partnership is the relation between persons who

have agreed to share the profits of a business carried on by all or any of them acting for all. Minimum & Maximum Partners: A partnership firm should have minimum 2 partners. 2. As per Companies Act 2013, an association of more than 100 persons which is not registered as Company or Society will be an illegal association. Therefore, maximum number of partners can be 100. (As per Companies. Act 1956, maximum number of partners could be 20 for any business other than banking and 10 for banking business). In case of Limited Liability Partnerships, there is no limit on maximum number of partners. 3. Who can become a partner?:. Only a person competent to contract can become partner. Minor, 4. insolvent, insane cannot become partners A company and a firm can become partner in another firm. Who can not become a partner?: HUF can not become partner as per judgement of the Supreme 5. Court because HUF is neither a legal person nor a natural person and can not be liable for action of others. Partnership Deed: Partnership can be oral or in writing. Therefore, banks do not insist on 6. partnership deed while opening accounts of a partnership eencern. Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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Registration of Partnership: A partnership firm is registered with registrar of firms. Though, it is not necessary that the firm be registered yet registration is ,preferred because an unregistered firm can not sue others in its own name for recovery of its dues while others can sue it in its name. Therefore, while granting loans banks prefer that the firm should be registered one. Implied authority of partner: As per section 19 of the Partnership Act, 1932, a partner of a firm has 8. implied authority to act on behalf of the firm for the normal business of the firm and bind the firm. All actions of the partner in the ordinary course of business are actions of all partners. However, in the absence of any usage or custom of the trade to the contrary, a partner's implied authority does not cover '(a) admission of any liability in a suit against the firm (b) withdrawal of any suit filed on behalf of the firm (c) acquire/transfer any immovable property on behalf of the firm (d) submitting a dispute relating to the business of the firm to arbitration (e) opening a bank account on behalf of the firm in his own name (f) compromising on behalf of a firm (g) entering into partnership on behalf of the firm. But if all partners agree for these issues—and authorize any one in this regard, these jobs can be undertaken by the said partner. 10.Liability of partner: As per section 25 of the Indian Partnership Act, 1932 every partner is liable, jointly with all other partners and also severally, for all acts of the firm while he is a partner. Thus, liability of a partner is unlimited. In case of Limited Liability Partnership, the liability of partner is limited up to the amount agreed to be contributed by him. 11.Account of Partnership firm: For opening account of a partnership firm, all partners are required to sign Account opening form except minor who is admitted for benefits of firm. 12.00erational Authority: In Partnership accounts operation authority is given by all partners. Any change in the operational authority is also with the consent of all partners including those who were earlier not authorized to operate. Every partner including a sleeping partner has authority to stop payment of a cheque issued by another partner of the firm. The revocation of stop payment of cheque will be as per operational authority._ 13.As per section 18, a partner is the agent of the firm for the purpose of business-of the firm. Being an agent, he can't delegate his authority to an outsider without the written consent of all other partners. 14.Death, insolvency, insanity of partner: On the death, insolvency or insanity of a partner, the partnership is dissolved and operations are stopped. The cheques signed by the deceased, insane or insolvent partner will not be paid. If the account is in credit, operations are allowed for winding up of the firm. In such case operations are allowed on the basis of a fresh mandate. It the account is in debit, operations in the account should be stopped to retain liability of the deceased /insolvent partner or his/her estate and to avoid operations of the Clayton's rule. Limited Liability Partnership : 1. Limited Liability Partnership is governed by Limited Liability Partnership Act 2008. 2. It is registered with Registrar of Companies. 3. Minimum number of partners is 2 but there is no limit on number of partners. An individual or a body coporate can be a member of an LLP. 4. Liability of partner is limited to the extent of his contribution in the firm. A partner shall not be personally liable. Accounts of Limited Companies A limited company is an artificial person with perpetual succession incorporated under the 1. Companies Act. Number of members: As per Companies Act 2013, in the case of a private limited company, 2. minimum number of members should be 2 and maximum number of members excluding employees can be 200. For public limited company minimum number of shareholders should be 7 and there is no ceiling on maximum number Number of Directors: Minimum Directors in a public limited company should be three, in a private 3. limited company 2 and in One Person Company one. Maximum directors in all types of companies can be 15. However, company may appoint more than 15 directors by passing a special resolution. An individual can not be director of more than 20 companies at one time out of which public co should not be more than 10. Shareholders are owners of the company, directors are agents of the company and debenture 4. holders are creditors of the company. 5. Documents for opening_ account: For opening account of a limited company bank should obtain the following: Memorandum of Association: It contains name of the Company, its authorised capital, registered (a) office and liability of shareholders, objects of the company etc. Anything done by the directors beyond the objects stated in the memorandum of association is called ultra-vices the company and can't be ratified even in a general body meeting. Directors can borrow only for the objects mentioned in the MOA. if any loan is given for objects other than those mentioned in Memorandum of Association, company will not be liable for such loans. Articles of Association: lays down the internal working of the company like rights and (b) powers of the directors, rules of conducting meetings, borrowing power of directors etc. Certificate of incorporation : It is equivalent to birth registration certificate of the company. (c) This is the most important document. A company does not exist without it. Certificate of commencement of business: used to be issued by Registrar of companies. (d) Earlier it was required by public limited companies only. Now it is not required by either public limited 7.


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company or private limited company. Resolution of Board of Directors which is passed by the Board of Directors authorising opening and operation of the account by named officials of the company. A copy of the resolution should be attested by its Company Secretary and / or Chairman of the meeting at which resolution was passed. While opening account of a limited company, no introduction is required as Certificate of (f) incorporation is sufficient for that purpose. However, KYC norms are required to be applied on all persons authorized to operate the account of company. 6. As per doctrine of 'Constructive Notice' anybody dealing with company is assumed to have knowledge of Memorandum and Articles of Association. 7. Operational Authority: The operational authority is decided by Board Resolution. Any change in operational authority is also as per Board Resolution. Stop payment of a cheque and revocation of stop payment will be as per operational authority. The directors can not delegate their authority to any other person. 8. In case a director dies, the cheques signed by him presented for payment can be paid if these are otherwise in order and are dated prior to his death. 9. Common Seal of the Company is to be affixed on documents as per Articles of Association or Board Resolution. 10.Borrowing powers of Directors: The borrowing powers of company arise from Memorandum of Association. The Borrowing powers of directors are given in the Articles of Association. If it is not mentioned in Articles of Association, it is equal to paid up capital and reserves of the company. The Board of Directors of a public limited company or a private limited company which is a subsidiary of public limited company can't borrow in excess of its paid-up capital and free reserves. If the directors want to borrow more than the paid up capital and reserves of the company, consent of the shareholders is required in the General Body meeting. 11.Winding up of company: Winding up can be (a) voluntary (b) Compulsory by court (c) through court supervision. (e)

Registration of Charge 1. When to be registered: Under section 77 of the Companies Act, 2013, a charge other than created by

way of pledge or lien, by a company is required to be registered with Registrar of Companies (ROC). 2. Modification: Whenever, there is a change in terms and conditions of the loan, then the particulars of Modification of charge should be filed with the ROC. 3. Satisfaction: When loan is repaid, particulars of satisfaction of charge should be filed with ROC , within 30 days of the satisfaction of charge. 4. ROC with whom particulars to be filed: The particulars of the charge should be filed with the Registrar of companies in whose jurisdiction the Registered Office of the Company is located. 5. Forms: For filing particulars of fresh charge, Form No. CHG 1 is required. Form used for modification of the charge is same as that for fresh registration. For satisfaction of charge, Form No. CHG 4 is to be submitted. 6. Period for filing particulars: Particulars of charge are required to be filed within 30 days of creation of charge. 7. Extension of Period of Registration: ROC can grant extension of 270 days in filing particulars of charge. The company will be required to pay additional fees not exceeding 10 times the specified fees. Beyond this period permission is required from the Central Government. 8. Duty to file particulars of charge: It is the primary duty of the company to get the charge / modification of charge / satisfaction of the charge registered with ROC. However, if the company does not get the charge registered, bank in its own interest can file particulars of charge. 9. Consequence of non filing the particulars: In case the particulars of charge are not filed, the bank becomes the unsecured creditor against the official liquidator. 10.Priority of charge: The priority of the charge is reckoned from the date of creation of charge (i.e. date of documents) and not from the date of registration if the charge is registered within the stipulated period. Hindu Undivided Family (HUF) : HUF is neither a legal person nor a natural person. It is not created by agreement_ It is not incorporated under any Act. It is from a common ancestor and membership is by birth or adoption.  The eldest member of family is the Karta and others are co parceners. Daughter can also be karta.  Seniormost member continues to be Karta even when he/she lives outside India.  Operational authority to operate the account is with Karta  Karts can appoint any other coparcener or third party to conduct business of HUF and/or operate the account.  Co parcener can not stop payment of the cheque unless he is authorized to operate the account.  Karta is personally liable.  The liability of a co parcener is limited up to his share in the firm. He is not liable personally.  HUF can not be partner as per Supreme Court Judgement.

TRUST ACCOUNTS : Bank accounts of Trust Documents for opening bank account a) certified true copy of the trust deed, Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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in case of a public trust a copy of the registration and certificate from Charity Commission, and an undertaking from the trust on appropriate adhesive stamped paper to indemnify the bank against proceeds, actionable claims etc. Operations in account: The account shall be operated jointly, if the number of trustee is two or more. OR as per mandate through Resolution given by the Trustees, if the Trust deed provides for that. Insolvency of a trustee: It will not affect the trust property, as the creditors of the trustee cannot have recourse to the property of the trust. Transfer of funds from trust account: Bank should not allow any trustee to transfer funds from trust account to his own account without making proper inquiry. The funds lying in a trust account can not be utilised for payment of debts of the trustee. Hence right of set-off in such circumstances cannot be exercised by the bank. Loans: Loan can be granted if it is for the purpose of the trust. Trustee is authorised to borrow as per the trust deed. Death of trustee: In case of death of single trustee cheques dated up to his date, would be paid. In case of death of one of joint trustees, the provisions as contained in the Trust Deed would be followed. b) c)

SOCIETIES AND CLUBS : Bank accounts While opening account of a society or a club, the banks should obtain following documents: a copy of registration certificate. b copy of rules and regulations (bye-laws). c copy of resolution passed by the Managing Committee regarding opening and conduct of the account which should specify the names of persons authorised to operate the account. Loans - While giving loans, it should be ensured that the purpose of loan is consistent with the objects of the institution, the amount of loan is within borrowing capacity and the resolution for the loan has been passed by the managing body. Death of the authorised persons - In the event of death of the person authorised to operate the account, the operation should be stopped till another office bearer is authorised for the same. COOPERATIVE SOCIETIES They can open account with co-operative banks and commercial banks by permission from Registrar of Co-operative Societies.The bank can open accounts of unregistered clubs/institutions, societies, associations, schools after satisfaction about the reputation, responsibilities and standing of the officebearers of such bodies.No lending should generally be made to such unregistered bodies. On death, resignation of the authorised office bearer, bank should stop operations till nomination of another. Cheques payable to such bodies even if endorsed, should not be collected for personal accounts of the office bearers.Cheques drawn by such bodies favouring self or cash, should be paid after obtaining confirmatory endorsement by authorised person/s of such bodies. This endorsement has double effect; one for authorising the presenter to collect the cash and the other that the withdrawal is within constitutional limits.Where there is change in the office bearerfs the same account can continue. Obtain a certified true copy of the resolution. ACCOUNTS FOR GOVERNMENT AND PUBLIC BODIES The central government transactions are governed by the Central Government Compilation of Treasury Rules and Account Codes. The state government transactions are governed by the State Financial Handbook of the state. The main function of banks in conducting government business consists of paying, receiving, collecting and remitting money on behalf of the government departments. Banks, while opening the accounts of government and public bodies, should also obtain a copy of the letter of authority issued by the competent authority for opening the account. Receipts : The receipt is through challans made in duplicate or triplicate as required, showing distinctly the nature of payment and the head of account to which the amount is to be credited. The challan must be passed by the treasury/sub-treasury before presenting for payment. Passed challans are valid for ten days after which they will have to be revalidated. Copies of challans returned to the depositor as receipts should be signed in full. In case a challan is lost, no duplicate is issued, but only a certificate is to be issued. Payments : The government departments are authorised to issue cheques within the drawing limit permitted to them. Self-drawings in cash are allowed for salary and expenses. Special Cheque books are used by the government departments. They are supplied by the department and are paid for by the banks. No overdraft is to be allowed in these accounts. The credit to these accounts is received through budget allocations by the respective ministries. Refund orders are issued by the central excise and customs department in favour of payees. Refund orders are also issued by the income tax department with a related advices. While paying, the banks should have cheques as well as advice at the time of payment. Advice is also received by the payee along with the cheques. Such refund orders are quasi-negotiable and do no attract any stamped discharge.

Account of Executors and Administrators 

An executor is a person named by the deceased in his will to mange his estate whereas an administrator is appointed by the court of law for the same purpose where the deceased dies without leaving behind a will (intestate). Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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In the eyes of law, executors and administrators, unlike trustees are treated as one person. On opening a bank account, therefore, executors/administrators can authorise any .one or more of them to operate the account. On the death of an executor or administrator, the surviving executor(s) or administrator(s) can continue to operate the account unless otherwise provided for in the will or letter of administration. While opening the account of an executor, bank should obtain letter of probate, which is an official confirmation of the will of the deceased by a court of law. For opening account in the name of administrator(s), letter of administration is required which is issued by the court of law. Mandate and Power of Attorney When an account holder authorises another person through a simple letter of authority, it is called mandate. On the other hand, power of attorney is executed on stamped paper and may cover any other transactions besides opening/operation of an account. Bank generally accept mandates. The account holder can revoke mandate or power of attorney any time even if it is stated to be irrevocable. Any cheque signed by the agent and presented after cancellation of authority shall not be paid. Power of attorney or mandate is revoked by death, insanity, insolvency of the Principal. Any cheque signed by the principal or agent presented after the death, insanity or insolvency of the principal will not be paid. In case Cheque issued by the agent is presented for payment after his death, insanity or insolvency, the same can be paid so long as the principal is alive provided the cheque is otherwise in order and is dated prior to the date of death or insanity of the agent. Agent cannot delegate authority to a third part

OPERATIONAL ASPECTS OF LOAN ACCOUNTS Advances granted by commercial banks take various forms such as cash credit, overdrafts, purchase or discounting of bills, term loans, etc. Apart from fund based facilities, banks also provide non-fund based facilities. Types of Loan products: 1. The loan portfolio can be classified into Retail loans and Commercial loans. 2. Retail loans are for the individual customers like - vehicle loans, home loans, education loans, credit cards, personal loans, loans for purchase of consumer durables, small business loans etc. These loans are usually for small amounts. 3 . Commercial loans are f or comparatively larger amounts and require more professional attention for assessment and monitoring due to the uniqueness of each such loan. Types of facilities: 1. Funded facilities: When there is actual outlay of funds by the bank e.g. Term loan, cash credit, overdraft, demand loan, bills purchased and bills discounted etc 2. Non-funded Credit Facilities: When bank is not required to disburse funds immediately. For example — Letter of Credit, Bank Guarantee etc. However, a non-funded facility may subsequently become a funded facility due to devolvement or invocation. 3. Term loans: When Commercial loans are given for purchase of fixed assets, these are term loans. Term loans are repayable in instalments spread over a period of time after the moratorium period wherever applicable. The amount of instalment and periodicity of repayment is fixed. The instalment may be uniform throughout the life of the loan, or may differ from instalment to instalment. The instalment can be fixed in two ways — firstly, instalment is only for Principal amount and entire amount of interest is payable separately by the borrower. In the second method, 'equated monthly instalments'-are fixed which includes both principal and interest amount. Term loan is disbursed in limited instalments and cheque books are not issued. 4. Working Capital loans are given for day to day requirements and are are payable on demand. The cash credit facility is generally granted against the security of stocks of goods, bills/book debts representing genuine sales - all belonging to the borrower. 5. Demand Loans: An advance of a fixed amount repayable on demand. The repayment of demand loans may be either in one lump sum or by instalments. 6. Bills Purchased and Discounted: Demand Bills are purchased and Usance Bills are discounted. Banks purchase/discount only bonafide trade bills and not accommodation bills. Security in a loan: The security created from bank's finance or against which credit is provided by the bank is called Primary security. A collateral security is additional security. Besides security, banks obtain personal guarantee from a third party for payment of dues in the event of default by the borrower. Characteristics of a good security: marketability, easy ascertainability of value, stability of value, and transferability. Methods of Creation of Charge: Mortgage, pledge, hypothecation, assignment, or set-off. Mortgage: Mainly of two types. Registered Mortgage - effected by a registered instrument called the 'Mortgage Deed' signed by the mortgagor. Equitable mortgage — created by a deposit of title deeds to the bank with intent to create security thereof. Pledge : Bailment or delivery of goods by the borrower to the lending bank to secure a loan. The ownership of the goods remains with the pledger but possession is with bank. Hypothecation: Neither ownership nor possession is transferred to the bank. The borrower periodically submits statements regarding quantity and value of hypothecated assets (stocks, debtors, etc.) to the Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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bank on the basis of which the drawing power is calculated. Assignment: Transfer of an existing or future debt, in favour of another person. Assignment is created on actionable claims such as book debts and life insurance policies. Set-off : statutory right of a creditor to adjust, wholly or partly, the debit balance in the debtor's account against any credit balance lying in another account of the debtor. For the purpose of set-off, all the branches of a bank are treated as one single entity. The right of set-off can be exercised in respect of time-barred debts also. Banker's General Lien: Right of bank to retain goods and securities of borrower till bank's dues are paid. Lien is a statutory right and does not require any separate agreement. Negative Lien: Undertaking given by the borrower to the bank that he will not sell or create any charge over his immovable and moveable properties without the prior permission of the bank. Margin: Margin is the contribution by owners for purchase of asset. Margin depends upon the risk perception, type of security, volatility in value etc. Type of charge: Fixed Charge: created on some specific assets in favour of the bank. A floating charge is an equitable charge on the assets, present as well as future. A floating charge becomes a fixed charge when money becomes repayable and the bank takes necessary steps for the enforcement of the security. Priority sector: Main sectors, included in the priority sector are — (a) Agricultural finance; (b) Micro and small enterprises including retail trade; (c) Housing finance; (d) Educational loans; (e) Export credit: not treated as priority sector for domestic banks but export credit by foreign banks is treated as finance to priority sector; (f) Other priority sector including micro credit. RBI sets the targets and sub-targets under priority sector lending for domestic and foreign banks operating in India. Base Rate system of interest on advances 1. The Base Rate system has replaced the BPLR system with effect from July 1, 2010. 2. Banks may determine their actual lending rates on loans and advances with reference to the Base Rate. 3. All categories of loans should be priced only with reference to the Base Rate. 4. Base Rate is the minimum rate below which banks will not lend to any borrower except in the case of (a) DRI advances (b) loans to banks' own employees (c) loans to banks' depositors against their own deposits. 5. Calculation of Base Rate: Base Rate shall include all those elements of the lending rates that are common across all categories of borrowers like (a)cost of funds (b) Unallocatable Overhead Cost (c) negative carry for SLR and CRR (d) Average Return on Net Worth. 6. Objective of Base Rate:(i) Enhancing transparency in lending rates of banks (ii) Enabling better assessment of transmission of monetary policy. 7. Banks may choose any benchmark to arrive at the Base Rate for a specific tenor that may be disclosed transparently. 8. Banks are required to review the Base Rate at least once in a quarter with the approval of the Board or the Asset Liability Management Committees (ALCOs) Penal rate of interest: Bank to decide penal rate of interest. For loans to borrowers under priority sector, no penal interest should be charged for loans up to Rs 25,000. Penal interest may be levied for reasons such as default in repayment, non-submission of financial statements, etc.

Operational Process of Loans 1. Receipt of loan application: The request is generally in a standard format of the bank. The applications are entered in a Loan Applications Received Register. Required documents also submitted with application. 2. Assessment of viability and credit worthiness: The degree of scrutiny depends largely on the amount of the loan. Following parameters are generally considered to ensure that it is technically feasible, economically viable and commercially acceptable: 1. Experience, competence and profile of the promoters of the unit. 2. Performance of the unit in comparison to its peers. 3. Conduct of its accounts with the existing lenders, if any. 4. Technical feasibility of the proposed unit. 5. Availability of inputs for production and commercial viability of the proposed business. 6. Ratio analysis to check unit's growth, its financial position, liquidity and the stake of promoters. 7. Guarantees and collateral securities offered. 8. Unit's capability to achieve the projected cash flows. 9. CIBIL Report, RBI List of defaulters, Credit report from other banks. 10. Locational restrictions, Govt, policy about particular industry, etc. 3. Sanction: Loan is sanctioned within powers delegated to concerned officials. If proposal is found to be acceptable, appraisal note along with necessary supporting papers is put up to sanctioning authority with recommendations. Detailed terms and conditions are written in the sanction letter which are communicated to applicant and his consent sought. 4.Disbursement: Documents prescribed by the bank are obtained and charges are created. Bank's charge is noted with Registrar of Companies, Transport Authority, insurance company, land records authority, etc. and then the loan is released. 5. Monitoring and Supervision: Monitoring is done through inspection, review of conduct of account Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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Inspections: Pupose of inspection 2. 3. 4. 5. 6. 7.

1. To ensure that the amount disbursed has been utilised for purposes for which the loan was sanctioned To ensure that the borrower has not availed of finance from any other lender without bank's permission_ To check that the borrower has not acquired/disposed off any asset without bank's consent. To ensure that the borrower has not availed of finance against unpaid stocks. To cross-check the figures declared in the stock statements with the books and physical verification of stocks. To check that the unit has been working at the projected levels. To check that there is a regular turnover of stocks and the unit does not carry any obsolete, unusable stocks. Review of the conduct of the account: By scrutinising the stock statements and other relevant financial data periodically and analyzing it.

Assessment of Working Capital limits

RBI has liberalized guidelines for assessment of working capital. Mainly three methods are adopted — Turnover method; Permissible Bank Finance method; Cash Budget Method. For large loans, banks follow the method of MPBF based on CMA (Credit Monitoring Arrangement) formats. CMA formats consist of the following forms: FORM I Particulars of the existing limits from the Banking System/Financial Institutions FORM II Operating Statement FORM III Analysis of Balance Sheet Part A - Balance Sheet Spread - Analytical and Comparative Ratios. FORM IV.Comparative statement of current assets and current liabilities FORM V Assessment of Maximum Permissible Bank Finance for Working Capital FORM VI Funds Flow Statement

Accounting aspects of Loan Products

Term Loans: At the time of disbursement: Debit the customer's loan account and credit - Cash account, if the disbursement is by way of cash, or Customer's current account or Third party account, or draft/pay order account, for direct payment to the supplier from whom the customer has purchased the asset financed. At the time of repayment: Debit cash or Debit deposit account of customer or Debit clearing account and credit loan account of the customer.

Operating Manual for Loans and advances

The Operations Manual of a bank is intended to provide guidelines to the operating staff on various matters including eligibility criteria for various loan products, appraisal method, margin, repayment period, processing fees, interest rate, penal interest, requirement of collateral security, personal guarantee, steps for creation of charge and documentation; insurance of primary and collateral security, procedure for disbursal of loan amount, monitoring and follow-up. The operational guidelines are based primarily on (a) General principles of credit; (b) Bank's loan policy; (c) RBI guidelines; (d) legal aspects. The operating guidelines differs from bank to bank depending upon its risk appetite, products offered, appraisal forms and methods, terms and conditions, type of documents, prudential exposure norms for individuals/groups as well as for industry segments.

Instructions for lending against various types of securities

Advance Against Goods 1. The goods offered for security should not be perishable articles, should be easily marketable, prices easily ascertainable and prices should be relatively stable and should not,fluctuate widely. 2. Advances should be allowed only against fully paid stocks. 3. The goods given as security should be the ones in which borrower normally deals. 4. Advance against goods should not be allowed for hoarding of goods for speculative purpose. 5. The goods should normally be not more than six months old. 6. Suitable margin should be kept on the value of the goods as a cushion against fall in prices and drawing power calculated accordingly. The margin may vary from customer to customer and stock to stock depending on nature of stocks and creditworthiness of borrower. Generally margin is between 25% to 30%. In case of commodities coming under the purview of Selective Credit Control, the margins are kept as per directives received from RBI. 7. Valuation should be done on Cost Price or Market Price whichever is lower, or Invoice Price or Market Price whichever is lower. 8. Marketability of the goods should be checked with reference to turnover of goods. The movement in the stocks should not be confined to only a few items but the entire stocks should move smoothly._A healthy turnover in the stocks is indicative of their ready marketability. Slow movement of stocks in an account may be due to — (a) Goods are not easily marketable; (b) Goods may be of an inferior quality; (c) overvaluation d) hoard the goods for speculative purpose; (e) deterioration in quality and quantity; f) obsolete or out of fashion goods. 9. Name plate that 'Goods pledged/hypothecated to...... ...... Bank' should be affixed to the main entrance of the godown. 10. Goods pledged/hypothecated to bank should be fully covered against fire and burglary risks. Insurance

must be for full marketable value of the goods pledged/hypothecated to the bank to avoid application of 'Average Clause'. If goods are underinsured, in case of loss insurance company will pay claim


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proportionately. The insurance policy should have 'Bank Clause'. 11. Godowns in a Pledge Account: In case of pledge, bank as a bailee is bound to take as much care of the goods bailed to him as a man of ordinary prudence would, under similar circumstances, take for his own goods of the same bulk, quality and value of the goods bailed. Therefore, Godown should have direct or independent access. When the godown/compound is not owned by the borrower(s), the landlord should give a letter that they will provide free access to godown and have no interest in the goods lying in the godown. 12. Stock Statements in Hypothecation Accounts: It will be submitted weekly, fortnightly or monthly duly signed by borrower or his authorized representative. Valuation of goods shown in Stock Statement should be checked. Bank should also obtain their sales during the period to enable the bank to check up whether the sale proceeds have been credited to their account. The value of stocks shown in the borrower's Balance Sheet should be compared with that shown in the Stock Statement as at the date of the Balance Sheet.

Advances Against Warehouse Receipts : Advances may be made against security of Warehouse Receipts issued by Central and State Government Warehouses or Warehouse Receipts issued by Private Agencies approved by Head Office. 2. Margin: Same as for commodities covered by the relative Warehouse Receipts. 3. No advance to be made against Warehouse Receipt indicating stocks of foodgrains marked as Grade II, Ill and IV. Only Grade I stocks to be accepted. Warehouse Receipts should be of recent dates. The stocks lying in the W arehouse for long periods 4. should not be taken as security. 5. Warehouse Receipts issued in the names of the borrowers only should be accepted. 6. No advance against a Non-negotiable Warehouse Receipts. 7. The Warehouse Receipt should be got endorsed by the borrower in favour of the bank. 8. A letter addressed to the Warehousing Corporation by the borrower notifying pledge of W arehouse Receipt to the bank and of bank's lien on the stocks should be obtained. 9. The bank should send notice to Warehousing Corporation, regarding pledge of Warehouse Receipt to the bank. It should be ensured that stocks are insured by the Warehouseman for the full cost price or market 10 . value whichever is higher. 1.

L o a n a g a i n s t G o l d J e w e l l er y 1.

2. 3. 4.

5.

Banks are prohibited from granting any advance against bullion/primary gold. However, loan can be made against specially minted gold coins provided the weight of the coin(s) does not exceed 50 grams per customer. The purpose of the loan should be approved, and non- speculative. The ownership of the gold ornaments to be verified before accepting them for pledge. Gold ornaments should be assessed by approved assessors. Loans are given only on the basis of gold content of ornaments. As per RBI, gold jewellery accepted as security/collateral will have to be valued at the average of the closing price of 22 carat gold for the preceding 30 days as quoted by the Indian Bullion and Jewellers Association Ltd. If the gold is of purity less than 22 carats, the bank should translate the collateral into 22 carat and value the exact grams of the collateral. Loan to Value (LTV) Ratio: Loans (including bullet repayment loans) sanctioned by banks against pledge of gold ornaments and jewellery for non-agricultural purposes should not exceed 75 per cent of the value of gold ornaments and jewellery.

Education Loan Scheme 1. 2. 3. 4.

5.

6. 7. 8.

9.

Prepared by IBA on the recommendations of a group headed by Shri R.J.Kamath. The scheme could be adopted by all scheduled commercial banks. Eligible Courses would include School education including plus 2 stage; Graduation & Post Graduation courses, professional courses, computer certificate courses etc. Student Eligibility: Should be an Indian national and should have secured admission to professional / technical courses through entrance test/selection process or secured admission to foreign university / institutions. If admission on management quota seat, not eligible for loan. Expenses for Loan: Fee payable to college / school / hostel; Examination I library / laboratory fee; Purchase of books / equipments / instruments / uniforms; Caution deposit / building fund / refundable deposit; Travel expenses / passage money for studies abroad; Purchase of computers essential for completion of the course; Other expense to complete the course like study tours, project work. Maximum loan: No ceiling now. Margin: Upto Rs.4 Iakh: No margin; More than 4 Iakh: Studies in India: 5%; Studies abroad: 15% • Security: Upto Rs.4 lakh: Co obligation of parent; No security or Third party Guarantee. Loan more than Rs 4 Iakh but up to Rs 7.5 lakh: Co obligation of parent and third party guarantee. Loan above Rs.7.5 lakh: Co obligation of parent and collateral security of suitable value and/or third party along with the assignment of future income of the student for payment of instalments. Interest Rate: Linked to base rate. Simple interest during moratorium period. Interest concession of 1-2 per cent may be provided for loanees if the interest is serviced during the study period when


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repayment holiday is specified for interest / repayment Moratorium period plus 10 to 15 years; For loans upto Rs 7.5 lakhs: upto 10 years; For loans above Rs 7.5 lakhs: upto 15 years; Moratorium: Course period + 1 year from completion of studies or 6 months after getting job, whichever is earlier. The accrued interest during the repayment holiday period should be added to the principal and repayment in EMI fixed. 11. The joint borrower should normally be parent(s)/guardian of the student borrower. In case of a married person, joint borrower can be either spouse or the parent(s)/parents-in-law. 12. Interest Subvention is available on the entire interest charged during moratorium period provided annual parental/family income does not exceed Rs.4.50 lakhs. 10. Repayments:

Home Loans Eligibility: Individuals or groups of individuals including co-operative societies, to purchase/construct the dwelling unit or for repairs, to the damaged dwelling unit. Banks should not grant loans in respect of properties which fall in the category of unauthorised colonies unless and until they have been regularised Valuation of properties: The property against which the home loan is to be provided should be valued by the approved valuer of the bank. Charges on account of stamp duty, registration and other documentation charges should not be included in the cost of the housing property to be financed. Maximum Loan to Value (LTV) ratio: Upto Rs 20 Lakh: 90 %; Above Rs 20 lakh & upto Rs75 lakh: 80%; Above Rs 75 Iakh; 75% Security: The property should be charged to the bank by way of equitable mortgage/registered mortgage. There should be clear and unencumbered title to the property. Repayment: The repayment is by EMIs. Foreclosure Charges/Prepayment Penalty: No foreclosure charges/prepayment penalties should be charged on floating rate home loans sanctioned to individual borrowers.

Vehicle Loans

Purpose of Auto loan: The loan can be sanctioned by the branch for the purchase of new Cars/used cars, Multi Utility Vehicles (MUVs) and Semi Utility Vehicles (SUVs) or two wheelers Eligibility:People engaged in trade, commerce and business, professionals, proprietary/partnership firms, companiesland individuals (singly or jointly). The age of the individual should not be more than 65 years. Loan tenure: Maximum 84 months. Maximum Loan to Value Ratio (LTV): Generally 80% of 'on road price' of the car Pre Payment penalty: Pre-payment penalty is waived. Security: Branch should verify the original RC book for noting down the charges in favour of the Bank. Insurance: The vehicle purchased is to be kept comprehensively insured for the market value or at least 10% above the loan amount outstanding, whichever is higher, and the Bank's interest as a hypothecatee should be noted in the Certificate of insurance and Insurance policy.

OPERATIONAL ASPECTS OF CBS ENVIRONMENT : CBS Banks are categorised as non-computerised banks, partially computerised banks or fully computerised banks depending on the level of computerisation. 2. Core Banking Solutions (CBS) means the platform where communication technology and information technology are merged to suit core banking needs. Under CBS, the software is installed at different branches of bank and then interconnected by means of communication lines like telephones, satellite, internet etc. Examples of core banking softwares include Infosys' Finacle, Nucleus FinnOne and Oracle's Flexcube application. 1.

Functions performed by CBS: (a) Opening new accounts; (b) Recording of transactions; (c)Passbook maintenance, (d) Interest calculations on loans and deposits; (e) Processing cash deposits and withdrawals; (f) Processing payments and cheques; (g) Maintaining records of all the transactions; (h) Customer relationship management activities; (i) Managing customer accounts. Prime features and advantages of CBS 1. CBS facilitates banking operations like ATMs, Electronic fund Transfers, mobile/intemet banking etc. 2. CBS helps in making branch clearings faster. 3. CBS has resulted in improved housekeeping and prevention of income leakages. 4. CBS has made Inter branch reconciliations faster and accurate. 5. CBS makes the bank's operations simpler and cost effective. 6. Customers can conduct financial transactions from any branch or through net banking, ATM, phonebanking, instead of visiting their home branches 7. CBS helps in saving time and inconvenience. 8. Branch staff has more time for focusing on serving the customers which improves the quality and efficiency of customer services. 9. In CBS, customers of a bank can be uniquely identified by their account number across branches. Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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1. 2. 3. 4. 5. 6. 7. 8.

Why CBS is needed by banks? To enhance efficiency and effectiveness To increase customer satisfaction and convenience To enhance bank's competitiveness To simplify processes for the staff To make available more time for branch staff to focus on sales and marketing To meet the compliance requirements To meet the intense competition To meet the demands of customers who have become more demanding and less loyal.

Flow of Transactions in CBS

The user has to log in to the system with his user id and password at the branch. Once the user logs in, he will get access to the different modules for doing the transactions. When the user logs in and does a transaction, the transaction will go through a maker checker functionality. In case of maker checker functionality when a teller or user (Clerical/Cashier level) initiates a transaction, the transaction has to be authorised by a supervisory official if the transaction exceeds the authority of the teller who initiates the transaction. 5. When transactions hits the host, the system will validate the transaction and debit or credit the particular account and a message is sent back to the user at the branch as to whether the transaction is complete or not. 6. The system validates the account number, balance in the account, authority of the teller who does the transaction, authority of the officer who authorises the transaction, and other validations. 1. 2. 3. 4.

Accounting transactions in CBS Transaction: Debit account of customer A and credits Customer B for Rs 1,000. Instead of debiting and crediting accounts straight away, the system posts the transactions through an intermediary account called the balancing account as given below: Debit account of customer A Rs 1,000; credit Balancing Account Rs '1,000 Debit Balancing Account Rs 1,000; credit account of customer B Rs 1,000 In case of batch transactions, if there is one debit for Rs 10,000 and credit to 10 different accounts for Rs 1,000/-each, following transaction will be done: Debit account of customer Rs 10,000; credit Balancing Account Rs 10,000 Debit Balancing Account (10 times @ Rs 1,000) and credit individual accounts Rs 1,000 Core banking solutions work on two levels of software. The first level software deals with transactions put through at the branches. The second level software deals with postings in the General Ledger. The interface for the postings between the two levels is what is known as 'GLIF' (General Ledger Interface File).

Begin of the Day and End of the Day Operations BOO- Branch Level: It is done to begin the day's transaction. This is done befOre the day's operations start. After the BOD, the users will be given access to the full module so that they can do transactions. Day start-up Activities of a computer system should be carried out either by the Branch Manager or System Administrator and entered in the register maintained for this purpose. It should not be carried out prior to the banking hours. All the security checks should be performed as per guidelines from Head Office. Banking date should be is verified daily. EOD- Branch Level: While EOD is done at the central data centre for the bank as a whole, the branch has to do the EOD checks to find out whether any transactions are pending to be authorised. Once the EOD at the branch is done, the users at the branch will not get access to any of the modules for doing transactions but will get access to certain limited modules such as account enquiry. EOD- Central Data Centre Level: 1. EOD operations at CDC start time is so fixed that all branches complete the day's transaction before that time. Normally it is 10 PM daily. 2. The branches will be cut off from the Host before start of EOD to ensure that branches do not do any Transaction after start of EOD at Central Level. 3. During EOD day's backup is taken. Data for the entire Bank is stored at CDC (Central Data Centre) level and all updating and back up is to be made at CDC level. 4. When EOD is completed, the start of day (SOD) process is done at the CDC level. 5. The SOD process takes care all the reposting of ATM transactions, which happened during EOD process was running. 6. Once SOD process is completed, branches will be able to get access to the system. The EOD/ SOD process is done for all the branches at one consolidated stretch.

Operational aspects for Password Control Problems in maintaining the integrity of the Password: 1. Users,donot understand the importance of the-password. They disclose it to others, write down at Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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some place, or use easy passwords and do not change their passwords at regular intervals. Passwords are not changed/deleted on the transfer/retirement of the operator/officer in the Master Record of the System Software. 3. In Certain cases multiple passwords are required to be entered. 4. Staff disclose Passwords to others very frequently for the convenience of work. 5. Sometimes, System Software does not store password in the encrypted form. Steps to be taken to ensure the integrity of the password: Passwords secrecy should be maintained by Branch Manager, System Administrator, Users, and Authorised Persons. The crifical passwords, for accepting sensitive jgbs like entering operating systems, taking back-ups, monitoring disk space creating/editing Master Records should be known only to Branch Manager or System Administrator.' The Operating System Password should be under Dual Control of Branch Manager and System Administrator in a sealed cover and opened in the presence of at least two persons. It should be changed at once on being opened. 2.

1. 2. 3. 4. 5. 6.

TRANSACTION CONTROL Date should be authorised either by Branch Manager or System Administrator. There should be control in the software so that entries pertaining to current date only would be accepted. There should not be any provision to feed back dated or future dated entries. In the case of non-usage of terminals, terminals should be logged-off. Only for the physically present users the requisite terminal/user account should be enabled. Special batch reports should be printed, checked, authenticated and duly filed.

1. 2. 3.

PERSONNEL CONTROLS There should be segregation of duties among the bank employees. Authorization for amounts entered by the operators should be clearly defined and documented. The job rotation should be carried out at regular intervals. DAY END ACTIVITIES

1. Day end activities are carried out by either the Branch Manager or System administrator. 2_ Supplementary activities should be checked and special users should be deleted. 3. Functions (performed centrally) to be completed at the day end: 1. Minimum balances calculated. 2. Products calculated for Current Account (Debit balances) . 3. Mandatory reports generated. 4. Fall back procedures activated. 5. Day end back up taken. 6. Recording of entries in back-up register. 7. Recording in Log Books. 8. Filing of reports. 9. Shutting down of complete computer system. 4. The data back-ups taken should be in safe custody. 5. Server Room should be properly locked and the keys are kept only with authorised person. 6. Documents generated at Day End - (a) Access log; (b) Supplementary; (c) Audit Trail; (d) Transaction number for each transaction entered. 7. After business hours of the bank, the following functions are performed (a) Supplementary Report is printed either by Branch Manager or System Administrators and filed; (b) Cash Denomination Report is printed and filed; (c) Vouchers are tallied and signed either by Branch Manager or System Administrator.

PARAMETER / MASTER FILE 1.

2. 3. 4. 5. 6. 7.

At the first stage of implementation of computerisation of the Branch, in a Parameter/Master File, all relevant information related to a particular account like Rate of Interest, Penal Interest, Commission Rates, Operation Limits in case of loans, Nature of operation of account, should be fed and stored. The Parameter/Master File if accessible to the operators should only be in read-only format so that unauthorized modifications cannot be done. If any alterations are to be made in the Parameter/Master File, printouts of the file prior to the changes and after the changes should be taken and kept in safe custody of Branch-Manager. Authorised personnel will mark all the Bank Holidays into the software in the beginning of the Financial Year. Operation limits and authorisation levels for the operators and supervisors should be clearly defined. The parameters for Interest and Bank Charges should be defined in accordance with the relevant rates and guidelines. The file is updated as and when changes are announced. Printouts of parameter file are taken out before and after changes are given effect and


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documented. 8 . The safe custody of the printouts should be with the Branch Manager and alterations are entered into "Parameter Register".

LOGICAL ACCESS CONTROL 1. 2.

3. 4. 5.

Available security features be implemented. A security officer should be appointed who would ensure that available features have been implemented. There should be a prOcess in place for granting access levels. Users should have only the minimum access level needed to do their job. Users' access should be restricted to specific applications, menus within applications, files, and servers. Access levels should be periodically reviewed by the internal auditor. Procedures should be implemented to limit access to workstations after normal working hours. Maintenance should be restricted to a minimum number of persons and it should be properly approved. The password file should be encrypted. Modem access should be protected by a secure system and Modem numbers should be changed periodically.

SECURITY CONTROL IN CBS - CHECK POINTS Only authorised, accurate and complete data are made available for processing. In case of interruption due to power, mechanical or processing failures, the system restarts without distorting the completion of the entries and records. 3. The system should prevent unauthorised amendments to the programmes. 4. The "access controls" assigned to the staff-working match with the responsibilities as per Manual. 5. Segregation of duties while granting system access to users 6. Changes made in the parameters or user levels should be authenticated. 7. Charges calculated manually for accounts when function is not regulated through parameters should be properly accounted for and authorised. 8. All modules in the software have been implemented. 9. Exceptional transaction reports are being authorised and verified on a daily basis by the officials concerned. 10. Account master and balance cannot be modified/amended/altered except by the authorised personnel. 11. All the general ledger accounts codes authorised by Head Office are existing in the system. 12. Balance in general ledger tallies with the balance in subsidiary book. 13. Important passwords, like database administrator and branch manager's password are kept in sealed cover with branch manager. 14. The bank takes daily and monthly backups. 15. Daily backup should be taken in 6 sets, one for each weekday and 12 sets for each month end. 16. The backup media is stored in fireproof cabinet and the off-site backups are preserved for emergency, 17. Anti-virus software of latest version is installed in servers/PCs of branches to prevent data corruption. 18. Access to the computer room is restricted to authorised persons only. 1. 2.

Role and Responsibilities of the Bank under CBS

The bank should have: 1. Data processing and data interface under various systems. 2. Data integrity and data security. 3. Business Continuity Plans and Disaster Recovery Plans. 4. Accounting manual and critical accounting entries (including month-end and year-end) 5. Controls and recording of various e-banking and Internet banking products. 6. Manual processing of key transactions. 7. MIS reports being generated and the periodicity thereof. 8. Hard copies being generated and the periodicity thereof. 9. Process of generating information related to various disclosures in the financial statements and the involvement of the IT systems. 10. Major exception reports and the process of generation thereof. 11. Major IT related issues such as, data/system corruption, system break-down, etc., having bearing on the preparation and presentation of financial statements. 12. Significant observations of internal auditors, concurrent auditors, system auditors, RBI inspection and internal inspection, etc., related to computerised accounting and overall IT systems. 13. Customer complaints related to mistakes in transactions (interest application; balances, etc.). 14. To ensure that the technology deployed is being operated in a safe, secure, sound and efficient manner and as per the process flow submitted by the bank banks are required to get a System Audit done by a firm of Chartered Accountants. The scope of the System audit would include evaluation of the hardware structure, operating systems and critical applications, security and controls in place, including access controls on key applications, disaster recovery plans, training of personnel managing systems and applications, documentation, etc.

BACK OFFICE FUNCTIONS/HANDLING UNRECONCILED ENTRIES IN BANKS

Role of Back Office:


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Back office consists of administration .and support personnel. Back offices carry out various functions to support the front office activities. In specialised functions like Treasury operations and Forex, the back offices perform the mainstream role of directly supporting the trading room or front office by controlling confirmations and settlement transactions. 4. With the introduction of computerisation in the banks, many of the activities, which were previously performed by the front office, are now performed by the back office, resulting in cost savings and economies of scale as also freeing the time for the front office staff to focus on sales and servicing functions. 5. Computerisation has eliminated the need of back office being a part of the branch. Back offices may be located somewhere other than the bank branch or bank office. Many are in areas and countries with cheaper rents and lower labor costs. 6. One of the important functions of the back office is to reconcile the accounting entries specially the inter office entries: Functions performed by the Back Office 1. Book keeping and accounting: transaction processing, maintenance of General Ledger and other books of account, balancing of branch accounts, reconciliation of entries and sub-systems, preparation of financial statements. 1. 2. 3.

Deposits: calculation and posting of interest, service charges, reminders for renewals of term deposits, nature of operation of account - single/jointly etc. 3. Loans: processing loan proposals or any aspect of loan servicing, NPA management, calculation of EMIs, calculation and posting of interest, penal interest, processing fee, commission and prepayment charges, operational Limits, risk management etc. 4. Regulatory Compliance: identifying KYC gaps, customer grievance redressal system etc. 5. e- banking: handling transactions through internet, mobile banking or ATMs, card based payments etc. 6. Other functions: clearing, collection, remittances etc. Reconciliation Function in Banks 1. Reconciliation of accounts for payments involving intermediaries 2. Reconciliation of accounts with correspondent banks 3. Reconciliation of bank accounts with RBI and other banks and institutions 4. Reconciliation of intra branch entries and sub-systems 5. Reconciliation of inter branch/office entries Reconciliation of Accounts for Payment Transactions Involving Intermediaries 1. The use of Electronic/Online Payment modes for payments to merchants for goods and services like bill payments, online shopping, generally involves the use of intermediaries like aggregators and payment gateway service providers. In arrangements involving such intermediaries, the payments made by customers (for settlement of e-commerce/m-commerce/bill payment transactions), are first credited to the accounts of these intermediaries and then transferred by these intermediaries to the accounts of the merchants in final settlement of the obligations of the paying customers. 2. Any delay in the transfer of the funds by the intermediaries to the merchants account will entail risks to the customers and the merchants and also impact the payment system. 3. To ensure that the payments made by customers are remitted by the intermediaries to the accounts of the merchants without delay, RBI guidelines for opening and operation of accounts and settlement of payments for electronic payment transactions involving intermediaries should be followed. 4. Further, management of ATMs is being assigned by banks to vendors who collect the amount from bank and load the same in the ATMs as well as collect the amount deposited by customers from ATMs and depositing with the bank. 5. Banks normally centralize the process of monitoring ATM balances and monitor balance as per the books and balances as per ATM machines (commonly termed as Switch balance) and their reconciliation and ensures timely adjustment of reconciliation entries. 2.

Reconciliation of Accounts with Correspondent Banks For settlement of foreign exchange transactions, banks normally maintain accounts with their overseas branches/correspondents which are called Nostro accounts. Banks are required to reconcile the entries that have passed over an account with an correspondent bank against those that are passed internally in the books of the bank to a Nostro account. After reconciliation, the unmatched items in both accounts represent entries that have not been responded to or have been responded differently in either the books of the bank or its correspondent.

Reconciliation of Bank Accounts with RBI and Balances with RBI Banks maintain a current account and other accounts with RBI to facilitate transactions relating to CRR, Repo and Reverse Repo, clearing/RIGS, currency chest transactions through select branches. These branches having account with RBI, should reconcile the balances in these accounts. The maker checker concept is used for preparation of the reconciliation statement. Following items appearing in the reconciliation statements need closer attention: - (a) cash transactions remaining unresponded; (b) revenue items requiring adjustments/write-offs; (c) old outstanding balances remaining unadjusted for a Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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significant period. In case of purchase and sale of security transactions, the banks periodically reconcile the security balance in the banks book vis-a-vis the balance in the custodian account (i.e., Subsidiary General Ledger or Demat account). As per RBI, investment balances as per bank's book should be reconciled at quarterly intervals with the balances in the Public Debt Office's books.

Balances With Other Institutions and Banks Other than RBI Accounts may be maintained for the purpose of clearing/collection, investments, money at call and short notice. The process adopted for reconciliation of balance with RBI is adopted for reconciling the balances with banks other than RBI. No debit for charges or credit for interest should remain outstanding and all revenue should be accounted for in the same year. No cheque sent or received in clearing should remain outstanding. Any cheque returned unpaid should be accounted for on the same day on which they were sent in clearing or on the following day. All bills or outstanding cheques sent for collection and outstanding as on the closing date should have been credited subsequently.

Reconciliation of Inter Branch Entries 4 Balancing of Books/Reconciliation of control and subsidiary records Balancing of the books of account means that the primary books of account have been tallied and the general ledger is balanced. At a particular point of time, the balance shown in a particular control account in the GL of the branch and the total of balances in all the folios of the subsidiary ledgers, pertaining to that control account, should be same. In the manual system of recording, balancing was an acute problem for branches having a large number of accounts. With computerisation, the original entry in the account is automatically posted in all the books and balances derived and therefore no problem of balancing. Sundry/ Suspense account: The problem relating to reconciliation in suspense and sundry accounts has not been resolved by computerization. Suspense account is used to temporarily record certain items like — (a) Amounts the precise nature thereof which is yet to be determined or pending transfer thereof to the appropriate head of account; (b) Debit balances arising from payment of interest warrants/dividend warrants pending reconciliation of amounts deposited by a company; (c) Losses caused due to frauds and awaiting adjustment. If entries in suspense account are not reconciled quickly, there may be frauds by passing debit entries in the account and siphoning off the amount. Details of old outstanding entries in suspense account, along with narrations, should be prepared periodically and decision on each entry is taken including provision/write off for old outstanding items. Outstanding entries in 'Sundry Deposits' or 'Sundries Account' should also be reconciled quickly. However, probability of fraud in such credit entries is relatively less. Reconciliation of Inter Branch Entries

Origination/Response(Reversal) of Inter Office Transactions Inter office transactions generally originate at branches. The major types of transactions, which result in Inter Office debit or credit entry, are: 1. Issue of remittance instruments like drafts on other branches; 2. Payment of remittance instruments like drafts drawn by other branches; 3. Payment to/receipts from other branches of the proceeds of instruments received/sent for collection/ realisation/clearing. 4. Transactions through NEFT, ECS and RIGS 5. ATM transactions of the customer either at ATMs linked with other branches or with merchant establishments. 6., Transactions through payment gateways of ATM, etch 7. Payment of instruments like gift cheques/banker's cheques/interest warrants/dividend warrants/ repurchase warrants/refund warrants/travelers cheques, etc., which are paid by the branch on behalf of other branches. 8. Deposits and withdrawal of money by branches from the currency chest maintained by another branch. 9. Cash sent to/received from other branches. 10. Head office interest receivable and payable by the branches. 11. Profit/loss transferred by the branch to head office. 12. Government receipts and payments handled by the branch either as the nodal branch or as an agent of the nodal branch. 13. Internet based transactions other than inter account transfers with the same branch. 14. Credit card related transactions of the customers. 15. Payments made under- LCs of other branches 16. Nostro Accounts of Indian branches maintained with overseas branches of the bank. 17. Operations by the authorised branches on the bank's NOSTRO accounts. If the balance in the Inter Office account is a debit balance it appears on the assets side of the balance Sheet of the branch, and if it is credit balance, it appears on the liability side. For the bank as a whole, the transactions which remain unmatched/unreconciled, appear as inter office adjustments balance in the balance sheet of the bank under the head, 'Other Assets' if in debit, and under the head, 'Other Liabilities and Provisions' if in credit Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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Reconciliation of Inter - Office Transactions A debit/credit Inter Office transaction, originated at one branch, should result in a corresponding credit/ debit transaction (reversal entry) in the inter Office account at the other branch. There may be a time lag in some transactions like drafts issued. Every entry in the Inter Office account should be reconciled with a corresponding entry in the account at another branch/office of the bank. The unreconciled interoffice entries indicate errors or may also be indicator of the fraud.

RBI guidelines on inter office reconciliation 1. Banks should reconcile the entries outstanding in their inter branch accounts within a period of six months. 2. Banks should segregate the credit entries outstanding for more than five years in inter-branch accounts and transfer them to a separate Blocked Account which should be shown in the balance sheet under the head 'Other liabilities and provisions-Others' (Schedule 5). While arriving at the net amount of interbranch transactions for inclusion in the balance sheet, the aggregate amount of Blocked Account should be excluded and only the amount representing the remaining credit entries should be netted against debit entries. 3. Any adjustment from the Blocked Account should be permitted only with the authorisation of two officials, one of whom should be from outside the branch concerned, if the amount exceeds a particular amount. 3. Beginning April 1, 1999, banks should maintain category-wise (head-wise) accounts for various types of transactions put through inter-branch accounts so that the netting can be done category-wise. Banks should make 100% provision against the net debit balance in the inter-branch account in respect of entries outstanding for more than six months. Banks should arrive. at the category-wise position of unreconciled entries outstanding in the inter-branch accounts for more than six months as on March 31. While making provision, the credit balance in the Blocked Account should also be taken into account and the net debit in one category is not setoff against net credit in another category. 4. Banks should segregate inter-branch transactions relating to demand drafts from other interbranch transactions. 5. Banks should introduce the system of segregating DD transactions, with reconciliation at weekly intervals and close monitoring of large amounts. 6. Banks should restrict originating debits to head office account to cash/funds transfer, purchase of securities/capital assets, withdrawals from Provident Fund, advances to inspection and other staff members..

Reconciliation set up and process at the banks 1.

2. 3.

4.

5.

The reconciliation work of inter Office accounts is normally centralised at the reconciliation department. When banks are working under CBS, banks have centralised this reconciliation work at the IT department at HO. The inter-branch accounts are normally sub-divided into segments or specific areas, e.g., 'Drafts paid/payable', 'inter-branch remittances', 'H.O. A/c' etc. Each branch has to send a daily statement of Inter Office account to the Central Reconciliation Department(CRD). If there is no transaction in this account, a NIL statement has to be sent by the branch. Based on these daily statements, the computer system matches the originating entries with the responding (reversal) entries for a particular day/period. If there remain any unreconciled entries, it could be due to - Nature of the entry i.e. there is a time lag involved in some entries like the draft issued entries; mistakes in one or more of the daily statements sent by the branches; frauds like payment of a forged draft. The system will generate the report of unreconciled entries for any particular day or period in any format, age wise, amount wise, branch wise, category wise etc. as per the requirements of the Reconciliation Deptt. All the unreconciled entries in the statement generated by the system have to be examined. Banks may adopt various approaches for corrective action in this regard. Some of these are given below: Application of the concept of A-B-C analysis to reconciliation of inter- office entries, e.g., segregation of bulk transactions, high value items, cash and other items that are vulnerable to frauds; Prescribing a procedure for action to be taken by the head office regarding any entries (particularly debit entries) not being responded by the branch concerned within a reasonable time. Special procedures to expedite clearance of the arrears, particularly in respect of large-value entries; Special emphasis on any reversal entries indicating the possibility of irregular payments or-frauds; a well defined system of follow-up with branches regarding outstanding entries till they are cleared/reconciled; Introduction of the system to restrict originating debits to head office account to cash/funds transfer, purchase of securities/capital assets, withdrawals from Provident Fund, advances to inspection and other staff members.


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TEST YOUR SELF

PRACTICE TEST PAPERS (BASED ON IIBF TEST PATTERN)

ACCOUNTING AND FINANCE FOR BANKERS (JAIIB PAPER - 2)

PRACTICE TEST PAPER NO. 1 ( TEST YOUR SELF ) 01 Which of the following would be considered as a source of funds for a business firm engaged in Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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manufacturing? a Increase in an asset, d none of the above

b

Increase in liability,

c

decrease

in

liability,

02 An error has occurred in the real accounts of a firm. Which of the following will be affected by this? a Balance sheet, b.Profit and loss account, c. Profit and loss appropriation account, d all 03 The cash book of a firm has been showing an overdraft balance of Rs.12800 but it is observed that a cash deposit of Rs.1200 has not been credited by the bank in the overdraft account. What will be the balance in the pass book? a) 11600, b) 14000, c) 10400, d) 15200 04 What is the amount of gross profit when net loss is Rs.2000, operating expenses Rs.12000 and sales Rs.48000? a) Rs.12000, b) Rs.11000, c) Rs.10000, d) Rs.9000 05 A company came out with a public issue of 2,50,000 shares of Rs.100 each and receives applications for 3 lac shares. X had applied for 200 shares in the company. On a pro-rata basis, how many shares will be get? a) 167 shares, b) 240 shares, c) 200 shares, d) none of the above 6. From the trial balance, the wages are transferred to which of the following accounts: a Profit and loss account, b trading account, c wages to profit and loss account, d salaries to trading & manufacturing account 7 A firm had made payment of wages of Rs.3000 to one of its staff members which have been debited to his personal account. This is an:a error of omission, b error of commission, c error of principle, d compensating error 8 In the above problem, the rectification of the error can be done by passing the following journal entry: a debit wages and credit cash account, b debit cash and credit personal account of the staff member, c debit wages and credit personal account of the staff member ,d debit personal account and credit cash A firm purchased machinery worth Rs.1.80 lac and it incurred Rs.20000 on its installation and 9 freight. Its scrap value at the end of 5 th year is expected at Rs.10000. What will be the amount of depreciation on SLM basis for the 5 th year? a Rs.40000, b Rs.35000, c Rs.38000, d Rs.36000 10 A company had forfeited 1000 shares with face value of Rs.10 each on which it had received Rs.4 as application money. The shares have been re-issued at a premium of Rs. 1. What is the total amount that would be credited to capital reserve including premium? a Rs.1000, b R s . 4 0 0 0 , c Rs.5000, d Rs.10000 11

When capital is debited in double entry system it is done by way of: a credit to capital account, b debit to capital account, c credit to drawings account, d debit to capital and drawings account

12 A company comes out with a public issue and decides to receive the proceeds as application money, allotment, 1st call and 2nd call. What will be the minimum time gap for calling the amount of 15t and 2nd call ? a No time gap is mandatory, b time gap of 6 months, c time gap of 3 months, d

time gap of 1 month

13 a b c d

Which of the following is the most appropriate formula for working out the amount of cost of sales: opening stocks — purchase — direct expenses + closing stock opening stocks + purchase direct expenses — closing stock opening stocks + purchase + direct expenses — closing stock opening stocks + purchase + direct expenses + closing stock

14 A company issues 6000 shares of Rs.10 each and Rs.6 only have been called and received so far. What is the amount of subscribed capital? a Rs.60000, b Rs.36000, c Rs.96000, d Rs.16000 15 a

Minor repairs are carried to building during the last one year. The expenses would be debited to: cash account, b creditors' account, c repair account, d building account

16 A company purchased equipment of Rs.8.80 lac against allotment of shares with face value of Rs.100 each at a premium of 10%. What would be no. of shares, issued to the vendor? a 8 800, b 8000, c 7 200, d 800 17 As per accounting equation what would be the amount of liabilities of a firm, if its assets are Rs. 3 lac and capital is Rs.1 lac: a Rs. 3 lac = 1 + 2 lac, b Rs. 2 lac = 3 — 1 lac, c Rs.1 lac = 3-2 lac, d none of the above 18 A firm makes purchase in cash for Rs.4000. Cash and trade discount are available @ 10% simultaneously. What is the net amount payable? a Rs. 3600, b Rs.3480, c d Rs.3240

Rs.3320,

19 A firm has to pay Rs.2500 to its creditor Mr. Mahesh. While making payment, it debits the account of Mr. Satish another creditor. This is: a an error of principal, b an error of commission, c compensating error as well as error of commission, d error of omission and compensating error Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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20 The overdraft overdraft balance balance in the cash book is Rs.45060 but from bank pass book it is found that a cheque cheque of Rs.600 has been debited twice, a cheque of Rs.6045 deposited with the bank has been dishonoured and Rs.60 have been debited by the bank as returning charge and bank credited Rs.8 to the account on account of postal charges refunded. What is the balance as per pass book? a Rs.51757 Cr, b Rs.57157, c Rs.51757 Dr, d Rs.57717 21

Inte Interrest susp uspense nse is class assifie fied as : a nomi ominal acc accoun ount, real account, d none of the above

b

persona onal account, unt,

c

22 At times, the errors are detected after preparation preparation of the trial balance. balance. The rect rectifi ificati cation on of such such error errors s is done done by : a debit debitin ing g the the ledg ledger er acco accoun unt, t, b debit debitin ing g the the prof profit it and and loss loss acco accoun unt, t, c debitin debiting g the balance balance sheet sheet , d way of suspen suspense se accoun accountt 23 A company came out with a public issue of 2 lac shares of Rs.10 each payable as application money @ Rs.3 and allotment money @ Rs.3. Final call amount has also been called which has not been received on 4000 shares. If the company decides to forfeit the partly paid shares, what is to the total amou amount nt of capi capita tal, l, that that woul would d be be forf forfei eite ted: d: a Rs. Rs.16 1600 000, 0, b Rs.2 Rs.240 4000 00,, c R s . 4 0 0 0 0 , d Rs.6 Rs.600 0000 00 24 Cash book of a firm is showing a balance of Rs.5100. Bank statement of account shows that bank has credited Rs.50 and a customer of the firm directly deposited with the bank Rs.610. What is the balance as per pass book. a Rs.5710, b Rs. 5150, c Rs.5760, d Rs.5660 25 The purchase account has been undercast by a firm by Rs.12000. What will be the journal entry for rectification? a debi debitt purc purcha hase se acco accoun untt and and cred credit it cred credit itor or,, b debi debitt purc purcha hase se acco accoun untt and and cred credit it susp suspen ense se c debi debitt cred crediitor' tor's s acc account ount and credi reditt pur purchas chase, e, d debi debitt purc purcha hase se and and cred crediit cash ash acco accoun untt is Rs.5 lac and the liabilities liabilities are Rs.2.60 Rs.2.60 lac. What will will be the 26 The amount of total assets of a firm is correc correctt accoun accountin ting g equati equation, on, when when the the gap gap betwe between en the the two is filled filled in: a 5.00 5.00 = 2.40 2.40 + 2.60 2.60 lac, lac, b 2.40 2.40 = 5.0 5.00 — 2.6 2.60 lac, c 2.4 2.40 = 2.60 .60 — 5.00 .00 lac, ac, d none none of the the abov above e 27 In the written down value method, the amount of depreciation depreciation is calculated calculated on which which of the following: a orig origiinal nal value alue of the the asse asset, t, b depr deprec ecia iate ted d value alue of the the ass asset, et, c scra scrap p value alue of the the asse assett d any of the above above,, whic whiche heve verr lowe lower r 28 A 28 A firm paid an amount of Rs.2000 to a transport company which include payment on account of freight of machine Rs.1000 and Rs.1000 as freight on raw material. Which account would be debited for frei freigh ghtt on raw raw mate materi rial al:: a raw raw materi terial al accou ccoun nt, b purc purcha hase se acco accoun unt, t, cfrei cfreight ght acco accou unt, nt, d cash account 29 a

In the above above problem, problem, the freight freight on machine machine would would be debited debited to which which account? account? cash account, b freight account, c purchase account, d mac machine account

30 a

Rebate on bills bills of exchan exchange, ge, in the books books of the drawer drawer would be be treated treated as: nominal account, b real account, c personal account, d

No where

31 The pass pass book of of a firm firm shows overdraft overdraft of of Rs.5100. Rs.5100. The The firm had issued issued a cheque of of Rs.2400 which which has not been presented for payment so far. What is the balance as per cash book? a Rs.5100 Dr, b Rs . 2 70 0 Cr, c Rs .7 50 0 Cr, d Rs.7500 Dr 32 A firm has received a cheque of Rs.3000 in its favour and uses this cheque for making payment by endorsing in favour of the seller. What treatment will be given to this in the cash book? a It need need not not be ente entere red d in the the cash cash book book,, b It will will be ente entere red d on debi debitt side side,, c It will will be ente entere red d on cred credit it side side,, d It will will be post posted ed both both on debit debit and and cred credit it side side 33 A firm earns earns profits profits of of Rs.12000. Rs.12000. Its partners partners had had drawn drawn Rs.8000 during during the the year. What was the capital at the beginning, if it is Rs.43000 at the close of the financial year? a 39000, b 38000, c 36000, d 34000 34 A firm has made provision @ 5% of its book debts of Rs.40000 at the beginning of the year. During the year, a sum of Rs.2000 is written off out of the provisions held. To maintain 5% provisions at the end of the the year year,, what what woul would d be the the amou amount nt of fres fresh h prov provis isio ion? n? a Rs. Rs.190 1900,b 0,b R s . 2 0 0 0 , c Rs.18 Rs.1800, 00, d Rs.1700 35 Which Which of the follow following ing statem statement ent is corre correct ct ? a Persona Personall accounts accounts are reflected reflected in trading trading account, account, b Real accounts accounts are recor recorded ded as as liabil liability ity in the the balance balance sheet, sheet, c Nominal Nominal acco accounts unts are refle reflected cted as asset in the balance sheet d Personal Personal and real accounts appear appear in the balance sheet 36 Goods worth worth Rs.2 Rs.2 lac relating relating to a firm firm have been been damaged damaged in fire. fire. Which account account would would be credited? a Claim receivable, bPr bProfit and loss account, c Purchase account, d No entry is required 37

Prel Prelim imin inar ary y expen expense ses s incu incurre rred d by a firm firm is an exam exampl ple e of : a reve revenu nue e expe expendi nditur ture, e,


b

defer deferred red 118 | P a g e

rev revenue enue expe expend ndiiture ture,,

c

capi apital tal expe expend ndiiture ture,,

d

fic fictiti titiou ous s asset ssets s

38 Expense Expenses s incur incurred red by a firm firm in manufact manufacturin uring g of goods goods are are to be class classifi ified ed as: as: a expe expend ndiiture ture,, b defe deferrred red rev revenue enue expe expend ndiiture ture,, c Capi Capita tall expe expend ndiiture ture,, d 39

A cons consig ignm nmen entt acco accoun untt is in the the natu nature re of: of: a Pers Persona onall acco account unt,, c Real Real acco accoun unt, t, d

revenue revenue fic fictiti titiou ous s asse assets ts

b Nomi Nomina nall acco accoun unt, t,

Inta Intan ngibl gible e asse assett

40 A 40 A firm makes advance payment of tax on behalf of one of its partners. This amount would be debited to: a cash cash acco accoun unt, t, b capi apital tal acco accoun untt of the the part partne ners rs,, c draw drawiing acco accoun untt of the the part partne ner r d none none of the the abov above e In the consignment account, the unsold stock is valued at: a orig origin inal al cost cost,, b orig origin inal al cost cost ÷ dire direct ct expe expens nses es incu incurr rred ed by cons consiigner gner/c /con onsi sign gnee ee,, dire direct ct expen expenses ses incu incurr rred ed by the the cons consig ignee nee,, d Origin Original al cost cost + indi indirec rectt expen expenses ses 42 a

Goods sent sent on consignme consignment nt is in the nature nature of: real account, b personal account, c

nominal account, d

c

none of the above

43 The credit balance of Rs.2000 in the bank column of the cash book was carried forward as its debit balance. If the overdraft as per pass book is the starting point: a Rs.2000 would be deducted, b Rs.2000 would be added, c Rs.4000 would be added d Rs.4 Rs.400 000 0 woul would d be dedu deduct cted ed 44 A favourable balance as per cash book means: a debit debit bal balan ance ce in in the the bank bank colu column mn of cash cash book, book, b credit balance balance in the bank column column of cash book c debit balance balance in the pass book, d any of the above above 45 a

If the trade discount appears in the trial balanc balance, e, in the final accou account nts s itit is show shown n as: as: deducti deduction on from sales sales in tradin trading g accoun account, t, b additio addition n to amount amount of sales sales in tradin trading g accoun account, t, c dedu eductio tion from amount of purch rchases, d none of the above

46 A firm's firm's profit profit is is 25% of the cost cost price. price. How much much it would would be of sales: sales: a 2 5 % , b 2 0 % , c15%, c15%, d 10% 10% 47 Which of the the following following kinds of compani companies es can issue issue a deferred deferred share: share: a public public compani companies, es, b priv privat ate e comp compan aniies, es, c inde indepe pend nden entt priv privat ate e comp compan anie ies, s, d govt govt.. comp compan anie ies s 48 When a company makes allotment of shares to the share applicants, which of the following accounts is to be credited? a share capital account, b share allotment account, c share applica applicatio tion n account account,, d any any of of the the abov above e 49 When preference preference shares are redeemed out of profits otherwise otherwise available available for dividend, equal amount must must be tran trans sferr ferred ed to: to: a capi apital tal rede redemp mpti tion on res reserv erve, b sink sinkiing fund fund,, c capi capita tall rese reserv rve, e, d none of the above 50 What kind of sales out of the following are recorded in the sale book? a credi creditt sales sales of of goods, goods, b cash cash sale sales s of goods goods,, c credi creditt and cash cash sale sales, s, d credi creditt or or cash cash sale sales s of any any thing thing 51 The promoter of a business is treated as a creditor of the business accordingly which of the following concepts of accounting? a Enti ntity conc concep ept, t, b Money oney meas measur urem emen entt conc concep ept, t, c Dual Dual conc concep ept, t, d Cos Cost conc oncept ept 52 A firm debited debited the the amount of of wages of Rs.1000 Rs.1000 paid paid on account account of instal installation lation of of equipment, equipment, to the wages account. How it can be rectified? a Debi Debitt mach machin iner ery y & cred credit it cash cash,, b Debi Debitt cash cash and and cred credit it wage wages, s, c Debi ebit mac machin hinery ery & credi reditt wages ages d Debi Debitt wage wages s and and cred credit it cash cash 53 In the books of a firm, the opening stocks are Rs.2 lac, net pur purchas hased Rs.19 .19 lac, ac, dire direc ct expe expens nses es Rs.3 Rs.3 lac, ac, clos closin ing g stoc stock k Rs.4 Rs.4 lac lac and and sal sales Rs.2 Rs.28 8 lac. lac. What What will ill be amou amount nt of gros gross s pro profit fit a Rs.8 lac, b Rs.7 lac, c Rs.6 lac, d Rs.5 lac 54 An sum of of Rs.10000 has been debited debited to repairs repairs account account wrongly wrongly instead instead of the machine machinery ry account. account. The total of debit side of trial balance comes to Rs.199000.What would be the correct total after rectification: a Rs.2 lac, b Rs.1.80 lac, c Rs.2.09 lac, d There will be no change 55 A firm starts business with a capital of Rs.90000 in cash and purcha purchase ses s mach machin iner ery y on cre credi ditt for for Rs.10000. Rs.10000. The accounting accounting equation would be as: a Rs.1 lac = Rs.90000 + 10000, b Rs.10000 = 1 lac – 90000, c Rs.9 Rs.900 0000 00 1 lac - 1000 10000 0 d Rs. 1 lac = 1 lac + 0 56 The closing closing stock stock of a firm is nil, the sales sales Rs. 2.98 2.98 lac, the opening opening stock stock Rs.0.36 lac, lac, purchases purchases Rs.1.56 Rs.1.56 lac lac and cost cost of of goods goods sold sold Rs.2.12 Rs.2.12 lac. lac. What What will will be the the amount amount of gross gross profi profit? t? A) 0.86 0.86 lac b) Comp Compil iled ed by Sanja anjay y Kumar umar Triv Trived edy, y, Divis ivisiional onal Mana Manag ger, Govt. ovt. Lin Link Cell, ell, Nag Nagpur pur

119 | P a g e

0.84 .84 lac c) 0.80 0.80 lac d) 0.78 0.78 lac 57. A firm has debited Rs.2000 to purchase account though it related to office expenses. The net profit of the the fir firm is Rs.6 Rs.603 0300 00 prese resent ntlly. Wha What it shou shoulld be ? a) Rs.6 Rs.623 2300 00 b) Rs.5 Rs.583 8300 00 c) Rs.603 .60300 00 d) Rs.64 Rs.6430 300 0 58. A machinery has been purchased for Rs.2 lac with expected life of 3 years. Its scrap value at the end of 3rd year is anticipated at Rs.20000. What is the amount of depreciation under SLM? a) Rs.60000 b) Rs.66667 c) Rs.73333 d) Rs.56000 59.A firm purchased machinery on April 01, 2001 for Rs.2 lac and sold it for Rs.1.20 lac on Oct 01, 2003. If depreciation is at 10% and annual closing is March. What is the profit or loss on sale of machinery? a) Prof Profit it Rs.0 Rs.0.30 .30 lac, lac, b) Loss Loss Rs.05 Rs.050 0 lac, lac, c) Profi Profitt Rs.0 Rs.0.50 .50 lac, lac, d) Loss Loss Rs.0 Rs.0.30 .30 lac lac 60 A firm firm raised raised a loan from from a national nationalized ized bank. bank. Such Such loan accoun accountt would would be cla class ssif ifie ied d unde under r whic which h of the the foll follow owin ing g acco accoun unts ts? ? a) Perso Persona nall acco accoun unt, t, b) Nomi Nominal nal acco accoun unt, t, c) Real Real Accou Account, nt, d) Real Real tang tangib ible le acco accoun untt 61 A firm has received advance from one of its customers for purc purcha hase se of fini finish shed ed good goods s. Which Which of the follo followi wing ng it is ? a) Pers Persona onall acco accoun untt and an asse asset, t, b) Real Real accoun accountt and a liabi liabilility ty,, c) Persona Personall account account and a liab liabili ility ty d) Real account account and and an asset 62 Which Which of the the follo followin wing g purpos purposes es is is served served by prepar preparati ation on of tria triall bala balance nce by a bus busin ines ess s organ organis isati ation? on? a loca locati tion on of erro errors rs of prin princi cipl ple, e, locati tion on of erro errors rs of omis omissi sion on,, c loca locati tion on b loca of cler cleric ical al erro errors rs d all all the the abov above e 63 A company issued capital and Mr. A subscribed 1500 shares of Rs.10 each by paying Rs.2.50 on application and Rs.3 on allotment but failed to pay the balance amount. What will be the increase in the amount of capital reserve on account of his non.- payment after forfeiture of shares? a Rs. 6750, b Rs. 8250, c Rs. 7750, d Rs. 5550 64 A firm had purchases of Rs.2 lac and sales of Rs.2.50 lac net of returns: The returns inward are R5.0.10 lac and returns outward Rs.0.15 lac. What would be the amount of gross profit of the firm? a Rs.50000, b Rs. 50000, c Rs.45000, d None of the above 65 The overdraft balance in a bank pass book is Rs.10200. Firm had issued a cheque of Rs.4800 which has not been presented so far for payment. What would be balance as per cash book of the firm? a Rs.15000, b Rs.5400, c Rs. 10200, d Rs. 4800 66. A company issues 6000 shares of Rs.10 each and Rs.6 only have been called and received so far. What What is the amoun amountt of paid paid up capi capita tall? a) Rs.3 Rs.300 0000 00 b) Rs.3 Rs.360 6000 00 c) Rs.6 Rs.600 0000 00 d) Rs.7 Rs.720 2000 00 67.The rule 'debit what comes is' is applicable in case of which of the following: a) payment payment of salary salary to an employ employee, ee, b) sale sale of goods goods on credi creditt to anothe anotherr firm, firm, c) purcha purchase se of vehicl vehicle e for for use in the busine business, ss, d) none none of the above above 68.In the terminology of books being maintained by a business firm, the term principal books refers to: a) cash cash book book,, b) jou journ rnal als s, c) led ledge gers rs,, d) all all the the abov above, e, 69.When discount is allowed to a debtor on prompt payment or otherwise, in the cash book it is is recorded recorded on: a) credit side of discount discount column, column, b) debit bit side of dis discount column umn, c) debi debitt side side of bank bank colu column mn,, d) cred credit it side side of bank bank colu column mn 70. What is the amount of net profit when merchandis merchandise e costs Rs.21650, Rs.21650, expenses of doing busi busine ness ss Rs.4 Rs.480 80 and and sal sales Rs.2 Rs.249 4900 00? ? a) Rs Rs.277 2770, b) R s . 3 2 5 0 , c) Rs.4030, d)Rs. )Rs.267 2670

ANSWER 1 B

2

A

3

B

4

6

7 12

C D

8 13

C C

17

A

22

D

18 18 23

27

B

31

A C

32

36

C

37 37

41

B

46 51

5 10

A

9

C C

14

A

15

E

D

19 19

C

20

A

C

24

C

25

B

28

C

29

D

30

A

D

33

A

34

A

35 35

D

38 38

A

39

B

40 40

C

42

B A

43

D

44

A

45

A

B

47

C

48

A

49 49

A

50

A

A

52

C

53

A

54

D

55

A

B 11 B 16 B B 21 26


C

120 | P a g e

56

A

57

C

58

A

59

D

60

A

61

C

62

C

63

B

64

A

65

A

66

B

67

C

68

C

69

B

70

A

PRACTICE TEST PAPER NO. 2 ( TEST YOUR SELF ) 1 . Cash of Rs.2000 has been received by a firm from Mr. A, the debtor but it has been credited to account of Mr. C, a creditor. How this entry would be rectified? A) Debit Cash and credit A b) Credit Cash and Debit C c) Credit cash and debit A, d) Debit C and Credit A 2 Find out the amount of marketing expenses of a firm which have been paid for Rs.20000 for the current year, these are outstanding for Rs.3000 for the current year, expenses worth Rs.2500 have been incurred for the previous year and an advance of Rs.1100 has been given for the next year. The firm follows the cash system of accounting: Rs.23600, b) Rs.24400, c) Rs.28300, d) Rs.20400, 3 The books of a firm reflect that the returns inward have been added short by Rs.1980. Presently its gross profit is Rs.38200. What it should be? A Rs.38200, b Rs.40180, c Rs.38220, d Rs.37640 4 The debit side trial balance of a firm is showing a balance of Rs.619800 but in the discount column of cash book the discounted given by the firm has been over-added by Rs.200. What should be debit side trial balance ? a Rs.619600, b R s. 62 0 00 0, c Rs.620200, d Rs.619400 5 Cash book of a firm has been showing overdraft of Rs.4200 but it is observed that the bank has. debited commission of Rs.186. The balance as per pass book should be: a Rs.4014, b R s . 4 3 86 , c Rs.4200, d None of the above 6

A firm failed to charge depreciation rectification of this error would result in: a increase in loss, b increase in profit, c reduction in profit, d a and c 7. The dissolution expenses have been paid by a partner of a firm. These would be transferred to: a) bank account, b) cash account, c) capital account of the partner, d) any of the above 8.Which of the following will be treated as a correct accounting equation: a) Assets = capital + liabilities, b) Assets = liabilities, c) Liabilities = Capital + assets, d) Assets = equity – liabilities 9. Income received in advance is written on the liability side of the balance sheet: a) true, b) false, c) incomplete statement, d) none of the above 10 When ever a company forfeits the share, the amount already received is transferred to which of the following accounts: a) Paid up capital, b) Surplus of profit and loss, c) General reserve, d) Capital reserve 11 The excess of credit side of an account over the debit side of the same account shows: a) credit balance, b) debit balance, c) overdraft balance, d) any of the above 12 A balance sheet is defined as: Statement, prepared with a view to measure the exact financial position of a business on a certain a: fixed date, Statement for the particular year, c Any of the above, d None of the above b: 13 Purchase of machinery by a firm for cash would result in: a increase in the assets, bincrease in the liabilities, c decrease in the assets, dthere will be no change in the total amount of assets What is the basic reason for committing error of principle? 14 a Incorrect posting, b Lack of knowledge about capital and revenue items, c Incorrect balancing of ledgers, d Incomplete records 15 What is the time period during which the shares can be issued at a discount after permission of Central Govt.: a 2 months, b 3 months, c 4 months, d 6 months 16 a

Claims against a firm raised by its creditor but not acknowledged by the firm would be classified as: intangible asset, b current liability, c contingent liability, d no where

17 Which of the following account will always have a debit balance: a real accounts, b personal accounts, c nominal accounts, d all the above 18 A company purchased a machinery for Rs.2.30 lac. The vendor was paid advance of Rs.20000 and the balance was paid to him as allotment of share of Rs.10 at a premium of Rs. 0.50. What is the no. of shares allotted? a 20000, b 18000, c 10000, d 5000 an asset, b a liability, c income, d none of 19 Accrued income is: a the above 20

A firm paid rent amounting to Rs.2000 but it credited the rent account. Now the entry would be


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rectified: a debit the rent account by Rs.2000, b debit the cash account by Rs.2000, rent account by Rs.4000, debit the cash account and credit the rent account by Rs.4000

c debit the

21. A firm purchased machinery worth Rs.30000 on April 01, 2000, Rs.20000 on Oct 01, 2000 and Rs.10000 on July 01, 2001. On Jan 01, 2002 it sold 1/3rd of the machinery purchased on April 01, 2000 for Rs.3000. The annual closing period of the firm is December. What will be the amount of depreciation during the first year, on SLM basis, if expected useful life is 10 years? a) 2250, b) 2400, c) 2650, d) 2750 22. In the above problem, what is the profit or loss on sale of the machinery? a) Profit Rs.5250, b) Loss Rs.5750, c) Profit Rs.5750, d) Loss Rs. 5250 23 In the same problem, wha t is the written down value as on December 31, 2002? a) Rs.37000, b) Rs.37500, c) Rs.38000, d)Rs/38500 2 4 What is the amount of gross profit when net purchases are Rs.50000, net sales Rs.80000 and sales returns Rs.10000? a) Rs.31000, b) Rs.20000, c) Rs.30000, d) Rs.29000 25 A company decides not to draw Articles of Association of its own. Which of the following would apply to the company? A) Table A of Companies Act, b) Table B of Companies Act, c) Table E of Companies Act, d) Nothing would be applicable. 26 The pass book of a firm shows overdraft of Rs.10000. It is observed that the firm had issued a cheque of "s.20000 which has not been presented, bank has charged interest on overdraft for Rs.1500, cheque of Rs.20000 deposited with the bank but not credited and insurance of Rs.100 has been debited by the bank. What is the balance as per cash book? a Rs.8400 cr, b Rs.8500 cr, cRs.8400 dr, d Rs.8200 cr 27 The cash book of a firm is undercast by Rs.700. What would be the change in the pass book? a credit balance would be increased by Rs.700, bCredit balance would be reduced by Rs.700 c balance would be increased by Rs.700, d there would be no effect 28 A firm has debited wages of Rs.5000 paid labour on account of installation of machinery to wages account. The debit side of trial balance should show total of Rs.184504. What it will be showing presently: a Rs.189504, b Rs.179504, c Rs.184504, d none of the above 29 A firm debited the wages of Rs.2000 to the salary account. The gross profit of the firm is Rs.102000. What should be the correct amount of gross profit? a Rs.104000, b Rs.102000, c Rs.100000, d Rs.98000 30 A firm debited the wages of Rs.10000 paid on account of construction of building to the wages account. Its net profit is Rs.52000 presently. What it should be: a R s. 42 00 0, b R s. 5 2 0 0 0 , c Rs.62000, d R s. 72 00 0 31 The cost of acquiring a table for Rs.3500 was debited by a firm to the purchase account. What is the journal entry for rectification? a Debit cash credit furniture account, b debit furniture account credit cash, c debit furniture credit purchase account, d debit purchase and credit cash account 32. A firm purchased machinery of Rs.4 lac. For the first year it charged depreciation @ 20% amounting to Rs.80000. On which of the following methods, the above amount of Rs.80000 might have been calculated: a) Straight line method, b) Written down value method, c) Any of the above methods, d) None of the above 33. Sales of a firm are Rs.3 lac, the net loss Rs.8000 and gross profit Rs.30000. What is the amount of operating expenses? a) Rs.30000, b) Rs.8000, c) Rs.22000, d) Rs.38000 34 Opening stock is Rs.18000, purchases Rs.78000, cost of goods sold Rs.106000 and sales Rs.149000? What is the extent of other manufacturing expenses in this problem? a) Rs.10500, b) Rs.10700, c) Rs.11000, d) Rs.10000 35 What is the amount of gross profit when opening stock is Rs.18000, purchases Rs.78000, cost of goods sold Rs.106000 and sales Rs.149000? a) Rs.44000, b) R s.4 30 00 lo ss, c) Rs.42000, d ) R s . 4 3 0 0 0 36 The pass book of a firm has been showing a debit balance of Rs.15110 and it is observed that bank has debited Rs.1440. What will be the balance as per cash book? a) Rs.13670 cr, b) Rs.15540 cr, c) Rs.16540 dr, d) Rs.14540 cr 37 A firm has posted an entry of Rs.12000 to sundry creditor while it related to sundry debtors. The total of debit and credit side of the trial balance is Rs.612000. What it should be after rectification: a) Rs.600000, b) Rs.624000, c) Rs.58800 0, d) none of the above 38 A firm sold goods worth Rs.9000 to one Mr. X but the entry could not be posted to his account. The total of debit side of thetrial balance is presently Rs.490500.What it should be? Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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a Rs.490500,

b) Rs.499500,

c)

Rs.481500,

d)

None of the above

39 A company issued shares and called Rs.3 with application and Rs.7 as allotment money. Allotment money was not received for 5000 shares which were reissued at a discount of Rs.1 after forfeiture. What will be amount of capital reserve on account of forfeiture? a Rs.5000, b Rs.15000, c Rs.10000, d No change 40 What is the cost of goods sold of a firm if its opening stock is Rs.1 lac,net purchases Rs.9.50 lac,direct expenses Rs.1.50 lac, closing stocks Rs.2lac and sales Rs.14 lac? a Rs.5 lac, b Rs.8 lac, c Rs.10 lac, d Rs.12 lac 41 Managing Director of a company is entitled for a commission of 5%. The profit after the commission is 1.90 lac. What is amount of profit? a Rs.180500, b Rs.210000, c Rs.181500, d Rs. 20 00 00 42 The sales book of a firm was overcast by Rs.3000. The total of debit side of trial balance has been showing Rs. 105400. What it should be ? a Rs.102400, b Rs.108400, c Rs.105400, d Rs.111400 43The cash 000k of a firm is showing a debit balance with the bank of Rs.4320. It is observed that bank has credited a dividend amount of Rs.1020 to the account. In order to reconcile the cash book with the pass book, the amount of dividend: should be added, b) should be deducted, c) no need to take into consideration, d) none of the above 44 A firm purchased 2" d hand machinery on July 01, 1999 for Rs.180000 and spent Rs.20000 on repairs and installation. On June 30, 2002 the machinery was sold for Rs.136000. Compute depreciation for the year 2002 if the annual closing is Dec 31 St and depreciation method is WDV at 10%. a) Rs.7695, b) Rs.8805, c). Rs.7805, d) Rs.8215 45

In the above problem, what is the profit or loss on sale of the machinery?

a) Profit Rs.2630,

b)

Loss Rs.2731,

c) Profit Rs.2710,

d)

Loss Rs.2612

46 A firm purchased machinery worth Rs.46000 and spent Rs.3000 on installation. Its expected useful life is 5 years and scrap value Rs.9000. What Drill be amount of annual depreciation? a) Rs.7500, b ) R s . 8 0 0 0 , c) Rs.9000, d) Rs.10000 47 What will be the written down value of the machinery at the end of 2nd year in the above case? a) Rs.33000, b) Rs.35000, C) Rs.37000, d ) R s . 4 1 0 0 0 48 A firm acquired the patent rights of a product for business purpose. Such expenditure would be treated as: a Revenue expenditure, b Deferred revenue expenditure, c capital expenditure, d fictitious assets 49 Freight paid on machinery brought to the factory premises, would be classified as which of the following kinds of expenditure? a Revenue expenditure, b Deferred expenditure, c Capital expenditure, d Any of the above 50 A sum of Rs.1100 has been posted in the depreciation account but is not posted to the furniture account. The total of debit side of trial balance is Rs.241100. What it should be: a Rs.240000, b R s . 2 4 2 2 0 0 , c Rs.238900, d R s . 2 4 3 3 0 0 51 When the entry for sale of goods worth Rs.2500 is recorded Rs.250 in the books of a firm, what kind of error it is? a Compensating error, b Error of principle, c Error of commission, d Error of omission 52 Mr. X applied for 500 shares of a company and was allotted 300 shares. The application money was Rs.3 per share but face valu i. of Rs.10. To allot the shares, the share application account wouic be debited for a 1500, b 5 0 0 0 , c 3 0 0 0 , d 900 53 a

As per the dual concept of accounting, the transactions arc recorded on the basis of: double entry system, b cash system, c mercantile system, d single entry system

54 What is recorded in journal proper? a all transactions, b transactions that are not recorded elsewhere, c transactions through a bank account, d transactions where error has taken place 55 a

The opening balance of a liability account will always show: a debit balance, b a credit balance, c either a debit or a credit balance,

d overdraft balance

56 A firm has a dealership for textile machinery. It sells machiner y worth Rs.5.50 lac but credits the same to the sales account. In order to rectify the error, what should be the correct entry? a Debit cash / credit sales, b Debit machinery I Credit cash, c Debit sales / credit machinery d no adjustment needed 57 A firm earned net profits of Rs.102200. Its manager gets 5% commission after charging such commission. What is the amount of commission, the manager would receive? a 4 7 7 2 , b 5110, c 4766,d 4760 58 The closing stocks of goods are recorded in which of the following books of a firm? Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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a trading & manufacturing account, b manufacturing account and profit & loss account, c trading account and balance sheet, d profit & loss account and balance sheet 59 A firm has incurred substantial expenditure on the marketing of a new product. In the books of the firm, how this would be classified? a) Revenue expenditure, b) Deferred revenue expenditure capital expenditure, c) pre-paid expenditure 60 A firm incurred Rs.3220 during a year on purchase/use of stationery. In which of the following, this expenditure would be classified: a) personal account, b) real account, c) nominal account, d) contingent account 61.The liabilities of a business firm are Rs.8240. According to accounting equation, what is the amount of promoter's equity if the assets are Rs.42630? a) 34390 b) 42630 c) 50870 d) 8240 62 A company issued 1 lac shares of Rs.10 each (payable Rs.4 with application, Rs.2 on allotment and Rs.4 as first and final call). It received the application money for all the shares but did not get the allotment money on 6000 shares and additionally allotment money and final call money on 2000 shares. What is the amount of calls in arrears? Rs.24000, b) Rs.16000, c) Rs.32000, d) Rs.48000 63 A firm sold a machinery for Rs.18000 at the end of 3`d year of its purchase, while its expected useful life was 5 years. If its original purchase price was Rs.40000 and its scrap value was expected at Rs.4000, what is the profit or loss on sale of the machinery? A) Profit of Rs.3600, b) Loss of Rs.400, c) Profit of Rs.18000, d) Loss of Rs.2000 64 A company issued fully paid up shares of Rs.10 each at a premium of Rs.2 to the vendor of plant and machinery worth 360000. What is the no. of shares that has been allotted to the vendor? a) 36000, b) 18000, c) 30000, d) Cannot be issued 65 A firm while checking its bank account statement found that bank has credited interest amount to Rs.240 to its current account. The balance in its pass book was Rs.9000. What should be the balance as per cash book: a R s. 9 0 0 0 , b Rs.9240, c Rs.8760, d Rs . 8 52 0 66 In the trial balance of a company, a sum of Rs.2460 has been appearing as interest accrued but not received. It will be recorded in a profit and loss account, b trading and manufacturing account, c balance sheet as asset, d balance sheet as a liability 67 A firm has in its books, sundry debtors amounting to Rs.2 lac. The amount of bad and doubtful debts is Rs.16000. What will be amount of provisions, if the firm is required to make provision @ 5% of the debtors: a 10000, b 2 6 0 0 0 , c 10800, d 92 00, 68 The overdraft balance in the cash book of a firm is Rs.23600. A debtor of the firm deposits directly in the bank an amount of Rs.3200, which bank credits in the personal account of a partner_ What is the balance as per pass book of the firm? a 2 6 8 0 0 , b 204 00 , c 23 60 0, d 300 00 69 What is the nature of balance in the overdraft account in the cash book of a firm and also the pass book? a credit balance in tnu cash book and credit balance in the pass book, b) debit balance in the cash book and debit balance in the pass book c) debit balance in the cash book and credit balance in the pass book d) credit balance in the cash book and debit balance in the pass book 70 Which of the following can be categorized as a real account in the books of a firm? a) marketing expenses, b) deferred revenue expenses, c) sundry debtors, d) credit balance in the bank account

ANSWER 1 D

2

A

3

C

4

6

7

C

8

A

11 A

12

A

13

16

17

A

22

31

A C

36

5 10

B

9

A A

D

14

B

15

A

A

19

A

20

C

D

18 23

D

24

C

25

A

27

D

28

29

C

30

C

32

C

33

C D

34

D

35

D

A

37

38

B

39

C

40

C

41

D

42

B C

43

A

44

A

45

B

46

B

47

A

48

E

49

C

50

A

51

C

52

D

53

A

54

B

55

B

56

D

57

A

58

C

59

B

60

C

21

26

C C D


D

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61

A

62

A

63

A

64

C

65

C

66

C

67

A

68

C

69

D

70

B

PRACTICE TEST PAPER NO. 3 ( TEST YOUR SELF ) 01 A company forfeits 2000 shares of Rs.10 each due to non-payment of 2nd call @ Rs.2. The amount already received is Rs.3 on application, Rs.3 as allotment, Rs.2 as first call. How much amount will be debited to share capital account: a Rs.2000, b Rs.8000, c Rs.10000, d none of the above 02 Which of the following provisions of Companies Act 1956 are not correct: a Section 209 - companies to maintain certain books of account, b Section 210 — preparation of final accounts, c Section 211 — balance sheet should exhibit true and fair view of state of affair of the company d Part II — Schedule VI prescribes the format for preparation of profit and loss account. 03 At the end of one year, a sum of Rs.10000 at 6% rate of interest when compounded half yearly becomes: a 10600, b 10609, c 10613, d 10616 04 For a capital budgeting expenditure, the net present value of a projectat 18% is Rs.15 lac negative, at 10%, it is Rs.12 lac positive and at 14%, it is ZERO. The internal rate of return from the project is a) 18%, as there is deficit, b) 14%, as it is Zero, c) 10% as there is surplus, d) none of the above 05 Expenses necessary to produce goods or service organisation can be classified as: a outflow of assets, b decrease in assets, c increase in liabilities, d all the above 06 X has been investing Rs.5000 every year at year end, at 5% for 5 years. How much he will get at the end of 5 years (hint calculate the future value of an ordinary annuity): a 26778.20, b 27278.90, c 27628.15, d 28342.25 a it is a system in 07 Which of the following statement is correct regarding single entry system: which only one entry is made, b it is a system where the principles of double entry are not being followed, c it is a system that takes into account only cash transactions, d none of the above 08 A machinery is purchased for a total price of Rs.1 lac with expected useful life of 5 years. What is the amount of depreciation at double declining balance method for calculation of depreciation, in the 2"d year: a Rs.20000, b R s .2 4 0 0 0 , c Rs.30000, d Rs.40000 (Hint-Rate of depreciation at double rate is 40%. Depreciation is calculated on the balance value of the assets in the beginning of 2nd year i.e. on Rs.60000) 09 A car is purchased for Rs.310000 with a scrap value of Rs.60000 at the end of 5 years' useful life during Sept 2008. What is the written down value as on Mar 31, 2009 (which is closing date of financial year). a 3 1 0 0 0 0 , b 260000 c 250000, d 2 0 0 0 00 10 The amount of undercasting of credit side of bank column of the cash book will be deducted from the overdraft as per: a cash book, b pass book, c both the books, d none of the above 11 A firm had written off a sum of Rs.5000 as bad debt. However, in the following year a sum of Rs.3500 was received as recovery. What will be the impact of this recovery : a reduce the debtors by that amount, b increase the debtors by that amount, c increase the profits by that amount, dincrease the liability by double the amount 12 If a two-sided error has taken place, it will be corrected: a By debiting the Suspense account b. By correcting the posting c by passing a journal entry, d none of the above 13 After preparation of trial balance it is observed that the goods amounting to Rs.10000 sold to Ashok & Sons were posted as Rs.1000 to their account. The rectification entry will be: a suspense account debit to Ashok & Sons Rs.9000, b Ashok & sons debit to sales account Rs.9000 c sales account debit to suspense account Rs.10000, d Ashok & sons debit to suspense account Rs.9000 14 When a company issues shares and the calls amount in instalments i.e. application money, allotment money, call money, the amount of single call : a should not be less than 25% of the face value, bshould not be less than 20% of the face value c should not be more than 25% of the face value, d should not be more than 20% of the face value 15 The shares of Rs.100 each, are issued at 10% discount and are forfeited for non payment of call money of Rs.20 each. Which of the following journal entry will not be correct: a forfeited shares account-credit Rs.60, b discount on issue of shares — cr Rs.10 c share capital account debit Rs.100, d share 1st and final call — debit Rs.30 16 What adjustment entry will be passed for the goods taken by the promoter out of the goods Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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purchased for the business: a purchase account debit to credit the drawing account, b capital account debit to credit the purchase account, c drawing account debit to credit the purchase a/c, dpurchase account debit to credit the capital account 17 Forex rate in Delhi is 1 US $ = 48.80/90. In London the 1 Euro = US $ 1.60/65 pound sterling. What is the cross rate for Euro. a 78.08, b 77.92, c 77.65, d 77.02 Spot rate is 1 US $ = 48.10 and 2 months forward is available at 1 US = 48.50. 18 a Forward is at a premium, bForward is at a discount, c Spot is at a premium, d Spot is at a discount 19 Which of the following does not match: a purchase of machinery for sale — revenue expenditure b advertisement expenses — deferred revenue expenses, c payment of wages to labourer — revenue expenditure, d purchase of goods for trade — capital expenditure 20 If there is overdraft with the bank, the bank column of the cash book will show: a a credit balance, b a debit balance, c either a debit balance or a credit balance, d neither a debit balance or a credit balance 21 The trial balance in which the total of debit side and total of credit side of each ledger account is taken into account is called: a main trial balance, b net trial balance, c trial balance, d gross trial balance 22 The pricing method under which the price is determined by subtracting an appropriate gross mark up from the sale price, to an unrelated 3 rd party, with the appropriate gross margin being determined by examining the conditions, under which the goods are sold and comparing the said transaction to other 3rd party transaction, is called: a comparable uncontrolled price method, b cost plus method, c re-safe price method, d non-traditional method 23 A firm has been following the practice of not charging annual depreciation. At the time of sale of assets, it shows the difference between sale price and original cost as gain or loss in the year of sale. Which accounting concept is being violated. a consistency concept, b conservatism concept, c money value concept, d periodicity concept 24 Which of the following is correct formula for calculation of future value of an annuity due (beginning of period). a C x {(1+r)"-1/r}, b C x {(1+r )" -1/r} x (1+r), c C / {(1+r) ° -1/r}x (1 +r), d C n x {(i+r ) -1/r} / (1+r) 25 X is to receive Rs.5000 at beginning of every year for 5 years at 5%. How much amount he is required to invest now (Hint : calculate the present value of annuity due). a 23630.50, b 22729.60, c 21942.15, d 21308.75 26 When a firm makes payment to another firm by way of a cheque, the bank debits the same, after a time lag when cheque is presented. In the meantime, if cash book balance is to be reconciled with the pass-book balance, in the balance of cash book, the amount of cheque: a is added if the firm has a current account, b is deducted if the firm has a current account, c is added if the firm has a overdraft account, d is added in all circumstances 27 Balance in cash book of a firm is Rs.9500. It is noticed that (a) the payment side of the cash book is undercast by Rs.200 (b) a cheque of Rs.5000 issued by the firm is not entered in the bank column of the cash book but bank has paid it. The balance in the pass-book should be: a 9500, b 9300, c 4300, d 4500 28 A firm purchased new machinery for Rs.3.20 lac. It is to charge depreciation @ 6%, 5% and 4% for 1 st, 2"d and 3`d year respectively. At the end of 3 rd year, its written down value will be: a 269500, b 271940, c 274400, d 275900 29 A firm paid cartage of Rs.200 on account of transportation of newly purchased machinery to the cartage account. It will affect which of the following accounts? a cartage account, b machinery account, c cash account, d cartage and machinery accounts 30 Which of the following transactions will result in increase in asset and increase in liability? a Payment made to Creditors in cash, b Goodwill account written off, c Issue of Bonus shares d Machinery purchased on credit 31 W hen t here is fa vourable balance as per cash b ook, a nd the cheque issued but not presented, to reach the balance in pass book, for this amount would be: a added, bdeducted, c not given any weightage, d none of the above 32 The depreciation has been charged and it has been debited to fixed asset account. It is an: a error of omission, b error of commission, c error of principle, d compensating error 33 A bond has face value of Rs.100 and coupon of 10%. Its remaining maturity period is 6 years. At 11% YTM, its market value is: Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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a

96.10, b 95.95, c 95.80, d 94.90 The liabilities that are repayable only when business will be terminated are

34 called: a fixed liabilities, b long term liabilities, c contingent liabilities, d current liabilities 35 For a given difference between YTM and coupon rate of a bond: a shorter the maturity, greater will be change in price with change in YTM b longer the maturity, greater will be change in price with change in YTM c longer the maturity, shorter will be change in price with change in YTM , d no change 36 A bond with a face value of Rs.100 has a maturity period of 5 years. If the YTM decreases to 9%, what will be the change in the price: a increase 3.9%, b decrease 3.9%, c increase 2.7%, d decrease 2.7% Problem: Bond-A with a face value of Rs.100 has a coupon of 12% with 6 years' maturity. At YTM of 10%, its market value is Rs.108.70. Bond-B with a face value of Rs.100, coupon of 12% with a 6 years' maturity carries value of Rs.73.40 for YTM of 20%. 37 If YTM increases by 20%, the market price of Bond-A will change to: a 110, b 106, c 100, d 98.40 (Hint: 12 PVIFA (12%,6) + 100 PVIF (12%, 6) 38 Adjustment entry for bad debts is: a Bad Debts Dr. to P & A/c or, b Provision for bad & doubtful a/c Dr. to Bad Debts, c Bad Debts Dr. to Debtors Cr, d P & L A/c Dr. to Bad Debts Cr. 39 On a bond, the investor is subject to interest rate risk on account of (a) re-investment of annual interest (b) capital loss on account of change in the value of bond due to increase in market interest rates. a only (a), b only (b), c a and b both, d none of these 40 If duration of a bond is 5 years, which of the following statement would be true:. a its payable after 5 years, b interest rate risk will disappear on the bond, if the holding of bond is for 5 years c no change in value of bond will take place within 5 years, d change in price of bond within 5 years will not affect the investor. 41 Which of the following expenses by a firm cannot be taken as part of capital expenditure: land & building, b plant and machinery, c technical know-how, d none of the above a: 42 The appraisal method for capital expenditure, under which it is examined, how much period the invested funds will come back as cash inflow is called: pay-back method, b rate of return method, c net present value method, d internal rate of a: return A firm has taken term loan from the bank for construction of building. It will: a increase 43 the asset and increase the liability, b increase the asset and decrease the liability, c increase one asset and decrease another asset, d decrease one asset and decrease one liability 44: The process under which the future value of present cash flows is determined is called: discounting, b compounding, c net present value, d internal rate of return a: 45 Which of the following is an error of omission. a wages account debited although services of labour used for building construction b goods purchased for cash from XYZ and their account credited c sale of goods made to ABC, but not entered. d an entry of Rs.927 posted as Rs.972. 46: Which of the following is not a source of finance for capital expenditure project: bank cash credit and trade creditors, b: bank term loan and subsidy from govt, c: a: institutional term loan and promoters' equity, d: long term unsecured loans and debentures Problem: A company invested Rs.5 lac in a project in the year 2000. The pro'ect earns the profits as under: Investment 1 sear profit 2" year profit r year profit 4''' year profit 5m year profit 6 year profit 7r year profit Total profit 47

Project-A 5,00,000 Nil 60000 80000 120000 120000 110000 90000 580000

Project-B 5,00,000 30000 50000 160000 170000 . 110000 20000 Nil 540000

Discount Factor 01 5%

0.95238 0.90703 0.86384 0.82270 0.78353' 0.74622 0.71068

Based on the above information, what is the payback period of Project-A


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a 5 years, b 5 years and 2.5 months, c 6 years and 1.33 months, d 6 years and 8.12 months 48 Based on the payback period, what is the payback period of Project-B a 4 years and 7.63 months, b 4 years and 9.12 months, c 5 years and 2 months d 5 years and 4.33 month 49 Based on the above information, which project is preferable for investment and why: a Project A with higher payback period, b Project A with lower payback period, c Project B with higher payback period, d Project B with lower payback period 50 In the above case, what is the accounting rate of return of Project A: a 28%, b 31%, c 33%, d 35% 51 In the above case, what is the accounting rate of return of Project B: a 28%, b 31%, c 33%, d 35% 52 Based on the accounting rate of return, which project is preferable for investment and why: a Project A with higher accounting rate of return, b Project A with lower accounting rate of return c Project B with higher accounting rate of return, d Project B with lower accounting rate of return 53 X wants Rs.340000 to replace his car after 5 years. He wants to save and invest in equal monthly instalments at 12% p.a. How much money will be deposited every month. a 4136.80, b 4163.20, c 4182.20, d 4203.40 54 X has been saving Rs.2000 at 10%p.a. compounded annually. What will be amount at the end of 3 rd year. a 6 5 4 0 , b 6 620 , c 66 90 , d 6710 55 a

The depreciation is calculated as: original cost / percentage rate of depreciation, b original cost / no. of years of useful life, c original cost / total life of the asset, d invoice price / total life of the asset if scrap value of the machinery is given, the amount of depreciation is worked out as: original cost / percentage rate of depreciation, b original cost I no. of years of useful life original cost — scrap value I no. of years of useful life, d invoice price — scrap value / total life of the

56 a c asset 57 The scrap value of a machinery with original cost of Rs. 1 lac is estimated at Rs.10000. Its useful life is 6 years. The depreciated value at the end of 41h year is: a 30000, b 35000, c 40000, d 45000 58 A person wants to remit Euro and there is no quotation with the bank for Euro. Bank works out the rate through Re/$ rate and $/Euro rate. This is called: a bid rate, b offer rate, c cross rate, d floating rate 59 On a particular amount, the simple interest is Rs.306 for 2 years and the compound interest is 450 for 3 years. What is the principal amount. a 3750, b 3775, c 3820, d 3860 60 X had borrowed Rs.65600 at 5% interest for 2 years to be payable in 2 annual instalment. What is the amount of annual instalment. a 3 3 4 5 0 , b 33980, c 34890, d 35280 61 Spot exchange rate is 1 Euro = $ 1.40 an d swap rat e (called forward points) is 0.0105. Calculate 90 days 3.50%, c 3.25%, d 3 % interest differential assuming 360 days in a year – a 4% b

62 Accounting system which is associated with the need of the business owners to keep record of their transactions, property etc, dues they owe and debts others owe them, is : a financial accounting, b steward accounting, c cost accounting, d management accounting 63 Accounting system which is used ascertaining the costs with a view to control them and also make assessment of profitability and efficiency of the business, is : a human resources accounting, b social responsibility accounting, c cost accounting, d management accounting 64 As per accounting standard No.22, the aggregate of current tax and deferred tax charged or credited to the statement of profit and loss for the period, is called: a taxable income or loss, b tax expenses, c deferred tax, d accounting income 65 A cheque issued by a firm is recorded on side of the ____: a payment, cash book, b receipt, cash book, c payment, journal, d receipt, journal 66 The price at which two unrelated and non-desperate parties would agree to a transactions is called: a cost pricing, b transfer pricing, c opportunity pricing, d arm's length pricing 67 Firm-A sells goods on credit as well cash. For goods worth Rs.50000 the payment is yet to be received although goods were supplied, two months earlier to closing of the financial year. a if it is not accounted for in the books it will have no effect and no accounting practice will be violated. b if it is accounted for, the profit will be increased without any reason to do so. c if it is accounted for, the profit position will be true and fair. d No accounting practice will be violated by not doing so. 68 A firm sells goods worth Rs.50000 to M/s XYZ in cash. in this case, which two accounts are involved: Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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a

cash account and XYZ account, b XYZ account and goods account, c goods account and cash account, d incomplete information 69A firm sells goods worth Rs.50000 to M/s XYZ in cash. In this case, while crediting the account, the following principle will be followed: a credit the giver, bcredit the receiver, c credit what comes in, d credit what goes out 70 A persons owes some amount to the firm, is called of the firm: a debtor, b creditor, c customer, d lender 71 Balance as per pass-book is Rs.23000 in the overdraft account as on Sep 30, 2008. It is observed that (a) a cheque of Rs.3000 deposited by the firm has been received by the bank as dishonoured. (b) bank has debited Rs.50 as cheque returning charges (c) bank has dishonoured a cheque of Rs.1000 by mistake, which the firm had issued to make payment. The balance as per cash book should be: a 20950, b 21000, c 24050, d 25050 72 Which of the following statement is not correct in the context of bank reconciliation statement: a cheque issued by a firm is first recorded in the cash book, b cheque deposited by a firm is first recorded in the pass-book, c direct deposit by a customer of a firm, in bank account, is credited by the bank d direct debit by the bank is later on credited by the firm to bank account in its books. 73 A company had issued share with face value of Rs.100 + premium of Rs.200. On certain shares, the application money and allotment money of Rs.40 each has been received but due to non-receipt of 1 st call money, few shares have been forfeited. Which of the following statement is correct: a debit to share capital Rs.100 per share to be made, b debit to share capital Rs.300 per share to be made c debit to share capital Rs.80 per share to be made, d debit to share application at Rs.100 to be made 74 The shareholders of a company have a fixed liability to pay, in case of liquidation of the company. It is called: a company limited by shares, b company limited by guarantee, c company with limited liability d company with unlimited liability 75 For making adjustment in respect of closing stocks, which of the following is debited: a purchase account, b trading account, c closing stocks, d balance sheet asset side 76 For which of the following, an adjustment entry will not be required: a salary of Rs. 3000, paid in advance, b commission due Rs.1000, but not received, c commission payable Rs.300 during the year, paid, d rent due Rs.2000 but not paid. 77 All the material information relating to business transactions is required to be given by a company in its balance, due to which of the following: a accounting period concept, bfull disclosure concept, c materiality concept, d all the above 78 If commission is received in advance and adjustment entr y is passed, which of the following will not be true: a it will reduce the commission income, b it will reduce the profit, c it will reduce the net worth d it will be shown on the asset side of the balance sheet at income received in advance. 79 Which among the following accounting standards deal with inventory valuation: a AS -2, b AS- 4, c AS -9, d AS 11 80 When a bill is drawn by a party on the other party which of the following accounts is credited : a bills receivable account, b debtor's account, c creditor's account, d bills payable account 81 a c

If trade discount allowed appears in the trial balance, it will be finally adjusted as : debit entryin the profit and loss account, b debit entryin trading and manufacturing account asset in the balance sheet, d deduction from sales in the trading account

82 When a firm withdraws money from bank, in the cash book, the amount of withdrawal is: a credited, b debited, c no change, d none of the above 83 When a bill is endorsed by the drawer in favour of another party, the drawee is required to debit which of the following accounts : a bills receivable account, b bills payable account, G no entry is needed, d endorsee's account 84 When loss of stock takes place due to theft or fire etc. it is called: a total loss, b normal loss, c contingent loss, d abnormal loss 85 A sum of Rs.2500 has been spent by a firm to replace the worn-outparts of the machinery. This will be treated as: a revenue expenditure, b capital expenditure, c deferred revenue expenditure, d intangible asset 86 All receipts and payment made in cash, including cheques are recorded in: Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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a

balance sheet, b income and expenditure account, profit and loss account

c

receipt and payment account, d

87Which of the following kinds of accounts are recorded in the ledger: a real accounts, b nominal accounts, c all kinds of accounts, d personal accounts 88 The balance in the pass book is Rs.54000 and it is observed that bank received Rs.2000 through NEFT and also remitted Rs.13000 through NEFT, as per standing instruction. What is the balance as per cash book: a 43000, b 65000, c 54000, d 39000 89 If the proprietor has made certain drawings, the profit will be calculated as under: a amount of drawings will be added back to the capital to find out the profit b amount of drawings will'be reduced from the capital to find out the amount of profit c the amount of drawings has already been accounted for and cash reduced to that extent d none of the above 90 Accounts and auditors' report of a banking company is required to be published (a) in a newspaper circulating in the place where the banking company is having its principal office (b) it is to be published within 6 months of close of its financial year (c) this is requirement of Rule 15 of Banking Regulation (Companies) Rules. a a to c all correct, b only a and c correct, c only b and c correct, d only a and b correct 91 The balance in the cash book is Rs.30000 overdraft. It is observed that a cheque of Rs.2000 has been debited twice by the bank. Further the bank credited Rs.3500 to the account of the firm by mistake, while this amount was to be credited to personal account of the partner. What is the balance in the pass book: a35500 credit balance, b 28500 debit balance, c 31500 credit balance, d 28500 credit balance 92 The finance manager of a company receives 10% commission- on the profit after charging commission. The profit of the company are Rs.3.30 lac. What will be amount of commission of the manager: a Rs.33000, b Rs.30000, c Rs.27767, d R s. 2 59 87 93 Pre-operative expenses are shown by a company as: a expenditure in the trading account, b expenditure in the profit loss account, c asset in the balance sheet, d liability in the balance sheet 94 A company comes out with an equity share issue having face value of Rs.10 and charges total Rs.30 for the share. The amount will be credited to: a entire amount to the share capital account, b entire amount to the share premium account c Rs.10 to share capital and Rs.20 to share premium a/c, d Rs.20 to share capital and Rs.10 to share premium a/c 95 Which of the following accounting standards do not match in the context of banking companies' accounts: a AS-21 : consolidated statements, b AS-17 : Segment reporting, c AS-18 : Related party disclosure, d AS-15 : payment of compensation to employees 96 In the income and expenditure account, transactions relating to are included: a current year only, b previous year only, c subsequent year only, d current, previous and subsequent years 97 When the drawee pays the amount of the bill before its due date it is called: a endorsing the bill, b honouring the bill, c retirement of the bill, d none of the above 98 When a bill is paid before due date and the drawer gives some allowance to the drawee, this is called: a discount on the bill, b retirement of the bill at a discount, c rebate, d any of the above 99The books of a firm are closed but it is found that a purchase of Rs.1000 from Atma Ram Sons has been passed through the sale book for Rs.100. What is the rectification entry, after preparing the trial balance. a sales account debit Rs.900 to Atma Ram Sons, b purchase account debit Rs.900 to Atma Ram Sons c sales account debit Rs.100, purchase account debit Rs.1000 to Atma Ram Sons Rs.1100 d sales account debit Rs.1000, purchase account debit Rs.100 to Atma Ram Sons Rs.1100 100 For which of the following, an adjustment entry will be required: a expenses paid but not due, b expenses paid which were due, c income received which was due, d all the above 101 A double column cash book records which of the following: a cash and discount transactions, b cash and credit transactions, c cash and income transactions d cash and petty cash transactions 102 When amount is paid to the petty cashier, this is called: a cash advance, b imprest amount, c petty cash amount, d any of the above 103 The periodical totals, monthly or weekly, of the purchase book is: a posted to the credit of credit book, b posted to the debit of credit book, c posted to the debit of purchase book, d posted to the debit of sales book Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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104 Which of the following does not match: a sales return book records return of goods to the customers, b sales return book records return of goods by the customers, c purchase return book records return of the goods to the supplier, d none of the above 105 When the credit side of the cash book is undercast, it has the same effect as overcasting of: a credit side of pass-book, b debit side of cash book, c debit side of pass-book, d there is no relationship between the two 106 The bank reconciliation statement is prepared to reconcile the following: a difference in the pass book and cash book, b difference between the opening and closing balance of cash book, c difference between the opening and closing balance of pass book, d difference in the cash and bank column of the cash book. 107 Which of the following does not match: a when subscription is made by the bank, there is a debit entry in the pass book debiting the firm's account b when cash is deposited in the bank, there is a debit entry in the cash book debiting the bank c when a customer directly deposits the amount, bank is credited in the cash book. d none of the above 108 Bank charges of Rs.100 have been recorded twice in the cash book. if the pass-book showing debit balance is taken as starting point: a Rs.100 will be deducted, b Rs.100 will be added, c Rs.200 will be added, d Rs.200 will be deducted 109 Which of the following statement does not match in the context of trial balances: a trial balances take care of arithmetic accuracy b in the trial balance, the balances of liabilities are recorded on the debit side c in the trial balance, the balances of expenses are recorded on the debit side d in the trial balance, the balance of capital account are recorded in the credit side. 110 Debit and credit totals of each ledger account are shown in the trial balance instead of the outstanding balance, against the name of each account. It is called: a trial balance, bnet trial balance, c gross trial balance, d any of the above 111 Expenses incurred on wages paid to a labourer of the factory, have been debited to wages account, while his services have been used for construction of factory building. This is: a compensating error, b error of commission, c error of omission, d error of principle 112 Firm ABC purchased a new machinery and expenses incurred on its transportation have been debited to the cartage account. This will affect: a trading & manufacturing account and balance sheet, b profit and loss account and balance sheet c only profit and loss account, donly balance sheet 113 Firm XYZ purchased goods worth Rs.20000 from P & Company and these have been routed through sales book as Rs.10000. The rectification of this will be through the following journal entry: a debit purchases Rs.20000 and credit sales Rs.20000, b debit sales Rs.20000 and credit purchases Rs.20000 c debit sales Rs.10000 and credit P & Company, d debit sales Rs.10000 and debit purchase Rs.20000 and credit P & Company Rs.30000 114 A firm had written off Rs.3000 as a bad debt of Z and the amount recovered from him later on has been credited to his account. Rectification of this error will result into: a decrease in the debtors, b decrease in the profit, c decrease in the capital, d increase in profit leading to increase in capital 115 Find out, which expenditure is wrongly classified: a purchase of goods — revenue expenditure, b purchase of machinery — capital expenditure, c payment of technical fee for selection of machinery for a project - revenue expenditure, d none 116 A firm incurred substantial marketing expenses to expand their market reach. This will be classified as: a revenue expenditure, b deferred revenue expenditure, c capital expenditure, d any of the above 117 When trade discount is received by a firm, it is shown as: a income in the trading account, b a deduction from the sales in the trading account, c a deduction from purchases in the trading account, d an addition to the purchases in the trading account 118 There was fire in the stock godown of Firm-B and stock worth Rs.2 iac is damaged. The insurance company makes payment of Rs.1.50 lac as a full and final payment of the claim. The balance of amount of Rs.0.50 lac: a will be debited to net loss in the profit and foss account, b will be debited to abnormal loss account and credited to trading account, c will be credited to abnormal loss account and debited to trading account, d will be debited to gross loss in the trading account. Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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119 Which of the following error may result in disagreement of trial balance: a error of omission, b error of commission, c compensating error, d 120 What type of accounts, do appear in the balance sheet, out of the following: a real and nominal, b real and personal, c personal and nominal, d nominal

error of principle real, personal,

ANSWER - PRACTICE PAPER NO. : 3 01 07 13 19 25 31 37 43 49 55 61 67 73 79 85 91 97 103 109 115

C b d d b a c a d b d c a a a b c c b c

02 08 14 20 26 32 38 44 50 56 62 68 74 80 86 92 98 104 110 116

D b c a a c d b c c b c b b c b c a c b

03 09 15 21 27 33 39 45 51 57 63 69 75 81 87 93 99 105 111 117

B b d d c c c c b c c d c d c c c c d c

04 10 16 22 28 34 40 46 52 58 64 70 76 82 88 94 100 106 112 118

B b c c c a b a a c b a c a a c a a b b

05 11 17 23 29 35 41 47 53 59 65 71 77 83 89 95 101 107 113 119

D c a d d b d c b a a a b c a d a c d b

06 12 18 24 30 36 42 48 54 60 66 72 78 84 90 96 102 108 114 120

c c a b d a a a b d d b d d a A b b d b

PRACTICE TEST PAPER NO. 4 ( TEST YOUR SELF ) 01 If a company issues share at a premium, the amount of premium is credited to which of the following accounts: a capital reserve account, b share capital account, c share premium account, d a or c 02 A company has issued certain shares giving an option to shareholders that in case there is no profit in a particular year, the dividend for that year shall be paid, in future, when the company has adequate profit. Such share is called: a cumulative equity share, b redeemable shares, c participating preference share, d cumulative preference share 03 When the application money is received from the shareholders, the next instalment due is called ______ due. Which account is debited in that situation to credit to share capital account: a allotment, share allotment account, bcapital, share application account, callotment, share application account, d amount due, share application account 04 When a company receives some amount as calls in advance. It (can / cannot) pay interest which can be maximum : a cannot pay, b can pay, 6%, c can pay, bank rate, d can pay, 13PLR of 5 top banks 05 Shares issued by a company to its staff for consideration other than cash are called: a rights shares b shares, c employees' stock option scheme, d sweat equity 06 Which among the following is not part of fixed assets in case of balance sheet of a company: a goodwill b land preference and building, c railway siding d none of the above 07 A 8% bond with a face value of Rs.10000 is quoted in the market at Rs.8000. What is the current yield on the bond: a 8% , b 12.5%, c 10%, d 8.5% 08 Which of the following statements is correct statement: a where the required rate of return is equal to the coupon rate, the value of the bond is equal to its par value. b where the required rate of return is > to the coupon rate, the value Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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of the bond is < its par value. where the required rate of return is < to the coupon rate, the value of the bond is > its par value. d all the above 09 If a firm receives advance against purchase of goods from a customer, it does not take this to income or sale, due to which of the following concept: a realization concept b revenue recognition concept, c conservation concept, d going concern concept 10 The depreciation method in which the depreciation is calculated on the principle that the asset loses an equal amount of value every year: a written down value method, b sum of years method, c doubt declining balance method d straight line method 11 Which of the following event / transaction shall not be recorded in the accounting books of a company: A compensation paid to a worker by the company for injury during duty hours B adverse effect of performance of the company due to ill health of the managing director C write off of account of a trade debtor who died after meeting an accident D all the above 12 A machinery is purchased for Rs.4 lac. Its rate of annual depreciation is 20% under written down value method. Its depreciated value at the end of 2nd year would be: a Rs.2.56 lac, b Rs.2.04 lac, c Rs.2.40 lac, d Rs.1.60 lac 13 When the accounting standards are not followed by a business (a) the auditors qualify their audit reports (b), if auditors do not qualify their audit reports they are guilty of professional misconduct (c) the management is held responsible. a a to c all correct, b a and c are correct, c a and b are correct, d b and c are correct 14 Which of the following is not matched in terms classification of various assets: a patents and trademarks — intangible assets, b goodwill — fictitious assets (due to which also part of intangible asset), c an intangible assets should be identifiable and distinguished from goodwill as per AS 26 d none of the above 15 The accounting equation "Assets = capital + liability", is due to application of which of the following accounting concept: a business entity concept, b money measurement concept, c realization concept, d dual aspect concept 16 A no. of notes are appended to the balance sheet by companies which include information such as contingent liabilities, market value of investments etc. This is due to compliance of which of the following accounting concepts: a business entity concept, bmoney measurement concept, c realization concept, d accounting of full disclosure concept 17 The principal of conservatism in accounting concepts stands for: a Anticipate no profits and provide for all possible losses, b conserve all the financial resources, c use the resources of the organization very carefully, d Do not overstate the assets or liabilities 18 A firm records the income and expenditure when it is actually received and incurred. The firm is following which of the following accounting system: a accrual system, b hybrid system, c mercantile system, d a and c both 19 Complete the following accounting equation (assets Rs.110000 - liabilities Rs. = capital Rs.80000: a Rs.190000, b Rs.110000, c Rs.80000, d Rs.30000 20 Which of the following are not properly matched in terms of classification of accounts: a machinery — real account, b Ramesh (buyer of goods from the firm on credit) — personal account, c bank account — real account, d salary paid — nominal account 21 The preparation of trial balance and final accounts with a view to ascertain the profit or loss made during a particular period and the financial position of the business on a particular date is called: a recording of transactions, b classifying the transactions, c summarizing the transactions d all the above 22 Which of the features of the journal and ledger given as under is not correct: a journal is book of original entry, ledger is a book b journal is a book of analytical record, c of secondary record, d process of recording the transaction in ledger is called posting 23 Nominal accounts relate to (a) incomes (b) expenses (c) assets (d) liabilities: a a to d all, b a and b only, c b and c only, d a and c only 24 The journal entries are posted in the ledger: a in order of their category, b in order of their dates, c in order of their importance, d as per discretion of the firm 25 Which of the following accounts is called valuation account or contra account (a) provision for depreciation account (b) provision for doubtful debts account (c) stock reserve account (d) reserves and surpluses account: a atodall, b a, b and c only, a, c and d only, d b, c and d only c 26 A double columnar cash book has two columns on each side (which one is false): a one column is meant for cash and another for discount b the discount column on the debit side represents the discount allowed c


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c the cash column on the credit side represents cash received d the discount column on the credit side means the discount allowed and cash column on the debit side means cash received a business firm, the chief cashier hands over some cash to the 27 In petty cashier who submits the account of petty cash after a fixed time interval. This system is called (which is most appropriate): a petty cash system, b petty cash book system, c imprest system of petty cash book d advance system of petty cash book purchase book — both credit and cash purchases are 28 Which of the following matches: a recorded, b sales book — both credit and cash purchases are recorded, c purchase book — only cash purchases are recorded, d sales book only credit purchases are recorded 29 When there is one debit and several credits equal the debit amount OR there is one credit and several debits to match the amount of credit, this is called: a simple journal entry, b multiple journal entry, c compound journal entry, d aggregated journal entry 30 (a) when goods are purchased, the 'purchases account' is used (b) when goods are sold, the 'sales account' is used (c) when goods are returned by the customers of the firm, the 'returns outward' is used (d) when the goods are returned by the firm to its suppliers, the 'purchase returns' is used. Which is correct: a atodall, bb, c and d, c a, b and d, d a, b and c 31 Returns of goods from the customers of the firm shbuld be credited to an d deb it ed to a customer account, sales returns, b sales account, sales returns, c customer account, sales account, d sales returns, customer account 32 An entry on the left side of a nominal account represents: a income or expenditure, b only income, c income or gain, d expense or loss 33 Which of the following is true: a balance of real account, personal account and nominal account are carried over to the next accounting period b debit side of the cash book is called payment and credit side is called receipt c discount allowed by the creditor is recorded on the payment side of the cash book d a person who owes a firm some amount is called debtor. 34 Process of transfer of an entry from the journal to ledger is called: a posting, b journalizing, c summarizing, d recording 35 If cash is deposited in the bank, in a three column cash book, it will be recorded on: a payment side of the cash book, b receipt side of the cash book, c both sides of the cash book d it will not be recorded as it represents a contra entry 36 Cash which is not due as income of the business is not credited to income under system and cash received whether due or not is taken as income of the business under system: a accrual, accrual, b accrual, cash, c cash, accrual, d cash, cash 37 A firm charges depreciation of Rs.10000 for the first two years on an assets. In the 3 rd year it charges Rs.5000 and in the 4th year Rs.8500. This is considered undesirable because of application of: a convention of conservatism, b convention of consistency, c convention of materiality, d convention of full disclosure 38 While recording a transaction, when it is not clear whether it is on cash basis or on credit basis, what would be done: a it will be taken as a cash transaction, b it will be taken as a credit transaction c it will not be recorded as it will create confusion, d it will be recorded after talking to the originator 39 A cash book is of different types such as (a) simple cash book (b) double column cash book (c) three column cash book a a to c all, b only a and b, c only a and c, d only b and c 40 Bank paid some interest to the party. Firm deposited one cheque with the bank. The entry in respect of these two would be made first by and respectively: a bank, bank, b bank, firm, c firm, firm, d firm, bank 41 The bank pass book shows a balance of Rs.30000. Its comparison with the cash book shows that bank has debited a sum of Rs.100 as incidental charges and a cheque of Rs.2000 issued by the firm has not been paid by the bank so far. The balance as per cash book is : a 32100, b 31900, c 2 7 9 0 0 , d 28100 42 The comparison between bank pass book and cash book shows that bank debited a cheque of Rs.3000 to firm's account while the cheque related to some other firm's account. A cheque of Rs.2000 deposited with the bank has not been credited so far. The balance in firm's Overdraft account as per cash book is Rs.40000. The balance in the pass book would be Rs. a 45000, b 41000, c 39000, d 35000 43 (a) Credit balance of the pass book means it is a deposit account (b) credit balance of the cash book means it is an overdraft account (c) debit balance of the pass book means it is an overdraft account (d) debit balance of the cash book means it is an overdraft account: Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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a a to d are correct, b a to c only correct, c a, c and d only correct, d b to c only correct 44 When balance in the cash book is the starting point, the cheque deposited and not credited by the bank are__: a a d d e d , b dedu cted , c not changed, d none of the above 45 is the statement showing debit and credit balance taken from ledger including cash and bank balances as on a particular date: a reconciliation, btrial balance, c profit and loss account, d balance sheet 46 Posting of correct amount has been made but on the wrong side. This is an error of a omission, b c o mm i s si o n , cprinciple, d compensating error Name which of the following errors are not error of commission: 47 a wrong amount has been posted, b correct amount has been posted on the wrong side of the account c a mistake has been made while balancing the ledger account, d a sale of goods has been made for Rs.500, but not entered in sale journal One sided error has been located before preparing the trial 48 balance, it can be rectified by: a changing the balance of trial balance, b increasing the balance in the individual account c decreasing the balance in the individual account, d correcting the posting in the concerned account A firm finds that during the last month of the year an amount of Rs.3500 received as cash from 49 XYZ has been posted as Rs.5300 to their account. The entry will be rectified: a no journal entry if the correction is to be made before trial balance, b debit XYZ account and credit suspense account if trial balance has been made, c debit XYZ account and credit suspense account if trial balance has been made, d all the above 50 At the end of each financial year all accounts of and_ are transferred to trading and profit & loss account, called closing entries: a assets, liabilities, b income, liabilities, c expenses, assets, d income, expenses 51 An expenditure which helps in generating revenue for more than one year is called _ expenditure and an expenditure which generates the revenue in the same year is called expe nditure: a revenue, capital, b capital, revenue, c capital, capital, d revenue, revenue 52 Which of the following expenses is not a deferred revenue expenditure: a huge advertisement expenses to promote a new product, b expenses incurred on raising capital through public issue by a company, c purchase of machinery on credit from supplier, d expenses for formation and registration of a company 53 A firm had purchased few items at different prices of Rs.50, Rs.60, Rs.70, Rs.80 and Rs.90. What is the rate of valuation of the goods as per average cost method: a Rs.70, being the middle item, b Rs.70 being the average of all items, c Rs.50 being the base item to be purchased, d Rs.90 being the last item to be purchased 54 A company came out with a public issue of 2 lac shares of Rs.10 each payable as application money @ Rs.3 and allotment money @ Rs.3. Final call amount has also been called which has not been received on 4000 shares. What would be amount of calls in arrears? a Rs.16000, b Rs.18000, c Rs.24000, d Rs.40000 55 Which of the following parties in a bill of exchange do match: a drawer — the person who orders the other person to make payment, b payee — the person who is to make payment, c drawee — the person who is to receive the payment as per order of the drawer, d none of the above 56 X draws a bill of exchange on V for Rs.5000 payable 60 days after date of the bill. He discounts the bill with his bank and pays discount of Rs.50. What will be the journal entry: a debit Y, credit bank and discount, cdebit bills b debit bank and discount, credit bills receivable, receivable, credit bank and discount, d debit bills receivable & discount, credit bank 57 Which of the following statements is not true: a amount of bill is received by the payee, b drawee is the maker of a bill of exchange, c acceptance by the drawee is compulsory in usance bill, d before acceptance of a bill, the drawee is not liable on the bill credit balance 58 If closing balance appears on the debit side of an account, it is said to have a : a only b debit balance only c credit balance or debit balance d none of these is correct 59 A company came out with a public issue of 2 lac shares of Rs.10 each payable as application money @ Rs.3 and allotment money @ Rs.3. Final call amount has also been called which has not been received on 4000 shares. In this problem, what would be the amount that would be credited to capital reserve after forfeiture? a Rs.16000, b Rs. 24 00 0, c Rs.40000, d Rs. 4000 60 While making the posting, the staff-of a firm credited the personal account of the partner instead of the account of the firm. This would be called: a error of principle, b error of omission, c compensating error and error of commission d none of the above 61 After allotment of shares by a company when the allotment money is made due, it is debited to which of the following accounts: Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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a

share capital account, b share application account, c share allotment account, d bank account

62 The provisions regarding issue of shares at a discount are contained as per : a Section 56 of Companies Act 1956, b Section 79 of Companies Act 1956, c Section 90 of Companies Act 1956, d Section 125 of Companies Act 1956 63 The closing stock given in the trial balance is transferred to which of the following accounts: a trading account, b profit and loss account, c manufacturing account, d balance sheet 64 A firm paid cartage of Rs.200 on account of transportation of newly purchased machinery to the cartage account. The error in the problem, would be called: a error of principle, b error of commission, c error of omission, d compensating error 65 While posting the transaction, the Accounts clerk of a firm posted an entry of Rs.9957 to an account as Rs.9597. This will be known as: a error of omission, b error of commission, c error of principal, d compensating error 66 If a company decides to forfeit the partly paid share, the amount will be debited to which of the following: a share forfeiture account, b share capital account, c calls in arrear account, d share application account 67 If there is loss to the goods, which of the following statement is correct in case of hire purchase and instalment sale: a loss to be borne by the seller in hire purchase and by the buyer in case of instalment sale b loss to be borne by the buyer in hire purchase and by the seller in case of instalment sale c loss to be borne by A the seller in hire purchase and by the seller in case of instalment sale d loss to be borne by the buyer in hire purchase and by the buyer in case of instalment sale 68 firm purchases old machinery for Rs.3 lac and incurs Rs. 500 on its transportation, Rs.4500 on installation and Rs.15000 on its repair. Its expected useful life is estimated for 5 years and scrap value Rs.20000. In this problem, what will bethe WDV at the end of 3'd year: a Rs.140000, b Rs.150000, c Rs.160000, d Rs.180000 69 A firm purchases old machinery for Rs.3 lac and incurs Rs. 500 on its transportation, Rs.4500 on installation and Rs.15000 on its repair. Its expected useful life is estimated for 5 years and scrap value Rs.20000. What will be amount of annual depreciation on SLM basis: a Rs.40 000, b Rs.5000 0, c Rs.60000, d Rs.80000 70 A firm purchases old machinery for Rs.3 lac and incurs Rs. 500 on its transportation, Rs.4500 on installation and Rs.15000 on its repair. Its expected useful life is estimated for 5 years and scrap value Rs.20000. What is the amount that would be taken for calculation of amount of depreciation: a Rs. 3.20 lac, b Rs.3.00 lac, c Rs.2.95 lac, d Rs.2.80 lac 71 The balance as per cash book of a firm is Rs.60000 and it is observed that bank has not credited the amount of Rs.5000 deposited as cash. Bank has credited Rs.30 as commission refund. What is the balance as per pass book. a 65030, b 55030, c 54970, d 60000 72 What is the amount of commission that the sales manager would get @ 10% of net profits after charging such commission, if the net profits are Rs.2.20 lac? a Rs.200, b Rs.2000, c Rs.2200, d Rs.20000 73 If the machinery is sold for Rs.150000 at the end of 3'd year, what will be the profit or loss on sale of this machine? a Profit Rs.10000, b Profit Rs.20000, c Loss Rs.20000, d No profit no loss 74 The pass book of the firm has been showing debit balance of Rs.75000. It is observed that the bank has not debited a cheque of Rs.1000 issued by the firm and has debited Rs.300 on account of interest. What is the balance as per cash book. a 75700 Dr, b 76300 Dr, c 76300 Cr, d 75700 Cr 75 The bank account pass book of XYZ has been showing a balance of Rs.30200. One of the debtors of the firm has deposited Rs.3000 directly in the account of the firm which bank has credited to the account of one of the partners. What is the balance as per cash book ? a Rs.30200, b Rs.27200, c Rs.33200, d Rs.26800 76 Depreciation is the result of (a) wear and tear due to use (b) fall in market price (c) obsolescence (d) passage of time: a a to d all, b a to c only, c b to d only, d a, b and only 77 An asset is purchased for Rs.4 lac on 1.10.2005 and its' rate of depredation is 10% at diminishing value. Its amount of depreciation during the year and written down value at March 31, 2008 would be: a 38000, 342000, b 35900, 325900, c 34200, 307800, d none of the above account: 78 A bills payable account is account and bills receivable account is Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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a real, real, b personal, personal, c real, personal, d personal, real 79 A computer and its related equipment is purchased for Rs.50000 with 3 years' expected useful life and Rs.2000 as salvage value. On this, depreciation is charged on sum-of-the year's digit method. Amount of depreciation in the first year would be: a Rs.16000, b R s. 24 00 0, c Rs.8000, d Rs.16667 80 The depreciation is calculated on the basis of (original cost / depreciated value) in caseof (straight line method / written down value method).Which of the following does match: a original cost, written down value method, b depreciated cost, straight line method, c depreciated cost, both the methods, d original cost, straight line method 81 The promoter brings capital of Rs.10000 out of which he purchases furniture worth Rs.2000. The balance sheet of the firm will show: a capital at Rs.8000 & furniture at Rs.2000, b capital at Rs.10000 & furniture at Rs.2000, c capital at Rs.10000 & furniture at Rs.2000 & cash Rs.8000, d capital at Rs.8000 & furniture at Rs.2000& cash Rs.10000 82 Which of the following error will be disclosed by the trial balance: a Omitting to post an amount from a subsidiary book, b Omitting to post the totals of subsidiary books into the ledger c Omission in writing the cash book balance in the trial balance, d all the above 83 In the sharing ratio of respective parties, which is not correctly matched: a proprietorship firm — entire profit belongs to promoter, b partnership firm — in all cases, the profit of partners is equal, c company members share profit in the form of dividend, d none of the above 84 Which of the following'accounts will definitely show debit balance: a machinery purchased, b discount allowed, above

c

goods purchased,

d all the

85 A company came out with a public issue of 1 lac shares of Rs.10 each payable Rs.4 as application money, Rs.4 as allotment money and Rs.2 as 1 st and final call. The company has received applications for 2 lac shares. If the company decides to forfeit the partly paid shares, the amount that will be transferred to capital reserve account would be : a Rs.4000, b Rs.8000, c Rs.32000, d Rs.40000 86 A company came out with a public issue of 1 lac shares of Rs.10 each payable Rs.4 as application money, Rs.4 as allotment money and Rs.2 as 1 5t and final call. The company has received applications for 2 lac shares. How much amount would be credited to the share capital account : a Rs. 1 lac, b Rs. 4 lac, c Rs.8 lac, d Rs.10 lac Which of the following account in the books of a firm, will not record credit balance: a partners' capital account, b current account with the bank, c sales account, d commission received 88 Which of th e following are advantages of accounting in a computerized environment: a costly computer stationery & hardware, b computer virus , c error-free accounting, d qualified staff required 89 Banks prepare their balance sheet as per provisions of Section _ of Banking Regulation Act in the format laid down by RBI as per Form ___: a 29, Form I, b 30, Form A, c 29, Form A, d 29, Form B 90 As per Rule 15 of Banking Regulating (Companies) Rules, banks have to publish their balance sheet and profit and loss account in newspaper/s within _ months from end of the period to which they relate: a) 1 news paper, 3 months, b) 2 newspapers, 6 months, c) 2 news papers, 3 months, d) 1 news paper, 6 months 91 Which of the following can be treated as indirect expense: a personal expenses of the proprietor, b selling expenses,c carriage inward d all the above 92 Which of the following items in a bank balance sheet is not placed under 'other assets" a inter-office adjustments (net), b interest accrued, c stationery and stamps d investment in subsidiaries 93 Which of the following statements regarding bank deposit is not correct: a interest paid on deposits which is accrued and not due, is not be shown in other liabilities b matured time deposits are to treated demand deposits' c deposits under special deposit schemes to be shown under term deposit even when they mature d deposit from banks including deposits from those banks even that have no presence in India. 94 In bank balance in Schedule 9, the advances are shown in the following heads (a) bills discounted and purchased (b) cash credit, overdrafts and loans payable on demand (d) term loans (d) other loans: a only a to o b only b to d, conly a, c and dd a to d all 95 The series of fixed payments paid or received by a persons at specified frequency over a fixed period of time are called: a instalments, b annuities, c maturity payments, d sinking funds 87


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96 Which of the following formula for calculation of compounded interest is not matched: a P (1+r) = for calculation of annual compounding, b P {1 + (r/4)} 4 = for calculation of quarterly 2 compounding, c P {1 + (r4)} = for calculation of half-yearly compounding, d P {1 + (r14)} 12 = for calculation of weekly compounding 97 A person invests some money in bonds on which interest would be received by him on half-yearly basis at the end of each 6th month. Such payment can be said to be: a at the end annuity, b at the beginning annuity, c ordinary annuity, d sinking annuity 98 To ensure that a company is following the Accounting Standards in India, is the duty of which of the following: a Company management, b Company Secretary, c Auditors of the company d all the above 99 A firm has been changing its depreciation policy after every 2-3 years. It is violating, which of the following concept: a conservation concept, b consistency concept, c accounting period concept, d historical cost concept 100 Which of the following is not correct in connection with a bond: a a bond is a negotiable promissory note, b rate of interest on a bond is fixed and called coupon rate c bond is redeemable any time, d expected cash flow from bond include interest payments plus the repayment of principal 101 Ramesh has the option of investing Rs.60000 at 10% p.a. with annual compounding for 3 years. it will fetch him maturity value of Rs.96000. What will be the gain or loss of Ramesh in terms of the present value. a Rs.19600 loss, b Rs.22070 loss, cRs.16090 profit, d Rs.16140 profit 102 Which of the following is a correct statement: a conversion of future value into present value, at a given discount rate, is called compounding b conversion of present value into present value, at a given discount rate, is called discounting c conversion of future value into present value, at a given discount rate, is called hedging d conversion of present value into future value, at a given discount rate, is called compounding 103 A difference (deficit of surplus) between the total amount of present value of future cash flows and initial investment in the project is called: a internal rate of return, b net present value, c pay back, d return on the project 104 An investment of Rs.140000 is made in a project that generates a profit of Rs.60000 each in the 1st year 2nd year 3rd year and 4th year. What is internal rate of return (IRR) of the project: a 2Z98%, b 23.22%, c 24.65%, d 25.68% 105 On the basis of Internal Rate of Return, under what situation a project should be taken up for investment: a when IRR = market interest rate, b whe n IRR < cap it al c ost , c when IRR > capital cost, d when IRR = capital cost 106 In which of the following methods of depreciation, the amount of depreciation remains same throughout the life of the asset: a machine hour method, b written down value method, c straight line method, d diminishing balances method 107 An equipment costing Rs.1 lac with a useful life of 5 years was purchased. Its salvage value is estimated at Rs.10000. What is the amount of depredation for the 2nd year and 5th year at double declining balance method. a 24000, 2960, b 25000, 3000, c 26000, 3140, d 28000, 3360 108 The depreciation under sum of year's digit (SYD) is calculated with the help of which of the following: a (written down value — salvage value) x (remaining useful life I sum of year's digit ) b (original cost — salvage value) x (sum of year's digit I remaining useful life) c (written down value — salvage value) x (sum of year's digit / remaining useful life) d (original cost — salvage value) x (remaining useful life / sum of year's digit ) 109 An equipment has original cost of Rs.100000 with a salvage value of Rs.25000 and useful life of 5 year. Calculate depreciation for the 2nd year by using sum of year's digit (SYD) method. a 20000, b 22000, c 25000, d 26600 110 Which of the following statement is correct in the context of book keeping and accounting: Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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a accounting deals with recording of transactions of business and book keeping deals with the interpretation, b book keeping deals with recording of transactions of business and accounting deals with the interpretation, c book keeping and accounting deals both with recording of transactions of business and their interpretation, d book keeping deals with recording of transactions of business and accounting deals with the audit of those transactions. 111 Which of the following accounting concept is observed at reporting stage and not at the recording stage: a money measurement concept, b cost concept, c consistency concept, d dual aspect concept 112 The valuation of assets is done at their cost price or market price, as per which of the following accounting standards: a money measurement concept, b going concern concept, c cost concept, d dual aspect concept 113 Prepaid expe nses a nd outstanding expenses are t aken into account by a firm on the basis of which of the following concept: a money measurement concept, b accrual basis of accounting, c cost concept, d dual aspect concept 114 Accounting standards are prescribed by: a Govt. of the country, b Central Bank of the country, c Professional accounting bodies of the country, d Tax departments of the country 115 Which two accounts in the following financial transactions do not match: arent paid to landlord — rent & cash, b goods given as a free sample — sales & advertisement, c goods lost in transit — abnormal loss & trading, d purchase of computer from XYZ on credit — computer & XYZ. 116 Out of the following accounts, which one is a personal account: a expenses made for advertisement, b interest received from X, c commission payable to Y d rent paid to the landlord 117 Which among the following is a book of prime entry (a) journal (b) cash book (e) subsidiary books a a and b only, b b and c only, c a and c only, d a to c all 118 Which of the following is a rule for debit and credit in case of a real account: a debit the giver and credit the receiver, b debit what comes in and credit what goes out, c debit all expenses and credit all incomes, d debit all assets and credit all liabilities 119 A firm has purchased a patent right from a reputed company. This will be treated as: a real account, 'b personal account, c personal account in representative category d nominal account 120 Which of the following is not a method of preparation of trial balances: a totals method, b balances method, c totals and balances method, d none of the above

ANSWER - PRACTICE PAPER NO. :4 01 07 13 19 25 31 37 43 49 55 61 67 73 79 85 91 97 103 109 115

c c a d b a b b d a c a a b c b c b a b

02 08 14 20 26 32 38 44 50 56 62 68 74 80 86 92 98 104 110 116

d d d c d d a b d b b a d d b d c d b c

03 09 15 21 27 33 39 45 51 57 63 69 75 81 87 93 99 105 111 117

a b d c c c a b b b d c a c b c b c c a

04 10 16 22 28 34 40 46 52 58 64 70 76 82 88 94 100 106 112 118

B d d b d a b b c a a b a d c a c c b b

05 11 17 23 29 35 41 47 53 59 65 71 77 83 89 95 101 107 113 119


d b a b c c d d b b b b c b c b d a b a

06 12 18 24 30 36 42 48 54 60 66 72 78 84 90 96 102 108 114 120

d a c b c b a d a c b d b d b d d d c d

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PRACTICE TEST PAPER NO. 5 ( TEST YOUR SELF ) 01 Which of the following items are shown in the other liabilities in the balance sheet (a) unexpired discount (b) outstanding charges like rent (c) deposits of staff like security deposit (d) margin deposits: a atocall atodall, c a, b and d onlyd b to d all 02 A joint stock company's features include (a) artificial person (b) perpetual succession (c) limited liability (d) common seal a atocall b atodall, c a, b and d only d to d all 03 Classification of companies can be (i) on the basis of incorporation (ii) on the basis of ownership (iii) on the basis of liability. These companies may be (a) public company (b) company limited with shares (c) subsidiary company (d) foreign company. Which of the following does not match. a ii b iii c iv d i 04 A company had come out with a public issue of 20000 shares of Rs.10 each payable Rs.2 with application and balance on allotment. The called up capital of the company is Rs.: a 200000 b 160000, c 40000 d 4000 05 The shares that can be purchased by an employee at a predetermined price at the time of a public issue is called: a rights shares, b preference shares, c employees' stock option scheme, d sweat equity 06 A joint stock company prepares its balance sheet as per Part , Schedule of Companies Act 1956: a A, IV b I, VI, c I, IV d V, V 07 To make provision on bad debts, which of the following journal entry is correct: a debit the profit & loss account and credit the bad debt account b debit the profit and loss account and credit provision on bad debts account c debit the provision account and credit the bad debt account d debit the provision account and credit the account of individual customer 08 When the future cash flow from a project is discounted, the project can be accepted if: a the net present value is zero or negative, b the net present value is negative c the net present value is zero or positive, d the net present value is more than one only 09 Internal rate of return (IRR) is the ______ rate at which the net present value of the cash flows from a project is ____________________ a return rate, less than one, b d iscount rate, more than one ' c discount rate, zero d discount rate, less than one 10 The estimated value of an asset at which it can be disposed of after a given no. of years of useful life is called: a depreciated value, b written down value, c salvage or residual value, d net value 11 A fixed asset is purchased for Rs.1 lac with expected useful life of 5 year s. its depreciat ed value at the end of 3rd year will be Rs._. If it is sold for Rs.45000, the firm will make profit I loss of Rs. a Rs.60000, loss, Rs.15000, b Rs.40000, profit, Rs.5000, c Rs.40000, loss, Rs.5000, d Rs.60000, profit, Rs.15000 12 Business transactions are recorded on the basis of certain set of rules and criteria, which are called: a double entry book keeping, b single entry book keeping, c accounting standards, d any of the above 13 Which of the following accounting standard prescribed by ICAI in India does not match the description: a AS 17 — segment reporting, bAS 26 — Intangible assets, c AS 09 — Revenue Recognition d AS01 — cashflow statement 14The accounting method in which the profit representsthe excess of receipts over the expenditure: a cash method, b accrual method, c single entry method, d none of the above 15 Which among the following is not a correct statement: a InIndia the accounting standardsare issued byAccounting Standard Board under ICAI, b Compliance with accounting standards is the duty of Auditor, c Single entry system is a scientific method of accounting d accounting standard 6 relates to depreciation accounting 16 Health of the proprietor which affects the business activity and hence the profit is not recorded in the books due to which of the following: a business entity concept, b money measurement concept, c realization concept, d going concern concept 17 When a business earns profits, these are shown in the balance sheet as: a capital, b reserves and surplus, c cash in hand, d cash at bank 18 Name the accounts involved in the following transaction i.e. the firm has purchased machinery from XYZ, for cash: a cash & XYZ, b XYZ and machinery, c cash and machinery, d cash, XYZ and machinery Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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19 Which of the following is a correct statement regarding a cash book (a) it is book of original entry (b) it is subsidiary book and a ledger account also (c) it records all cash transactions (d) the fundamental rule that each entry should be first recorded in the book of prime entry and then posted applies to cash book also: a a to d all correct, b a, b and c are correct, b, c and d are correct, d a, b and d are correct 20 The accounting cycle of business transactions follows the following order: a summarising - recording — classifying, b classifying summarizing- recording, c recording classifying – summarizing, d none of the above 21 When two sides of an account are equalized by putt ing the difference on the side where amount is short, the process is called: a balancing, b jou ma lising, c posting, d a or c 22 The debit balance of an account may represent either an asset or an expense. Which of the following is not correct in connection with the debit balance: a cash account – assets, b rent account – expense, c pre-paid expenses – asset, d pre-operative expenses – expense 23 The accounts showing transactions with persons like customers, suppliers, banks, owners etc. are categorized as personal account. Which of the following is not a sub-category of such accounts: a natural personal account, b artificial personal account, c representative personal account d real personal account 24 Which of the following accounts is not a real account: a machinery, b land, c b a n k , d c a s h 25 A firm has incurred huge expenditure on advertisement the benefit of which would be available for few years. It debits its profit and loss account for a part of the amount while the other part is not debited. These two parts would be classified as: a both nominal accounts, b first as real account, 2nd personal account, c first nominal account, 2" representative personal account, d both personal accounts 26 Which of the rule for debit or credit of account is properly matched out of the following: a personal account — debit the giver, b real account — debit what goes out, c nominal account — credit all income or gains, d none of the above 27 Debit in real account means (a) the value of the asset whose account is being debited has increased (b) the value of the asset whose account is being debited has decreased (c) business has acquired more of that asset (d) business has sold that asset: a a or c only, b b or c only, c a or d only, d cord only 28 A nominal account has been debited which signifies that (a) there has been some expense (b) there has been some loss (c) some income has diminished (d) some profit has diminished: a atodall, b a, b and c only, c b and c only, d a and d only 29 Which of the following statement is true with regard to debit or credit to cash book: a debit side of the cash book is called payments side, b credit side of the cash book is called receipt side c credit side is payment and debit side is receipts, d debit side is payment and credit side is receipts 30 The left hand side of an account is calledand right hand side entry is called _______: a debit, credit, b credit, debit, c both credit, d both debit 31 Which of the following is not correct: a cash is a real account, b bank account is a personal account, c journal is a book of original as well as secondary entry, d short description of a transaction is called narration 32 Name of the account book where the individual records of expenses, assets and persons are maintained is called: a cash book, b journal, c ledger, d all the above 33 Wages paid to Mohan, the peon is to be credited toand cash received from a debtor being payment of goods sold would be debited to : a Mohan, debtor, b cash, debtor, c cash, cash, d Mohan, cash 34 A business firm can adopt an accounting procedure which it has to follow later on also due to which of the following accounting concepts: a convention of conservatism, b convention of consistency, c convention of materiality d convention of full disclosure 35 The double entry accounting system (a) keeps a complete record of business transactions (b) it ensures arithmetical accuracy (c) balance sheet can be prepared at the end of year only by using this system (d) system being scientific, eliminates the commission of fraud. a a to d all, b only a, b and c, c only b, c and d, d a, b and c only 36 The accrual system of income recognition makes distinction between: a cash received and cash not received, b cash paid and cash not paid, c cash received and right to receive the cash, d cash actually received and cash yet to be received Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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37 Machinery account has been showing a balance of Rs.2.70 lac. An entry of Rs.0.30 lac is made on right side of this account.Thiswill (increase/ decrease) the balance which would be a decrease, Rs.3.00 lac, b increase, Rs.3.00 lac, c decrease, Rs.2.40 lac, d increase, Rs.2.40 lac 38 The balance of cash book and the balance as per pass book of the bank are required to be reconciled because of, which of the following reasons (which is not true): a some entries are recorded in the pass book first and cash book later on b some entries are recorded in the pass book later and cash book first c some entries are recorded either in the pass book or the cash book with delay d some entries are recorded in both the books, before date of reconciliation 39 A cheque is issued by a firm but not presented, while the other cheque drawn in its favour, is deposited by the firm with the bank.In the first case the entry will be first made by the in 11d its books and for the 2 case, entry will be first made by the a bank, firm, b firm, bank, c bank, bank, d firm, firm 40 For the purpose of reconciliation statement, if there is positive balance, it appears on _ side of in the cash book and ____side in the pass book: a debit, credit, b credit, debit, c debit, debit, d credit, credit 41 When pass book has a higher balance than the cash book and account is a current account with the bank, this may be on account of: a cheque issued by the firm and not paid by the bank b bank might have credited some amount to firm's account without information to the firm c some customer of the firm might have deposited some amount in the account without information to the firm d all the above 42 (a) credit balance as per cash book means overdraft (b) direct deposit by a firm's debtor in the bank is first recorded by the bank (c) debit of bank charges by the bank reduce the balance-In-thecontext of reconciliation, which of these is correct: a a to da ll, b a and b only, c b and c only, d a and c only 43 Bank reconciliation statement is : a ledger account, b part of the cash book, c astatement showing difference between the balance in the pass, d book and cash book, d a statement of position of balance of two books 44 The receipt side of the cash book is overcast by Rs.100 and the overdraft as per pass book is the starting point. The amount of Rs.100 will be: a added, b red uce d, c kept unaltered, dnone of the above 45 In gross trial balance, which of the following is taken (a) total of debit columns of each ledger account (b) total of credit columns of each ledger account (c) total of receipt of cash book (d) total of payment of cash book: a a to d all, b only a and b, c only c and d, d only a and c 46 Trial balance remains untallied due t o errors. Various types of errors can be (a) error of omission (b) error of commission (c) errors of principal (d) intentional errors: a a, b and c only, b a, c and d only, c b, c and d only, d atodall 47 XYZ had purchased certain goods from ABC firm but these were not recorded in the purchase journal. This is error of . It will (affect / not affect) the trial balance: . a omission, affect, b compensating, not affect, c principle, affect, domission, not affect An error that nullifies the wrong effect of another error is called 48 a omission, b commission, c principle, d compensating error 49 Goods purchased from Ramesh Kumar have been recorded in the sales register. a no rectification is required, b rectification can be done by making the correct, c rectification can be made by passing a journal entry debiting the sale account by Rs.500 and debiting the purchase account by Rs.500 and crediting the Ramesh Kumar account by Rs.1000, d rectification can be made by passing a journal entry debiting the sale account by Rs.1000 and crediting the purchase account by Rs.500 and crediting the Ramesh Kumar account by Rs.500 50 A purchase of Rs.6800 has been made by the firm but the amount has been posted to creditor's account for Rs.6000. For rectification, the journal entry would be: a debit creditor and credit purchase account Rs.800, b debit purchase account and credit suspense account Rs.800 c debit suspense account and credit creditor's account Rs.800, d debit creditor's account and credit suspense account Rs.800 51 Which of the following is not true: a wrong balance of an account affect the trial balance, b closing stock does not appear in the trial balance, c trial balance is prepared after preparation of the final account, d sales are shown on the credit side of the trial balance 52 (a) a recurring expense which is to be made frequently is called a revenue expense (b) a nonCompiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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recurring expense is a capital expense (c) purchase of motor cars from the manufacturer by a dealer is a revenue expense (d) purchase of machinery by a manufacturing firm for its use is a capital expense. a a to d all correct, b a, b and c are correct, c b, c and d are correct, d a, c and d are correct 53 Which of the following expenses and their type does not match: a cost of replacement of defective part of a machinery — Revenue Expense b professional fee paid in connection with acquisition of a leasehold premises — capital expenditure c traveling expenses incurred by the Chief Executive of a company in connection with purchase of costly equipment — capital expenses d purchase of machinery for sale — capital expenses 54 A sum of Rs.3000 paid to Mr. A against acceptance was debited to account of Mr. B. The rectification can be done by : a debit to the cash account, b debit to A's account, c debit to B's account, d none of the above 55 The profits represent excess of receipts over the payment, as per which of the following accounting methods: a accrual method, b cash method, c mercantile method, d all the above 56 A company came out with a public issue of 1 lac shares of Rs.10 each payable Rs.4 as application money, Rs.4 as allotment money and Rs.2 as 1st and final call. The company has received applications for 2 lac shares. If 1SI and final call money is not received on 4000 shares, what will be amount of share capital forfeited? a Rs. 4000, b Rs.40000, c Rs.20000, d Rs.8000 57 A party draws a bill of exchange in Delhi payable in Bangalore by a foreigner and no sale or purchase has actually taken place. Such bills are called: a documentary bills, b foreign bills, c accommodation bills, d usance bills 58 A bill has been received by a drawee X from drawer Y and has been dishonoured and noted. What journal entries will be passed: in the books of the drawee: a debit bills receivable, credit Y and noting charges, b debit bills payable, credit noting charges & Y c debit bills payable & noting charges, credit Y, d debit Y & noting charges, credit bills payable 59 The book in which all particulars relating to bills accepted are recorded is called Bills (receivable/payable) book and the entry is posted to the debit of respective (debtor / creditor) a payable, creditor, b payable, debtor, c receivable, creditor, d receivable, debtor 60 Which of the following statements best explains the relationship between Journal & Ledger? a First recording in Journal and then posting to ledger completes the double entry of the transaction. b Journal is the book of original entry where as the ledger is the book of second entry. c The Journal is the book for analytical record and the Ledger is the book for chronological record. d The process of recording in the Journal is called posting, the process of recording in the ledger is called journalising. 61 A company came out with a public issue of 1 lac shares of Rs.10 each payable Rs.4 as application money, Rs.4 as allotment money and Rs.2 as lst and final call. The company has received applications for 2 lac shares. In the problem, which account would be debited and which account would be credited: a debit bank account and credit share application account, b debit cash account and credit share capital account, c debit bank and credit share allotment, d debit share application and credit share capital 62 Which of the f ollowing transactions will increase as and also decrease an asset? a Stores purchased on credit, b Stores purchased on cash, c Payment of a Promissory Note with cash, d Declaration of Dividend 63 The gene ral reserve at the time of amalgamation of firms is transferred to: a revaluation account, b account of the new firm after amalgamation, account of partners, d written off to write off goodwill etc.

c

capital

64 A company came out with a public issue of 1 lac shares of Rs.10 each payable Rs.4 as application money, Rs.4 as allotment money and Rs.2 as 1 st and final call. The company has received applications for 2 lac shares. By what amount, the bank account would be credited: a Rs. 4 lac, b Rs.8 lac, c Rs.10 lac, d nil 65 An invoice of Rs. 560 is entered in the sales book as Rs. 650/-. The correct total of the debit side of the trial balance is Rs. 21240. Assuming no other error, what is the total of the credit side of the trial balance? a 2 1 2 4 0 , b21150, c 21330, d None of these 66

The rule 'credit the giver' would be applicable in which of the following transactions:


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a

purchase of goods on credit from Mr. X, b introduction of capital by the promoter, c salary payable but outstanding, d all the above 67 A purchase of Rs. 251 from Ramesh & Co. has been entered in the purchase book as 215. Debit side of the trial balance is 17364. Assuming no other error, what should be the total of the credit column of the trial balance? a 17364, b 17400, c 17328, d None of these 68 Stock does not include a Goods in the hands of an agent, b Goods out on approval (on sale or return), c Goods sold awaiting delivery to the buyer, d Goods (Meant for re-sale) 69 What is the amount of Operating Expenses when: Sales — Rs. 14900, Gross Profit — Rs. 3300 and Net Loss — Rs. 500 a 2 8 0 0 , b 3800 , c 11100, d 11600 70 Depreciation is appearing in the trial balance of a company. While making final accounts, it should be shown in: a The Profit & Loan A/c, b The balance sheet as a deduction from the asset concerned, c The profit and loss account and balance sheet, d . The Profit & Loan a/c or Balance Sheet. 71 An entry of Rs. 500 was wrongly posted to wages A/c instead of Machinery Account, as wages are to be capitalised. It is an error of: a Commission, b Omission, c Principle, d Clerical 72 The provision for bad and doubtful debts at the time of dissolution of a firm is transferred to which of the following accounts: a realisation account, b capital account of partners equally, c capital account of partners in their sharing ratios d debtors' accounts 73 A firm purchased machinery worth Rs.230000 and spend Rs.15000 on its installation. Its expected useful life is 5 years when its scrap value will be Rs.45000. What is the amount annual depreciation? a 30000, b 35000, c 40000, d 45000 74 Which is a Source of Funds? a Increase in Liability, b Decrease in Liability, c Purchase of Asset, d None of these 75 Wages paid to labour have been credited to wages account. It is an: a error of omission, b error of commission, c error of principle, d compensating error 76 (Cost price of assets — scrap value) / no. of years of estimated life of the asset. This method of depreciation calculation is : a written down value method, b annuity method, c depletion method, d straight line method 77 Which of the following accounting entry is passed at the end of the first year in case of sinking fund method: a debit depreciation, credit sinking fund investment, b debit sinking fund investment, credit bank account c both a and b, d only a 78 An asset is purchased for Rs.2 lac. Its depreciated value is Rs.1 lac at the end of 5th year at 10%. The depreciation in this case has been charged at under method: a depreciated value, straight line method, b original cost, straight line method, c original cost, written down value method, d depreciated value, written down value method 79 Full amount of depreciation is not provided to the debit of profit and loss account in which of the following methods of epreciation: a straight line method, b written down value method, c sinking fund method, d it has be provided in case of all method 80 Group A (a) cost of a fixed asset (b) residual value (c) depreciation cost (d) estimated life. Group 13 (i) cost less residual value (ii) purchase price excluding any other type of expenses (iii) value on estimated date of disposal (iv) no. of years the asset is expected to be in use. Which of the following is not matched: a ii, b iii, c I, d iv 81 In a balance sheet, which of the following equations, is not correct: a assets = total claims called equities, b assets = liabilities + capital, c liabilities = assets - capital d Capital = assets + liabilities 82 The promoter brings capital of Rs.20000 out of which he purchases furniture worth Rs.2000 & machinery of Rs.3000. The balance sheet of the firm will show: A capital at Rs.20000 & furniture at Rs.2000, Machinery Rs.3000 and cash Rs.20000. B capital at Rs.15000 & furniture at Rs.2000, Machinery Rs.3000 and cash Rs.20000. C capital at Rs.20000 & furniture at Rs.2000, Machinery Rs.3000 and cash Rs.20000. D capital at Rs.15000 & furniture at Rs.2000, Machinery Rs.3000 and cash Rs.15000. Owner's equity is equal to: a capital + debentures + long term liabilities, b capital + 83 reserves, c fixed assets + capital, d fixed assets + capital + reserves 84 Prepaid Insurance Account is:- a An expense, b A Revenue, c An Asset, d A liability 85 The profit or loss disclosed by the accounts of a company is :- a Transferred to share Capital Alc, b Shown in the column of "Current liabilities & Provisions", c Shown in the column of "Reserves & Surplus" under a separate head, d Transferred to General Reserve, e Transferred to "Dividends payable" account Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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86 An insurance company admitted claim of a firm for Rs.4000 against the loss of goods worth Rs.1000D. The abnormal loss of Rs.6000 would be debited to which of the following: a insurance receivable account, b trading account, c profit and loss account, d company's paid up account, if it is a company, otherwise capital account 87 Which of the following errors is revealed by the trial balance? a Wrong amount entered in the book of original entry, b Wrong amount entered in the ledger account c Complete omission of an entry from the book of original entry, d All of the above 88 Which of the following does not match in the context of computer based accounting: a accounting performed by computer: computerized accounting b the instructions written by the programmer for running the computer - programming c To guard against loss of data, regular copy is made called duplicate record d instructions written in the form of a computer program that destroy the information in the computer – virus 89 Balance sheet and profit and loss account prepared by a bank (a) are submitted to RBI by banks (b) within 6 months from close of the financial year (c) in three copies (d) alongwith auditor's report. Which of these is correct statement: a atodall a to c only, cb to d only d a, c and d only 90 Form B (under provisions of Banking Regulation Act) is used by banks to: a send report of CRR, b send details of SLR investments, c prepare profit and loss account d report unclaimed deposits 91 Provisions made for loan accounts are placed under which of the following item: a reserves & surplus, b other liabilities, c contingencies and provisions, a other liabilities and provisions 92 : Banks have different types of capital. What is the proper order: a authorized, subscribed, issued, paid-up, b authorized, issued, subscribed, paid-up, c authorized, paid-up, issued, subscribed, d authorized, paid-up, subscribed, issued 93 Contingency liabilities in a bank balance sheet include (a) claims against the bank not acknowledged as debt (b) liability for partly paid investments (c) guarantees given on behalf of the customers (d) liability on account of outstanding forward exchange contracts. aa to c only b b to d only, c a and d only d a to d all 94 Difference on account of incomplete recording of transactions between two branches is called . Its balance is a inter-office balance,•credit, b inter-office adjustment, debit or credit, c inter-office balance, debit d inter-office adjustment, debit 95 A person purchased a lap top for Rs.30000 by raising a loan from the bank at 12% on simple rate of interest, payable in 2 years as weekly payment. The total amount of interest would be Rs._ and the weekly instalment would be Rs___: a 7200, Rs.357.60, b 3600, Rs.357.60, c 7200, Rs.715.20, d 3600, Rs.715.20 96 When. the balance as per the cash book is starting point, in the reconciliation, the amount of cheques issued and not presented are : a subtracted, b a d d e d , c either added or subtracted, d none of the above 97 Which among the following is not correct in the context of annuity: a term of annuity — total time during which regular payments are made b payment period — the regular time periods during which payments are made c ordinary annuity — where payments are made at the end of the period d annuity date — when payments are made at the end of the period 98 A person wants to have Rs.2 lac annually for 20 years by investing the amount in an annuity with interest rate of 5%. He will have to invest: a Rs.24 lac, b Rs.2492440, c Rs. 2429000, d Rs.25 lac 99 A sinking fund can be created for using it for (a) pay a loan in lump sum (b) to redeem a bond (c) to buy new machinery (d) to replace a worn out equipment: a a to d all, b a, b and c only, c a, c and d only, d b, c and d only 100 When the required rate of return is (less than I more than) the coupon rate, the discount on the bond as maturity approaches: a more than, increases, b less than, increase, c less than, constant, d more than, declines 101. When simple rate of interest is calculated, the interest rate %age is expressed as: a Rate/100, b Rate x 100, c 100 / Rate, d 1+ rate 1100 102 Identify a personal account out of the following: a commission paid account, b machinery account, c income accrued but not received account, d cash account 103 In the case of loan obtained from the bank, the amount repayable is represented by the value and the amount taken represents the value: a present, future, b future, present, c present, present, d future, future Compiled by Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur

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104 Which of the following is not true: a principal = amount minus simple interest, b amount = principal plus simple interest, c amount = principal + (principal x interest rate% x time), d none the above 105 A principal amount of Rs.40000 becomes Rs.44400 at simple interest rate of 2.75% p.a. in a period of: a 2 years, b 3 years, c 4 years, d 5 years 106 Amount = Principal (1+r)n is the formula for calculation of: a simple interest, b floating interest, c compound interest, d annuity 107 In which of th e following, normally, the closing stock is not included: a trial balance, b profit and loss account, c balance sheet, , d none of the above 108 In the context of Rule of 72, which of the following is correct: a if amount of principal is divided by 72, it gives the rate of interest and period, to double the principal b if 72 is divided by the principal, it gives the rate of interest and period to half the principal c if 72 is divided by the rate of interest, it will provide the period to double the principal d if 72 is divided by the period, it will provide the rate of interest, to half the principal 109 Where regular payments are required to be made or received for a fixed period of time in the beginning of each period interval, this is called: a perpetuity, b ordinary annuity, c annuity due, d sinking fund 110 Mr.Satish has decided to invest Rs.7500 every year for the next 3 years at prevailing rate of 10% p.a. Calculate the present value of the amount he is to receive at the end of the period: a 18650, b 16850, c 19560, d 17550 111 Which of the following statement is correct: a present value of annuity due is lower than the present value of ordinary annuity. b present value of annuity due is higher than the present value of ordinary annuity. c present value of annuity due is equal to the present value of ordinary annuity. d present value of annuity due can be higher or lower than the present value of ordinary annuity depending upon the circumstances. 112 The payment side of the cash book is overcast by Rs.500 and starting point is overdraft as per passbook. a the amount would be subtracted, b the amount would be added, c the amount will neither be added nor subtracted, d the amount will be either added or subtracted. 113 Which of the following statements is correct in the context of interest rate: a compound interest is cheaper than the simple interest, b less frequent is the period of compounding, higher is the amount of interest, c frequent the period of compounding, higher is the amount of interest, d the effective rate is always less than the given annual compound rate. 114 When a bond matures, its maturity value is known as:- a maturity value, b redemption value, c face value, d coupon value 115 The coupon rate is (which of the following is correct) a rate of return on a debenture, b fixed rate of interest on a bond, c yield to maturity on a bond, d current yield of the bond 116 Which of the following best matches the description of a zero coupon bond: a it is issued at par in which interest is included and not paid in cash, b it carries a fixed rate of interest c it is issued at a discount to face value, without any interest payment, d any of the above 117 On which of the following instruments only interest is paid and the instrument has no maturity period: a annuity, b perpetual bond, c negotiable bond, d zero coupon bond 118 A bond issued for Rs.10000 for 5 years carries a coupon of 15%. With current market interest of 10%, what is the value of the bond: a 11974, b 13068, c 11896, d 10470 119 When a firm is not been able to locate the difference in the totals of trial balance and wants to prepare the final accounts: a it will ignore the difference, b the difference will be placed in the suspense account, c the difference will be placed in any account having substantial balance, d the difference will be adjusted to the capital account 120 Interest rate elasticity is calculated as under: a %age change in maturity value of bond in period t / % change in the yield to maturity for a bond I b %age change in price of bond in period t / % change in the yield to maturity for a bond I c %age change in price of bond in period t / % change in the maturity value for a bond I d total age change in price of bond in period t I % change in the yield to maturity for a bond


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Jaiib Made Simple-paper 2

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