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TOPICS BANK RECONCILIATION TRIAL BALANCE CAPITAL & REVENUE EXPENDITURE INVENTORY VALUATION BILLS OF EXCHANGE CONSIGNMENT ACCOUNT JOINT VENTURE LEASING & HIRE PURCHASE NON-TRADING ORGANISATIONS DEPRECIATION MODEL QUESTIONS
Bank Reconciliation statement Meaning Causes of differences
Cheque issued but not presented for payment Cheque deposited but not yet realized Bank charges Interest on saving bank Int. on overdraft Amount directly collected by bank Amount directly paid by bank on Std. Instructions Dishonor of a Cheque Direct payment into bank by customer errors
BANK RECONCILIATION STATEMENT
BANK RECONCILIATION( B. R. ) IS BASED ON THE PRINCIPLE OF DOUBLE ENTRY.
CREDIT THE GIVER AND DEBIT THE RECEIVER
B. R. SHOWS CAUSES OF DIFFERENCES BETWEEN CASH BOOK AND PASS BOOK BALANCE
DEBIT BALANCE AS PER CASH BOOK IS CREDIT BALANCE AS PER PASS BOOK = POSITIVE BALANCE
CREDIT BALANCE IN CASH BOOK IS DEBIT BALANCE IN PASS BOOK = NEGATIVE BALANCE/OVERDRAFT
EXAMPLES M/s Shekhar Enterprises .was maintaining account with KRB
Bank Ltd. On 31st December,2006, Bank column of cash book of company showed a debit balance of Rs. 26000. Cheques deposited into the bank but not credited before 31st December,2006 amounted to Rs.4000Bank charges of Rs. 500 were debited by the bank but no entry was made by the accountant of the company.
From the above particulars, find out the balance as per KRB Bank’s books.
Rs.30500 Rs.25500 Rs.21500 Rs.22500
EXAMPLESWhen overdraft as per cash book and a Cheque of Rs.1000 directly
deposited in the bank, but not recorded in cash book----
a) Add Rs.1000 in CB
b) Deduct Rs.1000 in CB
c) Add Rs.2000 in cash book
d) Deduct Rs.2000 in CB
Undercasting of the credit side of Cash Book has the same effect as overcasting of the–
• Debit side of the pass book.
• Credit side of the pass book.
• There is no relevance between the two
Trial Balance(TB)- Rectification entries
Trial balance – meaning Types- gross TB, Net TB Disagreement of TB Classification of errors
Clerical errors Errors of omission Errors of commission
Posting of correct amount at wrong side Posting wrong amount at wrong side Totaling error in subsidiary book Mistake while balancing of ledger
Compensating errors
Errors of principles
Suspense account- Suspense account- After preparation of T/B Rectification when books are closed- Diff. in
nominal A/c adj. through P & L Adj. A/c- then effect on Capital A/c
Rectification of Errors-Examples(1) Rs. 5000 paid as wages for installing the machinery should be
debited to-----
Wages A/c
Machinery a/c
Capital A/c
None of the above
(2) Sales to Navin of Rs.1000 is debited to Ravin A/c. this will be rectified by-----
Debiting Navin a/c and Crediting Ravin A/c Debiting both Accounts Debiting Ravin a/c and Crediting Navin A/c Debiting Navin A/c and crediting Sales A/C
Rectification of Errors-Examples(1) Rs. 5000 paid as wages for installing the machinery should be
debited to-----
Wages A/c
Machinery a/c
Capital A/c
None of the above
(2) Sales to Navin of Rs.1000 is debited to Ravin A/c. this will be rectified by-----
Debiting Navin a/c and Crediting Ravin A/c Debiting both Accounts Debiting Ravin a/c and Crediting Navin A/c Debiting Navin A/c and crediting Sales A/C
Rectification of Errors-Examples Credit sale of Rs.5000 to Suresh is posted to his credit, then
rectification is i. Credit Suresh to the extent of Rs.10,000ii. Credit Suresh to the extent of Rs.5,000 iii. Debit Suresh to the extent of Rs.10,000iv. Debit Suresh to the extent of Rs.5000 Freight expenses for carrying New Machinery is carried to
Traveling Exp. a/c. Choose the correct rectification entryi. Debit machinery a/c and credit Traveling Exp a/c.ii. Credit machinery a/c and debit Freight Exp a/ciii. Credit profit and loss account and debit Freight Exp a/c.iv. Debit profit and loss a/c( P&L a/c) and credit Traveling Exp a/c.
Capital & Revenue Expenditure
CAPITAL REVENUE
Large amount Relatively small
Improve or enhance earning capacity
Maintain asset
Long duration benefit Short duration
Non- recurring recurring
Balance sheet item Trading /P & L A/c item
Cap. & Rev. Expenditure-Examples
(1)Cost of replacement of defective parts of the machinery is -----
a. Capital expenditure
b. Revenue expenditure
c. Deferred revenue expenditure
(2) Loss of goods due to fire Rs.8000 is a revenue expenditure because----
a. It is recurring
b. Amount involved is small
c. Loss is arising out of business operations
Cap. & Rev. Expenditure-Examples
(3) Expenditure incurred in acquiring the patents rights for the business is an example of ----
a. Capital expenditure
b. Deferred revenue expenditure
c. Revenue expenditure
(4) Professional fees paid in connection with acquisition of leasehold premises is----
a. Capital expenditure
b. Deferred revenue expenditure
c. Revenue expenditure
Examples(5)Preliminary expenses , discount allowed on issue of
shares are the examples of a. Capital expenditure
b. Deferred revenue expenditure
c. Revenue expenditure
(6) Machinery costing Rs.10,000, whose current book value is Rs.7000 is sold for Rs.12000 what is the amount of capital & revenue receipt
a. Capital receipt of Rs. 2000 & Rev. Receipt of Rs.10000
b. Capital receipt of Rs. 9000 & Rev. Receipt of Rs.3000
c. Capital receipt of Rs. 12000 & Rev. Receipt of Rs.Nil
Methods of valuation of inventory
FIFO LIFO AVERAGECOST
•Goods issued valued at earliest price•Stock valuation at latest price
•Goods issued valued at latest price•Stock valuation at earliest price
Found out by dividing total price paid by quantity received
Examples
(1)During inflation, issue of material from the stores is charged to the products at the highest price under-----
a) LIFO method
b) FIFO method
c) Average cost method
d) None of the above
(2) The ascertainment of value of stock from accounting record is known as -----
a) Periodic inventory
b) Perpetual inventory
Examples-conted.As per According to Accounting Standard 2 inventory means
tangible property helda) for sale in the ordinary course of business (finished goods)b) in the process of production for such sale (work-in-process)c) for production in the production of goods or services for sale
(Raw materials)d) Maintenance supplies and consumables other than
Machinery and spares (Components) (a), (b) and (c) above (a), (b), (c) and (d) above None of the above
Examples-conted..Q-The cost formulae recommended by Accounting Standard 2 for
valuation of inventories are- FIFO or Weighted average Standard cost LIFO or latest purchase priceQ:During the rising prices the ______ method will reflect
(FIFO/LIFO/weighted Average) lowest cost of material supplied and results in under pricing the
products Inventory is shown at the higher priced material. Lock up of large amount of working capital. Profits are inflated More liability for payment of taxes
DEPRECIATION ACCCOUNTING
Meaning Causes of depreciation Need for depreciation
To know correct profit Show correct financial position Make provision for replacement of assets
METHODS OF DEPRECIATION Straight Line Method Written Down Value Method Example: Depreciation is a reduction in the book value of all fixed assets all fixed assets excepting land all fluctuating assets both fixed and current assets all assets used in business.
Bill of ExchangeBill of Exchange Promissory Note
Unconditional order Unconditional promise
Made by creditor Made by debtor
Acceptance by debtor must No acceptance as such
Three parties to a bill Two parties to a bill
Noting is not necessary On dishonor, noting is necessary by notary public
Bill of Exchange Honoring on due date Retirement Discounting of bill Sent for collection to bank Endorsed to creditor Renewal of the bill Accommodation bill
ExamplesQ. ___________ draws a bill on __________Q. A bill of exchange is a negotiable instrument True FalseQ. Negotiable instruments can be ________from one person to
anotherQ. A bill of exchange must be in writing True FalseQ: A bill of exchange is not to be dated True False
Examples-contedQ.: The date on which the bill is payable is called its _________Q. The due date is calculated after adding __________ to the
actual period of the bill.Q. If the due date falls on a public holiday, then it becomes due on
the -------Q.A bill was drawn on 23rd Dec. 2005 for one month maturity.
What will be its due date.
Q. When a Bill of exchange or promissory note has been dishonoured for non acceptance or non payment, the holder may, within a reasonable period, cause such dishonour to be noted and certified by a notary public, such a certificate is called________
Ans.: due date, Three days of grace, Previous working day, 25th January,protest
CONSIGNMENT ACCOUNTA consignment is the dispatch of goods by its owner
to his agent for the purpose of selling.Consignor, consignee, Proforma Invoice, Account
SaleBooks of Account in the books of consignor-
Consignment A/c Consignee A/c Goods sent on Consignment
Valuation of closing stockConsigning goods at higher price
CONSIGNMENT ACCOUNT
A TYPICAL CONSIGNMENT ACCOUNT WILL APPEAR AS FOLLOWS:
DR. CR To goods sent on By consignee consignment (goods sold by (invoice value) consignee) To bank By closing stock (all expenses incurred by Consignor in transporting) To consignee (all expenses incurred by Consignee in selling) To profit & loss a/c
ExamplesQ. The possession of the goods remains with the _________, but the property in
or the ownership of the goods remain with the _________Q. : Usually the consignee recovers all ___________ by him on the consignment.Q.:Consignment account is of the nature ofa. Personal accountb. Nominal accountc. Real accountQ.When the goods are sent by the consignor to the consignee, they are
accompanied bya. Proforma invoice*b. Commercial invoicec. Account salesd. Bank draft
Consignee, Consignor, expenses incurred, nominal
Examples
Q. Where del-credere commission is paid:a) the normal commission is not payable to the consigneeb) the bad debts, if occur, are borne by the consignorc) the bad debts, if occur, are borne by the consigneed) the bad debts, if occur, are shared by the consignor and consignee
equallyQ.: The principle followed in valuations of closing stock on consignment isa) to include the expenses by the consignor onlyb) cost to the consignor plus proportionate expenses incurred till the goods
reach to the premises of the consignee plus direct expenses of consigneec) Cost plus proportionate non-recurring expenses incurred by the
consignord) Cost plus proportionate non-recurring expenses incurred by the
consignee
JOINT VENTURE Meaning Temporary partnership Accounting-when separate books
Joint Bank Account Co-venturer’s Account Joint Venture Account
Accounting-when no separate books are maintained
Joint Venture Co-Venturer
ExamplesQ.When separate set of books are kept for keeping the accounts of
Joint Venture, thena) Memorandum Joint Venture Account is preparedb) Transactions take the form of ordinary accounting systemc) Only Joint Venture and Personal accounts of the co-venturers
are maintained.d) Joint Venture, Co-venturers and Joint Bank accounts are
opened*
Q.A debit balance in Joint Venture A/c indicatesa. Profit on Joint Ventureb. Loss on Joint venturec. Amount receivabled. Amount payable
LEASING Contract between two parties Owner of an asset transfers his right of use to
other party on payment of a fixed rent periodically
Types >> Finance or Capital Lease Operating Lease Service Lease Leveraged Lease
Leasing Examples A lease which does not secure for the lessor,
the recovery of his capital outlay (original cost of the asset leased) plus a return on the funds invested during the lease term is called-----
(a) Capital Lease
(b) Operational Lease
(c) Service Lease
(d) Leveraged Lease
Leasing Examples(2) There are three parties in-----a. Capital Leaseb. Operational Leasec. Service Leased. Leveraged Lease
(3) Allocating total finance income of Rs. 30000 over the leased period of 4 years by the sum of the digit method results in-----
a. FY Rs.7500,SY Rs.7500 TY Rs.7500, FY Rs.7500 b. FY Rs.12000,SY Rs.9000 TY Rs.6000 FOURTH Y Rs.3000c. FY Rs.3000,SY Rs.6000 TY Rs.9000 FY Rs.12000 d. FY Rs.NIL,SY Rs.10000 TY Rs.10000 FOURTH Y
Rs.10000
Leasing Examples
(4) If Lease charges of the year exceed the depreciation charge of the year then-----
a. Lease Equalization account is debited (with the difference)
b. Lease Equalization account is credited (with the difference)
c. Lease Terminal Adjustment account is debited (with the difference)
d. None of the above
(5) In case operational Lease , if the total lease rent is receivable in various installments then in the first year of lease , the journal entry for total lease rent receivable, in the books of lessor is------
a. Debit Lessee account and Credit Rent Suspense a/c*
b. Debit Advance Lease Rent account and Credit Lease Rent a/c
c. Debit Bank Account and Credit Lease Rent Accountd. Debit Bank Account and Credit Advance Lease Rent Account
HIRE PURCHASE & INSTALMENT SALE
A buyer purchases goods but pays the price in various installments.
In hire purchase ownership passes to the buyer on the payment of last installment while in installment selling it passes immediately.
The hire purchase price consists of two elements a) cash price and b) interest for delayed payments
Accounting of non-trading organizations
Meaning Need for maintenance of accounts Accounts
Receipt & Payment account Income & Expenditure Account Balance sheet
DistinctionReceipt & Payment A/ct Income& ExpenditureA/c
Real Account Nominal Account
All receipts & payment in a year Only income and expenses in a year
Capital/ revenue items Only revenue items
Starts with Opening cash & end with closing cash
No op. balance but end with surplus/ deficit
current,previous and next year Current year only
Treatment of some items Donations Entrance fees Life membership fees Government grants Special fund Op. & closing. Stock of stationary Sale of fixed assets/investments Sports material Opening/closing Balance sheet Capital fund
Q.For rendering services to the public, Non Trading organizations collect moneys by way of
a) Membership and Entrance Feeb) Tuition Feec) Subscriptionsd) Donations
Q:The following financial statement is not prepared by a non-trading concernsa) Receipt and Payment accountb) Income & Expenditure Accountc) Profit & Loss Accountd) Balance SheetQ: Receipts and Payments account isa) Real accountb) Personal accountc) Nominal account
ADJUSTING ENTRIES
Some common adjustments are:1. Closing Stock2. Expenses due but not paid (Outstanding expenses)3. Expenses paid in advance (Prepaid expenses)4. Incomes due but not received (Accrued incomes)5. Incomes not due but received (Unearned incomes)6. Depreciation on assets7. Interest on Capital8. Interest on Drawings9. Interest on Loan10. Bad debts to be written off11. Provision for bad debts12. Provision for discount on Debtors13. Provision for discount on creditors14. Losses on account of accidents15. Commission payable on profit
Goods used by the proprietor1. Goods distributed as Free Samples
CLOSING ENTRIESClosing consolidated journal entries are normally passed for Transfer of all manufacturing and purchase expense to the debit side of trading
a/c Transfer of Purchases and Sales return to the debit side of Trading a/c Transfer of Sales and Purchases return to the credit side of Trading a/c Transfer of closing stock to the credit of trading account by an adjustment entry Transfer of Gross profit to the credit side of Profit & Loss a/c Transfer of Gross loss to the debit side of Profit & Loss a/c Transfer of all administrative, selling and financial expenses to the debit of P & L
A/c Transfer of all operational and non-operational incomes to the credit of P & L A/c Transfer of Net profit to the credit of Capital a/c Transfer of net loss to the debit of Capital a/c