ACCOUNTING AND FINANCE BANKERS

JAIIB PAPER-2

MODULE C

By RAVI ULLAL CONSULTANT

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

BASICS OF ACCOUNTING

DOUBLE ENTRY SYSTEM 3 TYPES OF ACCOUNTS: -- REAL: ASSETS OF BUSINESS, TANGIBLE AND IDENTIFIABLE. -- PERSONAL: THEY ARE HEADED WITH THE NAME OF PERSON/BUSINESS/FIRM. DEBTORS OR CREDITORS.

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

.

BASIC RULES OF ACCOUNTING

RULES: -- REAL : DEBIT THE ACCOUNT WHEN WE PURCHASE AN ASSET & CREDIT WHEN WE SELL OR DEPRECIATE. -- PERSONAL : DEBIT THE RECEIVER OF GOODS & CREDIT THE GIVER OF GOODS. -- NOMINAL : DEBIT LOSSES & EXPENSES, CREDIT INCOMES & GAINS.

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

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

BANK RECONCILIATION STATEMENT

CAUSES OF DIFFERENCES

TREATMENT

CASH/PASS BOOK DT. CR.

CHEQUES ISSUED BUT NOT PRESENTED CHEQUES DEPOSITED BUT NOT COLLECTED BANK CHARGES INTEREST ON SAVINGS BANK INTEREST ON LOAN AMOUNT PAID BY BANK AS PER STANDING INSTRUCTIONS DIRECT PAYMENTS MADE BY CUSTOMERS

DISHONOUR OF CHEQUES RECEIVED

BANK RECONCILIATION STATEMENT

CAUSES OF DIFFERENCES

. PAYMENTS SIDE OF CASH BOOK UNDERCAST . DEPOSIT SIDE OF CASH BOOK OVERCAST . CHEQUE ISSUED BUT NOT TAKEN IN BANK COLUMN . DEBIT BALANCE X BROUGHT FORWARD AS CREDIT BALANCE . CHEQUE ISSUED BUT RECORDED TWICE

DT.

TREATMENT CASH/PASS BOOK

CR.

2X

BANK RECONCILIATION STATEMENT

IMPORTANT : WHETHER WE ARE RECONCILING PASS BOOK OR CASH

BOOK , EACH OF THE RECTIFICATION ENTRIES WILL

APPEAR ON THE SAME SIDE . ADDITION OR SUBRACTION OF ENTRIES FROM THE OPENING OR GIVEN BALANCE

DEPENDS UPON WHICH SIDE OF THE LEDGER THEY ARE

CAST OR TO BE CAST. THUS WHAT WE SIMPLY NEED TO KNOW IS WHETHER EACH FIGURE GIVEN IN THE

PROBLEM IS A DEBIT OR CREDIT ENTRY. I WILL EXPLAIN

WITH THE HELP OF A PROBLEM LATER.

BANK RECONCILIATION STATEMENT

SIMPLY PUT, IF AN ENTRY IS ALREADY THERE BUT EITHER THE WHOLE OR PART IT HAS TO BE RECTIFIED THEN THAT PORTION IS POSTED ON THE OPPOSITE SIDE OF THE

ORIGINAL ENTRY.

BANK RECONCILIATION STATEMENT

ADVANTAGES OF BANK RECONCILIATION . VERIFICATION OF ACCURACY OF ENTRIES . TIMELY CORRECTIVE ACTION . PREVENTS FRAUDS . CONTROL TOOL FOR MANAGEMENT

TRIAL BALANCE
DEFINITION IT IS A STATEMENT SHOWING CREDIT AND DEBIT BALANCES FROM THE LEDGER.

HELPS ARITHMETICAL ACCURACY AND FACILITATES FINAL ACCOUNTS.

TRIAL BALANCE

BASIC PRINCIPLE : SINCE IT IS DOUBLE ENTRY BOOK-KEEPING, HENCE, ASSETS AND EXPENSES ARE DEBIT BALANCES LIABILITIES AND INCOMES ARE CREDIT BALANCES

. IN CASE OF ARITHMETICAL INACCURACY IDENTIFY CLERICAL/PRINCIPLE ERRORS AND RECTIFY

TRIAL BALANCE

TYPES OF ERRORS: A) CLERICAL ERRORS -- ERRORS OF OMISSION

--- OMISSION OF TRANSACTION FROM BOOKS

--- COMPLETE OMISSION NOT AFFECTING TRIAL BALANCE

--- PARTIAL OMISSION AFFECTING TRIAL BALANCE

TRIAL BALANCE

-- ERRORS OF COMMISSION --- FIGURE POSTED ON THE WRONG SIDE OR WITH WRONG AMOUNT -- COMPENSATING ERRORS --- ONE ERROR BALANCES ANOTHER ERROR

. B) ERRORS OF PRINCIPLE -- ERRORS IN CONTRAVENTION OF ACCOUNTING PRINCIPLES

TRIAL BALANCE

RECTIFICATION OF ERRORS IS A SERIES OF STEPS: PASS THE CORRECT ENTRY COMPARE THE WRONG ENTRY WITH THE CORRECT ONE PASS THE RECTIFICATION ENTRY IF TRIAL BALANCE DOES NOT TALLY THEN DIFFERENCE IS TRANSFERRED TO SUSPENCE ACCOUNT

TRIAL BALANCE
TYPICAL TRIAL BALANCE

NAME CAPITAL DRAWINGS PURCHASES SALES EXPENSES DEBTORS(CUSTOMRES) CREDITORS(SUPPLIERS) CASH SALES RETURN

DEBIT X X

CREDIT X

X
X X X

X X

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

B) SALARY PAID 1000/- BUT POSTED IN RENT A/C. RECTIFICATION: DEBIT SALARY AND CREDIT RENT WITH 1000/-. C) GOODS WORTH 100/- SOLD TO VIJAY WRONGLY RECORDED IN PURCHASE REGISTER. RECTIFICATION: CREDIT SALES AND PURCHASE A/Cs WITH 100/- EACH AND DEBIT VIJAY WITH 200/-.

TRIAL BALANCE
AFTER TRIAL BALANCE IS PREPARED ONE FINDS . . D) SALES OF 500/- POSTED AS 5000/- WHILE RENT PAID 500/- POSTED AS 5000/-. RECTIFICATION: DEBIT SALES WITH 4500/-, CREDIT SUSPENCE WITH 4500/-, CREDIT RENT WITH 4500/-, DEBIT SUSPENCE WITH 4500/-.

E) SALARY PAID AS 1000/- BUT POSTED AS 10,000/- IN RENT A/C. RECTIFICATION: DEBIT SALARY WITH 1000/- SUSPENCE WITH 9000/-; CREDIT RENT WITH 10000/

F) A PURCHASERS DEBIT BALANCE OF 9000/- HAS NOT BEEN TAKEN. RECTIFICATION: DEBIT DEBTORS, CREDIT SUSPENCE TO THE EXTENT OF 9000/-.

CAPITAL AND REVENUE EXPENDITURE

BASIC PRINCIPLE: . ALL EXPENSES AND RECEIPTS OF REVENUE NATURE ARE TAKEN TO TRADING AND PROFIT & LOSS

ACCOUNT
. ALL EXPENDITURES AND RECEIPTS OF CAPITAL NATURE ARE TAKEN TO BALANCE SHEET

CAPITAL AND REVENUE EXPENDITURE

REVENUE RECEIPTS/PAYMENTS : . ARE SMALLER IN SIZE(RELATIVELY) . ARE RECURRING IN NATURE

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

. THE PURPOSE IS TO RUN THE BUSINESS ON A DAY TO DAY BASIS . MAINTAIN ASSETS IN WORKING CONDITION

CAPITAL & REVENUE EXPENDITURE

CAPITAL RECEIPTS/PAYMENTS: ARE USUALLY LARGE(RELATIVELY) ARE NON-RECURRING IN NATURE THE BENEFITS ARE OVER LONGER DURATION THE PURPOSE IS TO ENHANCE PRODUCTIVITY OF THE ASSETS

CAPITAL AND REVENUE EXPENDITURE

THERE ARE CERTAIN EXPENDITURES WHICH ARE OTHERWISE REVENUE IN NATURE BUT SOMETIMES UNUSUALLY LARGE AND WHOSE BENEFIT TO THE ORGANISATION MAY ACCRUE AFTER FEW YEARS.THESE MAY BE TREATED AS DEFERRED REVENUE EXPENDITURE , CARRIED TO THE BALANCE SHEET , AND WRITTEN OFF TO THE PROFIT & LOSS ACCOUNT OVER A PERIOD OF TIME.

CAPITAL AND REVENUE EXPENDITURE

SAME IS THE CASE WITH CERTAIN RECEIPTS SUCH AS SALE OF ASSETS, WHERE THE RECEIPTS UPTO BOOK VALUE IS DEDUCTED FROM THE ASSET, AND , IF BETWEEN BOOK VALUE & COST AS REVENUE RECEIPT & ABOVE COST AS CAPITAL RECEIPT. . THERE IS A THIN LINE BETWEEN CAPITAL & REVENUE CLASSIFICATION. FOR INSTANCE REPAIRS TO MACHINERY WHICH KEEPS THE ASSET IN WORKING CONDITION IS CHARGED TO THE P & L A/C WHILE BETTERMENT EXPENSE IS CAPITALISED.

CAPITAL & REVENUE EXPENDITURE

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

CAPITAL AND REVENUE EXPENDITURE

REVENUE NATURE: ALL TRANSACTIONS RELATING TO NOMINAL ACCOUNTS EVEN CERTAIN EXPENSES OF NON-RECURRING NATURE BASED ON MATERIALITY CONCEPT EXCESS OF SALE VALUE OF ASSET OVER W D VALUE UPTO COST OF ASSET

CAPITAL AND REVENUE EXPENDITURE

DEFERRED REVENUE EXPENDITURE: LARGE ADVERTISING EXPENDITURE FOR(SAY) LAUNCH OF A PRODUCT EXPENDITURE FOR RAISING OF FUNDS INCLUDING PREPARATION OF PROJECT REPORT INITIAL EXPENSES FOR SETTING UP OF A COMPANY

INVENTORY VALUATION

VALUATION OF STOCKS IS IMPORTANT FROM THE POINT OF INCOME DETERMINATION. THE DANGER COULD BE OF EITHER OVERVALUATION OR UNDERVALUATION OF STOCKS RESULTING IN OVERSTATING OR UNDERSTATING OF PROFITS. METHODS OF VALUATION: -- FIFO -- LIFO -- AVERAGE OR WEIGHTED AVERAGE COST METHOD -- BASE STOCK METHOD -- ADJUSTED SELLING PRICE METHOD

INVENTORY VALUATION

UNDER FIFO GOODS ISSUED TO PRODUCTION IS VALUED AT THE EARLIEST PRICE WHEREAS THE CLOSING STOCK IS AT THE LATEST PRICE. UNDER LIFO GOODS ISSUED TO PRODUCTION IS VALUED AT THE LATEST PRICE WHEREAS THE CLOSING PRICE IS AT THE EARLIEST PRICE. UNDER WEIGHTED AVERAGE COST METHOD ARITHMETIC MEAN OF TOTAL PRICE BY TOTAL QUANTITY RECEIVED IS TAKEN FOR VALUATION.

INVENTORY VALUATION

ADJUSTING SELLING PRICE METHOD IS GENERALLY USED BY SMALL BUSINESSMEN WHO ARE UNABLE TO DIFFERENTIATE VARIOUS COSTS. HENCE THEY VALUE THE STOCKS AT SELLING PRICE AND THEN REDUCE ITS VALUE TO THE EXTENT OF ESTIMATED GROSS MARGIN.

INVENTORY VALUATION

BASE STOCK METHOD IS SIMILAR TO LIFO. CLOSING STOCK IS ALWAYS AT COST AT THE BEGINNING OF BUSINESS. IN TIMES OF INFLATION VERY LOW VALUE OF STOCK MAKES FOR EXCELLENT ACCOUNTING. IT HOWEVER REQUIRES A MINIMUM STOCK TO BE MAINTAINED. PRESENTLY ACCOUNTING STANDARDS PERMIT FIFO(HISTORICAL PRICE) OR WEIGHTED AVERAGE COST METHOD.

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

INVENTORY VALUATION

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

INVENTORY VALUATION

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

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

INVENTORY VALUATION

IN THIS CHAPTER IT IS IMPORTANT TO DISCUSS THE VARIOUS ACCOUNTING CONVENTIONS CONSERVATISM CONCEPT: RECOGNITION OF INCREASES IN EARNINGS REQUIRES BETTER EVIDENCE THAN DOES RECOGNITION OF DECREASES THAT IS EXPENSES REALISATION CONCEPT: RECOGNITION OF AMOUNT OF REVENUE THAT HAS CERTAINTY OF REALISATION MATCHING CONCEPT: RECOGNITION OF REVENUES AND EXPENSES FOR A CERTAIN EVENT.

INVENTORY VALUATION

CONSISTENCY CONCEPT: ONCE A CERTAIN METHOD IS DECIDED UPON FOR ALL SUBSEQUENT EVENTS OF THE SAME CHARACTER THE SAME METHOD SHOULD BE USED UNLESS THERE IS A SOUND REASON TO CHANGE MATERIALITY CONCEPT: DEPENDING UPON JUDGEMENT AND COMMON SENSE IMMATERIAL EVENTS / TRIVIAL MATTERS SHOULD NOT BE GIVEN MORE IMPORTANCE THAN WARRANTED. HISTORICAL COSTS: COST OF ACQUISITION DISCOUNTS, IF ANY, + COSTS INCIDENTAL TO BRINGING THE ASSET/ ERECTING THE ASSET.

BILLS OF EXCHANGE

BILL OF EXCHANGE IS THE VEHICLE FOR CREDIT TRANSACTIONS IN BUSINESS; HAS 3 PARTIES: DRAWER WHO MAKES THE BILL/ CREDITOR;

DRAWEE ON WHOM THE BILL IS DRAWN;

PAYEE -- WHO RECEIVES THE MONEY;

SOMETIMES DRAWER & PAYEE ARE THE SAME. ACCEPTANCE TO PAY BY THE DRAWEE IS ESSENTIAL. .

BILLS OF EXCHANGE
. PROMISSORY NOTE IS SIMILAR ; HAS ONLY 2 PARTIES BUT SIGNED BY DEBTOR; NOTING NECESSARY. . ACCOMODATION BILL : THERE IS NO TRANSACTION; THE BILL IS DISCOUNTED TO RAISE MONEYS FOR BOTH PARTIES, WHO SHARE THE AMOUNT.

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

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

DR.

BILLS OF EXCHANGE
BILL ENDORSED TO C . Cs a/c TO BILLS RECEIVABLE ( NO ENTRY WHEN BILL IS MET)

DR.

BILL SENT FOR COLLECTION

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

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

DR.

BILLS OF EXCHANGE
IN CASE OF DISCOUNTING CASH a/c DISCOUNT a/c TO BILLS RECEIVABLE ( NO ENTRY WHEN BILL IS MET)

DR. DR.

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

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

DR.

BILLS OF EXCHANGE

THERE ARE CASES WHEN BILLS ARE DISHONOURED. IN THAT CASE THE ENTRIES ARE AS FOLLOWS: IN As BOOKS: BILL DIRECTLY SENT FOR PAYMENT Bs A/C DR. TO BILLS RECEIVABLE TO CASH ( CASH IS THE NOTING CHARGE) DISHONOUR OF DISCOUNTED BILL

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

BILLS OF EXCHANGE

-- Bs a/c TO BILLS RECEIVABLE TO NOTING CHARGES (BILL RETURNED TO A)

DR.

DISHONOUR OF BILL SENT BY BANK FOR PAYMENT

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

. Bs a/c TO BILLS RECEIVABLE TO NOTING CHARGES (BILL RETURNED TO B)

BILLS OF EXCHANGE

DISHONOUR OF ENDORSED BILL DR. DR.

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

Bs a/c TO BILLS RECEIVABLE TO NOTING CHARGES (BILL RETURNED TO B)

DR.

CONSIGNMENT ACCOUNT

WHEN OWNER SENDS GOODS TO HIS AGENT FOR THE PURPOSE OF SELLING THEN IT IS CALLED CONSIGNMENT. IT IS DIFFERENT FROM SALE IN THAT THE CONSIGNEE CANNOT DISPOSE OFF THE GOODS ACCORDING TO HIS CHOICE; DOES NOT RECEIVE ANY RISK FROM THE CONSIGNOR; CAN RETURN THE GOODS IF NOT MARKETABLE.

CONSIGNMENT ACCOUNT

IN CONSIGNMENT ACCOUNTING THERE ARE 3 ACCOUNTS: CONSIGNMENT ACCOUNT; WHICH SHOWS GOODS/STOCK AT COST INCLUDING EXPENSES INCURRED IN SENDING THE GOODS. CONSIGNEE ACCOUNT; WHICH IS NET OF HIS SELLING PRICE AND THE NON-RECURRING OR DIRECT EXPENSES INCURRED BY HIM. GOODS SENT ON CONSIGNMENT ACCOUNT.

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

CONSIGNMENT ACCOUNT

NOTES: CLOSING STOCK IS VALUED AT COST/INVOICE PRICE + PROPORTIONATE AMOUNT OF COST INCURRED BY CONSIGNOR IN TRANSPORTING. IF GOODS ARE LOST IN TRANSIT THE SAME METHOD OF COSTING IS APPLIED AND THAT AMOUNT IS CREDITED TO THE CONSIGNMENT ACCOUNT. NOMINAL LOSSES ARE PROPORTIONATELY CHARGED TO ALL STOCK WHETHER SOLD OR NOT. ABNORMAL LOSS IS DIRECTLY CHARGED TO P&L A/C. APART FROM FIXED RATE OF COMMISSION ON THE GOODS SOLD AN ADDITION DEL CREDERE COMMISSION IS PAID TO THE CONSIGNEE FOR ENCOURAGING SALES ON CREDIT BASIS. HOWEVER THE INHERENT RISKS REMAIN WITH THE CONSIGNEE.

JOINT VENTURE

JOINT VENTURE ACCOUNTS ARE TEMPORARY IN NATURE ; FOR THE AD HOC PURPOSE OF AN ASSIGNMENT UNDERTAKEN. IT IS SIMILAR TO A PARTNERSHIP EXCEPT SUCH ASSOCIATIONS ARE TEMPORARY IN NATURE. ALSO IN PARTNERSHIP THE ACCOUNTING IS ON ACCRUAL BASIS WHILE IN JOINT VENTURE ACCOUNTING IS ON CASH BASIS.

JOINT VENTURE

THERE ARE 3 ACCOUNTS: -- JOINT BANK WHICH SHOWS EACH CO-VENTURERS INVESTMENT;

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

LEASING AND HIRE PURCHASE

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

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

LEASING AND HIRE PURCHASE

FINANCIAL LEASE IS THE MOST POPULAR, LONG TERM IN NATURE, GENERALLY USEFUL FOR PLANT AND MACHINERY. OTHER TYPES ARE OPERATING AND SERVICE LEASES. LESSOR RECEIVES LEASE RENTALS, CLAIMS DEPRECIATION. LESSEE CHARGES THE LEASE RENTALS PAID TO THE P & L ACCOUNT.

LEASING AND HIRE PURCHASE

THE LESSOR BREAKS UP THE RENTALS RECEIVED INTO FINANCE INCOME AND ANNUAL LEASE CHARGE. FINANCE INCOME = TOTAL RENTALS OVER THE LEASE PERIOD + RESIDUAL VALUE OF LEASED ASSET -- COST OF LEASED ASSET ( FAIR VALUE ).

LEASING AND HIRE PURCHASE

USE SUM OF DIGITS METHOD TO FIND ANNUAL FINANCE INCOME. ANNUAL LEASE CHARGE = ANNUAL LEASE RENT ANNUAL FINANCE INCOME. ANNUAL LEASE CHARGE = STATUTORY DEPRECIATION + LEASE EQUALISATION CHARGE. LEASE EQUALISATION CHARGE IS DEDUCTED FROM THE LEASE RENTALS OR THE PROFIT & LOSS ACCOUNT.

LEASING & HIRE PURCHASE

SOMETIMES THE ANNUAL LEASE IS LESS THAN STATUTORY DEPRECIATION; THEN THE LEASE EQUALISATION CHARGE IS ADDED TO THE PROFIT & LOSS ACCOUNT. THE LEASE EQUALISATION CHARGE ACCOUNTED THROUGH THE LEASE TERMINAL ADJ. A/C WHICH FINALLY IS DEDUCTED FROM THE WRITTEN DOWN VALUE OF THE ASSET. IN CASE OF OPERATING LEASE IF THE PERIOD IS LESS THAN 1 YEAR ( WHICH IS GENERALLY THE CASE ) THEN THE ENTIRE AMOUNT IS TAKEN TO THE PROFIT & LOSS ACCOUNT. IF THE PERIOD IS MORE THAN 1 YEAR AND THE ENTIRE RENTAL IS TAKEN INTO A LEASE RENT SUSPENCE ACCOUNT AND YEARLY RENTALS ARE

LEASING & HIRE PURCHASE

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

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

LEASING AND HIRE PURCHASE

Explanation The concept of lease equalisation account is an equaliser between the capital recovery inherent in lease rentals and the depreciation chargeable as per Companies Act. The objective of the lessor is to write-off an amount equal to the capital recovery inherent in lease rentals, so as to leave in the revenue statement only the financing charges

LEASING AND HIRE PURCHASE

HIRE PURCHASE IS DIFFERENT IN THAT THE HIRER IS THE OWNER FOR THE PURPOSE OF DEPRECIATION. ALTHOUGH ACTUAL OWNERSHIP PASSES ON THE DATE OF PAYMENT OF LAST INSTALMENT. THE HIRE PURCHASE PRICE CONSISTS OF CASH PRICE AND INTEREST. INSTALMENT SALE IS SIMILAR EXCEPT THAT OWNERSHIP PASSES ON TO BUYER AS SOON AS THE 1ST INSTALMENT IS PAID.

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

THE SELLER OF THE ASSET IS CALLED VENDOR

LEASING AND HIRE PURCHASE

A TYPICAL LEASE TRANSACTION IN THE BOOKS OF THE LESSOR: Bank a/c dr. to lease rent (lease rent received) Lease rent a/c dr. to P & L a/c (lease rent transferred to profit) Depreciation a/c to asset (annual depreciation Of the asset) P&L a/c to depreciation dr.

dr.

LEASING AND HIRE PURCHASE

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

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

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

LEASING AND HIRE PURCHASE

A TYPICAL TRANSACTION IN THE BOOKS OF THE HIRER:

Asset a/c dr. to vendor (purchase of asset on H P basisto the extent of the amount agreed) . Vendor a/c dr. to bank (down payment/instalment) . Depreciation a/c dr. to asset (depn. Of asset) . P&L a/c dr.

NON-TRADING ORGANISATIONS
NON-TRADING ORGANISATIONS ARE NON PROFIT MAKING BODIES, RENDERING SERVICES TO PUBLIC, COLLECTING MONEYS BY WAY OF MEMBERSHIP FEES, SUBSCRIPTIONS, DONATIONS. HOWEVER TO PREVENT MISUSE OF FUNDS, ACCOUNTS ARE MAINTAINED. RECEIPTS & PAYMENTS STATEMENT CONTAINS REAL ACCOUNTS, ACTUAL RECEIPTS AND PAYMENTS, BOTH CAPITAL AND REVENUE ITEMS.

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

NON-TRADING ORGANISATIONS

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

DEPRECIATION

DEPRECIATION IS A CHARGE ON PROFITS, TO ACCOUNT FOR THE FALL IN THE VALUE( NOTIONAL OR OTHERWISE ) OF AN ASSET DURING THE PERIOD OF USE. DEPRECIATION OR WRITING OFF OF A CERTAIN PORTION OF AN ASSET ON AN ANNUAL BASIS IS A PRUDENT WAY OF SAVINGS FOR REPLACEMENT OF THE ASSET AFTER ITS USEFUL LIFE IS OVER. SINCE DEPRECIATION IS AN OPERATING COST AND THEREFORE TAX DEDUCTIBLE, EACH YEAR THE SAVING IS TO THE EXTENT OF (TAX RATE)* ANNUAL DEPRECIATION.

DEPRECIATION

DEPRECIATION CAN ALSO BE LOOKED IN A DIFFERENT WAY. DEPRECIATION IS AN ACCOUNTING PROCESS FOR THE GRADUAL CONVERSION OF THE CAPITALIZED COST OF FIXED(TANGIBLE) ASSETS INTO EXPENSE. SIMILARLY, INTANGIBLE ASSETS ARE CONVERTED INTO EXPENSE BY AMORTISATION.

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

DEPRECIATION

WHAT CAUSES DEPRECIATION ? SIMPLY WEAR AND TEAR MISHAPS OBSOLESCENCE PASSAGE OF TIME

FALL IN VALUE

DEPRECIATION

IN ORDER TO CALCULATE DEPRECIATION THERE ARE BASIC ISSUES TO BE ASCERTAINED : -- ESTIMATED USEFUL LIFE OF THE ASSET(YEARS). -- THE RESIDUAL VALUE OF THE ASSET. -- METHOD TO BE USED FOR PROVIDING DEPRECIATION.

DEPRECIATION
METHODS OF DEPRECIATION : . STRAIGHT LINE METHOD. EQUAL FRACTION OF THE NET COST(COST OF THE ASSET LESS THE RESIDUAL VALUE) IS CHARGED EACH YEAR.

WRITTEN DOWN VALUE METHOD. EQUAL PERCENTAGE OF THE WRITTEN DOWN VALUE IN THE BOOKS OF THE COMPANY IS CHARGED EACH YEAR. SINKING FUND METHOD. IT IS STRAIGHT LINE METHOD BUT THE DEPRECIATION CHARGED OR A PORTION OF IT IS KEPT AS A RESERVE, INVESTED IN MARKETABLE SECURITIES. THE FUND GROWS INTO REPLACEMENT VALUE OF THE ASSET.

FINAL LEG

THANK YOU VERY MUCH FOR YOUR PATIENCE; I TRUST IT WAS USEFUL. BEFORE WE DISPERSE LET US GO THRU A SET OF QUESTIONS WITH MULTIPLE CHOICE ANSWERS,WHICH WILL COVER THOSE ASPECTS OF ACCOUNTING THAT MAY NOT BEEN TOUCHED UPON.

END
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