Jaiib Accfinance c

8/7/2019 Jaiib Accfinance c

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ACCOUNTING AND FINANCEACCOUNTING AND FINANCE

BANKERSBANKERS

J A I I BJ A I I BPAPERPAPER--22

SPECIAL ACCOUNTSSPECIAL ACCOUNTS -- MODULE C MODULE C

ByByRAVI ULLALRAVI ULLAL

CONSULTANTCONSULTANT


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TOPICSTOPICS

BANK RECONCILIATIONBANK RECONCILIATION

TRIAL BALANCETRIAL BALANCE

CAPITAL & REVENUE EXPENDITURECAPITAL & REVENUE EXPENDITURE

INVENTORY VALUATIONINVENTORY VALUATION

BILLS OF EXCHANGEBILLS OF EXCHANGE

CONSIGNMENT ACCOUNTCONSIGNMENT ACCOUNT

JOINT VENTUREJOINT VENTURE

LEASING & HIRE PURCHASELEASING & HIRE PURCHASE

NONNON--TRADING ORGANISATIONSTRADING ORGANISATIONS DEPRECIATIONDEPRECIATION

MODEL QUESTIONSMODEL QUESTIONS


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BASICS OF ACCOUNTINGBASICS OF ACCOUNTING

DOUBLE ENTRY SYSTEMDOUBLE ENTRY SYSTEM

3 TYPES OF ACCOUNTS:3 TYPES OF ACCOUNTS:

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

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

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

..


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BASIC RULES OF ACCOUNTINGBASIC RULES OF ACCOUNTING

RULESRULES::---- REALREAL : DEBIT THE ACCOUNT WHEN WE PURCHASE: DEBIT THE ACCOUNT WHEN WE PURCHASE

AN ASSET & CREDIT WHEN WE SELL ORAN ASSET & CREDIT WHEN WE SELL ORDEPRECIATE.DEPRECIATE.

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

---- NOMINALNOMINAL : DEBIT LOSSES & EXPENSES, CREDIT: DEBIT LOSSES & EXPENSES, CREDITINCOMES & GAINS.INCOMES & GAINS.

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


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BANK RECONCILIATION STATEMENTBANK RECONCILIATION STATEMENT

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

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

B. R. SHOWS CAUSES OF DIFFERENCES BETWEEN CASHB. R. SHOWS CAUSES OF DIFFERENCES BETWEEN CASHBOOK AND PASS BOOK BALANCEBOOK AND PASS BOOK BALANCE

DEBIT BALANCE AS PER CASH BOOK IS CREDIT BALANCEDEBIT BALANCE AS PER CASH BOOK IS CREDIT BALANCEAS PER PASS BOOK = POSITIVE BALANCEAS PER PASS BOOK = POSITIVE BALANCE

CREDIT BALANCE IN CASH BOOK IS DEBIT BALANCE INCREDIT BALANCE IN CASH BOOK IS DEBIT BALANCE INPASS BOOK = NEGATIVE BALANCE/OVERDRAFTPASS BOOK = NEGATIVE BALANCE/OVERDRAFT

WHETHER WE START WITH CASH OR PASS BOOKWHETHER WE START WITH CASH OR PASS BOOKRECONCILIATION ENTRIES WILL REMAIN SAME AS PERRECONCILIATION ENTRIES WILL REMAIN SAME AS PERPRINCIPLESPRINCIPLES


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CAUSES OF DIFFERENCESCAUSES OF DIFFERENCES TREATMENTTREATMENT

CASH/PASS BOOKCASH/PASS BOOKDT. CR.DT. CR.

.. CHEQUES ISSUED BUT NOT PRESENTED CHEQUES ISSUED BUT NOT PRESENTED

CHEQUES DEPOSITED BUT NOT COLLECTED CHEQUES DEPOSITED BUT NOT COLLECTED

BANK CHARGES BANK CHARGES

INTEREST ON SAVINGS BANK INTEREST ON SAVINGS BANK

INTEREST ON LOAN INTEREST ON LOAN

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

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

. DISHONOUR OF CHEQUES RECEIVED . DISHONOUR OF CHEQUES RECEIVED


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CAUSES OF DIFFERENCES TREATMENTCAUSES OF DIFFERENCES TREATMENTCASH/PASS BOOKCASH/PASS BOOK

DT. CR.DT. CR.. PAYMENTS SIDE OF CASH BOOK. PAYMENTS SIDE OF CASH BOOKUNDERCAST UNDERCAST

. DEPOSIT SIDE OF CASH BOOK. DEPOSIT SIDE OF CASH BOOKOVERCAST OVERCAST

. CHEQUE ISSUED BUT NOT TAKEN. CHEQUE ISSUED BUT NOT TAKENIN BANK COLUMN IN BANK COLUMN

. DEBIT BALANCE X BROUGHT. DEBIT BALANCE X BROUGHTFORWARD AS CREDIT BALANCE 2XFORWARD AS CREDIT BALANCE 2X

. CHEQUE ISSUED BUT RECORDED. CHEQUE ISSUED BUT RECORDEDTWICE TWICE


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IMPORTANT : WHETHER WE ARE RECONCILING PASS BOOK OR CASHIMPORTANT : WHETHER WE ARE RECONCILING PASS BOOK OR CASH

BOOK , EACH OF THE RECTIFICATION ENTRIES WILLBOOK , EACH OF THE RECTIFICATION ENTRIES WILL

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

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

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

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

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

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

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


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

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

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

ORIGINAL ENTRY.ORIGINAL ENTRY.


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ADVANTAGES OF BANK RECONCILIATIONADVANTAGES OF BANK RECONCILIATION

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

. TIMELY CORRECTIVE ACTION. TIMELY CORRECTIVE ACTION

. PREVENTS FRAUDS. PREVENTS FRAUDS

. CONTROL TOOL FOR MANAGEMENT. CONTROL TOOL FOR MANAGEMENT


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EXAMPLESEXAMPLES

X co .was maintaining account with KRB Bank Ltd. On 31stX co .was maintaining account with KRB Bank Ltd. On 31stDecember,2006, Bank column of cash book of company showed a debitDecember,2006, Bank column of cash book of company showed a debitbalance of Rs. 26000.balance of Rs. 26000.

Cheques deposited into the bank but not credited before 31stCheques deposited into the bank but not credited before 31stDecember,2006 amounted to Rs.4000December,2006 amounted to Rs.4000

Bank charges of Rs. 500 were debited by the bank but no entry wasBank charges of Rs. 500 were debited by the bank but no entry wasmade by the accountant of the company.made by the accountant of the company.

From the above particulars, find out the balance as per KRB BanksFrom the above particulars, find out the balance as per KRB Banksbooks.books.

Rs.30500Rs.30500 Rs.25500Rs.25500

RsRs.21500.21500

Rs.22500Rs.22500


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EXAMPLESEXAMPLES

WhenWhen overdraftoverdraft asas perper cashcash bookbook andand aa ChequeCheque ofof RsRs..10001000 directlydirectlydepositeddeposited inin thethe bank,bank, butbut notnot recordedrecorded inin cashcash bookbook--------

a)a) AddAdd RsRs..10001000 inin CBCB

b)b) DDeducteduct RsRs..10001000 inin CBCB

c)c) AddAdd RsRs..20002000 inin cashcash bookbook

d)d) DeductDeduct RsRs..20002000 inin CBCB

UndercastingofthecreditsideofCash BookhasthesameeffectasUndercastingofthecreditsideofCash Bookhasthesameeffectasovercastingoftheovercastingofthe

DDebitsideofthepassbook.ebitsideofthepassbook.

Creditsideofthepassbook.Creditsideofthepassbook.

ThereisnorelevancebetweenthetwoThereisnorelevancebetweenthetwo


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DEFINITIONDEFINITION

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

BALANCES FROM THE LEDGER.BALANCES FROM THE LEDGER.

HELPS ARITHMETICAL ACCURACY AND FACILITATESHELPS ARITHMETICAL ACCURACY AND FACILITATES

FINAL ACCOUNTS.FINAL ACCOUNTS.


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BASIC PRINCIPLEBASIC PRINCIPLE ::

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

ASSETS AND EXPENSES ARE DEBIT BALANCESASSETS AND EXPENSES ARE DEBIT BALANCES

LIABILITIES AND INCOMES ARE CREDIT BALANCESLIABILITIES AND INCOMES ARE CREDIT BALANCES

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

CLERICAL/PRINCIPLE ERRORS AND RECTIFYCLERICAL/PRINCIPLE ERRORS AND RECTIFY


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TYPES OF ERRORS:TYPES OF ERRORS:

A)A) CLERICAL ERRORSCLERICAL ERRORS

---- ERRORS OF OMISSIONERRORS OF OMISSION

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

------ COMPLETE OMISSION NOT AFFECTING TRIALCOMPLETE OMISSION NOT AFFECTING TRIALBALANCEBALANCE

------ PARTIAL OMISSION AFFECTING TRIALPARTIAL OMISSION AFFECTING TRIALBALANCEBALANCE


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---- ERRORS OF COMMISSIONERRORS OF COMMISSION

------ FIGURE POSTED ON THE WRONG SIDE OR WITHFIGURE POSTED ON THE WRONG SIDE OR WITHWRONG AMOUNTWRONG AMOUNT

---- COMPENSATING ERRORSCOMPENSATING ERRORS

------ ONE ERROR BALANCES ANOTHER ERRORONE ERROR BALANCES ANOTHER ERROR

. B). B) ERRORS OF PRINCIPLEERRORS OF PRINCIPLE

---- ERRORS IN CONTRAVENTION OF ACCOUNTINGERRORS IN CONTRAVENTION OF ACCOUNTINGPRINCIPLESPRINCIPLES


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

PASS THE CORRECT ENTRYPASS THE CORRECT ENTRY

COMPARE THE WRONG ENTRY WITH THE CORRECTCOMPARE THE WRONG ENTRY WITH THE CORRECTONEONE

PASS THE RECTIFICATION ENTRYPASS THE RECTIFICATION ENTRY

IF TRIAL BALANCE DOES NOT TALLY THENIF TRIAL BALANCE DOES NOT TALLY THENDIFFERENCE IS TRANSFERRED TO SUSPENCEDIFFERENCE IS TRANSFERRED TO SUSPENCEACCOUNTACCOUNT


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TYPICAL TRIAL BALANCETYPICAL TRIAL BALANCE

N A M EN A M E DEBITDEBIT CREDITCREDIT

CAPITAL XCAPITAL X

DRAWINGS XDRAWINGS X

PURCHASES XPURCHASES X SALES XSALES X

EXPENSES XEXPENSES X

DEBTORS(CUSTOMRES) XDEBTORS(CUSTOMRES) X

CREDITORS(SUPPLIERS) XCREDITORS(SUPPLIERS) X CASH XCASH X

SALES RETURN XSALES RETURN X


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

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

1000/1000/--..

C) GOODS WORTH 100/C) GOODS WORTH 100/-- SOLD TO VIJAY WRONGLYSOLD TO VIJAY WRONGLY

RECORDED IN PURCHASE REGISTER.RECORDED IN PURCHASE REGISTER. RECTIFICATIONRECTIFICATION: CREDIT SALES AND PURCHASE A/Cs: CREDIT SALES AND PURCHASE A/Cs

WITH 100/WITH 100/-- EACH AND DEBIT VIJAY WITH 200/EACH AND DEBIT VIJAY WITH 200/--..


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

. D) SALES OF 500/. D) SALES OF 500/-- POSTED AS 5000/POSTED AS 5000/-- WHILE RENT PAIDWHILE RENT PAID500/500/-- POSTED AS 5000/POSTED AS 5000/--..

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

E) SALARY PAID AS 1000/E) SALARY PAID AS 1000/-- BUT POSTED AS 10,000/BUT POSTED AS 10,000/-- IN RENTIN RENTA/C.A/C.

RECTIFICATIONRECTIFICATION: DEBIT SALARY WITH 1000/: DEBIT SALARY WITH 1000/-- SUSPENCESUSPENCEWITH 9000/WITH 9000/--; CREDIT RENT WITH 10000/; CREDIT RENT WITH 10000/--

F) A PURCHASERS DEBIT BALANCE OF 9000/F) A PURCHASERS DEBIT BALANCE OF 9000/-- HAS NOTHAS NOTBEEN TAKEN.BEEN TAKEN.

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


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RectificationofErrorsRectificationofErrors--ExamplesExamples

(1)Rs. 5000paidaswagesforinstallingthemachinery shouldbe(1)Rs. 5000paidaswagesforinstallingthemachinery shouldbedebitedtodebitedto----------

WagesA/cWagesA/c

Machinery a/cMachinery a/c

CapitalA/cCapitalA/c

NoneoftheaboveNoneoftheabove

(2)SalestoNavinofRs.1000isdebitedtoRavinA/c.thiswillbe(2)SalestoNavinofRs.1000isdebitedtoRavinA/c.thiswillberectifiedbyrectifiedby----------

DebitingNavina/candCreditingRavinA/cDebitingNavina/candCreditingRavinA/c

DebitingbothAccountsDebitingbothAccounts

DebitingRavina/candCreditingNavinA/cDebitingRavina/candCreditingNavinA/c

DebitingNavinA/candcreditingSalesA/CDebitingNavinA/candcreditingSalesA/C


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(1)Rs. 5000paidaswagesforinstallingthemachinery shouldbe(1)Rs. 5000paidaswagesforinstallingthemachinery shouldbedebitedtodebitedto----------

WagesA/cWagesA/c

Machinery a/cMachinery a/c

CapitalA/cCapitalA/c

NoneoftheaboveNoneoftheabove

(2)SalestoNavinofRs.1000isdebitedtoRavinA/c.thiswillbe(2)SalestoNavinofRs.1000isdebitedtoRavinA/c.thiswillberectifiedbyrectifiedby----------

DebitingNavina/candCreditingRavinA/cDebitingNavina/candCreditingRavinA/c

DebitingbothAccountsDebitingbothAccounts

DebitingRavina/candCreditingNavinA/cDebitingRavina/candCreditingNavinA/c

DebitingNavinA/candcreditingSalesA/CDebitingNavinA/candcreditingSalesA/C



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Credit sale ofCredit sale of Rs.5000 to Suresh is posted to his credit, thenRs.5000 to Suresh is posted to his credit, thenrectification isrectification is

i.i. Credit Suresh to the extent of Rs.10,000Credit Suresh to the extent of Rs.10,000

ii.ii. Credit Suresh to the extent of Rs.5,000Credit Suresh to the extent of Rs.5,000

iii.iii. DebitDebitSuresh to the extent of Rs.10,000Suresh to the extent of Rs.10,000iv.iv. Debit Suresh to the extent of Rs.5000Debit Suresh to the extent of Rs.5000

Freight expenses for carrying New Machinery is carried to TravelingFreight expenses for carrying New Machinery is carried to TravelingExp. a/c. Choose the correct rectification entryExp. a/c. Choose the correct rectification entry

i.i. Debit machinery a/c and credit Traveling Exp a/c.Debit machinery a/c and credit Traveling Exp a/c.

ii.ii. Credit machinery a/c and debit Freight Exp a/cCredit machinery a/c and debit Freight Exp a/c

iii.iii. Credit profit and loss account and debit Freight Exp a/c.Credit profit and loss account and debit Freight Exp a/c.

iv.iv. Debit profit and loss a/c( P&L a/c) and credit Traveling Exp a/c.Debit profit and loss a/c( P&L a/c) and credit Traveling Exp a/c.


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CAPITAL AND REVENUE EXPENDITURECAPITAL AND REVENUE EXPENDITURE

BASIC PRINCIPLEBASIC PRINCIPLE::

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

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

ACCOUNTACCOUNT

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

NATURE ARE TAKEN TO BALANCE SHEETNATURE ARE TAKEN TO BALANCE SHEET


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REVENUE RECEIPTS/PAYMENTS :REVENUE RECEIPTS/PAYMENTS :

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

. ARE RECURRING IN NATURE. ARE RECURRING IN NATURE

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

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

DAY BASISDAY BASIS

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


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CAPITAL RECEIPTS/PAYMENTS:CAPITAL RECEIPTS/PAYMENTS:

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

ARE NONARE NON--RECURRING IN NATURERECURRING IN NATURE

THE BENEFITS ARE OVER LONGER DURATIONTHE BENEFITS ARE OVER LONGER DURATION

THE PURPOSE IS TO ENHANCE PRODUCTIVITY OFTHE PURPOSE IS TO ENHANCE PRODUCTIVITY OFTHE ASSETSTHE ASSETS


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THERE ARE CERTAIN EXPENDITURES WHICH ARETHERE ARE CERTAIN EXPENDITURES WHICH ARE

OTHERWISE REVENUE IN NATURE BUT SOMETIMESOTHERWISE REVENUE IN NATURE BUT SOMETIMES

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

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

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

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

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


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SAME IS THE CASE WITH CERTAIN RECEIPTS SUCH ASSAME IS THE CASE WITH CERTAIN RECEIPTS SUCH AS

SALE OF ASSETS, WHERE THE RECEIPTS UPTO BOOKSALE OF ASSETS, WHERE THE RECEIPTS UPTO BOOK

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

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

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

.. THERE IS A THIN LINE BETWEEN CAPITAL & REVENUETHERE IS A THIN LINE BETWEEN CAPITAL & REVENUECLASSIFICATION. FOR INSTANCE REPAIRS TOCLASSIFICATION. FOR INSTANCE REPAIRS TOMACHINERY WHICH KEEPS THE ASSET IN WORKINGMACHINERY WHICH KEEPS THE ASSET IN WORKINGCONDITION IS CHARGED TO THE P & L A/C WHILECONDITION IS CHARGED TO THE P & L A/C WHILEBETTERMENT EXPENSE IS CAPITALISED.BETTERMENT EXPENSE IS CAPITALISED.


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EXAMPLES OF EACH TYPE OF CLASSIFICATION:EXAMPLES OF EACH TYPE OF CLASSIFICATION:

CAPITAL NATURE:CAPITAL NATURE:

---- PURCHASE OF ASSETS SUCH AS BUILDING,PURCHASE OF ASSETS SUCH AS BUILDING,

MACHINERY, VEHICLES.MACHINERY, VEHICLES.---- EXPENDITURE IN PURCHASE /SETTING UP OFEXPENDITURE IN PURCHASE /SETTING UP OF

CAPITAL GOODS/ASSETSCAPITAL GOODS/ASSETS

---- EXCESS OF SALE PRICE OF ASSET OVER ITS COSTEXCESS OF SALE PRICE OF ASSET OVER ITS COST

PRICEPRICE---- FUNDS RAISED THRU BANKS/INSTITUTIONSFUNDS RAISED THRU BANKS/INSTITUTIONS

---- FUNDS RAISED THRU ISSUE OF SHARES, &FUNDS RAISED THRU ISSUE OF SHARES, &

DEBENTURESDEBENTURES


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REVENUE NATUREREVENUE NATURE::

ALL TRANSACTIONS RELATING TO NOMINALALL TRANSACTIONS RELATING TO NOMINALACCOUNTSACCOUNTS

EVEN CERTAIN EXPENSES OF NONEVEN CERTAIN EXPENSES OF NON--RECURRINGRECURRINGNATURE BASED ON MATERIALITY CONCEPTNATURE BASED ON MATERIALITY CONCEPT

EXCESS OF SALE VALUE OF ASSET OVER W D VALUEEXCESS OF SALE VALUE OF ASSET OVER W D VALUE

UPTO COST OF ASSETUPTO COST OF ASSET


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DEFERRED REVENUE EXPENDITUREDEFERRED REVENUE EXPENDITURE::

LARGE ADVERTISING EXPENDITURE FOR(SAY)LARGE ADVERTISING EXPENDITURE FOR(SAY)LAUNCH OF A PRODUCTLAUNCH OF A PRODUCT

EXPENDITURE FOR RAISING OF FUNDS INCLUDINGEXPENDITURE FOR RAISING OF FUNDS INCLUDING

PREPARATION OF PROJECT REPORTPREPARATION OF PROJECT REPORT

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


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

((1)1)CostofreplacementofdefectivepartsofthemachineryCostofreplacementofdefectivepartsofthemachineryisis----------

a.a. CapitalexpenditureCapitalexpenditure

b.b. RRevenueexpenditureevenueexpenditurec.c. DeferredrevenueexpenditureDeferredrevenueexpenditure

(2)LossofgoodsduetofireRs.8000isarevenue(2)LossofgoodsduetofireRs.8000isarevenueexpenditurebecauseexpenditurebecause--------

a.a. ItisrecurringItisrecurringb.b. AmountinvolvedissmallAmountinvolvedissmall

c.c. LLossisarisingoutofbusinessoperationsossisarisingoutofbusinessoperations


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

((33)) ExpenditureExpenditure incurredincurred inin acquiringacquiring thethe patentspatents rightsrightsforfor thethe businessbusiness isis anan exampleexample ofof --------

a.a. CCapitalapital expenditureexpenditure

b.b. DeferredDeferred revenuerevenue expenditureexpenditurec.c. RevenueRevenue expenditureexpenditure

((44)) ProfessionalProfessional feesfees paidpaid inin connectionconnection withwith acquisitionacquisition ofofleaseholdleasehold premisespremises isis--------

a.a. CCapitalapital expenditureexpenditure

b.b. DeferredDeferred revenuerevenue expenditureexpenditure

c.c. RevenueRevenue expenditureexpenditure


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ExamplesExamples

((55)Preliminary)Preliminary expensesexpenses ,, discountdiscount allowedallowed ononissueissue ofof sharesshares areare thethe examplesexamples ofof

a.a. CapitalCapital expenditureexpenditure

b.b. DDeferredeferred revenuerevenue expenditureexpenditure

c.c. RevenueRevenue expenditureexpenditure

((66)) MachineryMachinery costingcosting RsRs..1010,,000000,, whosewhose currentcurrentbookbook valuevalue isis RsRs..70007000 isis soldsold forfor RsRs..1200012000whatwhat isis thethe amountamount ofof capitalcapital && revenuerevenue

receiptreceipta.a. CapitalCapital receiptreceipt ofof RsRs.. 20002000 && RevRev.. ReceiptReceipt ofof RsRs..1000010000

b.b. CCapitalapital receiptreceipt ofof RsRs.. 90009000 && RevRev.. ReceiptReceipt ofof RsRs..30003000

c.c. CapitalCapital receiptreceipt ofof RsRs.. 1200012000 && RevRev.. ReceiptReceipt ofof RsRs..NilNil


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VALUATION OF STOCKS IS IMPORTANT FROM THEVALUATION OF STOCKS IS IMPORTANT FROM THEPOINT OF INCOME DETERMINATION.POINT OF INCOME DETERMINATION.

THE DANGER COULD BE OF EITHER OVERVALUATIONTHE DANGER COULD BE OF EITHER OVERVALUATIONOR UNDERVALUATION OF STOCKS RESULTING INOR UNDERVALUATION OF STOCKS RESULTING INOVERSTATING OR UNDERSTATING OF PROFITS.OVERSTATING OR UNDERSTATING OF PROFITS.

METHODS OF VALUATIONMETHODS OF VALUATION:: ---- FIFOFIFO ---- LIFOLIFO ---- AVERAGE OR WEIGHTED AVERAGE COST METHODAVERAGE OR WEIGHTED AVERAGE COST METHOD ---- BASE STOCK METHODBASE STOCK METHOD ---- ADJUSTED SELLING PRICE METHODADJUSTED SELLING PRICE METHOD


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UNDER FIFOUNDER FIFO GOODS ISSUED TO PRODUCTION ISGOODS ISSUED TO PRODUCTION ISVALUED AT THE EARLIEST PRICE WHEREAS THEVALUED AT THE EARLIEST PRICE WHEREAS THECLOSING STOCK IS AT THE LATEST PRICE.CLOSING STOCK IS AT THE LATEST PRICE.

UNDER LIFOUNDER LIFO GOODS ISSUED TO PRODUCTION ISGOODS ISSUED TO PRODUCTION ISVALUED AT THE LATEST PRICE WHEREAS THEVALUED AT THE LATEST PRICE WHEREAS THECLOSING PRICE IS AT THE EARLIEST PRICE.CLOSING PRICE IS AT THE EARLIEST PRICE.

UNDER WEIGHTED AVERAGE COSTUNDER WEIGHTED AVERAGE COST METHODMETHOD

ARITHMETIC MEAN OF TOTAL PRICE BY TOTALARITHMETIC MEAN OF TOTAL PRICE BY TOTALQUANTITY RECEIVED IS TAKEN FOR VALUATION.QUANTITY RECEIVED IS TAKEN FOR VALUATION.


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ADJUSTING SELLING PRICE METHODADJUSTING SELLING PRICE METHOD IS GENERALLYIS GENERALLYUSED BY SMALL BUSINESSMEN WHO ARE UNABLE TOUSED BY SMALL BUSINESSMEN WHO ARE UNABLE TODIFFERENTIATE VARIOUS COSTS.DIFFERENTIATE VARIOUS COSTS.

HENCE THEY VALUE THE STOCKS AT SELLING PRICEHENCE THEY VALUE THE STOCKS AT SELLING PRICEAND THEN REDUCE ITS VALUE TO THE EXTENT OFAND THEN REDUCE ITS VALUE TO THE EXTENT OFESTIMATED GROSS MARGIN.ESTIMATED GROSS MARGIN.


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BASE STOCK METHODBASE STOCK METHOD IS SIMILAR TO LIFO. CLOSINGIS SIMILAR TO LIFO. CLOSINGSTOCK IS ALWAYS AT COST AT THE BEGINNING OFSTOCK IS ALWAYS AT COST AT THE BEGINNING OFBUSINESS. IN TIMES OF INFLATION VERY LOW VALUEBUSINESS. IN TIMES OF INFLATION VERY LOW VALUEOF STOCK MAKES FOR EXCELLENT ACCOUNTING.OF STOCK MAKES FOR EXCELLENT ACCOUNTING.IT HOWEVER REQUIRES A MINIMUM STOCK TO BEIT HOWEVER REQUIRES A MINIMUM STOCK TO BE

MAINTAINED.MAINTAINED.

PRESENTLY ACCOUNTING STANDARDS PERMITPRESENTLY ACCOUNTING STANDARDS PERMITFIFO(HISTORICAL PRICE) OR WEIGHTED AVERAGEFIFO(HISTORICAL PRICE) OR WEIGHTED AVERAGECOST METHOD.COST METHOD.

VALUE OF STOCK CAN BE ASCERTAINED BYVALUE OF STOCK CAN BE ASCERTAINED BYPERIODIC(PHYSICAL VERIFICATION) OR PERPETUALPERIODIC(PHYSICAL VERIFICATION) OR PERPETUALINVENTORY ( MAINTAINENCE OF STOCK REGISTER).INVENTORY ( MAINTAINENCE OF STOCK REGISTER).


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CHARACTERISTICS OF DIFFERENT METHODS OFCHARACTERISTICS OF DIFFERENT METHODS OFINVENTORY VALUATIONINVENTORY VALUATION

FIFO :FIFO :

---- IN RISING MARKET FIFO RESULTS IN HIGHERIN RISING MARKET FIFO RESULTS IN HIGHERPROFITS LOCKING UP OF SCARCE W. C.PROFITS LOCKING UP OF SCARCE W. C.

---- GOODS ARE SOLD AT CURRENT HIGHER PRICESGOODS ARE SOLD AT CURRENT HIGHER PRICES

WHILE COST OF GOODS REFLECTS LOWER THANWHILE COST OF GOODS REFLECTS LOWER THAN

CURRENT COSTSCURRENT COSTS

---- IN FALLING MARKET FIFO RESULTS IN LOWERIN FALLING MARKET FIFO RESULTS IN LOWER

PROFITSPROFITS

..


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---- LIFO :LIFO :

---- IN FALLING MARKET THE EFFECT IS THE SAME ASIN FALLING MARKET THE EFFECT IS THE SAME AS

THAT OF FIFO IN RISING MARKETTHAT OF FIFO IN RISING MARKET

---- IN RISING MARKET THE EFFECT IS SAME AS THATIN RISING MARKET THE EFFECT IS SAME AS THAT

OF FIFO IN FALLING MARKET.OF FIFO IN FALLING MARKET.


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IN THIS CHAPTER IT IS IMPORTANT TO DISCUSS THEIN THIS CHAPTER IT IS IMPORTANT TO DISCUSS THEVARIOUS ACCOUNTING CONVENTIONSVARIOUS ACCOUNTING CONVENTIONS

CONSERVATISM CONCEPTCONSERVATISM CONCEPT: RECOGNITION OF: RECOGNITION OF

INCREASES IN EARNINGS REQUIRES BETTERINCREASES IN EARNINGS REQUIRES BETTEREVIDENCE THAN DOES RECOGNITION OF DECREASESEVIDENCE THAN DOES RECOGNITION OF DECREASESTHAT IS EXPENSESTHAT IS EXPENSES

REALISATION CONCEPTREALISATION CONCEPT: RECOGNITION OF AMOUNT: RECOGNITION OF AMOUNTOF REVENUE THAT HAS CERTAINTY OF REALISATIONOF REVENUE THAT HAS CERTAINTY OF REALISATION

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


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CONSISTENCY CONCEPTCONSISTENCY CONCEPT: ONCE A CERTAIN METHOD: ONCE A CERTAIN METHODIS DECIDED UPON FOR ALL SUBSEQUENT EVENTS OFIS DECIDED UPON FOR ALL SUBSEQUENT EVENTS OFTHE SAME CHARACTER THE SAME METHOD SHOULDTHE SAME CHARACTER THE SAME METHOD SHOULDBE USED UNLESS THERE IS A SOUND REASON TOBE USED UNLESS THERE IS A SOUND REASON TOCHANGECHANGE

MATERIALITY CONCEPT:MATERIALITY CONCEPT: DEPENDING UPONDEPENDING UPONJUDGEMENT AND COMMON SENSE IMMATERIALJUDGEMENT AND COMMON SENSE IMMATERIALEVENTS / TRIVIAL MATTERS SHOULD NOT BE GIVENEVENTS / TRIVIAL MATTERS SHOULD NOT BE GIVENMORE IMPORTANCE THAN WARRANTED.MORE IMPORTANCE THAN WARRANTED.

HISTORICAL COSTS:HISTORICAL COSTS: COST OF ACQUISITIONCOST OF ACQUISITION DISCOUNTS, IF ANY, + COSTS INCIDENTAL TODISCOUNTS, IF ANY, + COSTS INCIDENTAL TOBRINGING THE ASSET/ ERECTING THE ASSET.BRINGING THE ASSET/ ERECTING THE ASSET.


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BILL OF EXCHANGEBILL OF EXCHANGE IS THE VEHICLE FOR CREDITIS THE VEHICLE FOR CREDIT

TRANSACTIONS IN BUSINESS; HAS 3 PARTIES:TRANSACTIONS IN BUSINESS; HAS 3 PARTIES:

DRAWERDRAWER WHO MAKES THE BILL/ CREDITOR;WHO MAKES THE BILL/ CREDITOR;

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

PAYEEPAYEE ---- WHO RECEIVES THE MONEY;WHO RECEIVES THE MONEY;

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

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

..


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

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

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

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

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


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TYPICAL ENTRIES:TYPICAL ENTRIES:

. THE ENTRIES IN THE BOOKS OF DRAWER A ARE:. THE ENTRIES IN THE BOOKS OF DRAWER A ARE:

DIRECT BILL TRANSACTIONDIRECT BILL TRANSACTION

BILLS RECEIVABLE a/c DR.BILLS RECEIVABLE a/c DR.

TO DRAWEE BTO DRAWEE B

. CASH a/c DR.. CASH a/c DR.

TO BILLS RECEIVABLETO BILLS RECEIVABLE

( BILL IS MET ON DUE DATE)( BILL IS MET ON DUE DATE)


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BILL ENDORSED TO CBILL ENDORSED TO C. Cs a/c DR.. Cs a/c DR.


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

BILL SENT FOR COLLECTIONBILL SENT FOR COLLECTION

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

. CASH a/c DR.. CASH a/c DR.TO BANK FOR BILL COLLECTIONTO BANK FOR BILL COLLECTION

( BILL SENT FOR COLLECTION IS MET)( BILL SENT FOR COLLECTION IS MET)

..


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IN CASE OF DISCOUNTINGIN CASE OF DISCOUNTINGCASH a/c DR.CASH a/c DR.DISCOUNT a/c DR.DISCOUNT a/c DR.


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

THE ENTRIES IN THE BOOKS OF DRAWEE B:THE ENTRIES IN THE BOOKS OF DRAWEE B:.. As a/c DR... As a/c DR.

TO BILLS PAYABLETO BILLS PAYABLE

. BILLS PAYABLE a/c DR.. BILLS PAYABLE a/c DR.TO CASHTO CASH

( BILL IS PAID)( BILL IS PAID)


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THERE ARE CASES WHEN BILLS ARE DISHONOURED.THERE ARE CASES WHEN BILLS ARE DISHONOURED. IN THAT CASE THE ENTRIES ARE AS FOLLOWS:IN THAT CASE THE ENTRIES ARE AS FOLLOWS:

IN As BOOKSIN As BOOKS::BILL DIRECTLY SENT FOR PAYMENTBILL DIRECTLY SENT FOR PAYMENT

Bs A/C DR.Bs A/C DR.

TO BILLS RECEIVABLETO BILLS RECEIVABLETO CASHTO CASH( CASH IS THE NOTING CHARGE)( CASH IS THE NOTING CHARGE)

DISHONOUR OF DISCOUNTED BILLDISHONOUR OF DISCOUNTED BILL

. BILLS RECEIVABLE A/C DR.. BILLS RECEIVABLE A/C DR.NOTING CHARGES A/C DR.NOTING CHARGES A/C DR.TO CASHTO CASH

(CASH (notary charges) IS PAID TO THE BANK)(CASH (notary charges) IS PAID TO THE BANK)


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---- Bs a/c DR.Bs a/c DR. TO BILLS RECEIVABLETO BILLS RECEIVABLE TO NOTING CHARGESTO NOTING CHARGES (BILL RETURNED TO A)(BILL RETURNED TO A)

DISHONOUR OF BILL SENT BY BANK FOR PAYMENT

BILL RECEIVABLE a/c DR.BILL RECEIVABLE a/c DR. NOTING CHARGE a/c DR.NOTING CHARGE a/c DR. TO CASHTO CASH

TO BANK FOR BILL COLLECTIONTO BANK FOR BILL COLLECTION( DISHONOUR OF BILL FOR COLLECTION)( DISHONOUR OF BILL FOR COLLECTION)

. Bs a/c DR.. Bs a/c DR.TO BILLS RECEIVABLETO BILLS RECEIVABLETO NOTING CHARGESTO NOTING CHARGES

(BILL RETURNED TO B)(BILL RETURNED TO B)


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DISHONOUR OF ENDORSED BILLDISHONOUR OF ENDORSED BILL

. BILLS RECEIVABLE a/c DR.. BILLS RECEIVABLE a/c DR.

NOTING CHARGES a/c DR.NOTING CHARGES a/c DR.

TO CTO C

Bs a/c DR.Bs a/c DR.


TO NOTING CHARGESTO NOTING CHARGES

(BILL RETURNED TO B)(BILL RETURNED TO B)


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WHEN OWNER SENDS GOODS TO HIS AGENT FOR THEWHEN OWNER SENDS GOODS TO HIS AGENT FOR THEPURPOSE OF SELLING THEN IT IS CALLEDPURPOSE OF SELLING THEN IT IS CALLEDCONSIGNMENT.CONSIGNMENT.

IT IS DIFFERENT FROM SALE IN THAT THEIT IS DIFFERENT FROM SALE IN THAT THECONSIGNEE CANNOT DISPOSE OFF THE GOODSCONSIGNEE CANNOT DISPOSE OFF THE GOODSACCORDING TO HIS CHOICE; DOES NOT RECEIVE ANYACCORDING TO HIS CHOICE; DOES NOT RECEIVE ANYRISK FROM THE CONSIGNOR; CAN RETURN THERISK FROM THE CONSIGNOR; CAN RETURN THEGOODS IF NOT MARKETABLE.GOODS IF NOT MARKETABLE.


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IN CONSIGNMENT ACCOUNTING THERE ARE 3IN CONSIGNMENT ACCOUNTING THERE ARE 3ACCOUNTSACCOUNTS::

CONSIGNMENT ACCOUNT; WHICH SHOWSCONSIGNMENT ACCOUNT; WHICH SHOWS

GOODS/STOCK AT COST INCLUDING EXPENSESGOODS/STOCK AT COST INCLUDING EXPENSESINCURRED IN SENDING THE GOODS.INCURRED IN SENDING THE GOODS.

CONSIGNEE ACCOUNT; WHICH IS NET OF HISCONSIGNEE ACCOUNT; WHICH IS NET OF HISSELLING PRICE AND THE NONSELLING PRICE AND THE NON--RECURRING OR DIRECTRECURRING OR DIRECT

EXPENSES INCURRED BY HIM.EXPENSES INCURRED BY HIM.

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


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A TYPICAL CONSIGNMENT ACCOUNT WILL APPEAR ASA TYPICAL CONSIGNMENT ACCOUNT WILL APPEAR ASFOLLOWS:FOLLOWS:

DR. CRDR. CR To goods sent on by consigneeTo goods sent on by consignee

consignment (goods sold byconsignment (goods sold by(invoice value) consignee)(invoice value) consignee)

To bank by closing stockTo bank by closing stock(all expenses incurred by(all expenses incurred byConsignor in transporting)Consignor in transporting)

To consigneeTo consignee(all expenses incurred by(all expenses incurred byConsignee in selling)Consignee in selling)

To profit & loss a/cTo profit & loss a/c


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

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

IF GOODS ARE LOST IN TRANSIT THE SAME METHODIF GOODS ARE LOST IN TRANSIT THE SAME METHODOF COSTING IS APPLIED AND THAT AMOUNT ISOF COSTING IS APPLIED AND THAT AMOUNT ISCREDITED TO THE CONSIGNMENT ACCOUNT.CREDITED TO THE CONSIGNMENT ACCOUNT.

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

APART FROM FIXED RATE OF COMMISSION ON THEAPART FROM FIXED RATE OF COMMISSION ON THEGOODS SOLD AN ADDITION DEL CREDEREGOODS SOLD AN ADDITION DEL CREDERECOMMISSION IS PAID TO THE CONSIGNEE FORCOMMISSION IS PAID TO THE CONSIGNEE FORENCOURAGING SALES ON CREDIT BASIS.ENCOURAGING SALES ON CREDIT BASIS.HOWEVER THE INHERENT RISKS REMAIN WITH THEHOWEVER THE INHERENT RISKS REMAIN WITH THECONSIGNEE.CONSIGNEE.


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JOINT VENTURE ACCOUNTS ARE TEMPORARY INJOINT VENTURE ACCOUNTS ARE TEMPORARY INNATURE ; FOR THE AD HOC PURPOSE OF ANNATURE ; FOR THE AD HOC PURPOSE OF ANASSIGNMENT UNDERTAKEN.ASSIGNMENT UNDERTAKEN.

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

ALSO IN PARTNERSHIP THE ACCOUNTING IS ONALSO IN PARTNERSHIP THE ACCOUNTING IS ONACCRUAL BASIS WHILE IN JOINT VENTUREACCRUAL BASIS WHILE IN JOINT VENTURE

ACCOUNTING IS ON CASH BASIS.ACCOUNTING IS ON CASH BASIS.


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THERE ARE 3 ACCOUNTS:THERE ARE 3 ACCOUNTS:

---- JOINT BANK WHICH SHOWS EACH COJOINT BANK WHICH SHOWS EACH CO--VENTURERSVENTURERS

INVESTMENT;INVESTMENT;

---- COCO--VENTURERS ACCOUNTVENTURERS ACCOUNT

---- JOINT VENTURE INTO WHICH THE FINALJOINT VENTURE INTO WHICH THE FINAL

PROFIT/LOSS IS TRANSFERRED.PROFIT/LOSS IS TRANSFERRED.


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LEASING AND HIRE PURCHASELEASING AND HIRE PURCHASE

LESSOR (OWNER) GIVES HIS ASSETS TO LESSEELESSOR (OWNER) GIVES HIS ASSETS TO LESSEE(USER) FOR USE; RECEIVES LEASE RENTALS IN(USER) FOR USE; RECEIVES LEASE RENTALS INRETURN, AN AMOUNT WHICH INCLUDES COST OFRETURN, AN AMOUNT WHICH INCLUDES COST OFDEPRECIATION, COST OF FINANCE, ANDDEPRECIATION, COST OF FINANCE, ANDADMINISTRATIVE EXPENSES OF THE LESSOR.ADMINISTRATIVE EXPENSES OF THE LESSOR.

. LEASING HELPS IN IMPROVING SALES VOLUME OF. LEASING HELPS IN IMPROVING SALES VOLUME OFGOODS; REDUCES CAPITAL INVESTMENT FORGOODS; REDUCES CAPITAL INVESTMENT FORLESSEE, INCREASES HIS BORROWING CAPACITY,LESSEE, INCREASES HIS BORROWING CAPACITY,REDUCES TAX LIABILITY AS RENTALS ARE FULLYREDUCES TAX LIABILITY AS RENTALS ARE FULLYTAX DEDUCTABLE, HOWEVER BURDENSOME.TAX DEDUCTABLE, HOWEVER BURDENSOME.


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FINANCIAL LEASE IS THE MOST POPULAR, LONGFINANCIAL LEASE IS THE MOST POPULAR, LONGTERM IN NATURE, GENERALLY USEFUL FOR PLANTTERM IN NATURE, GENERALLY USEFUL FOR PLANTAND MACHINERY.AND MACHINERY.

OTHER TYPES ARE OPERATING AND SERVICEOTHER TYPES ARE OPERATING AND SERVICELEASES.LEASES.

LESSOR RECEIVES LEASE RENTALS, CLAIMSLESSOR RECEIVES LEASE RENTALS, CLAIMS

DEPRECIATION.DEPRECIATION.

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


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THE LESSOR BREAKS UP THE RENTALS RECEIVEDTHE LESSOR BREAKS UP THE RENTALS RECEIVED

INTO FINANCE INCOME AND ANNUAL LEASE CHARGE.INTO FINANCE INCOME AND ANNUAL LEASE CHARGE.

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

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

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


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USE SUM OF DIGITS METHOD TO FIND ANNUALUSE SUM OF DIGITS METHOD TO FIND ANNUALFINANCE INCOME.FINANCE INCOME.

ANNUAL LEASE CHARGE = ANNUAL LEASE RENTANNUAL LEASE CHARGE = ANNUAL LEASE RENT

ANNUAL FINANCE INCOME.ANNUAL FINANCE INCOME.

ANNUAL LEASE CHARGE = STATUTORYANNUAL LEASE CHARGE = STATUTORYDEPRECIATION + LEASE EQUALISATION CHARGE.DEPRECIATION + LEASE EQUALISATION CHARGE.

LEASE EQUALISATION CHARGE IS DEDUCTED FROMLEASE EQUALISATION CHARGE IS DEDUCTED FROMTHE LEASE RENTALS OR THE PROFIT & LOSSTHE LEASE RENTALS OR THE PROFIT & LOSSACCOUNT.ACCOUNT.


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SOMETIMES THE ANNUAL LEASE IS LESS THANSOMETIMES THE ANNUAL LEASE IS LESS THANSTATUTORY DEPRECIATION; THEN THE LEASESTATUTORY DEPRECIATION; THEN THE LEASEEQUALISATION CHARGE IS ADDED TO THE PROFIT &EQUALISATION CHARGE IS ADDED TO THE PROFIT &LOSS ACCOUNT.LOSS ACCOUNT.

THE LEASE EQUALISATION CHARGE ACCOUNTEDTHE LEASE EQUALISATION CHARGE ACCOUNTEDTHROUGH THE LEASE TERMINAL ADJ. A/C WHICHTHROUGH THE LEASE TERMINAL ADJ. A/C WHICHFINALLY IS DEDUCTED FROM THE WRITTEN DOWNFINALLY IS DEDUCTED FROM THE WRITTEN DOWNVALUE OF THE ASSET.VALUE OF THE ASSET.

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

IF THE PERIOD IS MORE THAN 1 YEAR AND THEIF THE PERIOD IS MORE THAN 1 YEAR AND THEENTIRE RENTAL IS TAKEN INTO A LEASE RENTENTIRE RENTAL IS TAKEN INTO A LEASE RENT

SUSPENCE ACCOUNT AND YEARLY RENTALS ARESUSPENCE ACCOUNT AND YEARLY RENTALS ARE


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NOTES:NOTES:

FINANCE INCOME IS THE PERCEIVED RETURN ONFINANCE INCOME IS THE PERCEIVED RETURN ONLEASED ASSET.LEASED ASSET.

LEASE EQUALISATION CHARGE IS THE EXCESS OFLEASE EQUALISATION CHARGE IS THE EXCESS OFLEASE RENT AFTER DUE WEIGHTAGE IS GIVEN TOLEASE RENT AFTER DUE WEIGHTAGE IS GIVEN TOTHE RETURN ON THE LEASED ASSET AND THETHE RETURN ON THE LEASED ASSET AND THEEXTENT OF DEPRECIATION CHARGED.EXTENT OF DEPRECIATION CHARGED.

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


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ExplanationExplanation The concept of lease equalisation account isThe concept of lease equalisation account is

an equaliser between the capital recoveryan equaliser between the capital recoveryinherent in lease rentals and the depreciationinherent in lease rentals and the depreciationchargeable as per Companies Act.chargeable as per Companies Act.

The objective of the lessor is to writeThe objective of the lessor is to write--off anoff anamount equal to the capital recovery inherentamount equal to the capital recovery inherentin lease rentals, so as to leave in the revenuein lease rentals, so as to leave in the revenuestatement only the financing chargesstatement only the financing charges


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

THE HIRE PURCHASE PRICE CONSISTS OF CASHTHE HIRE PURCHASE PRICE CONSISTS OF CASHPRICE AND INTEREST.PRICE AND INTEREST.

INSTALMENT SALE IS SIMILAR EXCEPT THATINSTALMENT SALE IS SIMILAR EXCEPT THATOWNERSHIP PASSES ON TO BUYER AS SOON AS THEOWNERSHIP PASSES ON TO BUYER AS SOON AS THE11STST INSTALMENT IS PAID.INSTALMENT IS PAID.

THE 1THE 1STST INSTALMENT IN BOTH CASES IS CALLEDINSTALMENT IN BOTH CASES IS CALLEDDOWN PAYMENT.DOWN PAYMENT.

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


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A TYPICAL LEASE TRANSACTION IN THE BOOKS OFA TYPICAL LEASE TRANSACTION IN THE BOOKS OFTHE LESSOR:THE LESSOR:

Bank a/c dr.Bank a/c dr.to lease rentto lease rent

(lease rent received)(lease rent received)

Lease rent a/c dr.Lease rent a/c dr.to P & L a/cto P & L a/c

(lease rent transferred to profit)(lease rent transferred to profit)

Depreciation a/c dr.Depreciation a/c dr.to assetto asset

(annual depreciation(annual depreciationOf the asset)Of the asset)

P & L a/c dr.P & L a/c dr.

to depreciationto depreciation


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

Lease rent paid a/c dr.Lease rent paid a/c dr.to bankto bank

(lease rent paid)(lease rent paid)

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

(lease rent charged to P & L)(lease rent charged to P & L)

IF LEASE RENT IS PAID FOR THE ENTIRE PERIOD THEIF LEASE RENT IS PAID FOR THE ENTIRE PERIOD THESAME IS ACCOUNTED FOR IN BANK A/C AND ANSAME IS ACCOUNTED FOR IN BANK A/C AND ANANNUAL AMOUNT IS CHARGED TO P & L A/C EVERYANNUAL AMOUNT IS CHARGED TO P & L A/C EVERYYEARYEAR


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

Asset a/c dr.Asset a/c dr.

to vendorto vendor(purchase of asset on H P basis(purchase of asset on H P basis--

to the extent of the amount agreed)to the extent of the amount agreed)

. Vendor a/c dr.. Vendor a/c dr.

to bankto bank

(down payment/instalment)(down payment/instalment). Depreciation a/c dr.. Depreciation a/c dr.

to assetto asset

(depn. Of asset)(depn. Of asset)

. P & L a/c dr.. P & L a/c dr.


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NONNON--TRADING ORGANISATIONSTRADING ORGANISATIONS

NONNON--TRADING ORGANISATIONS ARE NON PROFITTRADING ORGANISATIONS ARE NON PROFITMAKING BODIES, RENDERING SERVICES TO PUBLIC,MAKING BODIES, RENDERING SERVICES TO PUBLIC,COLLECTING MONEYS BY WAY OF MEMBERSHIPCOLLECTING MONEYS BY WAY OF MEMBERSHIPFEES, SUBSCRIPTIONS, DONATIONS. HOWEVER TOFEES, SUBSCRIPTIONS, DONATIONS. HOWEVER TOPREVENT MISUSE OF FUNDS, ACCOUNTS AREPREVENT MISUSE OF FUNDS, ACCOUNTS ARE

MAINTAINED.MAINTAINED.

RECEIPTS & PAYMENTS STATEMENT CONTAINS REALRECEIPTS & PAYMENTS STATEMENT CONTAINS REALACCOUNTS, ACTUAL RECEIPTS AND PAYMENTS,ACCOUNTS, ACTUAL RECEIPTS AND PAYMENTS,BOTH CAPITAL AND REVENUE ITEMS.BOTH CAPITAL AND REVENUE ITEMS.

. INCOME & EXPENDITURE STATEMENT CONTAINS. INCOME & EXPENDITURE STATEMENT CONTAINSNOMINAL ACCOUNTS, OF REVENUE ITEMS OF INCOMENOMINAL ACCOUNTS, OF REVENUE ITEMS OF INCOME& EXPENSES FOR A FIXED PERIOD.& EXPENSES FOR A FIXED PERIOD.


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NONNON--TRADING ORGANISATIONSTRADING ORGANISATIONS

A TYPICAL WAY OF CONVERTING RECEIPTS &A TYPICAL WAY OF CONVERTING RECEIPTS &PAYMENTS STATEMENT INTO INCOME &PAYMENTS STATEMENT INTO INCOME &EXPENDITURE STATEMENT IS TAKE THEEXPENDITURE STATEMENT IS TAKE THERECEIPTS/PAYMENTS OF THE CURRENT YEARRECEIPTS/PAYMENTS OF THE CURRENT YEARSUBTRACT THE OPENING BALANCE OF THE CURRENTSUBTRACT THE OPENING BALANCE OF THE CURRENT

YEAR AND ADD THE CLOSING BALANCE ( IF ANY ).YEAR AND ADD THE CLOSING BALANCE ( IF ANY ).

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


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DEPRECIATIONDEPRECIATION

DEPRECIATION IS A CHARGE ON PROFITS, TODEPRECIATION IS A CHARGE ON PROFITS, TOACCOUNT FOR THE FALL IN THE VALUE( NOTIONALACCOUNT FOR THE FALL IN THE VALUE( NOTIONALOR OTHERWISE ) OF AN ASSET DURING THE PERIODOR OTHERWISE ) OF AN ASSET DURING THE PERIODOF USE.OF USE.

DEPRECIATION OR WRITING OFF OF A CERTAINDEPRECIATION OR WRITING OFF OF A CERTAINPORTION OF AN ASSET ON AN ANNUAL BASIS IS APORTION OF AN ASSET ON AN ANNUAL BASIS IS APRUDENT WAY OF SAVINGS FOR REPLACEMENT OFPRUDENT WAY OF SAVINGS FOR REPLACEMENT OFTHE ASSET AFTER ITS USEFUL LIFE IS OVER.THE ASSET AFTER ITS USEFUL LIFE IS OVER.

SINCE DEPRECIATION IS AN OPERATING COST ANDSINCE DEPRECIATION IS AN OPERATING COST ANDTHEREFORE TAX DEDUCTIBLE, EACH YEAR THETHEREFORE TAX DEDUCTIBLE, EACH YEAR THE

SAVING IS TO THE EXTENT OF (TAX RATE)* ANNUALSAVING IS TO THE EXTENT OF (TAX RATE)* ANNUALDEPRECIATION.DEPRECIATION.


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DEPRECIATION CAN ALSO BE LOOKED IN ADEPRECIATION CAN ALSO BE LOOKED IN ADIFFERENT WAY.DIFFERENT WAY.

DEPRECIATION IS AN ACCOUNTING PROCESS FORDEPRECIATION IS AN ACCOUNTING PROCESS FOR

THE GRADUAL CONVERSION OF THE CAPITALIZEDTHE GRADUAL CONVERSION OF THE CAPITALIZEDCOST OF FIXED(TANGIBLE) ASSETS INTO EXPENSE.COST OF FIXED(TANGIBLE) ASSETS INTO EXPENSE.

SIMILARLY, INTANGIBLE ASSETS ARE CONVERTEDSIMILARLY, INTANGIBLE ASSETS ARE CONVERTEDINTO EXPENSE BY AMORTISATION.INTO EXPENSE BY AMORTISATION.

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


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WHAT CAUSES DEPRECIATIONWHAT CAUSES DEPRECIATION ??

SIMPLY WEAR AND TEARSIMPLY WEAR AND TEAR

MISHAPSMISHAPS

OBSOLESCENCEOBSOLESCENCE

PASSAGE OF TIMEPASSAGE OF TIME

FALL IN VALUEFALL IN VALUE


73/76


IN ORDER TO CALCULATE DEPRECIATION THERE AREIN ORDER TO CALCULATE DEPRECIATION THERE AREBASIC ISSUES TO BE ASCERTAINEDBASIC ISSUES TO BE ASCERTAINED ::

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

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

---- METHOD TO BE USED FOR PROVIDINGMETHOD TO BE USED FOR PROVIDING

DEPRECIATION.DEPRECIATION.


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

NET COST(COST OF THE ASSET LESS THE RESIDUALNET COST(COST OF THE ASSET LESS THE RESIDUALVALUE) IS CHARGED EACH YEAR.VALUE) IS CHARGED EACH YEAR.

WRITTEN DOWN VALUE METHOD. EQUALWRITTEN DOWN VALUE METHOD. EQUALPERCENTAGE OF THE WRITTEN DOWN VALUE IN THEPERCENTAGE OF THE WRITTEN DOWN VALUE IN THEBOOKS OF THE COMPANY IS CHARGED EACH YEAR.BOOKS OF THE COMPANY IS CHARGED EACH YEAR.

SINKING FUND METHOD. IT IS STRAIGHT LINESINKING FUND METHOD. IT IS STRAIGHT LINE

METHOD BUT THE DEPRECIATION CHARGED OR AMETHOD BUT THE DEPRECIATION CHARGED OR APORTION OF IT IS KEPT AS A RESERVE, INVESTED INPORTION OF IT IS KEPT AS A RESERVE, INVESTED INMARKETABLE SECURITIES. THE FUND GROWS INTOMARKETABLE SECURITIES. THE FUND GROWS INTOREPLACEMENT VALUE OF THE ASSET.REPLACEMENT VALUE OF THE ASSET.


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FINALLEGFINALLEG

THANK YOU VERY MUCH FOR YOURTHANK YOU VERY MUCH FOR YOUR

PATIENCE; I TRUST IT WAS USEFUL.PATIENCE; I TRUST IT WAS USEFUL.

BEFORE WE DISPERSE LET US GOBEFORE WE DISPERSE LET US GOTHRU A SET OF QUESTIONS WITHTHRU A SET OF QUESTIONS WITH

MULTIPLE CHOICE ANSWERS,WHICHMULTIPLE CHOICE ANSWERS,WHICH

WILL COVER THOSE ASPECTS OFWILL COVER THOSE ASPECTS OFACCOUNTING THAT MAY NOT BEENACCOUNTING THAT MAY NOT BEEN

TOUCHED UPON.TOUCHED UPON.


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ENDEND

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Jaiib Accfinance c

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