DBF/JAIIB Nov 2017

18TH NOV 17

www.AccountsClass.com
Important Topics 2

1. Rule of 72 and 69
2. Trial Balance
3. Types of Errors
4. Ratio Analysis
Important Topics 3

6. Capital & Revenue expenditure / Receipt , Deferred revenue

expenditure
7. GAAP
6. Accounting Concepts and Conventions
7. Accounting Standards
8. BRS Bank Reconciliation Statement
9. Depreciation and its types
10. Sum of digits methods
Important Topics 4

11. Terminologies
1) Direct Quote
2) Indirect Quote
3) Limited liability
4) Unlimited liability
5) Holding company
6) Subsidiary company
7) Shares issued at discount, par, premium
8) Under subscription, over subscription
9) Sweat equity issued to employees
10) Forfeit of shares
Important Topics 5

11. Terminologies
11. Cost of goods sold
12. MoA, article of association,
13. Floatation of public company
14. Overhaul of machine
15. Fictitious asset
16. Capital Reserves
17. Capital Redemption Reserves
18. Bonds and types of bonds
Important Topics 6

11. Capital Classification

Authorized
Issued
Subscribed
Called up
Paid up
Important Topics 7

Rule of 72 and 69
http://accountsclass.com/what-is-rule-of-72/
http://accountsclass.com/what-is-rule-of-69/
Important Topics 8

Trial Balance
http://accountsclass.com/what-is-trial-balance-and-trial-balance-
problems/
Important Topics 9

1. Ratio Analysis
1. Current Ratio
1. http://accountsclass.com/what-is-current-ratio/
2. Debt to Equity Ratio
1. http://accountsclass.com/what-is-debt-to-equity-ratio/
Important Topics 10

Types of Errors

1. Clerical Errors
1. Errors Of Omission
2. Errors Of Commission
3. Compensating Errors
4. Errors Of Duplication

2. Errors Of Principle
Important Topics 11

Types of Errors
1. Clerical Errors

1. Errors Of Omission
Cash paid to the suppliers has been entered in the payment side of the cash book but it will
not be entered in the debit side of the suppliers account.

2. Errors Of Commission
3. Compensating Errors
4. Errors Of Duplication
2. Errors Of Principle
Important Topics 12

Types of Errors
1. Clerical Errors

1. Errors Of Omission
2. Errors Of Commission
Entered wrongly, partially or incorrectly - purchase of Rs.430 may be entered in the Purchase a/c as Rs.340
- Wrong casting or carry forward of a subsidiary book. Casting refers to the process of totalling the
daybooks periodically. A mistake in relation to totalling is called error in casting(the total of a page may
be Rs.235 and carried forward to the next page as Rs.325) - purchase of goods from Mr. Raj for Rs.1000 is
debited to his account [instead of crediting]

3. Compensating Errors
4. Errors Of Duplication
2. Errors Of Principle
Important Topics 13

Types of Errors
1. Clerical Errors

1. Errors Of Omission
2. Errors Of Commission
3. Compensating Errors
Debit of one account is neutralized by an over credit in some other account to the same extent
if tax paid Rs.2, 500 is debited in Tax a/c as Rs.3, 000 and interest received Rs.3, 500 is credited
in the interest a/c as Rs.4, 000, the excess debit of Rs.500 in tax a/c is compensated by an excess
credit of Rs.500 in interest a/c.
4. Errors Of Duplication
2. Errors Of Principle
Important Topics 14

Types of Errors
1. Clerical Errors

1. Errors Of Omission
2. Errors Of Commission
3. Compensating Errors
4. Errors Of Duplication
Entering 2 times

2. Errors Of Principle
Types of Errors 15

1. Clerical Errors

1. Errors Of Omission
2. Errors Of Commission
3. Compensating Errors
4. Errors Of Duplication

2. Errors Of Principle -
Wrong allocation between capital and revenue expenditure, or wrong valuation of assets.
For example, debiting the wage account instead of machinery account for the wage paid to the mechanics used
for the installation of machine and debiting the customer's account instead of cash account for the cash sales
made
GAAP 16

GAAP - Generally Accepted Accounting Principles.

http://accountsclass.com/what-are-gaap-generally-accepted-
accounting-principles/
Accounting concepts and conventions
http://accountsclass.com/accounting-concepts/
MCQs - http://accountsclass.com/mcq-5-accounting-concepts-and-
conventions/

Accounting Standards
http://accountsclass.com/what-are-accounting-standards/
BRS 17

http://accountsclass.com/what-is-bank-reconciliation-statement-
brs/
Capital Classification 18

Authorized Capital
Issued Capital
Subscribed Capital
Called up Capital
Paid up Capital
Share Capital, the company should specifically state:
Authorized capital
1 crore shares of Rs.10 each 10,00,00,000
Issued capital
25 lac shares of Rs.10 each 2,50,00,000
Subscribed capital
24 lac shares of Rs.10/- each 2,40,00,000
Called up
24 lac shares-Rs.5 each called 1,20,00,000
Less calls in arrears
50000 shares of Rs.2 each 1,00,000
Paid up capital 1,17,50,000
Forfeited shares account 1,50,000
Depreciation 20

Depreciation MCQs
http://accountsclass.com/1070-2/

Depreciation types
Straight Line Method: This method is suitable for asset depreciate for lapse of time, such as
patents.
Diminishing Value Method: In this method annual depreciation is calculated on the opening
balance of the Asset Account and it reduces year by year. This method is suitable for
exhausting and costly assets like plant and machinery.
Depletion Method: This method is applicable for assets of wasting nature and also for
intangible assets such as mines, patents, copyrights etc.
Sinking Fund Method: According to this method the amount of depreciation is invested in
interest earning securities.
Depreciation 21
Sum of the years digit method
Machine Hour Rate Method: This method is used for machines where
productivity is relevant in their performance and in the case of machines
with high cost.
Revaluation Method: In the assets are revalued each year. The method is
normally adapted to charge depreciation on numerous inexpensive fixed
assets like small tools, live stock. Excess of the opening over the closing
inventory thus gives the periodic depreciation expenses.
For example, if the value of tools at the beginning of the year was Rs. 8,000,
during the year tools worth Rs. 6,000 were purchased more and when at the end
revaluation was undertaken it amounted to Rs. 11,000. The amount of
depreciation for the year shall be as under:
(Rs. 8,000 + Rs. 6,000) - Rs. 11,000
=Rs. 14,000 - Rs. 11,000
= Rs. 3,000
Insurance policy method: In this method annual depreciation amount is
invested as the payment to an insurance policy as premium.
Terminologies Company Accounts 22

Limited liability
Unlimited liability
Holding company
Subsidiary company
Shares issued at discount, par, premium
Under subscription, over subscription
Sweat equity issued to employees
Forfeit of shares
Subsidiary Books 23

Subsidiary Books are those books of original entry in which

transactions of similar nature are recorded at one place and in
chronological order. In a big concern, recording of all transactions
in one Journal and posting them into various ledger accounts will be
very difficult and involve a lot of clerical work.
This is avoided by sub-dividing the journal into various subsidiary
journals or books. The subdivisions of journal into various subsidiary
journals for recording transactions of similar nature are called as
Subsidiary Books.
Types of Subsidiary Books 24

a) Purchases Day Book for recording credit purchase of goods only. Cash
purchase or assets purchased on credit are not entered in this book.
b) Sales Day Book for recording credit sales of goods only. Assets sold or cash sales
are not recorded in this book.
c) Purchases Returns Book for recording the goods returned to the suppliers when
purchased on credit.
d) Sales Returns Books for recording goods returned by the customers when sold
on credit.
e) Bills Receivable Book for recording the bills received [Bills Receivables] from
customers for credit sales.
f) Bills Payables Book for recording the acceptances [Bills Payables] given to the
suppliers for credit purchases.
g) Cash Book for all receipts and payments of cash.
h) Journal Proper for recording any transaction which could not be recorded in
the above-mentioned subsidiary books. For example, assets purchased or sold on
credit and opening entry etc., are entered in this book
 Cash Book
It is a special journal where all cash receipts and cash payments are
recorded
Types of cash book:
Single column cash book Only cash column
Two column cash book- Cash with discount columns
Three column cash book Cash, Bank and Discount columns

DR CR
Date Particula Dis- Cash Date Particulars Dis- Bank Cash
rs count Bank count

25
Technical terms 26

Cost of goods sold

Moa, article of association,
Floatation of public company
Overhaul of machine
Fictitious asset
Cost of goods sold 27

Cost of goods sold is the accumulated total of all costs used to

create a product or service, which has been sold.
COGS = Beginning Inventory + Purchases Made During the
Reporting Period - Ending Inventory.
Overhaul of machine 28

Process of restoring and maintaining an equipment, machine, or

system in a serviceable condition. Overhaul involves (1) partial or
complete disassembly of the item, (2) inspection to detect
damaged, defective, or worn parts, (3) repair or replacement of
such parts, and (4) reassembly, testing, and trial-run prior to returning
the item to its full operating level
Memorandum of Association 29

(MOA)
Memorandum of Association (MOA) is the supreme public
document which contains all those information that are required for
the company at the time of incorporation. It can also be said that, a
company cannot be incorporated without memorandum. At the
time of registration of the company, it needs to be registered with
the ROC (Registrar of Companies).
It contains the objects, powers and scope of the company, beyond
which a company is not allowed to work, i.e. it limits the range of
activities of the company
Articles of Association (AOA) 30

Articles of Association (AOA) is the secondary document, which

defines the rules and regulations made by the company for its
administration and day to day management. In addition to this the
articles contain the rights, responsibilities, powers and duties of
members and directors of the company. It also includes the
information about the accounts and audit of the company
Fictitious asset 31

Asset created by an accounting entry (and included under assets in

the balance sheet) that has no tangible existence or realizable value
but represents actual cash expenditure
Preliminary expenses(cost involved for the issue of shares/debentures
at the time of establishment), discount on issue of shares, debit
balance in the profit and loss
Floatation, free float, public float 32

Public float or free float represents the portion of shares of a

corporation that are in the hands of public investors as opposed to
locked-in stock held by promoters, company officers, controlling-
interest investors, or government.
Wasting assets 33

A wasting asset is a property or security that has a limited life and

loses value over its life.
Mines, oil wells quarries
General Reserves 34

When any amount is kept separate by a company out of its profit for
future purpose then that is called as general reserves. In other words
the general reserves are the retained earnings of a company which
are kept aside out of companys profits to meet future known or
unknown obligations. General reserves are the part of Profit and Loss
Appropriation Account
Capital Reserves 35

Any profit that arises in a company in special circumstances is

called capital reserves. In other words, any profit or gain that arises
other than routine business activities is treated as capital reserves.
Example
Profit prior to incorporation of company:-
Profit on sale of fixed assets :-
Premium of issue of shares :-
Premium of issue of debentures:-
Profit on purchase of a business:-
Profit on redemption of debentures:- .
Capital reserves 36
Any profit that arises in a company in special circumstances is called capital reserves. In other words,
any profit or gain that arises other than routine business activities is treated as capital reserves.
Example
Profit prior to incorporation of company:- Every limited company is legal and independent entity and
does not come in to existence till the certificate of incorporation is received from the registrar of
companies. But any profit earned by the company before its incorporation, shall be treated as capital
reserves.
Profit on sale of fixed assets :- Any company who sells any fixed assets and earns any profit on sale of
the fixed assets, shall be treated as capital reserves.
Premium of issue of shares :- When shares are issued at a price of more than its face value then the
extra money received is called share premium. This share premium is also transferred in capital reserves
account.
Premium of issue of debentures:- When Debentures are issued at a price of more than its face value
then the extra money received, shall be transferred in capital reserves account.
Profit on purchase of a business:- When any company purchases any existing business and the
purchase price is less than its net assets of the business firm then the difference between purchase price
and net assets value, shall be treated as capital reserves account.
Profit on redemption of debentures:- When any profit is earned by a company at redemption of
debenture then this profit also shall be transferred to capital reserves account.
Capital redemption reserve 37

It is a reserve created when capital is redeemed.

When shares are redeemed or bought back, the company is
required to either replenish the capital by issuing fresh shares in lieu
of the redeemed or bought back shares or to transfer their funds to
an account called the Capital Redemption Reserve (CRR)

https://www.quora.com/What-is-the-logic-behind-the-creation-of-the-capital-
redemption-reserve
BRS - Causes of differences between cash book & pass book
Causes & position
of cash book
Cheques issued but not presented
for payment
Cheques deposited into the bank
but not yet credited
Bank charges
Interest on overdraft
Amount paid by the bank on SI.
Dishonour of cheque deposited.
Interest credited by bank
Amount collected by bank on SI.
Direct credits recd by bank
Clerical Errors
Effect in cash book (Debit balance)
Would immediately appear on the
credit side.
Balance would come down
Would immediately appear on the
debit side.
Balance would go up.
No entry till the customer gets the
intimation.
No entry till the customer gets the
intimation.
Over casting, under casting,
wrong entries etc
Effect in Pass book (credit
balance)
No entry till it is presented for
payment
No entry till the cheques are
cleared.
Debited in the pass book
immediately.
Balance would come down.
Credited in the pass book
immediately.
Balance would go up.
Wrong entries, wrong balancing
etc 38
BRS 39

Particulars
Balance as per cash book (+debit -credit)
ADD
Interest credited by bank
Direct credits received by bank
Amount deposited but not recorded in cash book

Deduct
Bank charges
Interest on overdraft
Dishonor of cheque deposited.

Adjusted Balance as per cash book (+debit or- credit)

Important Topics - Calculation of forward rates 40

Accounting equation
Rectification of error
Company accounts
Important Topics 41

Terminologies

Direct quote The price of one unit of foreign currency in terms of

local currency.
Us$ 1 = Rs.49.
Indirect quote - The price of the local currency in terms of foreign
currency. (upto 1.8.93)
Rs.1/- = $0.0200
Some basic rate Arithmetic:
Cross rate Rate of Euro arrived through US $.
Eg. 1 us$ =0 .70 euro 1 us $ = Rs.45.50 1 euro=?
Value date date when actual exchange of currency takes place.

 Bonds
Bonds are negotiable promissory notes issued by Public/Pvt sector
companies, Govt or Govt agencies.
They are debt instruments carrying a fixed rate of interest.
They can be traded in the market.
Bond terminologies:
Face value amt borrowed. Amount on the bond.
Coupon rate (interest rate mentioned on the instrument)
Maturity issued for a specified period. Date of maturity.
Redemption value the value which one gets on maturity.
Market value - Price at which the bond is bought or sold.
YTM - Its the rate of return wherein the present value of the promised cash flows
is equal to the purchase price.

 Types of bond
Fixed rate bonds-interest rate constant throughout the period.
Floating rate notes Linked to reference rates such as LIBOR, MIBOR
etc.
Zero coupon bonds issued at a discount and redeemed at par.
High yield bonds (junk bonds)- high risk and rated below investment
grade by credit rating agencies.
Convertible bonds option to convert to shares.
Inflation-indexed bonds-both principal and interest is indexed to
inflation.
Perpetual bonds no maturity dates.
Government bonds.(treasury bonds)
Golden rules of accounting 44

http://accountsclass.com/golden-rules-acounting/
 45

Adjusting entries
Entries made for adjustment of receivables and payables for the
year in the final accounts.
Closing entries
Entries made for transfer of all revenue items (income and
expenditure) to Trading and profit and loss account are called
closing entries.
Capital and Revenue Expenditure 46

http://accountsclass.com/capital-expenditure-revenue-
expenditure/
 Distinction between capital and revenue expenditure

Capital expenditure Revenue expenditure

Amount spent is usually large Amount spent is relatively small

The purpose is to improve o The purpose is to maintain the fixed

enhance business or productive or assets in good working condition,.
earning capacity
Benefit - Long duration Short duration

Non recurring Recurring

Shown is balance sheet Shown is profit and loss account

47
Accounting Equation 48

Assets = Capital + Liabilities

Bank Balance Sheet - schedules 49

http://accountsclass.com/format-of-bank-balance-sheet-format-of-
banking-companies-balance-sheet/