PRESENTATION

BY
Cma Sunil Kumar Mohan
9839736168
cmaskmohan@gmail.com

S K MOHAN 1
-MODULE C

S K MOHAN 2
 Balance sheet equation
 Preparation of Final account
 Ratio Analysis
 Final accounts of banking
companies
 Company accounts
 Accounting in a Computerized
environment

S K MOHAN 3
 The whole Financial Accounting depends on
Accounting Equation which is also known as
Balance Sheet Equation. The basic Accounting
Equation

SK MOHAN 5/13/2018 4
 It may be understood that the
◦ assets of the business should always be equal to
the liabilities (i.e. capital + outside liabilities)
◦ and the total revenue minus total expenses would
result either in profit or loss
◦ and this profit or loss would become part of the
capital.
 Capital or owner's equity = Assets—outside
liabilities
 Asset = Capital + outside liabilities
 Outside liabilities = Assets-capital
 Income i.e. profit = Revenue—Expenses
 Revenue = Expenses + profits
Assets = Liabilities
Assets = Capital + Liabilities
Assets =Net worth + Liabilities
Net worth = Capital + Reserves&
Surplus
Net worth = Assets Less Liabilities

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Assets = Liabilities

Assets = Liabilities (+) Capital

Liabilities = Assets (-) Capital

Capital = Assets (-) Liabilities

5/13/2018 SK MOHAN 7
 A caselet would clarify the above equations, as
under:
 A business has cash balance of Rs.37000,
furniture worth Rs.1000, goods Rs.6000 and
debtors nil which are financed by creditors of
Rs.4000 and promoter's capital of Rs.40000. Out
of the available goods, the business sells goods
valuing Rs.5000 for Rs.8000 to Mr. X . The
accounting equation will be as under:
 Assets = Liabilities
 Cash + furniture + Goods + debtors = capital +
profit + creditors
 37000+1000+1000+8000=40000+3000+4000

S K MOHAN 8
 Examine the following transactions and state whether
the statement is correct or incorrect:
 1. Assets = Liabilities + capital, is the basic equation
in a balance sheet.
 2. Capital—liabilities = Assets
 3. A firm has assets worth Rs.24000 and liabilities of
Rs.6000. The capital would be equal to Rs.30000.
 4. A balance sheet which does not have any outside
liability would have the same amount of capital and
assets.
 5. When a firm increases its term loan from the bank,
its capital is reduced to that extent.

 (Answer: 1 & 4 are correct and 2,3 &5 incorrect)

LIABILITIES ASSETS

Capital 300.00 Fixed assets 700.00

Reserves 200.00 Current 300.00

assets
Term Loans 300.00

Current 300.00
Liabilities
Total 1000.00 Total 1000.00
S K MOHAN 10
 Illustration 1
 If the capital of a business is Rs.3,00,000 and other
liabilities are Rs.2,00,000, calculate the total assets
of the business.
 Solution
 Assets = Capital + Liabilities
 Capital + Liabilities = Assets
 Rs. 3,00,000 + Rs.2,00,000 = Rs.5,00,000
 Illustration 2
 If the total assets of a business are Rs.3,60,000 and
capital is Rs.2,00,000, calculate liabilities.
 Solution
 Assets = Capital + Liabilities
 Liabilities = Assets – Capital
 Assets – Capital = Liabilities
 Rs. 3,60,000 – Rs. 2,00,000 = Rs. 1,60,000

S K MOHAN 11
 Illustration 3
 If the total assets of a business are Rs.4,50,000
and outside liabilities are Rs.2,50,000, calculate
the capital.
 Solution:
 Capital = Assets – Liabilities
 Assets – Liabilities = Capital
 Rs. 4,50,000 – Rs. 2,50,000 = Rs.2,00,000

S K MOHAN 12
 Transaction 1: SUNIL started business with Rs.50,000 as capital.
 The business unit has received assets totaling Rs.50,000 in the form
of cash and the claims against the firm are also Rs.50,000 in the form
of capital. The transaction can be expressed in the form of an
accounting equation as follows:
 Assets = Capital + Liabilities
 Cash = Capital + Liabilities
 Rs. 50,000 = Rs. 50,000 + 0
 Transaction 2: SUNIL purchased furniture for cash Rs.5,000.
 The cash is reduced by Rs,5,000 but a new asset (furniture) of the
same amount has been acquired. This transaction decreases one
asset (cash) and at the same time increases the other asset (furniture)
with the same amount, leaving the total of the assets of the business
unchanged. The accounting equation now is as follows:
 Assets = Capital + Liabilities
 Cash + Furniture = Capital + Liabilities
 Transaction 1 50,000 + 0 = 50,000 + 0
 Transaction 2 (–) 5,000 + 5,000 = 0 + 0
 Equation 45,000 + 5,000 = 50,000 + 0

S K MOHAN 13
 Transaction 3: He purchased goods for cash Rs.30,000.
 As a result, cash balance is reduced by the goods purchased, leaving
the total of the assets unchanged.
 Assets = Capital +Liabilities
 Cash + Furniture + Stock (Goods)= Capital +Liabilities
 Transaction 1&2 45,000 + 5,000 + 0 = 50,000 + 0
 Transaction 3 (–) 30,000 + 0 + 30,000 = 0+ 0
 Equation 15,000 + 5,000 + 30,000 = 50,000 + 0
 Transaction 4: He purchased goods on credit for Rs.20,000.
 The above transaction will increase the value of stock on the
assets side and will create a liability in the form of creditors.
 Assets = Capital +Liabilities
 Cash + Furniture + Stock = Capital +Creditors
 Transaction 1-3 15,000 + 5,000 + 30,000 = 50,000 + 0
 Transaction 4 0 + 0 + 20,000 = 0 + 20,000
 Equation 15,000 + 5,000 + 50,000 = 50,000 + 20,000

S K MOHAN 14
1. The origin of a transaction is derived from the
◦ a) Source document b) Journal c) Accounting equation
2. Which of the following is correct?
◦ a) Capital = Assets + Liabilities
◦ b) Capital = Assets – Liabilities
◦ c) Assets = Liabilities – Capital
3. Amount owned by the proprietor is called
◦ a) Assets b) Liabilities c) Capital
4. . The Accounting Equation is connected with
◦ a) Assets only b) Liabilities only c) Assets, Liabilities and
capital
5. Supply the missing amounts on the basis of
Accounting Equation
 Assets = Liabilities + Capital
 Assets = Liabilities + Capital
 i. 20,000 = 15,000 + ?
 ii. ? = 5,000 + 10,000
 iii. 10,000 = ? + 8,000

S K MOHAN 15
(1) If the net worth of the business is Rs.1100,fixed
assets are Rs. 600, current assets Rs.400,
investments Rs.300, current liabilities Rs. Nil, what
is the amount of claim to outsiders?
◦ Rs. 1300
◦ Rs. 500
◦ Rs.200*
◦ Rs. Nil
(2) Identify the wrong pair
◦ Outstanding expenses - Personal Account *
◦ Profit and Loss Account (Dr. balance) – Application of funds
◦ Net worth less reserves & surplus - Balance in P & L
Account*
◦ Balance sheet - Financial position

S K MOHAN 16
1. The Assets of a business are Rs.500000 and
its capital is Rs.115000. Its liabilities on that
date would be------
a) Rs.615000
a) Rs.385000
b) Rs.500000
a) Rs. 115000
2. A had a capital of Rs.750000. He has also
purchased goods of Rs.150000 on credit
from Mr. Saha. The value of total assets of
the entity is-----
a) Rs.750000
a) Rs.900000
b) Rs.600000
c) Rs.1050000

S K MOHAN 17
 Trading Account
 Profit and Loss Account
 Profit and Loss Appropriation Account
 Balance Sheet:

S K MOHAN 18
 Final accounts are the end product of financial accounting
process. It consists of trading and profit loss account and
balance sheet
 – Manufacturing account shows cost of production;
 trading account shows the gross profit or gross loss
 while profit and loss account shows the net profit earned or
net loss suffered by the organization during a particular period.
 – Balance sheet discloses the financial position i.e. the balances
of assets, liabilities, and capital of the business as on a particular
date.
 – Balance sheet is prepared with assets on the right hand side
and liabilities on the left hand side.
 – Assets and liabilities are classified into fixed and current and
are shown in the balance sheet either in the order of liquidity or
permanence
S.K.MOHAN May 13, 2018 19
 Adjustment entries are passed at the end of the
accounting period in order to adjust various nominal
accounts to find out the correct profit or loss.
 – Closing entries are journal entries required for
transferring all accounts relating to expenses and gain
to trading and profit loss account.

S K MOHAN 20
Closing 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

S K MOHAN 21
 Closing Entries
 Like ledger accounts, trading account will be closed by
transferring the gross profit or gross loss to the profit
and loss account.
 i. If gross profit
 Trading A/c.............Dr xxx
 To profit and loss account x x x

 (Gross Profit transferred to
 Profit and loss A/c)
 ii. If gross loss.
 Profit and loss A/c.........Dr x x x
 To Trading A/c x x x
 (Gross Loss transferred to
 Profit and loss A/c)

S K MOHAN 22
 According to accrual concept of accounting, the
profit or loss for an accounting year is not based
on the revenues realised in cash and the
expenses paid in cash during that year.
 There may exist some receipts and expenses in
the current year which partially relate to the
previous year or to the next year.
 There may exist incomes and expenses relating
to the current year that still need to be brought
into books of account.
 Such items duly adjusted, the final accounts will
not reflect the true and fair view of the state of
affairs of the business.

SK MOHAN 5/13/2018 23
 Adjustments may also become necessary in
respect of certain incomes received in advance
or those which have accrued but are still to be
received.
 Apart from these, there are certain items which
are not recorded on day-to-day basis such as
depreciation on fixed assets, interest on capital,
etc. These are adjusted at the time of preparing
financial statements.
 The purpose of making various adjustments is
to ensure that the final accounts reveal the true
profit or loss and the true financial position of
the business.

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 What are adjusting entries? Why are they necessary for preparing
final accounts?
 As we know, basic accounting records are on the basis of Going
Concern Assumption.
 But the Final Accounts are prepared every year on the basis of
‘Accounting Period Assumption’, ‘Revenue Recognition Assumption’
and ‘Matching Principle’ besides others.
 The purpose is to make a continuous assessment of the final affairs
of the firm. It is necessary that all expenses and incomes for the year
for which accounts are being prepared be taken.
 It, therefore, necessitates that:
 Expenditure whether paid or not to be included Income whether
received or not be included Expenditure relating to the succeeding
years be excluded and
Income relating to the succeeding years be also excluded.


SK MOHAN 5/13/2018 25
 Some important and common items, which need to be adjusted at
the time of preparing the final accounts are discussed below.
 1. Closing stock
 2. Outstanding expenses
 3. Prepaid Expenses
 4. Accrued incomes
 5. Incomes received in advance
 6. Interest on capital
 7. Interest on drawings
 8. Interest on loan
 9. Interest on investment
 10. Depreciation
 11. Bad Debts
 12. Provision for bad and doubtful debts
 13. Provision for discount on debtors
 14. Provision for discount on creditors.
 Note : All adjustments are given outside the trial balance

S K MOHAN 26
 Let us understand with the help of examples.
◦ Suppose, a firm closes its books on 31st March and rent for the month
of March has not yet been paid.
◦ This amount has to be paid in any case because the expense has been
incurred.
◦ Therefore, it would be proper to include the rent for this month along
with other expenses for the year.
 Take another example.
◦ Insurance premium has been paid for twelve months beginning 1st
October. It is apparent that insurance protection will be available for six
months this year and six months next year.
◦ Half the premium, therefore, should be treated as the next year’s
expense.
 In a firm there are a number of transactions related to
expenses and incomes, which have to be adjusted.
 If such items are not adjusted or brought into the current
year’s books of account, the Final Accounts will not reveal a
true and fair picture of the results.
 All such items which need to be brought into books of
accounts at the time of preparing Final Accounts are called
‘adjustments’.
 Journal entries are passed to effect the required adjustments.
These entries are known as Adjusting Entries.

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 Why is it necessary to record the adjusting entries in
the preparation of final accounts?
◦ The purpose is to make a continuous assessment of the final
affairs of the firm. It is necessary that all expenses and
incomes for the year for which accounts are being prepared
be taken.
 What is meant by closing stock? Show its treatment in
final accounts?
◦ All goods purchased or produced during the accounting year
are not completely sold out by the end of the year.
◦ The goods remaining unsold constitute the ‘Closing Stock’.
◦ In order to ascertain the gross profit or gross loss, closing
stock has to be brought into the Final Account.
◦ Closing stock is valued at cost or market price whichever is
lower and then incorporated in the accounts by passing the
following adjustment entry:
 Closing Stock A/c Dr.
 To Trading A/c

SK MOHAN 5/13/2018 28
 (a) Outstanding expenses
◦ Expenses which have been incurred during the year and whose
benefit has been derived during the year, but not paid for yet
are called outstanding expenses.
 (b) Prepaid expenses
◦ In some cases, the benefit of the amount already spent will be
available in the next accounting year also. Such a part of the
expense is called a ‘ prepaid expense’.
 (c) Income received in advance
◦ Sometimes an amount is received during a year in respect of an
income that relates partially to the next year. The income which
has been received during the current accounting year but
relates to the next accounting year is called ‘Unearned Income’
or ‘Income Received in Advance’.
 (d) Accrued income /outstanding income
◦ accrued incomes are those incomes which have been earned
during the accounting period but have not been received till
the end of the accounting period. Such incomes are called
‘Outstanding incomes’ or ‘Incomes earned but not yet
received’.

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 Why is it necessary to create a provision for
doubtful debts at the time of preparation of final
accounts?
 We make provisions for expected losses but we
do not take credit for expected profit.
 A firm, therefore, make provision at the end of
the accounting year for likely bad debts in the
next year.
 This is for the simple reason that out of the
credit sales made during the particular year,
some debts are likely to become bad in the next
year due to non – payments.
 The correct accounting is to make provision for
such likely bad debts every year.
SK MOHAN 5/13/2018 30
 (a) Depreciation
 When provision for depreciation account is not maintained:
◦ Depreciation A/c Dr.
 To Asset A/c

◦ Profit and Loss A/c Dr.

 To Depreciation
 (b) Discount on debtors Accounting Treatment
 For Discount Allowed:
◦ Discount Allowed A/c Dr.
 To Debtors
◦ (Being discount allowed on debtors)
 (c) Interest on capital
◦ Interest on Capital A/c Dr.
◦ To Capital A/c

◦ Profit and Loss A/c Dr

 To Interest on Capital A/c
 (d) Manager’s commission
◦ Profit and Loss A/c Dr.
 To Commission Payable or Outstanding commission A/c

SK MOHAN 5/13/2018 31
 What is meant by provision for discount on
debtors?
 Debtors outstanding at the end of the year
make payment in the next year and they may
be entitled to cash discount if they make the
payment by the due date.
 Because, the debt has arisen during the year,
the discount is to be taken as expense for the
year.
 Thus, a provision for discount on debtors is
made.

SK MOHAN 5/13/2018 32
 Indicate where the following items will be shown in the
balance sheet.
 (1) Credit balance in the bank column of the cash book
 (2) Debit balance to the account of A who is a customer
 (3) Credit balance in A/c of B who is supplier
 (4) Debit balance in A/c of C who is a supplier
 (5) Credit balance in A/c of D who is a customer
 (6) Outstanding rent
 (7) Insurance paid for the next year
 (8) Loan from HDFC bank for 7 years
 (9) Interest due on loan
 (10) Provision for doubtful debtors
 (11) Net Profit t for the year
 (12) Machinery
 (13) Accumulated depreciation on vehicle
 (14) Cash at Bangalore office
 (15) Balance with Citi Bank
SK MOHAN 5/13/2018 33
 Answer:
 (1) Credit balance in the bank column of cash book indicates a liability
towards bank. This is actually a bank overdraft. Hence, it should be
shown as Current Liability.
 (2) Debit balance in A’s A/c means amount due from him as a
customer. To be shown as Sundry Debtors.
 (3) Credit balance in supplier’s A/c is a liability, hence will be shown
under Current Liabilities.
 (4) Debit balance in supplier’s A/c reflects an advance given to
supplier, hence will be shown under Current Asset.
 (5) Credit balance in customer’s A/c means advance from customer,
hence will be shown as Current Liability.
 (6) Outstanding rent will be shown under Current Liability.
 (7) Insurance paid for next year is ‘prepaid’ for current year, hence will
be taken as Current Asset
 (8) Loan from HDFC is for 7 years which is a long term loan, hence
will be shown as Long Term Liability.

SK MOHAN 5/13/2018 34
 (9) Interest due on loan is Current Liability.
 (10) Provision for doubtful debts will be reduced from the
sundry debtor’s amount under Current Assets as it denotes
chances of not receiving the money from customers.
 (11) Net Profit for the year will be added to the Capital or to
Reserves and Surplus in Balance Sheet.
 (12) Machinery is a Fixed Asset.
 (13) Accumulated depreciation on vehicle is reduction in its
value, so will be shown as deduction from vehicle under Fixed
Assets.
 (14) Cash at Bangalore office is a Current Asset.
 (15) Balance with Citi Bank is Current Asset

SK MOHAN 5/13/2018 35
 Illustration 4.
 From the following particulars prepare a Balance Sheet of Mr. X, for the
year ended 31st March, 2013.
 Capital : ` 2,00,000: Drawings : ` 40,000 ; Cash In Hand : ` 20,000 ; Loan
from Bank : ` 60,000; Bank balance 40000
 Sundry Creditors : ` 40,000; Bills Payable : ` 20,000; Bank Overdraft : `
20,000; Goodwill : ` 60,000; Sundry Debtors : ` 80,000; Land and Building :
` 50,000; Plant and Machinery : ` 80,000; Investment : ` 20,000;
 Bills Receivable : ` 10,000.
 The following adjustments are made at the time of preparing final
accounts:
 I. Outstanding Liabilities for : Salaries ` 10,000; wages ` 20,000; Interest on
Bank Overdraft ` 3,000; and Interest on Bank Loan ` 6,000.
 II. Provide Interest on Capital @ 10% p.a.
 III. Depreciation on Plant and Machinery by 10% p.a.
 IV. Bad Debts amounted to ` 10,000 and make a provision for Bad Debts @
10% on Sundry Debtors.
 V. Closing stock amounted to ` 1,20,000.
 Net profit for the year amounted to ` 96,000 after considering all the above
adjustments
SK MOHAN 5/13/2018 36
SK MOHAN 5/13/2018 37
SK MOHAN 5/13/2018 38
Liability AMT Assets AMT

Capital Fixed Assets:

(separate figures are shown for Land less depreciation
each owner) Building less depreciation
Long term Liabilities: Plant and Machinery
Loans from banks or financial less depreciation
Institutions Vehicles less depreciation
Current Liabilities: Computer systems less depreciation
Sundry creditors Office equipments less Depreciation
Bills payable Current Assets:
Advances from customers Stocks
Outstanding expenses Sundry debtors less provisions
Bills receivables
Cash in hand
Cash at bank
Prepaid expenses

Advances to suppliers
Total Total

SK MOHAN 5/13/2018 39
 Trading account is a part of final accounts prepared
by a business firm which shows gross profitability of
business activities during a particular period.
 trading account shows total sales, total purchases
and all direct expenses relating to purchase and
sales.
 Trading account is prepared by manufacturing
companies and trading companies only because the
sales and purchases of goods are done in these types
of business firms only.
 Trading Account is like a statement which is divided in
two parts i.e. Income part and Expenditure Part.

S K MOHAN 45
 In income part, we show the following details:-
 Sales of goods
 LessSalesReturns
Closing Stock of goods
 In Expenditure part, we show the following
accounts:-
 Opening stock of goods
Purchases of goods
 Less Purchase Returns
 All direct expenses relating to purchase, sale and
manufacturing of goods like Cartage & Freight
Expenses, Rent for godown or factory, Electricity
and Power expenses, wages of workers and
supervisors, Packing expenses etc.

S K MOHAN 46
S K MOHAN 47
  Test Your Understanding - II
 Choose the correct option in the following questions :
 1. Choose the correct chronological order of
ascertainment of the following profits from the profit and
loss account :
◦ (i) Operating Profit, Net Profit, Gross Profit
◦ (ii) Operating Profit, Gross Profit, Net Profit
◦ (iii) Gross Profit, Operating Profit, Net Profit
◦ (iv) Gross Profit, Net Profit, Operating Profit
 2. While calculating operating profit, the following are
not taken into account.
◦ (i) Normal transactions
◦ (ii) Abnormal items
◦ (iii) Expenses of a purely financial nature
◦ (iv) (ii) & (iii)
◦ (v) (i) & (iii)
S K MOHAN 48
 . Which of the following is correct :
◦ (i) Operating Profit = Operating profit – Non-
operating expenses – Non-operating incomes
◦ (ii) Operating profit = Net profit + Non-operating
Expenses + Non-operating incomes
◦ (iii) Operating profit = Net profit + Non-
operating Expenses – Non-operating incomes
◦ (iv) Operating profit = Net profit – Non-operating
Expenses + Non-operating incomes

S K MOHAN 49
 I State True or False :
 (i) Gross profit is total revenue. T
 (ii) In trading and profit and loss account, opening stock
appears on the debit side because it forms the part of the
cost of sales for the current accounting year. T
 (iii) Rent, rates and taxes is an example of direct expenses.
F
 (iv) If the total of the credit side of the profit and loss
account is more than the total of the debit side, the
difference is the net profit. T
 II Match the items given under ‘A’ with the correct items
under ‘B’
 B(i) Closing stock is credited to (a) Trial balance
 A(ii) Accuracy of book of account is tested by (b) Trading account
 E(iii) On returning the goods to seller, the buyer sends (c) Credit note
 D(iv) The financial position is determined by (d) Balance sheet
 C(v) On receiving the returned goods from the (e) Debit note
 buyer, the seller sends

S K MOHAN 50
 Gross Profit = Sales – (Purchases + Direct
Expenses
 Net Profit = Gross Profit + Other Incomes –
Indirect Expenses
 Cost of Goods Sold ={ Purchases + Direct
Expenses + opening stock} – Closing Stock

S K MOHAN 51
S K MOHAN 52
SK MOHAN 5/13/2018 54
SK MOHAN 5/13/2018 55
 It is a summary of revenue earned and expenses
incurred which ultimately results in profit or loss
of to the company
 Operating revenue = Sales revenue
 Non_operating revenue = Other income ( out of
sale of investments, interest, commission and
discount etc)
 Hence operating profit is a yard stick for
operating profit of the company
 Operating profit = Sales Revenue- Operating Cost

S.K.MOHAN May 13, 2018 56

 Gross Sales
 Gross sales includes excise duty to be charged to the customer, central
sales tax applicable, state sales tax applicable, the discount to be allowed to
distributors/dealers/customers.
 Net Sales
 The sales figure excluding all the factors explained above are the net sales.
 Cost of production
 This is the cost incurred right from the procurement of raw material to the
finished good. For ex in a garment firm following cost is incurred while
production
 1) cost of raw material cloth, buttons, canvas, hooks, zips etc
 2) Maintenance of sewing machines
 3) payment of wages to workers
 4) power
 5) washing, ironing , packing etc.
 Cost of Production exclude selling & admn exp & int cost
S.K.MOHAN May 13, 2018 57
 Selling And General Administrative Expenses
 Maintaining office staff for admn & acctg
 marketing effort
 payment of salaries/Tr All to market personnel
 All the expenses which are not directly connected to
manufacturing are classified as selling and/or general expenses
 Cost of goods sold
 Cost of goods sold includes all manufacturing expenses and the
adjustments for opening and closing stock
 Cost of Goods sold = Opening stock + Purchases +
Manufacturing expenses - Closing stock

S.K.MOHAN May 13, 2018 58

 Gross Profit is arrived deducting figure of cost of goods sold
from the sales figure
 ie Gross profit = Sales - Cost of goods sold.
 Operating Profit is arrived deducting selling, administrative and
general expenses , provision for bad debts, interest and
miscellaneous expenses from the gross profit.
 ie Op Profit = Gr Prof - (Sel & adm exp + Prov bad debt + mis
exp )
 Profit Before Tax When other income is added and other
expenses are deducted from the operating profit we get profit
before Tax
 ie PBT = Op Profit + oth Inc - oth exp

S.K.MOHAN May 13, 2018 59

 Net Profit When provision for taxes is deducted from the Profit
Before Tax we get Net profit
 ie Net Profit = PBT - taxes
 Non Operating Income/Expenses
 The income earned by the unit from other than manufacturing and
selling operations is classified under this head . i.e
 a) Interest earned on fixed deposits
 b) Dividends and profit earned by sale of assets and share.
 All those expenses which are not directly connected with
operations of the unit are classified under this
head. i.e
 a) Preliminary expenses written off
 b) Loss suffered due to sale of assets & share


S.K.MOHAN May 13, 2018 60

 The net profit or loss is added to or deducted
from owner‘s equity.
 The net profit may be used by the business to
distribute dividends, to create reserves etc. In
order to show these adjustments, a P & L
Appropriation A/c is maintained.
 Distribution of profits is only appropriation
and does not mean expenses.
 Passing such distribution entries, the
remaining surplus is added in owner‘s equity.

S K MOHAN 61
S K MOHAN 62
Profit and Loss account

Profit and Loss account

GROSS SALE
(Inclusive of excise duty)
LESS : Excise Duty, cash discounts, returned
goods, compensations etc.

May 13, 2018

NET SALES 63
S.K.MOHAN May 13, 2018 63
 Profit and Loss account

Opening stock of RM Plus Purchases Less Closing Stock of RM

= Raw Material Consumed (A)

ADD Direct Labor Expenses

(related to manufacturing) (B)
ADD Power, Fuel, Water charges etc. (C)
Consumable stores & Spares
ADD (related to manufacturing) (D)
Depreciation on factory building &
ADD Plant and machinery (E)
Any other direct manufacturing
ADD
May 13, 2018 Expenses (F) 64
S.K.MOHAN May 13, 2018 64
 Profit and Loss account

Manufacturing cost (A+B+C+D+E+f)

ADD Opening stock of W.I.P

LESS Closing Stock of W.I.P

= COST OF PRODUCTION
May 13, 2018 65
S.K.MOHAN May 13, 2018 65
 Profit and Loss account

COST OF PRODUCTION

ADD Opening stock of finished goods

LESS Closing Stock of finished goods

= COST OF SALES

May 13, 2018 66

S.K.MOHAN May 13, 2018 66
NET SALES LESS COST OF SALES

= GROSS PROFIT
LESS ADMINSTRATIVE &
GROSS PROFIT SELLING EXPENSES
INTEREST EXPENSES

= OPERATING PROFIT
{ It is a business profit . It indicates
the efficiency of business operation}

May 13, 2018 67

S.K.MOHAN May 13, 2018 67
 ADD Non operative income
OPERATING PROFIT LESS Non operative
ADD/ less
Expenses

= NET PROFIT BEFORE TAX

NPBT LESS TAX / Provision for taxes

= NET PROFIT AFTER TAX

May 13, 2018 68

S.K.MOHAN May 13, 2018 68
NPAT LESS DIVIDEND/Drawings

RETAINED PROFIT
=

May 13, 2018 69

S.K.MOHAN May 13, 2018 69
NPAT LESS DIVIDEND = RETAINED PROFIT

NPAT

Add

Non Cash expenses and Depreciation

Cash Generation from Business

Less Drawings / dividend

Net cash Generation

S.K.MOHAN May 13, 2018 70

 Fixed Liabilities refer to amounts "Received" on a long-
term basis, the period generally being more than one year.

 Fixed Assets are acquired by making "Payments" which

are expected to be kept in the business on a long-term
basis.

 Current Liabilities refer to amounts "Received" on a

short-term basis. The liabilities should be discharged
within a year.

 Current Assets are "Payments" made on a short-term

basis which can be realised within the operative period or
within one year.

71
S K MOHAN 72
 Net worth-Paid up capital  Fixed assets land building
General reserve other ,Plant and machinery , Capital
reserve surplus from P&L work in progress
account  Miscellaneous assets
 Deferred liabilities – Term Investment is associates , deposit
Loan Un secured Loan , DPG with Government Securities ,Non
consumable stores & spares ,
 Current Liabilities CC Slow moving current assets
/Overdraft creditor for  Current assets cash & Bank
purchases Creditor for balance , RM , Packing material ,
expenses Provision for WIP ,Finished Goods debtors ,
taxation provision for Prepaid expenses
dividend Advance received  Intangible assets Deferred
from supplier etc revenue Expenses , Prem ,
preoperative expenses, Promoters
current account , debit P&L loss
only,, goodwill, Patent , Royalty ,
R&D expenses

May 13, 2018 73

S K MOHAN 5/13/2018 73
 a) Fill in the blanks:

 1. ____________ account enables the trader to find out gross

profit or loss.
 2. By preparing profit and loss account _________ can be find
out.
 3. Closing stock is _______ in the trading account.
 4. Direct expenses appears in the debit side of the ___________
 account.
 5. Indirect expenses appears in the __________ side of the profit
and loss account.
 6. All incomes are _____________ in the profit and loss account.
 7. Bad debt is a __________ expense.
 8. ‘Salaries and wages’ appear on the ______________ account.
 9. Balance sheet shows the ________ of a business

 [Answers: 1. Trading, 2. net profit or loss, 3. credited, 4.

Trading, 5. debit, 6. credited, 7. selling, 8. profit and loss
account, 9. financial position]

S K MOHAN 74
 1. Trading account is prepared to find out
 a) gross profit or loss b) net profit or loss c) financial
position
 2. Wages is an example of
◦ a) capital expenses b) indirect expenses c) direct
expenses
 3. Opening stock is
◦ a) debited in trading account b) credited in trading
account
◦ c) credit in profit and loss account
 4. Balance sheet is a
◦ a) statement b) account c) ledger
 5. Fixed assets have
 a) short life b) long life c) no life

S K MOHAN 75
 6. Cash in hand is an example of
 a) current assets b) fixed assets c) current liability
 7. Capital is a
◦ a) income b) assets c) liability
 8. Drawing must be deducted from
◦ a) net profit b) capital c) gross profit
 9. Current liabilities are recorded in the balance
sheet on
 a) not recorded b) liability side c) assets side
 10. Net profit is added to
◦ a) gross profit b) drawings c) capital

S K MOHAN 76
 Select from the following , a statement which
speaks about liabilities of an entity.
 The liabilities consist of claims of the owners
 The liabilities consist of claims of the owners and
outsiders
 The liabilities consist of claims of the outsiders
 None of the above
 If the net worth of the business is Rs.500,
fixed assets are Rs. 500, current assets
Rs.300, investments Rs.300, current
liabilities Rs. Nil, what is the amount of
claim to outsiders?
 Rs. Nil
 Rs. 1100
 Rs.500
 Rs.600

S K MOHAN 77
 Select from the following a sentence which
is wrong

 If assets increase and liabilities do not , the capital will
increase
 If assets increase and liabilities also increase by same
sum , the capital will remain same
 A reduction in the amount of assets will amount to
equivalent reduction in the net worth
 An increase in the amount of liabilities with no
corresponding increase in liabilities will increase the
amount of capital

S K MOHAN 78
Financial Parameter What it denotes
Cash Accruals (Cash Profit) Surplus Cash available to
the business
Profit Before Depreciation, Cash Accrual available for
Interest & Tax (PBDIT) payment of interest &
servicing of debt
Net Worth Excess of all Assets over
outside Liabilities
Tangible Net Worth Excess of Tangible Assets
over outside Liabilities
Net Working Capital Excess of Current Assets
over Current Liabilities. It
also the margin available
for settlement of Current
Liabilities
S K MOHAN
How it is computed
Net Profit + Non-Cash
Expenses (Depreciation,
Amortization, write-offs,etc.)
Net Profit + Interest +
Depreciation (including any
non-cash expenses such as
amortization, write off, etc.)
+ Tax
Assets – Total Outside
Liabilities
Net Worth – Intangible
Assets
Current Assets – Current
Liabilities
79
 A RATIO is an arithmetical expression of relationship
between two related or inter dependent items.
 The relationship may be shown as a percentage or as a
quotient or even as a ratio.
 Ratios should be computed only for those relationships
that are significant from a banker’s point of view.
 RATIO ANALYSIS is a systematic interpretation of the
financial statements
 through the use of ratios between balance sheet items
and profit & loss items so that the strengths and weakness
of the firm vis-à-vis other firms in the industry as well as
historical performance can be determined (trend analysis).
 Ratios are only financial indicators. These indicators point
the necessity for investigation.
 Ratio Analysis diagnoses the financial health by
evaluating liquidity, solvency, profitability etc.
S K MOHAN 80
 Ratios are expressed in three ways:
 1. Time: In this type of expression one number is divided by another
number and the quotient is taken as number of times. For example,
expressing the attendance of 40 students present in a class of 80
students would be:
 40
 —— = 0.5 times
 80
 2. Percentage: It is expressed in Percentage. When the above
example is expressed as percentage, it would be as under
 40
 —— x 100 = 50%
 80
 3. Pure: It is expressed as a proportion. In the above example, this
would be as under
 40 1
 —— = —— = 0.5
 80 2
 This may also be expressed as 0.5:1.
 The study of relationships between various items or groups of items
in financial statements is known as ‘Financial Ratio Analysis’
S K MOHAN 81
 1. Liquidity Ratios
 Short-Term Financial Strength.

 2. Solvency Ratios
 Long-Term Financial Strength.

 3. Profitability Ratios
 The ability to earn profit in future.

 4. Operational Efficiency Ratios.

 The efficiency with which the business is managed.

82
 Liquidity Ratio indicates the ability of the business to pay its
short term liability.
 Traditionally two ratios are used to highlight the business
liquidity. They are
 Current Ratio
 Quick Ratio.
 a. Current Ratio = Current Assets/Current Liabilities
 Current Assets include inventories, Sundry Debtors,
trade receivables; short term Loans and Advances, Short
Term Investment, Deposit with Post Office, Cash & Bank
Balance etc.
 These assets are convertible into cash within the operating
cycle of the business within a period of 12 months

S K MOHAN 83
 Current Liabilities include Creditors for goods and
services, Short Term Loans, Bank overdrafts,
outstanding expenses etc. These liabilities mature
for payment within next 12 months.
 The objective of finding of this ratio is to know as
to whether the business unit does have enough
current assets to meet the payment schedule of its
current debts with a margin for possible losses.
 Bench mark of this ratio is 1.33 : 1
 Higher ratio may be good in the point of view of
creditors.
 A poor current ratio can be improved either by
bringing in fresh term funds or by ploughing back
profit.
 Diversion of funds reduces the current ratio badly.

S K MOHAN 84
 It is also known as acid test ratio. It is a more
exacting measure than Current Ratio.
 It concentrates on really liquid assets with value
fairly certain.
 Quick Ratio = Quick Assets
 Current Liabilities
 Quick Assets consist of only cash and cash
equivalents.
 Quick Assets = Current Assets – Inventories
 Quick Ratio of 1: 1 is considered satisfactory

S K MOHAN 85
skmohan 5/13/2018 86
skmohan 5/13/2018 87
skmohan 5/13/2018 88
skmohan 5/13/2018 89
skmohan 5/13/2018 90
 Calculate the current ratio from the following
information:
 Total Assets = Rs. 3,00,000
 Non-current Liabilities = Rs. 80,000
 Shareholders’ Funds = Rs. 2,00,000
 Non-Current Assets:
 Fixed Assets = Rs. 1,60,000
 Non-current Investments = Rs. 1,00,000

S K MOHAN 91
S K MOHAN 92
 Qus;-

• The current ratio is 2:1. State giving reasons which of

the following transactions would improve, reduce and
not change the current ratio:
• (a) Payment of current liability by cheque
• (b) Purchased goods on credit;
• (c) Sale of desktop (Book value – Rs. 4,000) for Rs.
3,000 only;
• (d) Sale of merchandise (goods) costing Rs. 10,000 for
Rs. 11,000 in cash
• (e) Payment of dividend.

5/13/2018 skmohan 93
• Solution:
• The given current ratio is 2:1. Let us assume
that current assets are Rs. 50,000 and current
liabilities are Rs. 25,000; Thus, the current ratio
is 2:1. Now we will analyse the effect of given
transactions on current ratio.
• (a)Assume that Rs. 10,000 of creditors is paid by
cheque. This will reduce the current assets to Rs.
40,000 and current liabilities to Rs. 15,000. The
new ratio will be 2.67(Rs. 40,000/Rs.15,000).
Hence, it has improved

5/13/2018 skmohan 94
• (b) Assume that Rs. 10,000 goods are purchased on credit.
This will increase the current assets to Rs. 60,000 and
current liabilities to Rs. 35,000. The new ratio will be 1.7:1
(Rs. 60,000/Rs. 35,000). Hence, it has reduced.
• (c) Due to sale of a Desktop (a fixed asset) the current
assets will increase up to Rs. 53,000 without any change in
the current liabilities. The new ratio will be 2.1:2 (Rs.
53,000/Rs. 25,000). Hence, it has improved.
• (d) This transaction will decrease the inventories by Rs.
10,000 and increase the cash by Rs. 11,000 thereby
increasing the current assets by Rs. 1,000 without any
change in the current liabilities. The new ratio will be 2.04:1
(Rs. 51,000/Rs. 25,000). Hence, it has improved.
• (e) Assume that Rs. 5,000 is given by way of dividend. It
will reduce the current assets to Rs. 45,000 without any
change in the current liabilities. The new ratio will be 1.8:1
(Rs. 45,000/Rs. 25,000). Hence, it has reduced.

5/13/2018 skmohan 95
• INTERPRETATION AND MANAGERIAL DECISIONS
• Current ratio expresses the ability of a business to meet its short-
term obligations. Within the normal operating period, the current
assets are converted into cash to discharge current liabilities.
• In our example, the current assets being twice the current
liabilities, the margin of safety is adequate. In case of inadequate
current ratio (current liabilities are more than the current assets),
the eventuality may arise when short-term creditors will have to be
paid by disposing the fixed assets. In such a case, the firm's
financial position is seen to be shaky and the firm may be on the
verge of liquidation.

• Some of the factors which generally influence the current ratio are
the speculative nature of the business, its seasonal character, the
credit period required and allowed, trend in the business, etc.
Normally a 2 : 1 ratio is considered satisfactory. This allows for
making up for any temporary loss as well as leaving some working
capital.

5/13/2018 skmohan 96
• When current assets and current liabilities are equal
(ratio 1 : 1), it may be presumed that the short-term
creditors are meeting the day-to-day requirements of
the business in its entirety. In such circumstances, if
there is any loss in the realisation of current assets, the
short-term creditors tend of suffer. This ratio, therefore,
is highly decisive for all short-term creditors.

• A very high current ratio (such as 4 : 1 or 6 : 1)

indicates that there are too many current assets which
are not properly utilised in the business. This may also
mean that the management of the concern is not
adopting proper investment policies for optimum
utilisation of its current assets.

• A very low current ratio indicates the lack of liquidity

and shortage of working capital.
S K MOHAN 97
• a) Choose the correct answer from the given four alternatives.
• (1) Ratio analysis is the process of determining and
interpreting numerical relationships based on _________.
– (a) Financial values
– (b) Financial statements
– (c) Financial numerical information
– (d) All of the above
• (2) Ratio analysis is based on __________ measure.
– (a) relative
– (b) absolute
– (c) Both of the above
– (d) None of the above
• (3) The persons interested in the analysis of financial
statements can be grouped as ______________.
– (a) Owners or investors
– (b) Creditors
– (c) Financial executives
– (d) All of the above
5/13/2018 skmohan 98
• (4) The term “Operating Profit” means profit before
______________.
– (a) interest
– (b) tax
– (c) interest and tax
– (d) interest or tax
• (5) Debt- equity Ratio is an example of ________________.
– (a) Short term solvency Ratio
– (b) Long term solvency Ratio
– (c) Profitability Ratio
– (d) None of the above
• (6) In Cash Flow Statement, Cash includes_______________
– (a) cash on hand
– (b) demand deposits with banks
– (c) cash on hand and demand deposits with banks
– (d) cash on hand or demand deposits with banks

5/13/2018 skmohan 99
• (7) The treatment of interest and dividends received and paid
depends upon the nature of the enterprise.
• For this purpose, the enterprises are classified as
_________________.
– (a) (i) Financial enterprises, and (ii) Operating enterprises.
– (b) (i) Financial enterprises, and (ii) Other enterprises.
– (c) (i) Financial enterprises, and (ii) Non-Financial enterprises.
– (d) (i) Trading enterprises, and (ii) Non - Trading enterprises.
• (8) Cash Flow Statement is _____________ for Income Statement
or Funds Flow Statement.
– (a) not a substitute
– (b) a substitute
– (c) depends on situation
– (d) None of the above
• (9) Funds Flow Statement reveals the change in _______________
between two Balance Sheet dates.
– (a) Working capital
– (b) Internal capital
– (c) Share capital
– (d) Both (a) & (c)
5/13/2018 skmohan 100
• (a) With the help of the following information
complete the Balance sheet of National Ltd.
• Equity share capital Rs.1,00,000
• The relevant ratios of the company are as follows:
• Current debt to total debt = 0.40
• Total debt to owner‘s equity = 0.60
• Fixed assets to owner‘s equity =0.60
• Total assets turnover 2 times
• Inventory turnover 8 times

5/13/2018 skmohan 101

• 1. Total debt = 0.60 * Owners equity = 0.60 * ` 1,00,000 = ` 60,000
• Current debt to total debt = 0.40, hence Current debt = 0.40 * `
60,000 = 24000
• 2. Fixed assets = 0.60 * Owners equity = 0.60 * ` 1,00,000 = 60,000
• 3. Total equity/ total libility
• = Total debt + Owners equity = ` 60,000 + ` 1,00,000 = ` 1,60,000
• 4. Total assets
• consisting of fixed assets and current assets must be equal to `
1,60,000 (Assets =Liabilities + Owners equity). Since fixed assets are
` 60,000 hence, current assets should be ` 1,00,000
• 5. Total assets to turnover = 2 times :
• inventory turnover = 8 times
• Hence, Inventory / Total assets = 2/8 = 1/4, Total assets = ` 1,60,000
• Therefore, Inventory = ` 1,60,000/4 = ` 40,000
• Balance on Asset side Cash = ` (1,00,000 – 40,000) = ` 60,000

5/13/2018 skmohan 102

Liabilities Assets

Owner equity 1,00,000 Fixed assets 60,000

Current debt 24,000 Cash 60,000
Long term debt 36,000 Inventory 40,000

160000 160000

5/13/2018 skmohan 103

• From the information given below calculate the amount of
Fixed assets and Proprietor‘s fund.
• Ratio of fixed assets to proprietors fund = 0.75
• Net working capital = Rs.6,00,000
• Solution:
• Calculation of Fixed Assets and Proprietor‘s Fund
• Since Ratio of Fixed Assets to Proprietor‘s Fund = 0.75
• Therefore, Fixed Assets = 0.75 Proprietor‘s Fund
• Net working capital = 0.25 Proprietor‘s Fund
• Rs 6,00,000 = 0.25 Proprietor‘s Fund
• Therefore, Proprietor‘s Fund =6,00,000 / 0.25 = Rs 24,00,000
• Since, Fixed Assets = 0.75 Proprietor‘s Fund
• Therefore, Fixed Assets = 0.75 * ` 24,00,000 = Rs.18,00,000

5/13/2018 skmohan 104

 PURPOSE
 If the sundry debtors delay the payments and the bills receivable
are dishonoured, the liquidity position indicated by the quick ratio
will not help the business. An even better indicator of liquidity is
the cash ratio, since, in the ultimate analysis, cash is to be paid
to discharge the current liabilities.
 To compute Cash Ratio, Sundry debtors and bills receivable
are excluded from the current assets.
 Components

 The two components involved in cash ratio are absolute liquid

assets. which include
 cash in hand,
 cash at bank and
 readily marketable securities,
 and
 current liabilities with the exclusion of overdraft.
10
skmohan 5/13/2018 5
 Formula Cash Ratio = Absolute Liquid Assets
 Quick Liabilities

 Presentation
 Balance Sheet of A Company Ltd., as on ...
 Credit Receipts/From Whom? Debit/Payments/How Utilised?
 Liabilities/To Whom? Rs Assets! What are available? Rs
 Fixed Liabilities 9,500 Fixed Assets 9,000
 Quick Liabilities 400 absolute Liquid Assets 200
 Overdraft 100 Closing Stock 600
 Debtors & Bills Receivable 200
 TOTAL 10,000 TOTAL 10,000
 Computation
 Absolute Liquid Ratio = 200 = 1 : 2
 400
 Ideal Ratio The ideal cash ratio is 1 : 1.

 Interpretation and Managerial Decisions

 This is an absolutely safe ratio for measuring the liquidity position or
short-term solvency of a company. However, this has not become very
popular with the analysts and is rarely used.

10
skmohan 5/13/2018 6
 Solvency Ratios
• Solvency of business is determined by its ability to meet its
contractual obligations towards stakeholders, particularly
towards external stakeholders, and the ratios calculated to
measure solvency position are known as ‘Solvency Ratios’.
These are essentially long-term in nature. The following
ratios are normally computed for evaluating solvency of the
business.
• 1. Debt-Equity Ratio;
• 2. Debt to Capital Employed Ratio;
• 3. Proprietary Ratio;
• 4. Total Assets to Debt Ratio;
• 5. Interest Coverage Ratio.

5/13/2018 skmohan 107

 1. Debt-Equity Ratio; --- Debt-Equity Ratio measures the
relationship between long-term debt and equity
 2. Debt to Capital Employed Ratio; --- The Debt to capital
employed ratio refers to the ratio of long-term debt to the total of
external and internal funds (capital employed or net assets).
 3. Proprietary Ratio;--- Proprietary ratio expresses relationship of
proprietor’s (shareholders) funds to net assets
 4. Total Assets to Debt Ratio;--- This ratio measures the extent of
the coverage of long-term debts by assets
 5. Interest Coverage Ratio---It is a ratio which deals with the
servicing of interest on loan. It is a measure of security of interest
payable on long-term debts. It expresses the relationship between
profits available for payment of interest and the amount of interest
payable. It is calculated as follows: 10
skmohan 5/13/2018 8
 Total Solvency Ratio
• PURPOSE
• .The purpose of the solvency ratio is to find out the relationship
between total assets and total liabilities in order to ascertain the
ability of the company to meet its total liabilities out of its total
assets.
• Components
– Total assets include
– all realisable current and
– fixed assets,
– except fictitious assets.
• Total liabilities include only the external liabilities, both current
and long-term. This does not include owners’ funds and re-
serves.
• Formula
Total tangible Assets
• Solvency Ratio = -------------------------------- x 100
• Total External Liabilities
5/13/2018 skmohan 109
 Presentation of Data
• Balance Sheet of A Company Ltd., as on ...

• Credit Receipts/From Whom? Debit/Payments/ How Utilised?

• Liabilities/To Whom? Rs Assets/ What are available? Rs
• Equity Shares 3,000 Fixed Assets 9,000
• Reserves 500 Current Assets 1,000
• Preference Shares 1,000
• long-term loans and Deposits 5,000
• Current Liabilities 500
• TOTAL 10,000 TOTAL 10,000

• Computation
• 10 000
• Solvency Ratio = ------------- x 100 = 181.81 %
• 5,500
• The Ideal Solvency Ratio is 1 : 0.33 or 303.03%.

5/13/2018 skmohan 110

 • Generally, Solvency Ratio is determined to find out Long Term
solvency of a firm. • Main ratios under this category are ;
 a. Debt equity ratio
◦ It gives the relation between borrowed funds (debts) and Net owned funds
(TNW).
◦ Debt Equity Ratio = Long Term Funds
◦ Tangible Net worth
 The purpose of calculating this ratio is to determine the relative stake
of outsiders and share holders.
 DER is also calculated by dividing total outside liabilities by Tangible
Net Worth (TNW).
 Debt Equity Ratio = Total Outside Liability
 Equity
 b. Proprietary Ratio
◦ • Gives the relationship between own funds and total assets.
◦ Proprietary Ratio = Share Holder’s funds
 Total Assets (excluding fictitious assets)

11
S K MOHAN 1
 11
skmohan 5/13/2018 2
 Significance: This ratio measures the degree of
indebtedness of an enterprise and gives an idea
to the long-term lender regarding extent of
security of the debt
 from the perspective of the owners, greater use
of debt (trading on equity) may help in ensuring
higher returns for them if the rate of earnings
on capital employed is higher than the rate of
interest payable.

11
skmohan 5/13/2018 3
Equity and Liabilities
1. Shareholders’ funds
a) Share capital 12,00,000
b) Reserves and surplus 2,00,000
c) Money received against share warrants 1,00,000
2. Non-current Liabilities
a) Long-term borrowings 4,00,000
b) Other long-term liabilities 40,000
c) Long-term provisions 60,000
3. Current Liabilities
a) Short-term borrowings 2,00,000
b) Trade payables 1,00,000
c) Other current liabilities 50,000
d) Short-term provisions 1,50,000
Total 25,00,000

11
skmohan 5/13/2018 4
 Assets
 1. Non-Current Assets
 a) Fixed assets 15,00,000
 b) Non-current investments 2,00,000
 c) Long-term loans and advances 1,00,000
 2. Current Assets
 a) Current investments 1,50,000
 b) Inventories 1,50,000
 c) Trade receivables 1,00,000
 d) Cash and cash equivalents 2,50,000
 e) Short-term loans and advances 50,000
 TOTAL 25,00,000

11
S K MOHAN 5
 Solution:
 Debt-Equity Ratio =Debts/Equity
 Debt = Long-term borrowings + Other long-term liabilities
+Long-term provisions
 = Rs. 4,00,000 + Rs. 40,000 + Rs. 60,000= Rs. 5,00,000
 Equity = Share capital + Reserves and surplus + Money
received against share warrants
 = Rs. 12,00,000 + Rs. 2,00,000 + Rs. 1,00,000= Rs. 15,00,000
 500000/1500000= 1:3

11
S K MOHAN 6
 11
skmohan 5/13/2018 7
 The Debt to capital employed ratio refers to the
ratio of long-term debt to the total of external
and internal funds (capital employed or net
assets).
 It is computed as follows:
 Long-term Debt/Capital Employed (or Net
Assets)
 Capital employed = long term debt +
shareholders’ funds
 Alternatively it may be taken as net assets
which are equal to the total assets –current
liabilities

11
skmohan 5/13/2018 8
 (capital employed = Rs. 15,00,000 + Rs.
5,00,000 = Rs. 20,00,000.
 Net Assets as
 Rs. 25,00,000 – Rs. 5,00,000 = Rs.
20,00,000 and
 Debt to capital employed ratio as Rs.
5,00,000/Rs. 20,00,000 = 0.25:1).

11
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 Proprietary ratio expresses relationship of proprietor’s
(shareholders) funds to net assets and is calculated as follows :
 Proprietary Ratio = Shareholders Funds/Capital employed (or
net assets
 Significance: Higher proportion of shareholders funds in
financing the assets is a positive feature as it provides security
to creditors. This ratio can also be computed in relation to total
assets in lead of net assets (capital employed)
 the total of debt to capital employed ratio and proprietary
 ratio will be equal to 1
 ratios worked out on the basis of data of Previous example ,
the debt equity ratio is 0.25 and the Proprietary Ratio 0.75, the
 total is 0.25 + 0.75 = 1.
12
skmohan 5/13/2018 0
 This ratio measures the extent of the coverage of
long-term debts by assets. It is calculated as
 Total assets to Debt Ratio = Total assets/Long-term
debts
 The higher ratio indicates that assets have been
mainly financed by owners funds and the long-term
is adequately covered by assets.
 It is better to take the net assets (capital employed)
instead of total assets for computing this ratio also.
 It will be observed that in that case, the ratio will be
the reciprocal of the debt to capital employed ratio.
 Significance. This ratio primarily indicators the rate
of external funds in financing the assets and the
extent of coverage of their debts are covered by
assets.
12
skmohan 5/13/2018 1
 Balance Sheet as at March 31, 2013
Equity and Liabilities:
1. Shareholders’ funds
a) Share capital 4,00,000
b) Reserves and surplus 1 00,000
2. Non-current Liabilities
a) Long-term borrowings 1,50,000
3. Current Liabilities 50,000
TOTAL 7,00,000
II. Assets
1. Non-current Assets
2. a) Fixed assets 4,00,000
b) Non-current investments 1,00,000
2. Current Assets 2,00,000
TOTAL 7,00,000

12
skmohan 5/13/2018 2
 i) Debt-Equity Ratio = Debts / Equity
 Debt = Long-term borrowings =Rs. 1,50,000
 Equity = Share capital + Reserves and surplus
 Rs. 4,00,000 + Rs. 1,00,000 = Rs. 5,00,000
 Debt-Equity Ratio =Rs. 1,50,000/Rs. 5,00,000 = 0.3:1

12
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 12
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 12
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 12
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 The debt equity ratio of X Ltd. is 0.5:1. Which
of the following would increase/
 decrease or not change the debt equity ratio?
 (i) Further issue of equity shares
 (ii) Cash received from debtors
 (iii) Sale of goods on cash basis
 (iv) Redemption of debentures
 (v) Purchase of goods on credit.

12
S K MOHAN 7
 The change in the ratio depends upon the original ratio. Let us assume
that external funds are Rs. 5,00,000 and internal funds are Rs.
10,00,000. It explains the debt equity ratio of 0:5:1 Now we will analyse
the effect of given transactions on debt equity ratio.
 (i) Assume that Rs. 1,00,000 worth of equity shares are issued.
This will increase the internal funds to Rs. 11,00,000. The new
ratio will be 0.45:1 (5,00,000/11,00,000). Thus, it is clear that
further issue of equity shares decreases the debt-equity ratio.
 ii) Cash received from debtors will leave the
internal and external funds unchanged as this
will only affect the composition of current
assets. Hence, the debt-equity ratio will remain
unchanged

12
S K MOHAN 8
 (iii) This will also leave the ratio unchanged.
 (iv) Assume that Rs. 1,00,000 debentures are redeemed.
This will decrease the long-term debt to Rs. 4,00,000. The
new ratio will be 0.4:1 (4,00,000/ 10,00,000). Redemption of
debentures will decrease the debit equity ratio.
 (v) This will also leave the ratio unchanged.

12
S K MOHAN 9
 These ratios indicate the speed at which, activities of
the business are being performed.
 Higher turnover ratio means better utilization of assets
and signifies improved efficiency and profitability, and
as such are known as efficiency ratios. The important
activity ratios are as under:
 1. Inventory Turnover;
 2. Trade Receivable Turnover;
 3. Trade Payable Turnover;
 4. Investment (Net Assets) Turnover
 5. Fixed Assets Turnover; and
 6. Working Capital Turnover
13
skmohan 5/13/2018 0
 It determines the number of times inventory is converted in to
revenue from operations during the accounting period under
consideration.
 It expresses the relationship between the cost of revenue from
operations and average inventory. The formula for its
calculation is as follows:
 Cost of Goods Sold / Average Inventory
 Significance : It studies the frequency of conversion of
inventory of finished goods into revenue from operations. It is
also a measure of liquidity.
 It determines how many times inventory is purchased or
replaced during a year. Low turnover of inventory may be due
to bad buying, obsolete inventory , etc. and is a danger signal.
 High turnover is good but it must be carefully interpreted as it
may be due to buying in small lots or selling quickly at low
margin to realise cash.
 Thus, it throws light on utilisation of inventory of goods
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 From the following information, calculate inventory turnover ratio :
 Inventory in the beginning = 18,000
 Inventory at the end = 22,000
 Net purchases = 46,000
 Wages = 14,000
 Revenue from operations = 80,000
 Carriage inwards = 4,000

13
skmohan 5/13/2018 2
 13
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 13
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 It expresses the relationship between credit revenue from
operations and trade receivable. It is calculated as follows :
 Net Credit Revenue from Operations i.e. credit sales
 Average Trade Receivable

 Where Average Trade Receivable
 (Opening Debtors and Bills Receivable + Closing Debtors and Bills Receivable)
 2
 It needs to be noted that debtors should be taken before making
any provision for doubtful debts.
 Significance: The liquidity position of the firm depends upon the
speed with which trade receivables are realised.
 This ratio indicates the number of times the receivables are
turned over and converted into cash in an accounting period.
 Higher turnover means speedy collection from trade receivable.
 This ratio also helps in working out the average collection period.
The ratio is calculated by dividing the days/months in a year by
trade receivables turnover ratio.

13
skmohan 5/13/2018 5
 13
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 Trade Payables turnover ratio indicates the pattern of payment of trade
payable. As trade payable arise on account of credit purchases, it expresses
relationship between credit purchases and trade payable. It is calculated as
follows :
 Trade Payables Turnover ratio= Net Credit purchases
 Average trade payable

 (Opening Creditors and Bills Payable + Closing Creditors and Bills Payable)
 2

 Average Payment Period = No. of days in a year
 Trade Payables Turnover Ratio

 Significance : It reveals average payment period.
 Lower ratio means credit allowed by the supplier is for a long period or it
may reflect delayed payment to suppliers which is not a very good policy as
it may affect the reputation of the business.
 The average period of payment can be worked out by days/months in a year
by the turnover rate.
13
skmohan 5/13/2018 7
 13
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 13
skmohan 5/13/2018 9
 It reflects relationship between net assets /
capital employed and revenue from operations in
the business.
 Higher turnover means better activity and
 profitability. It is calculated as follows :
 Net Assets/Capital Employed Turnover ratio=
 Revenue from Operations/Capital Employed

14
skmohan 5/13/2018 0
 14
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 14
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 The profitability or financial performance is mainly summarized in the
statement of profit and loss.
 Profitability ratios are calculated to analyse the earning capacity of the
business which is the outcome of utilisation of resources employed in
the business.
 There is a close relationship between the profit and the efficiency with
which the resources employed in the business are utilised.
 The various ratios which are commonly used to analyse the profitability
of the business are:
 1. Gross Profit Ratio
 2. Operating Ratio
 3. Operating Profit Ratio
 4. Net profit Ratio
 5. Return on Investment (ROI) or Return on Capital Employed
(ROCE) 6. Return on Net Worth (RONW)
 7. Earnings per Share
 8. Book Value per Share
 9. Dividend Payout Ratio
 10. Price Earning Ratio.
14
skmohan 5/13/2018 3
 Gross Profit Ratio = Gross Profit/Net Revenue of Operations ×
100
 Operating Ratio = (Cost of Revenue from Operations +
Operating Expenses) / Net Sales × 100
 Net Profit Ratio = Net profit/Revenue from Operations × 100
Generally, net profit refers to Profit after Tax (PAT).
 Return on Shareholders’ Fund =Profit after Tax/ Shareholders'
Funds
 EPS = Profit available for equity shareholders/No. of Equity
Shares
 Book Value per share = Equity shareholders’ funds/No. of
Equity Shares
 Dividend Payout Ratio = Dividend per share/Earnings per share
 Price/Earning Ratio i.e P/E Ratio = Market Price of a
Share/Earnings per Share
 Return on Investment (or Capital Employed) =
 Profit before Interest and Tax/Capital employed X 100
14
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 14
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 14
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 14
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 14
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 14
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 15
skmohan 5/13/2018 0
 15
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 15
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 15
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 15
skmohan 5/13/2018 4
 Debtors velocity = Net Credit sales
 Average receivable
 Average receivable includes debtors + Bills
receivable
 Purpose is to calculate average time taken to
collect credit sales.
 Debt Collection period = Month / days) in a year
 Debtor’s velocity
 The period may increase due to reduction in
demand due to poor quality, industry
recession, poor collection mechanism etc.

15
S K MOHAN 5
  Creditors Velocity
 Shows relation between net credit purchases and average
payables (trade creditors & bills payable)
 Creditor’s velocity = Net credit purchases
 Average Payables
 Debt Payment period = Month (or days) in a year
 Creditors velocity
 Capital Turnover Ratio
 shows efficiency of capital employed in the business
 Capital Turnover ratio = Net sales
 Capital employed

15
S K MOHAN 6
 Also known as gearing ratio.
 Utilizing borrowed funds to give an increased return
to share holders is known as financial leverage.
 A company is said to be highly geared when its fixed
charge bearing funds are disproportionately higher
compared to shareholder’s funds.
 Capital gearing ratio is one leverage ratio.
 Capital gearing ratio = Fixed charge bearing long term funds
 TL + NW
 A high ratio increases yield on equity.
 At the same time, if the firm is not able to earn
adequate profit, the debt may not be serviced and
push the firm to debt crisis
15
S K MOHAN 7
1. Return on Investment established the relationship
between
 a. Operating profit to sales.
 b. Net profit after tax and capital employed
◦ c. Net profit before interest and tax and capital employed
◦ d. None of the above.

2. Return on Investment measures

 a. The efficiency of the investments made by the company
 b. The efficiency in the use of the capital employed
 c. The efficiency of the business in using its assets to generate
income
 d. None of the above.
3. Gross profit Ratio is a measure of
 a. Gross Profit on Gross sales
 b. Profit from operations
 c. Gross Profit on Net sales
 d. None of the above

15
S K MOHAN 8
 Current Ratio of a firm is 1 : 1. What will be the Net Working Capital ?
 a. 0
b. 1
c. 100
d. 200
 Ans - a
 Explanation :
 It suggest that the Current Assets is equal to Current Liabilities hence the NWC
would be 0
(since NWC = C.A - C.L)
 Suppose Current Ratio is 4 : 1. NWC is Rs.30,000/-. What is the amount of Current
Assets ?
◦ a. 10000
b. 30000
c. 40000
d. 50000
 Ans - c
 Explanation :
 Let Current Liabilities = a
 4a - 1a = 30,000
a = 10,000 i.e. Current Liabilities is Rs.10,000
Hence Current Assets would be
4a = 4 x 10,000 = Rs.40,000/-

15
S K MOHAN 9
 The amount of Term Loan installment is Rs.10000/ per
month, monthly average interest on TL is Rs.5000/-. If the
amount of Depreciation is Rs.30,000/- p.a. and PAT is
Rs.2,70,000/-. What would be the DSCR ?
 a. 1
b. 1.5
c. 2
d. 2.5
 Ans - C
 Explanation :
 DSCR = (PAT + Depr + Annual Intt.) / Annual Intt +
Annual Installment
= (270000 + 30000 + 60000 ) / 60000 + 120000
= 360000 / 180000
=2

16
S K MOHAN 0
 1. _______ is a mathematical relationship between two items expressed in
quantitative form.
 2. Ratio helps in _______ forecasting.
 3. ______Ratio measures the firm ability to pay off its current dues.
 4. _______ are those assets which are easily convertible into cash.
 5. Bank overdraft is an example of _______ liability.
 6. Liquid ratio is used to assess the firm’s _______ liquidity.
 7. Liquid assets means current assets less _______ and _______.
 8. _______ ratio is modified form of liquid ratio.
 9. Liquid liabilities means current liabilities less _______.
 10. Proprietory ratio shows the relathionship between _______ and total tangible
assets.
 11. Gross profit can be ascertained by deducting cost of goods sold from
_______.
 12. Stock turnover ratio is otherwise called as _______.
 13. 100% – Operating profit ratio is equal to _______ ratio.
 14. When total sales is Rs.2,00,000, cash sales is Rs.65,000, then credit sales will
be Rs._______.
 15. Liquid ratio is otherwise known as _______.
 Answer: 1. Ratio; 2. Financial; 3. Liquid; 4. Current Assets; 5. Current; 6. Short term; 7.
Stock, prepaid expenses; 8. Absolute liquid; 9. Bank overdraft; 10. Shareholders fund /
Proprietors fund; 11. Sales; 12. Inventory turnover ratio; 13. Operating ratio; 14.
Rs.1,35,000; 15. Quick ratio (Acid test ratio)) 16
S K MOHAN 1
 b) Choose the correct answer:
 1. All solvency ratios are expressed in terms of
◦ a) Proportion b) Times c) Percentage
 2. All activity ratios are expressed in terms of
 a) Proportion b) Times c) Percentage
 3. All profitability ratios are expressed in terms of
◦ a) Proportion b) Times c) Percentage
 4. Liquid liabilities means
◦ a) Current liabilities b) Current liabilities – Bank overdraft
◦ c) Current liabilities + Bank overdraft
 5. Shareholders funds includes
◦ a) Equity share capital, Preference share capital, Reserves
&Surplus
 b) Loans from banks and financial institutions
◦ c) Equity share capital, Preference share capital, Reserves &
Surplus and Loans from banks and financial institutions
 6. Which of the following option is correct
◦ a) Tangible Assets = Land + Building + Furniture
◦ b) Tangible Assets = Land + Building + Goodwill
◦ c) Tabgible Assets = Land + Furniture + Goodwill + Copy right
 7. Gross profit ratio establishes the relationship between
◦ a) Gross profit & Total sales
◦ b) Gross profit & Credit sales
◦ c) Gross profit & Cash sales 16
S K MOHAN 2
 8. Opening stock is equal to Rs.10,000, Purchase Rs.2,00,000 and
closing stock is Rs.5,000. Cost of goods sold is equal to
◦ a) Rs. 2,15,000 b)Rs. 2,10,000 c) Rs. 2,05,000
 9. Operating ratio is equal to
◦ a) 100 – Operating profit ratio b) 100 + Operating profit ratio c)
Operating profit ratio
 10. Total sales is Rs,3,40,000 and the gross profit made is Rs.1,40,000.
The cost of goods sold will be ________
◦ a) Rs.2,00,000 b) Rs. 4,80,000 c) Rs. 3,40,000
 11. Total sales of a business concern is Rs.8,75,000. If cash sales is
Rs.3,75,000, then credit sales will be
◦ a) Rs.12,50,000 b) Rs.5,00,000 c) 12,00,000
 12. Cost of goods sold is Rs.4,00,000 and average stock is Rs.80,000.
Stock turnover ratio will be
◦ a) 5 times b) 4 times c) 7 times
 13. Current assets of a business concern is Rs.60,000 and current
liabilities are Rs.30,000.Current ratio will be
◦ a) 1 : 2 b) 1 : 1 c) 2 : 1
 14. Equity share capital is Rs.2,00,000, Reserves & surplus is
Rs.30,000. Debenture Rs.40,000 and the shareholders funds will be
◦ a) Rs.2,00,000 b) Rs. 2,30,000 c) Rs. 1,90,000
 (Answers: 1. (a); 2. (b); 3. (c); 4. (b); 5. (a); 6. (a); 7. (a); 8. (c); 9. (C);
 10. (a); 11. (b); 12. (a); 13. (c); 14. (b)) 16
S K MOHAN 3
 State which of the following statements are True or
False.
 (a) The only purpose of financial reporting is to keep the
managers informed about the progress of operations. F
 (b) Analyses of data provided in the financial statements
is termed as financial analysis. T
 (c) Long-term borrowing are concerned about the ability
of a firm to discharge its obligations to pay interest and
repay the principal amount. T
 (d) A ratio is always expressed as a quotient of one
number divided by another. F
 (e) Ratios help in comparisons of a firm’s results over a
number of accounting periods as well as with other
business enterprises. T
 (f) A ratio reflects quantitative and qualitative aspects of
results. F
16
S K MOHAN 4
 The following groups of ratios are primarily measure
risk:
 A. liquidity, activity, and profitability
 B. liquidity, activity, and inventory
 C. liquidity, activity, and debt
 D. activity, debt and profitability
 The _________ ratios are primarily measures of
return:
 A. liquidity
 B. activity
 C. debt
 D. profitability
 The _________ of business firm is measured by its
ability to satisfy its short term obligations as they
come due:
 A. activity
 B. liquidity
 C. debt
 D. profitability

16
S K MOHAN 5
 _________ ratios are a measure of the speed with
which various accounts are converted into revenue
from operations or cash:
 A. Activity
 B. Liquidity
 C. Debt
 D. Profitability
 The two basic measures of liquidity are:
 A. inventory turnover and current ratio
 B. current ratio and liquid ratio
 C. gross profit margin and operating ratio
 D. current ratio and average collection period
 The _________ is a measure of liquidity which
excludes _______, generally the least liquid asset:
 A. current ratio, accounts debtors
 B. liquid ratio, accounts debtors
 C. current ratio, inventory
 D. liquid ratio, inventory

16
S K MOHAN 6
 i) The _________ is useful in evaluating credit and
collection policies.
 A. average payment period
 B. current ratio
 C. average collection period
 D. current asset turnover
 (ii) The ___________ measures the activity of a firm’s
inventory.
 A. average collection period
 B. inventory turnover
 C. liquid ratio
 D. current ratio
 (iii) The ___________ ratio may indicate the firm is
experiencing stock outs and lost sales.
 A. average payment period
 B. inventory turnover
 C. average collection period
 D. quick

16
S K MOHAN 7
 vi) ABC Co. extends credit terms of 45 days to its
customers. Its credit collection would be considered
poor if its average collection period was.
 A. 30 days
 B. 36 days
 C. 47 days
 D. 45 days
 (v) ___________ are especially interested in the average
payment period, since it provides them with a sense
of the bill-paying patterns of the firm.
 A. Customers
 B. Stockholders
 C. Lenders and suppliers
 D. Borrowers and buyers
 (vi) The __________ ratios provide the information
critical to the long run operation of the firm
 A. liquidity
 B. activity
 C. solvency
 D. profitability
16
S K MOHAN 8
 Definition
 Requirements –Accounts & audit
 Third Schedule annexed to BRA
 Form A- Balance sheet
 Form B- Profit & Loss Account
 Audit
 Submission of accounts- RBI- within 3 months
 Publication of accounts- within 6 months
 Auditor-prior approval of RBI for appt/removal

16
S K MOHAN 9
 Requirement of Banking Companies as to Accounts and
Audit
 Date of final accounts of banking companies :
 Requirement of preparation of final accounts: Section 29 ..
 Statutory Audit of final accounts: Under Section 30 of the
Act,
 As per Section 31, three copies of the balance sheet and profit
and loss account together with auditors' report must be
submitted to RBI within three months from the end of the period
to which they refer.
 32 of the B R Act, furnish three copies of its annual accounts and
auditor's report to the Registrar of Companies at the same time
when it furnishes these documents to the RBI.
 as per Rule 15 of BR (companies )rule 1949 Accounts and
auditor report to be published in the news paper where banking
company having Head office ( principle office ) with in 6 month
from end of the period to which they related
17
S K MOHAN 0
 The main characteristics of a bank's system of
book-keeping are as follows:
 (a) Voucher posting —
 (b) Voucher summary sheets –
 (c) Daily trial balance -
 (d) Continuous checks –
 (e) Control Accounts –
 (f) Double voucher system -debit voucher and
another credit voucher.

17
S K MOHAN 1
Capital & Liabilities Assets

1.Capital 6.Cash & Bank Bal. RBI

2. Reserves & surplus 7.Balances with Banks &
Money at call and SN

3.Deposits 8.Investments

4.Borrowings 9Advances
5 Other Liabilities & Provisions 10.Fixed Assets
11.Other Assets
S K MOHAN 172
 Credit balances in OD and CC
 Deposits payable at call
 Overdue deposits
 In-operative current accounts
 Matured time deposits
 Matured cash certificates
 Matured certificate of deposits

17
S K MOHAN 3
Schedule-12( Contingent liability)
 Claims against bank not acknowledged as
debts
 Liability for partly paid shares
 Liability on account of outstanding forward
exchange contracts
 Acceptances ,endorsement & other
obligations
 Other items for which bank is contingently
liable.

17
S K MOHAN 4
Income
Interest Earned Schedule.13
Other Income Schedule.14
Expenditure
Interest Expended Schedule.15
Operating Expenses Schedule.16
Provision for contingencies
Profit /Loss

Appropriations
Transfer to Reserves
Proposed dividend
Balance carried to Balance
sheet
S K MOHAN 175
Significant Accounting Policies Schedule.17

Notes forming part of Accounts Schedule.18

S K MOHAN 176
 Summary of disclosures (RBI Master Circular Jul
01, 2014)
 There are 3 groups of disclosures, namely
 (1)General disclosures,
 (2)Disclosures related to Accounting Standards
and
 (3)Additional disclosures.
 In addition there are Basel Committee
disclosures

17
S K MOHAN 7
 Profit on exchange transactions
 Profit on sale of investments
 Profit on revaluation of investments
 Profit on sale of fixed assets
 Letting of locker (income from locker charges )
 Misc. income -Godown rent

17
S K MOHAN 8
 Govt. securities shown at book value and diff.
between MV and BV is given in the notes
 If some fixed assets are w/o on revaluation of
assets/reduction of capital every B/S after wards
should. show the revised figure for next 5 yrs. With
the date & amt. revised
 Other fixed assets includes vehicles, furniture and
fixtures. Lockers and safe deposit vaults are
included in furniture

17
S K MOHAN 9
 20% to reserve fund before declaring dividend U/S
17 OF B/R ACT but RBI has instructed to banks
transfer not less than 25% of net profit
 Gold is treated as investment
 Silver is treated as other assets
 Income from performing assets is recognized on
accrual basis while in the case of non-
performing assets it is on cash basis
 In case of NPA, if income is already recognized,
then make provision

18
S K MOHAN 0
Held to maturity Available for Held for trading
sale
Investment should Freedom available Freedom available
not exceed 25% of
total investment
-no marked to market. -Marked to market Marked to market
Profit on sale treated as -profit on sale of
cap. Reserve investment. taken to
P&L a/c
To be sold within
90 days

S K MOHAN 181
 One of the items is a misfit in a group namely
‘other income’ of a banking company. Select this
item from the following
 INCOME ON INVESTMENTS
 PROFIT ON SALE OF INVESTMENTS
 PROFIT ON REVALUATION OF INVESTMENTS
 PROFIT ON EXCHANGE TRANSACTIONS
 In banking company, matured term deposit to be
shown under-----
 demand deposits
 saving bank deposits
 term deposits
 other liabilities and provisions
 Advances given to a staff by a bank as a employer
should be included in-----
 other assets
 advances
 investments
 none of the above

18
S K MOHAN 2
 The scheduled banks are required by RBI to
transfer at least ------ of their disclosed
profit after adjustment/provision towards
bonus to staff to reserves
 25%
 15%
 10%
 None of the above
 THE FINANCIAL STATEMENT OF BANK
CONSISTS OF ------- SCHEDULES
 18 SCHEDULES
 16 SCHEDULES
 17 SCHEDULES
 SCHEDULES

18
S K MOHAN 3
 Acceptances, endorsements and guarantees
are shown as-----
 other assets
 contingent liabilities
◦ advances
◦ other liabilities and provisions

 INVESTMENTS, ADVANCES, FIXED ASSETS AND

OTHER ASSETS ARE PART OF SCHEDULE NOS.--
RESPECTIVELY
 6,7,8,9
 7,8,9,10
 8,9,10,11
 9,10,11,12
 LIABILITY FOR PARTIALLY PAID INVESTMENTS IN
RESPECT OF BANKING COMPANIES IS GROUPED
UNDER THE HEAD-----
 INVESTMENTS
 OTHER ASSETS
 OTHER LIABILITIES AND PROVISIONS
 CONTINGENT LIABILITIES 18
S K MOHAN 4
 The investment under “held to maturity” should
not exceed -----of bank’s total investment.
 25%
 75%
 5%
 The list given below consists of various
securities. Identify the security which is SLR
security
 Securities issued by local authorities
 Shares
 Bonds
 Subsidiaries
 Acceptances, endorsements and guarantees are
shown as-----
 other assets
 contingent liabilities
 advances
 other liabilities and provisions
18
S K MOHAN 5
 Select the false statement in respect of banking A
company
 accepting deposits for the purpose of lending or investment is a
banking company
 A manufacturing company accepting deposits from the public
and some portion of it is lending to its employees as home loans
is a banking company
 A company besides accepting deposits and lending is dealing in
goods in connection with the realisation of a security is a banking
company
 A company besides accepting deposits and lending is in the
business of collections or negotiating bills of exchange is a
banking company.
 The list given below provides the close relationship
between the items of each pair. One of the pairs has
no such close relationship. Identify this pair.
 Banking company – trustees and executors
 Form B - Profit and Loss Account
 Ledger book - Letter of credit register
 Other liabilities and provisions - Schedule 5 18
S K MOHAN 6
 The Bank for international settlement was established
in 1930. It is the world’s oldest International Financial
Institution and remains the principal Center for
International Central Bank cooperation.
 it is the regular meeting place for Central Bank
Governors and experts from Central Banks and other
Agencies.
 in 2004 BCBS( Basle committee on Banking
supervision ) With new accord on capital adequacy
 This is known as “international Convergence of
capital Measurement and capital standard ”{ICCMACS}
 also called basle capital accord II
 In India applicable from 31.3.2008

18
S K MOHAN 7
 Capital requirement
 Tier I ,
 tier II,
 tire III
 Capital for three type of Risk
 credit risk
 market risk ,
 operation risk
 The Total regulatory capital requirement
 Tier I + tier II + tier II
 - -----------------
Risk weight assets ( Credit+ Market + operational)

 Three pillar approach

18
S K MOHAN 8
 BASEL – II is built on 3 parameters/ Pillars

 The first pillar – MINIMUM CAPITAL

REQUIREMENTS

 The second pillar – SUPERVISORY REVIEW PROCESS RBI

has asked banks to develop an Internal capital adequacy assessment Process . Banks have
to satisfy RBI intt. Rate risk, reputational risk, settlement risk , strategic risk etc.

 The third pillar – Market Discipline

 banks have to declare its policies and risk exposure
, capital requirement results on quarterly bases

18
S K MOHAN 9
 CORE capital or Basic capital /Tier I capital
◦ Equity capital
◦ Disclosed reserves:-Statutory Reserve, capital Reserve
◦ Innovative Perpetual debt Instruments (IPDI) (RBI from 2006
has permitted)
 But it should be not more than 15% of tier I capital excess of
this will be part of the tier II capital
 Perpetual Non –Cumulative Preference Share (PNPS)
 SUPPLEMENTARY CAPITAL OR tier II capital ( it should not be
more than 100% of tier I capital )
◦ Undisclosed reserves
◦ Revaluation reserves ( it is discounted to 55% of value )
◦ General Provisions/General Loss reserves
◦ Hybrid debt capital investments
◦ Subordinated term debt ( It should not be more than50% of tier I capital
 Deductions from capital:
◦ Goodwill from Tier I capital
◦ Investments in subsidiaries not consolidated from total capital base.

19
S K MOHAN 0
 Released in December, 2010 is the third in
the series of Basel Accords.
 These accords deal with risk management
aspects for the banking sector.
 In a nut shell we can say that Basel iii is the
global regulatory standard (agreed upon by
the members of the Basel Committee on
Banking Supervision) on bank capital
adequacy, stress testing and market liquidity
risk.
 (Basel I and Basel II are the earlier versions of
the same, and were less stringent)
19
S K MOHAN 1
 improve the banking sector's ability to absorb
shocks arising from financial and economic stress,
whatever the source
 improve risk management and governance
 strengthen banks' transparency and disclosures

19
S K MOHAN 2
 The Basel III which is to be implemented by banks in India
as per the guidelines issued by RBI from time to time, will be
challenging task not only for the banks but also for GOI.
 It is estimated that Indian banks will be required to raise Rs
6,00,000 crores in external capital in next nine years or so
i.e. by 2020 (The estimates vary from organization to
organization).
 Expansion of capital to this extent will affect the returns on
the equity of these banks specially public sector banks.
 However, only consolation for Indian banks is the fact that
historically they have maintained their core and overall
capital well in excess of the regulatory minimum

19
S K MOHAN 3
 The basic structure of Basel III remains
unchanged with three mutually reinforcing
pillars.
 Pillar 1 Minimum Regulatory Capital
Requirements based on Risk Weighted Assets
(RWAs) : Maintaining capital calculated through
credit, market and operational risk areas.
 Pillar 2 : Supervisory Review Process : Regulating
tools and frameworks for dealing with peripheral
risks that banks face.
 Pillar 3: Market Discipline : Increasing the
disclosures that banks must provide to increase
the transparency of banks
19
S K MOHAN 4
 a) Better Capital Quality : introduction of much stricter
definition of capital.
 b) Capital Conservation Buffer :-banks will be required to hold a
capital conservation buffer of 2.5%
 (c) Countercyclical Buffer:-The buffer will range from 0%
to 2.5%, consisting of common equity or other fully
loss-absorbing capital
 d) Minimum Common Equity and Tier 1 Capital Requirements
 from 2% to 4.5% of total risk-weighted assets. The overall Tier 1
capital requirement, consisting of not only common equity but also
other qualifying financial instruments, will also increase from the
current minimum of 4% to 6%. Although the minimum total
capital requirement will remain at the current 8% level, yet the
required total capital will increase to 10.5% when combined with
the conservation buffer
19
S K MOHAN 5
 e) Leverage Ratio: 3% leverage ratio of Tier 1 will be
tested before a mandatory leverage ratio is introduced in January
2018
 f) Liquidity Ratios :-A new Liquidity Coverage
Ratio (LCR) and Net Stable Funding Ratio (NSFR) are
to be introduced in 2015 and 2018, respectively.
 g) Systemically Important Financial Institutions
(SIFI) systemically important banks will be expected
to have loss-absorbing capability beyond the Basel III
requirements

19
S K MOHAN 6
 Comparison of Capital Requirements under Basel II and Basel III

Requirements Under Basel IIUnder Basel III

Minimum Ratio of Total Capital To RWAs 8% 10.50%

Minimum Ratio of Common Equity to RWAs 2% 4.50% to 7.00%

Tier I capital to RWAs 4% 6.00%

Core Tier I capital to RWAs 2% 5.00%

Capital Conservation Buffers to RWAs None 2.50%

Leverage Ratio None 3.00%

Countercyclical Buffer None 0% to 2.50%

Minimum Liquidity Coverage Ratio None TBD (2015)

Minimum Net Stable Funding Ratio None TBD (2018)

Systemically important Financial Institutions
None TBD (2011)19
Charge S K MOHAN 7
Features of a Joint stock Company
 Incorporated association
 Artificial person
 Perpetual succession
 Common seal
 Limited liability
 Separation of management from ownership
 Transferability of shares
 Separate legal status
 Large membership

19
S K MOHAN 8
1. When was the New Companies Act 2013 notified in the Gazette of India?
 Answer: 30 August 2013
2. The New Companies Act 2013 has implications for banks, under three broad
areas. What are they?
◦ Answer: Registration of charges Satisfaction of charges and Borrowing powers
of a company
 3. What is the importance of Section 77 of the New Companies Act as regards
pledge?
 Answer: The old Companies Act excluded Pledge from the purview of
registration of charges. The New Act includes Pledge also
 4. As per New Companies Act, within how many days the company should register
charges with the RoC?
 Answer: within 30 days + 270days with penalty
 5. What is the importance of Section 82 of the New Companies Act 2013 as
regards satisfaction of charges?
 Answer: The company shall report satisfaction of charges within 30 days of
payment of satisfaction
 6. Penalties for default ( in reporting satisfaction of charges) have been enhanced
in the New Act. For the Company the penalty shall be Rs.-----------minimum and
Rs.-----------maximum
19
 Answer: Rs.100000/- and Rs.1000000/-
S K MOHAN 9
 under the New Companies Act 2013, the
maximum number of members (shareholders)
permitted for a private limited company is
increased from 50 to ---------
 Answer: 200
 What are the features of One Man company,
envisaged under the New Companies Act 2013?
 a) it has only one shareholder
 b) There should be a nominee for the director
 c) One Man company can have maximum 15 directors
 How many board meetings should be conductd
in a year?
 Answer: minimum 2 in a year ( minimum 1 in a half-year

20
S K MOHAN 0
On the basis of On the basis of On the basis of
incorporation ownership liability

Chartered company Private company and Co. limited by shares

One person company

Statutory company Public company Co. Ltd. by guarantee

Registered company Government Co. with unlimited

company liability

Foreign company Holding company

S K MOHAN 201
•The following points should be kept in mind while issuing the share
capital for public subscription :
•1. The application money should be at least 5% of the face value of
the share.
•2. Calls are to be made as per the provisions of the articles of
association.
•3. Where there is no articles of association of its own, the following
provisions of Table A will apply:
•(a) A period of one month must elapse between two calls;
•(b) The amount of call should not exceed 25% of the face value
of the share;
•(c) A minimum of 14 days’ notice is given to the shareholders to
pay the amount; and
•(d) Calls must be made on a uniform basis on all shares within
the same class.
•Note: The procedure for accounting for the issue of both equity and
preference shares is the same. To differentiate between the two the
words ‘Equity’ and ‘Preference’ is prefixed to each and every
instalment.
20
S K MOHAN 2
State which of the following statements are true :
(a) A company is an artificial person.
(b) Shareholders of a company are liable for the acts of the
company.
(c) Every member of a company is entitled to take part in its
management.
(d) Company’s shares are generally transferable.
(e) Share application account is a personal account.
(f) The director of a company must be a shareholder.
(g) Paid-up capital can exceed called up capital.
(h) Capital reserves are created from capital profits.
(I) At the time of issue of shares, the maximum rate of securities
premium is 10%.
(j) The part of capital which is called up only on winding up is
called reserve capital.
(k) Forfeited shares can not be issued at a discount.
(l) The shares originally issued at discount may be re-issued at a
premium

(a) False, (b) True, (c) False, (d) True, (e) True, (f) True, (g) True, (h) False,
(i) True, (j) False, (k) True, (l) False, (m) True S K MOHAN
20
3
 EQUITY
 PREFERENCE
 CUMULATIVE and non cumulative
 Convertible and non convertible
 REDEEMABLE and irredeemable company limited by shares ,if
authorized by its AOA may issue redeemable shares . But issue of
irredeemable are not permitted by CO law
 PARTICIPATING:- which in addition to their preferential
dividend are also entitled to participate in surplus profit which
remains after paying dividend to equity share holder . But if AOA is
silent in this regard than all preference shares holder are deemed t
be non participating
 PS holder can vote only on such resolution which
directly affect the PS holder’s right
 if PS holder’s dividend not paid fully for more than
two years PS holders shall also gets voting right-on
every resolution placed before the company
20
S K MOHAN 4
 AUTHORISED CAPITAL
 ISSUED CAPITAL
 SUBSCRIBED CAPITAL
 CALLED CAPITAL
 PAID UP CAPITAL
 Uncalled Capital
 Reserve Capital:
 A company may reserve a portion of its uncalled capital to be
called only in the event of winding up of the company. Such
uncalled amount is called ‘Reserve Capital’ of the company. It is
available only for the creditors on winding up of the company

20
S K MOHAN 5
 Choose the Correct Answer.
 (a) Equity share holders are :
 (i) creditors
 (ii) owners
◦ (iii) customers of the company
 (iv) none of the above
 (b) Nominal share capital is :
 (i) that Part of the authorised capital which is issued by the
company.
 (ii) the amount of capital which is actually applied for by
the prospective shareholders.
◦ (iii) the maximum amount of share capital which a
company is authorised to issue.
 (iv) the amount actually paid by the shareholders.

20
S K MOHAN 6
 (c) Interest on calls-in-arrears is charged according
to “Table A” at :
 (i) 5%
 (ii) 6%
 (iii) 8%
 (iv) 11%
 (d) Money received in advance from shareholders
before it is actually called-up by the directors is :
 (i) debited to calls-in-advance account
 (ii) credited to calls-in-advance account
 (iii) debited to calls account
 (iv) none of the above
 (e) Shares can be forfeited :
 (i) for non-paymnt of call money
 (ii) for failure to attend meetings
 (iii) for failure to repay the loan to the bank
 (iv) for which shares are pledged as a security

20
S K MOHAN 7
 (f) The balance of share forfeited account
after the reissue of forfeited shares is
transferred to :
 (i) general reserve
 (ii) capital redemption reserve
 (iii) capital reserve
 (iv) reveneue reserve
 (g) Balance of share forfeiture account is
shown in the balance sheet under the item :
 (i) current liabilities and provisions
 (ii) reserves and surpluses
 (iii) share capital
 (iv) unsecured loans

20
S K MOHAN 8
-BANK Debited -
- SHARE APPLICATION
- credited

-SHARE APPLICATION Debited -

-SHARE CAPITAL - Credited

Over subscription
-share application Debited -
-share capital - Credited
-bank (refund) - Credited
-share allotment - Credited
S K MOHAN 209
Bharat Limited had an authorised capital of Rs.4,00,000 divided into shares
of Rs.100 each. It offered to the public 3000 shares payable as follows.
On Application Rs. 30
On Allotment Rs.20
On First Call Rs.25
On Second Call Rs.25
The shares were duly subscribed for by the public and all money
was received. Pass journal entries to record the above transactions

S K MOHAN 210
S K MOHAN 211
S K MOHAN 212
Share allotment a/c Debited -
- Credited
Share capital a/c
Debited -
Bank a/c
- Credited
Share allotment a/c
Share call a/c Debited -
- Credited
Share capital a/c
Bank a/c Debited -
- Credited
Share call a/c
Calls in arrears a/c Debited -
- Credited
Share allotment a/c
Share call a/c - Credited

S K MOHAN 213
Share application/ Debited -
allotment a/c
To Share capital A/c - Credited
To Share premium A/c - Credited

S K MOHAN 214
Share allotment A/c Debited -
Discount on issue of Debited -

-
To Share capital A/c Credited

S K MOHAN 215
Share capital A/c Debited -
Call in arrears A/c - Credited
Forfeited shares A/c - Credited

S K MOHAN 216
Bank A/c Debited -
Forfeited shares A/c Debited -
Share capital A/c - Credited
Capital reserve A/c - Credited

S K MOHAN 217
Cap. Red. Reserve A/c Debited -
Share premium A/c Debited -
Capital reserve A/c Debited -
Gen Reserve A/c Debited -
Profit & Loss A/c Debited -
Bonus to shareholders A/c - credited
Bonus to shareholders A/c Debited -
Equity share capital A/c credited

S K MOHAN 218
 Select the incorrect statement in respect of utilization of
share premium
 it is used for the purpose of buy back of shares
 it used for payment of dividend in case of inadequacy of
profits
 it is used for writing off preliminary expenses
 it is used for issue of fully paid bonus shares
 Select the source which is not valid for
issue of bonus shares
 Share premium
 Revaluation reserve created by revaluation of fixed
assets
 Capital reserve
 Capital redemption reserve


21
S K MOHAN 9
 Mr. X was issued 100 shares of Rs.10 each. He
failed to pay call money of Rs. 5 per share. The
shares were forfeited and re-issued to Mr. Y at
Rs.9. When the entry recording the re-issue of
shares was passed in all, four accounts were
affected. The debit and credit effect of these four
accounts is given below. One of the accounts is
given wrong effect. Select that account from the
following.
 Debit bank account by Rs.900
 Debit forfeited shares by Rs.500
 Credit share capital by Rs.1000
 Credit forfeited shares by Rs.400

22
S K MOHAN 0
 DT Ltd. issued shares of Rs.10 each at 10 %
premium, payable on application Rs.2, on
allotment Rs.3 (including premium), on first
call Rs.2 and on final call Rs.4. One of the
shareholders, applied for 100 shares but
fail to pay allotment and first call money. At
this stage, the said shares were forfeited.
Select the account which was wrongly
credited.
 Credit Forfeited shares Account by Rs.200
 Credit Share allotment Account by Rs.200
 Credit share premium Account by Rs.100
 Credit Share first call Account by Rs.200

22
S K MOHAN 1
 1. Companies have been defined in Section ___________ of the
Companies Act, _______.
 2. __________ is considered as the official signature of the
company.
 3. The management of a company is done by __________.
 4. The liability of share holders are __________ in a company.
 5. Audit of accounts are done by practicing chartered accounts
who are appointed by __________ at the __________.
 6. ________ is the maximum amount of capital that can be
issued by a company.
 7. Nominal capital is the capital mentioned in the
_______________ of the company.
 8. That part of the authorised capital not offered for
subscription to the public in known as _________.
 9. Reserve capital can be issued only at the time of __________.

 (Answers: 1.( section 20 chapter(1) of 2013 and ( Sec. 3(1)(i),

1956; 2. Common Seal; 3. Board of Directors; 4. Limited;
5. Shareholders, Annual General Meeting; 6. Authorised/
Nominal / Register; 7. Memorandum of Association; 8.
Unissued; 9. Winding up; S K MOHAN
22
2
 10. A public issue can not be kept open for more
__________ days.
 11. Minimum subscription that should be received by
the company is ______% of the issued capital.
 12. When excess application money is adjusted
towards allotment it is called as __________ allotment.
 13. There should be a time gap of ____________
between two calls.
 14. Capital Reserve represents __________ profit
 15. Forfeited shares have to be reissued at a price
__________ than the face value.
 16. Securities premium is shown in the __________
side of the Balance Sheet.
 10. 10 days; 11. 90; 12. Prorata/Proportional; 13.
One month; 14. Capital; 15. Lesser than; 16. Liability)
22
S K MOHAN 3
 According to Companies (Amendment) Act 2000, a
company
 limited by share can issue _______ kinds of shares.
 a) 1 b) 2 c) 3
 The public issue must be kept open for atleast
 a) 3 days b) 5 days c) 7 days
 Minimum amount to be collected by a company as
application money according to SEBI is _____% of the
issue price.
 a) 10% b) 25% c) 50%
 When more number of applications are received than
that are offered to the public, it is called ____________.
 a) Over subscription b) Under subscription c) Full subscription
 The maximum calls that a company can make is
 a) one b) two c) three
 According to Table A, interest charged on calls-in-
arrears is
 ______%.
 a) 4% b) 5% c) 6%

22
S K MOHAN 4
 According to Table A, interest charged on calls in
advance is
 _______%.
 a) 4% b) 5% c) 6%
 A company can issue shares
 a) at par only b) at par and at premium
 c) at par, at premium & at discount
 When the company issue shares at a price more
than the face value it is called as an issue at
________.
 a) Par b) Premium c) Discount
 Normally companies can issue shares at ________%
of discount
 a) 5 b) 10 c) 20
 When shares are forfeited the share capital of the
company will _______.
 a) remain same b) reduce c) increase
22
S K MOHAN 5
 Securities premium will appear in the ________
side of the Balance Sheet.
 a) Asset b) Liability c) Assets & Liabilities
 The balance of forfeited share account
is________ in the Balance Sheet.
 a) added to paid up capital b) added to authorised capital
c) deducted from paid up capital.
 Calls-in-arrears is shown in the Balance Sheet
as
 a) deduction from called up capital
 b) addition to paid up capital
 c) addition to issued capital
 Capital Reserve is shown on the ________ side of
Balance Sheet.
 a) Asset b) Liability c) Both
22
S K MOHAN 6
 Computer is an electronic device capable of
performing
 variety of operations as desired by a set of
instructions.
 Elements of a Computer System :
◦ • Hardware
◦ • Software
◦ • People
◦ • Procedure
◦ • Data
◦ • Connectivity
 Capabilities of Computer :
◦ • Speed
◦ • Accuracy
◦ • Reliability
◦ • flexibility
◦ • Storage
22
S K MOHAN 7
 22
S K MOHAN 8
 Computerized Accounting System refers to the
processing of information with the help of
computers and accounting software.
 The computer receives the data as its inputs and
processes it as per the accounting rules and
generates various types of information as the
organization need.

22
S K MOHAN 9
 The features of Computerized Accounting System are as
follows:
A. Computerized accounting system is designed to automate and
integrate all the business operations like sales, purchase, and
manufacturing. In computerized accounting, accurate, upto-
date business information is available at any time.
B. Computerized accounting has user friendly templates which
provides fast, accurate data entry of the transactions;
thereafter all documents and reports can be generated
automatically, at the press of a button.
C. The system can cope easily with the increase in the volume
of business. It requires only additional data operators for
storing additional vouchers
D. It is capable of offering quick and quality reporting because
of its speed and accuracy.
E. This system is highly secure and the information can be kept
confidential in comparison to manual accounting system.
23
S K MOHAN 0
F. This system generates real-time,
comprehensive MIS reports and ensures
access to complete and critical information,
immediately.
G. It makes sure that the critical financial
information is accurate, controlled and safe
from data corruption.

23
S K MOHAN 1
 Discuss the significance of Computerized
Accounting System
 Answer:
 Following are the significances of computerized
accounting system.
a) The speed with which accounts can be
maintained is several folds higher.
b) It helps in automatically correcting the
balances of ledger accounts.
c) It helps in automatic tallied trial balances
unless some mistake is made while recording
the opening balance.
d) It automatically generates income statement.
e) It automatically generates balance sheet

23
S K MOHAN 2
 Choose the correct alternative
 1. Which of the following is/are computerized accounting system?
◦ (a) Processing of any information
◦ (b) involving computer(s)
◦ (c) operated by entity or third party
◦ (d) All of these
 2. Threat to Computerized accounting system are-
◦ (a) Control
◦ (b) Security
◦ (c) Integrity
◦ (d) All of these
 3. Hacking into the computer server deals with-
◦ (a) Unauthorized access to data
◦ (b) Threat to computer usage
◦ (c) Security
◦ (d) All of these
 4. Which of the following is code accounting software?
◦ (a) More convenient
◦ (b) Less complex
◦ (c) Less risky
◦ (d) None of these
 5. Codification needs
◦ (a) Complexity
◦ (b) Spelling
◦ (c) Systematic grouping
◦ (d) None of these

23
S K MOHAN 3
 Fill in the blanks:
 1. Coding accounting system is more convenient as
complexity is……
 2. Computer data hacking concerns with ………
system of the software.
 3. Computerized accounting system means ……..
through computer.
 4. Computer software includes ……….. that
performs a desired function.
 5. Computer software for accounting system may be
acquired or ……………. specifically for the business.
 Answer:
 1. high 2. security 3. data processing 4. programme
 5. developed.
23
S K MOHAN 4
 State whether the following statements are true or
false:
 1. The acquired software may consist of a spread
sheet package.
 2. The data hacking is a question against security
system.
 3. Computerized accounting system delays the
accounting function.
 4. Data processing is done though software.
 5. Non coded accounting system is more
convenient system.
 Answer:
 1. True
 2. True
 3. False
 4. True
 5. False.
23
S K MOHAN 5
 Need of Computers in Accounting : The advent of globalisation
has resulted in the rise in business operations. Consequently,
every medium and large sized organisations require well-
established information system in order to generate information
required for decision-making and achieving the organisational
objectives. This made information technology to play vital role in
supporting business operations.
 MIS and Accounting Information System : A management
information system provides information necessary to take
decisions and manage an organisation effectively. Accounting
information system on the other hand identifies, collects,
processes and communicates economic information about an
entity to a wide variety of users.
 Accounting Reports : Information supplied to meet a particular
need is called report. An accounting report must fulfil the
following conditions :
 • Relevance
 • Timeliness
 • Accuracy
 • Completeness
 • Summarization

23
S K MOHAN 6
1. The user oriented programmes designed and
developed for performing certain specific tasks are
called as ...........
2. Language syntax is checked by software called as
...........
3. The people who write programmes to implement the
data processing system design are called as ...........
4. . ...........is the brain of the computer.
5. . ...........and ...........are two of the important
requirements of an accounting report.
6. An example of responsibility report is ..........
7. ANS
◦ 1. Application software 2. Language processor
◦ 3. Programmer 4. CPU 5. Timliness, Relevance
◦ 6. Cash position, Management responsibility
23
S K MOHAN 7
 A computerised accounting system is an
accounting information system that processes the
financial transactions and events to produce
reports as per user requirements. It is based on
the concept of database and has two basic
requirements:
 (a) Accounting framework and
 (b) Operating Procedure.
 Advantages of Computerised Accounting System :
 • Speed • Accuracy
 • Reliability • Up-to-date
 • Scalability • Legibility
 • Efficiency • Quality Report
 • MIS Reports • Real time user interface
 • Storage and Retrieval • Motivation and Employees
interest
 • Automated document production

23
S K MOHAN 8
• Cost of training
• Staff Opposition
 Disruption
 System failure
 Breaches of security
 Ill-effects on health
 Inability to check
 unanticipated errors
 Categories of Accounting Packages :
 • Ready-to-Use
 • Customized
 Tailored

23
S K MOHAN 9
 1. The framework of storage and processing of
data is called as ........
 2. Database is implemented using ........
 3. A sequence of actions taken to transform the
data into decision useful information is
called.......
 4. An appropriate accounting software for a
small business organisation having only one
user and single office location would be ........

 ANS 1. Operating environment 2. DBMS 3. Data Processing 4. Ready to

use

24
S K MOHAN 0
A. Every relation has at least one super key by
default, which is the combination of all its
attributes. T
B. Data transformation is called Information. T
C. Referential integrity constraint arises because
of relationships between various entities. T
D. The complete absence of WHERE clause in
SELECT statement implies that no tuples of a
relation shall be selected. F
E. ER model is an example of representational
data model. F

24
S K MOHAN 1
 24
S K MOHAN 2
 Accounting Transactions of an organisation are
documented using a voucher.
 Each vouchers is assigned a serial number, which begins
with “01” indicating first vouchers of the accounting
period. There is only one simple transaction voucher used
for documenting the transactions
 • Each voucher documents date of transaction,
account name along with its account code for debit as
well as credit entry.
 • Each voucher indicates the amount and narration with
respect to accounting transaction.

24
S K MOHAN 3
 Support documents such as bills, receipts, contracts,
etc. also may be attached to an accounting voucher.
 • Each Voucher is prepared by a particular Employee
and authorised by another employee.
 • There is an exhaustive list of Accounts with respect
to which the transactions are documented. Each
Account carries a unique numeric code with its width
equal to six digits.
 • Each Account is classified as belonging to one of the
Accounts Types: Expenditure, Income, Assets and
Liabilities.

24
S K MOHAN 4
 The passwords should be changed periodically
by the user. The System should force change of
passwords if the users are not doing
periodically on their own.

 It is the duty of every person to protect his/her
password with at most secrecy. He/she is
responsible for all the activities done under
his/her Login Id/User Id and this may result in
penal/disciplinary action.

24
S K MOHAN 5
 (a) A ........... does not have key attributes of its own.
 (b) The ........... for binary relationship specifies the
number of relationship instances that an entity can
participate in.
 (c) Each simple attribute of an entity type is associated
with a value set called ........... of values.
 (d) When structure of AIS is based on both human and
computer resources, it is called ........... AIS.
 (e) An ........... is a collection of all entities of a
particular entity type.
 (f) A weak entity type always has a ........... constraint
with respect to its identifying relationship.
 (g) When a relation has more than one attribute with
unique values, each such attribute is called ............
 ANS (a) Weak entity (b) Computer based c) Timeware (d) Liveware (e)
Total participation (f) Multi-valued (g) Full functional

24
S K MOHAN 6
 Accounting in Banks.
The transactions in the banks are done in the following three ways.
1. Cash
2. Transfer
3. Clearing.

24
Sunil K Mohan 5/13/2018 7
 WHERE THE TRANSACTION RELATES TO
RECEIPT OR PAYMENT OF CASH

24
Sunil K Mohan 5/13/2018 8
 WHERE BOTH THE TRANSACTIONS RELATES
TO ACCOUNTS WITHIN THE BANK / BRANCH

24
Sunil K Mohan 5/13/2018 9
 WHERE ONE END OF THE TRANSACTION
RELATES TO THE CLEARING HOUSE.
 CLEARING HOUSE IS THE PLACE OF EXCHANGE
OF INSTRUMENTS BETWEEN BANKS.

 THE NODAL POINT/ OFFICE

ESTABLISHED FOR CLEARING
WITHIN THE BANK IS CALLED
CENTRAL CLEARING OFFICE

25
S K MOHAN 0
 Basic Banking Operations

Accounting in Banks.

Cash transaction examples.

Credit/debit to a deposit account.
Debit/Credit to a Loan account.
Cash received for issuance of DD etc.
Cash paid for DD etc.

IN ALL THE ABOVE EXAMPLES, THE OTHER

LEG OF THE TRANSACTION WILL BE CASH
ON HAND.
25
Sunil K Mohan 5/13/2018 1
 Basic Banking Operations

Accounting in Banks.

Transfer transaction examples (in a transfer transaction

both the legs of transaction will be in the same
branch.
Credit/debit to a deposit account.
Debit/Credit to a Loan account.
Debit to a deposit account for issuing DD etc.
Credit to a deposit account by paying a DD etc,

25
Sunil K Mohan 5/13/2018 2
 Basic Banking Operations

Accounting in Banks.

Clearing transaction examples (in a clearing transaction

one of the leg of transaction will be in some other
Bank/branch where clearing house exists)
Credit/debit to a deposit account.
Debit/Credit to a Loan account.
Payment of DD etc. drawn on us to other bank.
Receipt of amount from other bank in payment of DD
etc. drawn on other bank.

25
Sunil K Mohan 5/13/2018 3
Basic Banking Operations

Some accounting examples - CASH

Credit to Deposit Account Debit Cash

Debit to Deposit Account Credit Cash

Debit to Loan Account Credit Cash

Credit to Loan Account Debit Cash
Credit DDR account Debit Cash
Debit DDR account Credit Cash
25
Sunil K Mohan 5/13/2018 4
 Basic Banking Operations

Some accounting examples - TRANSFER

Credit to Deposit Debit Deposit/Loan
Account Account
Debit to Deposit Credit Deposit/Loan
Account Account
Debit to Loan Account Credit Loan/Deposit A/c
Credit to Loan Account Debit Loan/Deposit A/c
Credit DDR account Debit Deposit/Loan A/c
Debit DDR account Credit Deposit/Loan A/c

25
Sunil K Mohan 5/13/2018 5
Basic Banking Operations

Some accounting examples - CLEARING

Credit to Deposit A/C Debit clearing Account
Debit to Deposit A/C Credit clearing Account
Credit to Loan Account Debit clearing account
Debit DDR account Credit clearing A/c

25
Sunil K Mohan 5/13/2018 6
-Recording
- Classifying
- Summarizing

25
S K MOHAN 7
 VOUCHERS
 JOURNAL / SCROLL
 LEDGERS
 SUPPLEMENTARIES
 DAY BOOK
 GENERAL LEDGER

25
Sunil K Mohan 5/13/2018 8
 RECORDING OF TRANSACTIONS UNDER THE
RELEVANT ACCOUNT HEAD WITH THE
NARRATION

25
Sunil K Mohan 5/13/2018 9
 Receipt Voucher
 Payment Voucher
 Non-Cash or Transfer Voucher
 Supporting Voucher
 In other word
 DEBIT
 CREDIT
 CONTRA

26
Sunil K Mohan 5/13/2018 0
 26
S K MOHAN 1
 General Instructions Clean and Secured Environment
Cabling
UPS) and Batteries Electrical Cabling Data

 Automated Teller Machine (ATM)

 Internet Banking
 Mobile Banking
 Core Banking Solutions under various Modules
 ADVANCES
 CASH
 CURRENT and CASH CREDIT
 CLEARING
 DEMAND DRAFTS RECONCILIATION
 DEPOSITS
 GENERAL LEDGER
 INLAND BILLS PURCHASE
 INLAND COLLECTION BILLS
 EXPORT
 IMPORT
 PPF SCHEME, 1968
 SAVINGS BANK
 SUNDRY CREDITORS/SUSPENSE
 SENIOR CITIZENS SAVINGS SCHEME - 2004 26
S K MOHAN 2
  ModuleD
Banking Operation

26
S K MOHAN 3
 Banking Operation
 Operational aspects of
 KYC/ customer services ;-As per RBI guideline
Adhar is compulsory for opening of account
 Accounting entries
 Cash and clearing
 Deposit accounts
 Loans accounts
 CBS environment
 Back office operation

26
S K MOHAN 4
 Some basic functions performed by the banks
are discussed below.
 1. Accepting Deposits
◦ (i) Demand Deposits – with drawable on demand
(ii) Current Account
(iii) Savings Deposits
(iv) Term Deposits – Received for a fixed period
 2. Granting Loans and Advances
◦ (i) Overdraft
(ii) Cash Credit:
(iii) Discounting of Bills
(iv) Loans and Advances

26
S K MOHAN 5
 Remittance of Funds
 Collection and Payment of Credit Instruments
 Execution of Standing Orders
 Purchasing and Sale of Securities
 Collection of Dividends on Shares
 Income Tax Consultancy
 Acting as Trustee and Executor
 Acting as Representative and Correspondent
 Locker Facility
 Traveller's Cheques
 Letter of Credit
 Collection of Statistics
 Underwriting Securities
 Gift Cheques
 Acting as Referee
 Foreign Exchange Business 26
S K MOHAN 6
 Mutual Fund Business
 Money Market Mutual Funds
 Cheque Writing Facility for Investors of Mutual
Funds/Money Market Mutual Funds
 Primary Dealership Business
 Underwriting Activities
 Equipment Leasing, Hire Purchase Business and
Factoring Services
 Investment in Venture Capital Funds
 Sponsors to Infrastructure Debt Funds
 Insurance Business
 Pension Fund Management
 Referral Services
 Trading on/Membership of SEBI approved Stock
Exchanges
 Portfolio Management Services
26
S K MOHAN 7
(a) Strategic Risk – The service provider may conduct business on its own
behalf, which is inconsistent with the overall strategic goals of the bank
(b) (b) Reputation Risk – Poor service from the service provider, its customer
interaction not being consistent with the overall standards of the bank
(c) (c) Compliance Risk – Privacy, consumer and prudential laws not
adequately complied with
(d) (d) Operational Risk – Arising due to technology failure, fraud, error,
inadequate financial capacity to fulfil obligations and/or provide remedies
(e) (e) Exit Strategy Risk – This could arise from over–reliance on one firm,
the loss of relevant skills in the bank itself preventing it from bringing the
activity back in-house and contracts entered into wherein speedy exits
would be prohibitively expensive
(f) (f) Counterparty Risk – Due to inappropriate underwriting or credit
assessments
(g) (g) Country Risk – Due to the political, social or legal climate creating
added risk
(h) (h) Contractual risk – arising from whether or not the bank has the ability
to enforce the contract
(i) I) Concentration and Systemic Risk – Due to lack of control of individual
banks over a service provider, more so when overall banking industry has
considerable exposure to one service provider.

26
S K MOHAN 8
 1. What are the KYC requirements for opening bank account?
◦ 1. ID Proof 2. Address Proof 3. Latest Photo 4 All of above 5 NOA

 2. Name six documents that can be given as Proof of Identity and Proof of
Address.
◦ Ans: 1. PAN 2. Voter ID 3. Passport 4. Driving License 5. Aadhar Card 6. NAREGA Job Card
 3. In respect of "Low Risk Customers" if prescribed documents are not
available, we can open the account with any of the following documents
 Ans: 1.ID card by Central /State Govt Dept, Statutory / Regulatory authority /
PSU / SCB / PFI or 2. Letter issued by Gazetted Officer duly certifying
 4. What is the type of account a person can open without production of any of
the documents except photograph?
◦ Ans: He can not open any account without document / Small Account {Strike out
inapplicable)

 5. If a customer refuses to provide requisite documents or if you are not

satisfied with the KYC details of a customer, what option is available to you?

 Do not open the account

 6. What are the important features / limitations of "Small Account" ?
◦ 1. Balance < Rs.50,000 2. Total credits in a FY < Rs.1.00 lakh 3.Withdrawal PM not to
exceed Rs.10,000 4.No inward foreign remittances 5. Valid for 1 year + 1 year in which KYC
documents to be provided or freeze
26
S K MOHAN 9
7. Explain the process of e-KYC
 Thro BC – Handholding machine
8. I want to open a Current Account in your
branch which is 25 years old. I have necessary
KYC documents but I do not have Íntroduction'.
Can you open an account for me?
 Ans: Yes. Introduction
9. I belong to Delhi . If I am staying in Shimla but
I submit Address Proof of my Delhi address,
would you accept and open account in Shimla?
 Ans: Yes. Declaration of local address
10. I have an account with Surat br which is KYC
compliant. I get it transfered to Amritsar br.
What is the requirement under KYC at Amritsar
br?
 Ans: Declaration of local address
S K MOHAN
27
0
11. What are the norms for periodical updation of KYC
records for various types of risks?
 Ans: Once in 2 years for High / Exceptional – 8
yeras for Medium / 10 years for Low (if no change,
not required – mere communication is enough)
 What is the name of the Act governing KYC / AML?
 Ans: Prevention of Money Laundering Act, 2002

 In which cases it is mandatory to give High Risk?

 Ans: NRI / HNI / PEP / Trust / Charities / NGO /
Receiving donation accounts / Non face to face
customers / Jewelers / Bullion dealers / Antique
dealers

27
S K MOHAN 1
 Explain CTR & STR and to whom it has to be submitted?
 Ans: To FIU India

 Who shall be classified under RIP – Exceptional?

 Ans: Against whom cases filed by ED / Police/ ITD/ IMP & EXP
authorities

 What is the procedure for opening account of a close relative who has
recently joined him and does not have Address Proof?
 Ans: KYC of relative and a declaration from him

 What is the reporting requirement in respect of Non Profit

Organisation (NPO)?
 Ans: Report to FIU if remittances exceed Rs.10.00 lakhs in a month

 What is the relationship between Forged Notes and KYC requirements?

 Ans: To be reported to FIU – India within 7 days

 How to close an account from KYC context?

 Ans: Three months notice and another three months and then debit
freeze. After that six months notice and then complete freeze or close
after due notice. 27
S K MOHAN 2
 Business hours/working hours
 Display of time norms
 Commencement/Extension of working hours
 Identity Badges
 Complaint Box and Book
 Booklets/Brochures for Guidance to customers
 Display of information relating to Interest Rates and
Service Charges – Rates at a quick glance
 Disclosure of Information by banks in the public domain
 Website
 Need for Bank Branches / ATMs to be made accessible
to persons with disabilities
 Providing banking facilities to Visually Impaired Persons
 Facility to sick/old/incapacitated non-pension account
holders
 Extended business hours for non-cash banking
transactions
27
S K MOHAN 3
 The following non-cash transactions should be undertaken
by banks during the extended hours i.e.before the close of
working hours:
 Non-voucher generating transactions
◦ Issue of pass books/statement of accounts
◦ Issue of cheque books
◦ Delivery of term deposit receipts/drafts
◦ Acceptance of share application forms
◦ Acceptance of clearing cheques
◦ Acceptance of bills for collection
 Voucher generating transactions
◦ Issue of term deposit receipts
◦ Acceptance of cheques for locker rent due
◦ Issue of travelers cheques
◦ Issue of gift cheques
◦ Acceptance of individual cheques for transfer credit
27
S K MOHAN 4
 The Committee has studied the customer care and protection
measures available in the various developed economies, all the
international best practices in this regard and deliberated upon all
the issues raised/feedback received by the various stake holders all
over the country. In this report, the same are presented under the
following eight major groups:
 i. Deposit Accounts
 ii. Loans and Advances
 iii. Remittances and other Facilities
 iv. Special Customers
 v. Institutional Arrangements
 vi. Customer Education
 vii. Comprehensive Banking Regulation
 viii. Other Aspects


27
S K MOHAN 5
 The Committee met various stakeholders
pertaining to the area of customer service.
 Based on the deliberations with the stakeholders,
the Committee has made its recommendations
on the following sections:
 Customer Service in Banks.
 Grievance Redressal System in Banks.
 Banking Ombudsman Scheme.
 Customer Service and Technology.
 Role of Boards of Banks in Customer Service

27
S K MOHAN 6
A. CUSTOMER SERVICE IN BANKS
 DEPOSIT ACCOUNTS
 REMITTANCES
 LOANS AND ADVANCES
 SPECIAL CUSTOMERS
 INSTITUTIONAL ARRANGEMENTS
 CUSTOMER EDUCATION
 COMPREHENSIVE BANKING REGULATION -
 OTHER ASPECTS
B. TECHNOLOGY AND CUSTOMER SERVICE
 INTERNET BANKING
 ATM / DEBIT CARD TRANSACTIONS
 Issue of Photo Based Cards -.
 Unique ID for Every ATM.
 Blocking of ATM Card -
 Chip Based Card (EMV

27
S K MOHAN 7
a) Bundling of Products –
b) Passbooks / Account Statements
c) Inoperative Account
d) Minimum Account Balance –
e) Basic Savings Account –
f) Annualized Interest Yield on Deposits –
g) Uniform Account Opening Forms –
h) KYC Norms –
i) Linking Terms and Conditions of various Products to
CBS –
j) Renewal Notices for Term Deposits –
k) Service Charges -
 Charges for Basic Service –
 Charges on Non-Home Branch Transactions –
 Intersol Charges –
l) TDS certificate
27
S K MOHAN 8
 (i) Small Remittances –
 (ii) Prepaid Instruments –
 (iii) Online Payments –
 This would result in substantial savings to them in cash management.
 (iv) Travel VISA Fee payable at Banks -
 (v) Penalty for Returned Clearing Cheques –
 (vi) Automatic Cheque Deposit Facility –
 . (vii) Cheque Truncation from the.
 (viii) point of deposit in the automatic deposit machine
should be allowed, thereby preventing further flow of
physical cheque to Clearing Department. Cheque Deposit
Machine should be installed in branches where daily cheque
deposit is more than 300 CBS should provide for matching
the salary paid account through ECS with the name
provided by the Organisation/Employer before entertaining
the ECS mandate.
27
S K MOHAN 9
 (i) Pricing and Non-pricing Terms and Conditions of Loans -

 (ii) The CBS Software should be so enabled so as to provide the following:
 (iii) Time Schedule for Disposing of Loan Application -.
 (iv) Loan Statement.
 (v) Loan Documents –
 (vi) Small Loans -.
 (vii) Reporting to Credit Information Bureau -.
 (viii) Rules of the Credit Information Bureau should clearly differentiate
settlements .
 (ix) Home Loans –
 Housing Loan Foreclosure Charges –
 (x) The title deeds should be returned to the customers within a period of 15
days after the loan closure.
 (xi) Most Important Terms and Conditions (MITC) -. All MITCs should
be in Arial font and size 12, which would be easily readable to the
customers.
 (xii) Educational Loans - The banks should ensure through Government
subsidy or insurance that the educational loans are properly priced so that no
bright student would be denied an educational loan.
 (xiii) Switch Over to Base Rate - 28
S K MOHAN 0
 (i) Pricing and Non-pricing Terms and Conditions of Loans -

 (ii) The CBS Software should be so enabled so as to provide the
following:
 (iii) Time Schedule for Disposing of Loan Application -.
 (iv) Loan Statement.
 (v) Loan Documents –
 (vi) Small Loans -.
 (vii) Reporting to Credit Information Bureau -.
 (viii) Rules of the Credit Information Bureau should clearly
differentiate settlements .
 (ix) Home Loans –
 Housing Loan Foreclosure Charges –
 (x) The title deeds should be returned to the customers within
a period of 15 days after the loan closure.
 (xi) Most Important Terms and Conditions (MITC) -. All MITCs
should be in Arial font and size 12, which would be easily
readable to the customers.
 (xii) Educational Loans -
 (xiii) Switch Over to Base Rate -
28
S K MOHAN 1
 Cash and its custody
 Cash and small coin balances must be kept in the strong room in the joint custody.
 No member of staff other than cashier/teller should receive money over the counter.
 Strong Room and safe must be under the double lock of the Cashier and Supervising
Official.
 Bulk of Cash balances should always be in the strong room/safe in the joint custody.
Cashier Hand balance will be kept as low as possible.
 Checking of Cash Balance
 Before taking notes and coins into "Joint Custody", the supervising official will :
 Personally count all notes of denominations above Rs. 10.
 Count all other notes on the "clip system".
 Have all bags of coinsweighed in his presence.
 Take and count fewpieces and leave the reminder to be counted in his presence on the
"clip system".
 Invariably check the entire Head Cashier's/Cashier's hand balance of loose notes.
 Assure that Head Cashier's/Cashier's hand balance are kept in the cash box and locked in
his presence.

28
S K MOHAN 2
 Shortage or Excess in Cash
 Any shortage in the cash balance should be recovered on the same day from the
Head Cashier/Cashier.
 Failing recovery on the same day, the amount of shortage should be debited to
Suspense Account taking the signatures of the members responsible under report to
the Head Office.
 Head Cashier/Cashier is responsible for any shortage either in Hand or Vault
Balance.
 Cashiers signed the Denomination Slips will be responsible for any shortage in
book of notes.
 Any excess in the Cash Balance must be credited to Sundry Creditors Account on
the same day.
 Remittance of Cash
 When remittances of currency notes are sent from one office to another, following
instructions must be strictly complied with :
 Should not be allowed to be carried without and armed guard.
 Always entrusted to an authorised employee with experienced subordinate staff
and armed guard.
 Night journeys and unusual halts at junctions should be avoided.
 Remittance box should always be conveyed in the van provided.
 The box should be securely chained and locked.
 A register should be maintained to record all cash remittances 28
S K MOHAN 3
 Clearing Operation
 Prerequisites for sending cheques for clearing
 All the instruments presented through the clearing should bear
the "Clearing" stamp with Bank and Branch and date.
 Bank crossing stamp with MICR code.
 Verify the name of the payee and on pay-in-slip which should
be one and the same.
 Verify the amount on the cheque and on pay-in-slip which
should be one and the same.
 Cheques with a/c payee crossing must be collected to the
payee a/c only.
 Send the unpaid Return Cheques through the branch courier to
reach the clearing branch before stipulated time.
 Follow all the specified instructions for :
 Inward clearing cheques
 Outward clearing cheques
 High Value clearing
 Electronic Clearing System (ECS)
 Clearing House Account Reconciliation
 Balancing of Clearing House Account
28
S K MOHAN 4
  Current Accounts
◦ Current Accounts (C/As) can be opened by individuals,
partnership firms, private and public limited companies,
HUFs, societies, trusts, clubs, associations, Govt
Departments etc.
◦ No interest is payable on credit balances in Current
Accounts.
◦ The customers may receive the statements of account
according to the frequency desired by them.
◦ Cheque books are issued to all Current Account holders
and all withdrawals should be made only through issue of
cheques.
◦ As per RBI directive, the applicant for Current Account
should declare in the account opening form or separately
that he/they is/are not enjoying any credit facility with any
Bank and if he/they does/do enjoy any credit facility,
he/they should declare full particulars thereof indicating
the name of the Bank/branch concerned.

28
S K MOHAN 5
 There is no restriction on the number and amount of deposits.
 However, mandatory PAN details are required for doing cash transactions
exceeding Rs.50,000.
 Withdrawals are allowed subject to certain restrictions.
 The money can be withdrawn either by cheque or withdrawal slip of the
respective bank.
 The rate of interest payable is between 4% to 6% p.a in India.
 Saving account is of continuing nature. There is no maximum period of
holding.
 A minimum amount has to be kept on saving account to keep it functioning.
 No loan facility is provided against saving account.
 Electronic clearing System (ECS)/E-Banking/Net Banking/Mobile Banking
facilities are available.
 Eligibility to open Savings Bank Accounts
 Individuals
 Two or more persons in joint names
 Associations or clubs if eligible as per RBI guidelines
 Minor above 10 year
 A bank should not open more than one SB account for the same person in
his individual name
 If joint accounts, operating instructions and survivorship should be obtained

28
S K MOHAN 6
 Government Departments
 Municipal corporations
 Municipal Committees
 Panchayat Samitis
 State Housing Boards
 Water and Sewerage/Drainage Boards
 State Text Book Publishing Corporations
 Societies
 Metropolital Development Authority
 Any trading business or professional concern
 Political Party
 State/District level Housing Co.op Socieities
28
S K MOHAN 7
 )

 Banks are advised to offer a ‘Basic Savings Bank Deposit Account’

which will offer following minimum common facilities to all their
customers:
 The BSBAD should be considered a normal banking service available to
all.
 This account shall not have the requirement of any minimum balance.
 The services available in the account will include deposit and
withdrawal of cash at bank branch as well as ATMs; receipt/credit of
money through electronic payment channels or by means of
deposit/collection of cheques drawn by Central/State Government
agencies and departments;
 While there will be no limit on the number of deposits that can be made
in a month, account holders will be allowed a maximum of four
withdrawals in a month, including ATM withdrawals;
 Facility of ATM card or ATM-cum-Debit Card;
 The above facilities will be provided without any charges. Further, no
charge will be levied for non-operation/activation of in-operative ‘Basic
Savings Bank Deposit Account’.
28
S K MOHAN 8
 Banks should encourage the opening of joint
accounts on terms such as, payable to
 (a) Either or Survivor
(b) Former or Survivor
(c) Later or Survivor
(d) Anyone or Survivors, or Survivor

28
S K MOHAN 9
 Section 45ZA to 45ZF of the Banking
Regulations Act. permit banks to accept
nomination in respect of
 Deposit accounts,
 Safe custody of articles
 Safe Deposit locker facility

29
Sunil Kumar Mohan 5/13/2018 0
 Banks would be free to evolve other requirements including
pricing structure for additional value-added services beyond the
stipulated basic minimum services on reasonable and
transparent basis and applied in a non-discriminatory manner.
 The BSBDA would be subject to RBI instructions on Know
Your Customer (KYC) / Anti-Money Laundering (AML) for
opening of bank accounts issued from time to time.
 If such account is opened on the basis of simplified KYC
norms, the account would additionally be treated as a ‘Small
Account’ and would be subject to conditions stipulated for such
accounts.
 Holders of BSBDA will not be eligible for opening any other
savings bank deposit account in that bank. If a customer has any
other existing savings bank deposit account in that bank, he/she
will be required to close it within 30 days from the date of
opening a BSBDA.
 The existing basic banking ‘no-frills’ accounts should be
converted to BSBDA.

29
S K MOHAN 1
 Branches may accept nominations in various deposit accounts in
the following manner:
 a) Accounts in the name of an individual
*nomination should be given by that individual alone.
 b) Accounts in the joint names of two or more individuals
* nomination should be made jointly by all the joint account
holders.
 c) Accounts in the joint names of individuals with “Either or
Survivor”, Anyone or Survivor” or Former or Survivor” mandate
* nominations should be made jointly by all the joint account
holders irrespective of the operational instructions.
 accounts and Minor’s Special Savings Bank accounts operated by
the minor alone.
 g) Accounts of Non-resident Indians

29
Sunil Kumar Mohan 5/13/2018 2
 d) Accounts of minors operated by guardian on
behalf of the minors
*nomination should be made only by the guardian
authorised to operate the account of the minor
(natural guardian or the guardian appointed by the
Court)
 e) Accounts of minors operated by guardian held
jointly with the guardian
*nomination should be made only by the guardian
both on behalf of the minor and the guardian
himself/herself.
 f) Minor’s Special Deposit accounts
*Branches should not accept any nomination in
Minor’s Special Fixed deposit 29
Sunil Kumar Mohan 5/13/2018 3
 Only Individual
 One person for one account
 Minor can be appointed as nominee
 NRI can be appointed as nominee( but in case of death
of depositor money can not be repatriated without obtaining the permission
of RBI or Subject to Exchange Control Regulation prevailing at the time of
remittance )

 A blind , purdanashin lady or Illiterate

person can be appointed as nominee
 But LUNATIC CANNOT BE APPOINTED AS
NOMINEE

29
Sunil Kumar Mohan 5/13/2018 4
 Safe Custody a/c in Joint name are not eligible
for nomination
 Only in case of individual this facility is available
 We do not accept articles in safe custody from
Minor
 In case of Nominee is Minor in that case one
adult should be also be appointed to receive the
articles
 Delivery of articles to nominee --Bank should not
open sealed /closed packet .
 Inventory in the form prescribed by RBI to be
taken duly signed by the nominee
 All other conditions as applicable deposit account
29
Sunil Kumar Mohan 5/13/2018 5
 Nomination facility available both for individual and joint hirers.

 In case of joint hirers, branch may accept more than one nominee
upto the limit of the number of joint hirers.

 If the sole locker hirer nominates a person,--- banks should

give to such nominee access of the locker and liberty to remove
the contents of the locker in the event of the death of the sole
locker hirer.

 In case the locker was hired jointly with the instructions to

operate it under joint signatures, and the locker hirer(s)
nominates person(s), in the event of death of any of the locker
hirers, the bank should give access of the locker and the liberty
to remove the contents jointly to the survivor(s) and the
nominee(s).
 Preparation of an inventory of contents of locker –
 Sealed / closed packets , if any need not be opened .—it should
be signed by the nominee , surviving hirers
29
Sunil Kumar Mohan 5/13/2018 6
 FORMS TO BE USED
 Form SL-1 for making nomination in case of
sole hirer
 Form SL-1A for making nominations in case of
joint hirers
 Form SL-2 for cancellation of nomination
 Form SL-3 for variation of nomination in case
of sole hirer
 Form SL-3A for variation of nomination in
case of joint hirers

29
Sunil Kumar Mohan 5/13/2018 7
 Form E for making nomination
 Form F for cancellation /variation of
nomination
 Form H Claim form

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Sunil Kumar Mohan 5/13/2018 8
 Operation in the account should be stoped
 Settlement to be made with in 15 day after receipt of
papers
 Credit received after death (pipe line transactions) of the
customer can be credited in the account with permission
of survivor, legal heirs or nominee.
 Pre mature payment of Term deposit is allowed but no
loan can be given.
 Intt. on CA /SB to be paid on SB rate till date of
payment from date of death .
 Intt. On Term deposit –will be paid on contractual rate
till maturity and after maturity rate applicable for the
period .
29
Sunil Kumar Mohan 5/13/2018 9
Type of accounts After Death Disposal of balance in the
account
Individual Stop operation Nominee or legal heirs
Joint account Stop operation If E/S and F/s pay to survivor If
Joint operation survivor and
legal heirs even Nominee
Partnership firm (CR Stop operation If account to be closed than
Balance) survivor and legal heirs If
account to be operated than
fresh mandate
Partnership (dr. Stop Operation Before allowing operation is
balance) credit decision whether loan is
to be given to the new firm or
not if yes than fresh
documentation and closure of
exiting account
Trust ee Pay cheque Allow operation to new trustee
after verifing the trust deed
30
Sunil Kumar Mohan 5/13/2018 0
Type of accounts After Death Disposal of balance in the
account

Assignee or Pay cheque Proceed as per fresh court order

receiver
Liquidator Pay cheque Proceed as per fresh court order

Director in a Pay cheque Payment will be new authorized

company official
Executor or Pay cheque Proceed as per fresh court order
administrator
Agent or attorney Pay if agent Proceed as per fresh mandate
holder or mandate dies DONOT from account holder , if alive
holder pay if
principle
dies

30
Sunil Kumar Mohan 5/13/2018 1
 Locker facility- is one of the valuable and
popular supplementary service offered to our
constituents by the branches.
 Locker- rent is one of the major source of
income under the category of non-interest
income.

30
skmohan iob stc new delhi 5/13/2018 2
 Should not be rented to Minor
 Can be rented to Individual jointly with instruction
to operate by E /S, any one or survivor
 BUT NOT WITH Former or survivor
 Partnership firm, companies , societies ,
government deptt, HUF,
 Locker to illiterate is full of risk it should be done
in very exceptional cases . With RO permission
 Can be given to Blind
 Staff is eligible for one locker only
concessional rate is 1/3 of public rate
 Trusts –ONLY WITH RO PERMISSION
 Lockers should not be rented to minors

 Trusts –ONLY WITH RO PERMISSION

30
skmohan iob stc new delhi 5/13/2018 4
 Lockers should not be hired with “Former or
Survivor” clause

 No person(s) other than those authorised by

the hirers should be allowed to operate the
lockers

30
skmohan iob stc new delhi 5/13/2018 5
 Forms and Registers to be used:
 Forms :
 Locker Application and Agreement ..
F.125 AX
 Power of Attorney for Single Hirers ..
F.122 AX
 Power of Attorney for Joint Hirers ..
F.122 BX
 Trust Account Opening Form . F.551
 Hindu Undivided Family Letter ..
F.303 X

30
skmohan iob stc new delhi 5/13/2018 6
 Registers
 Safe Deposit Locker Register .. R.133
 Locker Access Register .. R.134

 Letting out Lockers

30
skmohan iob stc new delhi 5/13/2018 7
 APPLICATION FOR HIRING A SAFE DEPOSIT
LOCKER
 ACKNOWLEDGEMENT
 LETTER OF ALLOTMENT OF SAFE DEPOSIT
LOCKER
 LOCKER WAITING LIST REGISTER


30
skmohan iob stc new delhi 5/13/2018 8

Branches should maintain a waiting list for the
purpose of allotment of lockers.
 All such applications received for allotment of
lockers should be acknowledged and given the
waiting list number
 At least eighty percent of the lockers should be
allowed by the branches on first-come-first served
basis.
 The remaining lockers can be allotted by the
branch Manager at their discretion to valued
customers on business considerations.
 In any case, it should be the endeavor of the
branches to secure other remunerative acceptable
business to our fold by extending locker service.
 Once the locker has been let out and the
receipt for the key has been obtained from
the hirer, he/she should be asked to sign the
Locker Access Register and access should
then be allowed to him/her for the first
operation.

31
skmohan iob stc new delhi 5/13/2018 0
 The hirer should be advised about the
procedure for operating the locker, the
number of his/her key and the importance of
ensuring the locker is properly locked once
the hirer has completed the operations.

31
skmohan iob stc new delhi 5/13/2018 1
 Addition / Deletion of names
 Collection of Rent
 Branches should ensure that the hirer records
the check-in and check-out time, when
he/she operates the Locker.

31
skmohan iob stc new delhi 5/13/2018 2
 Nomination facility
 Surrendering of Lockers
 Death of Hirer

31
skmohan iob stc new delhi 5/13/2018 3
 Fixed deposit which cover three year rent and
charges for break open of locker in case of any
eventuality can be accepted but in normal NO
deposit is insisted .
 Transparency in allotment of lockers .
 Bank to give a copy of locker agreement to
customer .
 KYC to be done
 LOCKER AGRREMENT
 RENTERS OWN LOCK AND PASSWORD
 ADDITION OR DELETION OF NAMES
 LOCKER RENT
 NON PAYMENT OF RENT
 SUPERVISION OF LOCKERS
 Articles found outside the locker unit
 Which items can be accepted under safe custody
 Only Sealed packet
 Shares , debenture securities , bank deposit receipt
 Banker customer relation in this case is Bailee and
Bailor
 Articles kept under safe custody are not subject
to banker’s lien.
 Packets accepted for Safe custody should have
CUSTOMER seal not Bank’s seal
 The deposit receipts issued by bank can be kept in
safe custody FREE OF CHARGE
 U/S 151 of Indian contract act
 U/S 152 of Indian Contract act
 Minor
 Lunatics
 Convicted
 Illiterate persons -
 Blind
 Pardhanishin lady-
 Illiterate Pardhanishin lady-
 Married woman
 Joint borrowers-
 Sole Proprietor-
 Trustees--- by Indian trust act , Public trust act Religious and
charitable endowments act
 Executor
 HUF:- Customary law pertaining to Hindus
 Agents
 Partnership--- Indian partnership act
 Company--- ---company act
 Statutory Corporation ----- by act created for them
 Societies---- societies registration act , wakf act
 LLP ---- LLP act
31
SUNIL KUMAR MOHAN 5/13/2018 7
 Minor- Incompetent to contract ,
◦ necessaries supplied to minor u/s 68 of contract act ( his
property is liable not in person ) ,
◦ loan can not recover even ratification after attending the age
of majority,
◦ securities can not enforced against minor,
◦ bank can not recover from guarantor who has given the
guarantee for loan to minor ,
◦ without permission of court guardian can not mortgage or
transfer any immovable property of minor ,
◦ minor can witness documents ,
◦ minor can be admitted as partners
 Lunatics Person of unsound mind , not competent
to contract u/s 11 of ICA ,Same rule applicable in
case of heavily drunk person
 Insolvent --- undercharge insolvent is incompetent
to contract
 Convicted – can not enter into contract during
imprisonment period
31
SUNIL KUMAR MOHAN 5/13/2018 8
 Illiterate persons -Left hand thumb impression. It should be
certified that LTI is belongs to so and so person , It is
compulsory to obtain one declaration from an independent
person that the effect of documents are read out to concern
person that has put his LTI after understanding of the same .
 Blind He should put his signature as well as LTI and obtain
one declaration as we take in case of illiterate
 Pardhanishin lady- All contract are voidable with Pardhanishin
lady at the option of the lady on account of undue influence .
It is better to take documents in the presence of her attorney
 Illiterate Pardhanishin lady- A certificate to the effect that” all
the contents of the document were read over to her and she
signed after understanding the same” to be added.
 Married woman She can execute the document husband is not
liable for any loan given to her But we can obtain the
guarantee of her husband . As per section 56 of CPC woman
can not be arrested or imprisoned for non payment of
judgment debts
 Joint borrowers- all should join execution
 Sole Proprietor- In representative capacity

31
SUNIL KUMAR MOHAN 5/13/2018 9
 Trustees--- If trust deed permit they can borrow,
◦ all trustees have to execute documents ,
◦ no trustee can delegate the power to another person ,
◦ copy of trust deed should kept in branch and enter into PA register
◦ Trustee have no implied power to borrower against trust property
 In case of public trust advance against registered
mortgage of trust property prior permission from charity
commissioner have to obtained
 Apart from charge over trust property personnel guarantee
of all trustee should also be obtained
 Executor;-He can be a borrower provided he is authorized to borrow .
He is jointly and severally liable for such advances
 HUF:- Advance can be given for ANCESTRAL family business not for
new ones
 it is better to obtain signature of Karta and all Co -parceners on all
documents
 an undertaking letter must be obtained from all co parceners (f303) –
◦ 1) purpose of advance to run family business ,
◦ 2) Co -parceners are jointly and severally liable ,
◦ 3) they re continue to liable till the separation notice is not received by the bank

32
SUNIL KUMAR MOHAN 5/13/2018 0
 Agents :-
◦ PA must be stamped and executed by principle in presence of
magistrate / notary public ,
◦ authority must be specific to execute the documents and copy of
same to be kept in the branch and entered in PA register .
 Partnership – Partnership is not having separate legal
entity
 HUF and NBFC can not become the partner in
partnership firm
 in case of mortgage of firm’s property or guarantee on
behalf of the firm all partner jointly have to sign
 All partners should join execution of documents , all
partner can authorize one or two partners to execute the
documents
 Guarantee from all partners must be obtained
 It is preferably the firm should be registered 32
SUNIL KUMAR MOHAN 5/13/2018 1
 Before sanctioning credit facilities to the company banker have
to verify the following :- MA and AA are public documents one
have to verify them
 Memorandum of association – object clause , Name clause
registered office , capital clause ,liability clause and association
clause ( principle of constructive notice)doctrine of ultra virus)
 We must ensure that purpose of taking loan is well within object
clause
 Advance sanctioned for purpose beyond the ambit of object
clause is not recoverable
 Any trading company has implied power to borrower unless it is
restricted by MA or AA
 Non trading company require express power either in MA or
AA
 Article of association ;- banker have to verify the following in
AA exercise of borrowing power , use of common seal , power of
directors
Certificate of incorporation ;- it is birth certificate of the company
Certificate of commencement of business
32
SUNIL KUMAR MOHAN 5/13/2018 2
 Other important things to be seen
Board resolution for obtaining loan
where a company wants to create mortgage of immovable
property against loans (other than temporary loans ) exceeding
the paid-up capital and free reserve , a general body resolution
authorizing the board to do so also required
Copy of resolution forwarded by the company must be signed by
the chairman of the board meeting and counter signed by the
secretary
Copy of the resolution can be certified by the Secretary or
authorized official of the company
Credit facility should not be preferably sanctioned against omnibus
resolution
Resolution must contain the:- name of bank preferably name of
branch , detail facility , name of persons who are authorized to
execute the documents , charge securities , and operate the
advances account It should be also specify the manner of
affixing common seal
 Common seal to be affixed if so provided in Articles of
Association
 Letter of negative lien
32
SUNIL KUMAR MOHAN 5/13/2018 3
 Filing of annual return , B/s, list of directors
 Filing of Charge :-
 Reference :- Section 77-87 of the Companies Act,
2013 read with the Companies (Registration of
Charges) Rules, 2014
 Definition :-Charge defined as “Charge means an
interest or lien created on the property or assets of
the Company or both as security and includes a
mortgage”.
 Type of Charges to be registered :- Section 77
states that Companies are required to register all
types of Charges:
 within or outside India,
 on its property or assets or any of its undertakings,
 whether tangible or otherwise, and
 situated in or outside India
 with ROC within 30 days of its creation.
32
SUNIL KUMAR MOHAN 5/13/2018 4
 Additional period to register the Charge Section 77- ROC
may on application by the company, allow the registration
of charge within 300 days (30 days + additional period of
270 days).
Application to be supported by a declaration in Form CHG-
10 from the CS or Director that such belated filing will not
adversely effect the rights of any creditors of the company.
 Notice by Registrar in case any person other than
Company applies for registration of Charge :-Section 78- In
case the Company fails to get the Charge registered, then
the person in whose favour the Charge is to be registered
may apply to the registrar.
The Registrar shall send 14 days notice to the Company
and on not receiving any response after the expiry of 14
days, the registrar shall register the Charge.
 Modification of Charge :-As per Section 77, the same
provisions as applicable to Creation of Charge applies to
modification.
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SUNIL KUMAR MOHAN 5/13/2018 5
 Registration of Satisfaction of Charges
 Condonation of delay
 Certificate of registration
 Register of Charges
 Penalty - Multifold increase in the penalty

32
SUNIL KUMAR MOHAN 5/13/2018 6
 Funded and Non-Funded Credit Facilities
 Term Loans
 Demand Loans
 Bills Purchased
 Bills Discounted
 End use of funds
 Primary Securities
 Collateral Securities
 Personal Security of Guarantor
 Fixed Charges
 Floating Charges
 Margin
32
S K MOHAN 7
 Priority Sector
 Refinance
 Credit Risk Management
 Credit Exposure Norms
 Base Rate System of Interest on Advances
 Fixed/Floating Rate of Interest on Loans
 Penal Rate of Interest
 Security
 Documents of Title of Goods
 Banker’s General Lien
 Negative Lien
 Restrictions on Advances
 Rehabilitation
 Recovery
 Fair Practice Code
32
S K MOHAN 8
 Receipt of Loan Application
 Assessment of viability and credit worthiness
 Sanction
 Disbursement
 Monitoring and supervision
 Inspections
 Review of the conduct of the account
 Renewal of advances

32
S K MOHAN 9
 Go through these following operating instructions in details with book
 Documentation
 Margin
 Valuation
 Marketability
 Godown Board
 Insurance
 Godowns in a Pledge Account
 Pledging of Stocks
 Storage of goods pledged in the godowns where goods not pledged are
also stored
 Delivery of stocks pledged
 Submission of stock statements in Hypothecation accounts
 Goods hypothecated in the godowns where goods not hypothecated are
also lying
 Staff accountability
 Charges for inspection of Godowns/Assets/Securities etc.
 Godown charges
 Selective credit control
 Advances against warehouse receipts
33
S K MOHAN 0
 Gold Loans
 Must be covered under policy framed by Bank’s Board
 Prohibited from granting any advance against
bullion/primary gold
 End use of the funds to be ensured
 Ownership of the ornaments to be ensured
 Valuation of gold ornaments to be done
 Prefer hallmarked jewellery
 Purpose of loan can be for both Agriculture and non-
agriculture purposes
 Loan to Value (LTV) to be maintained (Max. 75 % of
value of gold ornaments)
 Maximum amount of loan should be within board
approved limit
 Record of security
33
S K MOHAN 1
 Custody of ornaments
 Repayment should not be more than 12
months (other than agriculture)
 Return of ornaments on repayment
 Delivery to third parties should be by a letter
of authority from the buyer
 Default is to be informed to the borrower that
the ornaments would be auctioned
 Should be insured for the approved value
 Surprise verification of the pockets to be
carried out

33
S K MOHAN 2
 Service area norms
 Eligibility criteria
 Student eligibility
 Expenses considered for loan
 Quantum of finance
 Margin
 Security
 Documentation
 Sanction
 Disbursement
 Repayment
 Follow up
 Processing charges
 Capability certificate
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S K MOHAN 3
 Home Loans
 Valuation of property
 Eligibility
 Loan to Vale (LTV) ratio
 Interest rate
 Security
 Insurance
 Disbursal – for purchase of constructed
property/built up property
 Disbursal – for building construction
 Repayment
 No Foreclosure charges/Prepayment
penalty for floating rate individual
borrowers 33
S K MOHAN 4
 Purpose of Auto Loan – New/used Car, MUVs, SUVs, Two
wheelers
 Eligibility
 Documents required to be submitted
 Loan Tenure
 Loan to Vale (LTV) ratio
 Interest rate – Fixed/Floating
 Calculation of interest
 Penal interest
 Bounced cheque/ECS or SI dishonorurs
 Intimation of change in base rate
 Repayment
 Security
 Insurance
 Prepayment penalty is waived
 Inspection
 Fees and charges
 Disbursement

33
S K MOHAN 5
 Core Banking Solutions (CBS)
 Need for Core Banking Solution
 Improve operational efficiency - reduce cost of operations
 Improve customer service
 Comply with Anti Money Laundering (AML) / Know Your Customer
(KYC) requirements
 Integrate with electronic payment systems
 Benefits of CBS
 CBS will provide the following benefits:
 Anytime and Anywhere banking (online mediums/SMS)
 Standardised, simple and automated processes
 Increase in quality of the service provided to the customers
 Timely and accurate information for management decision making
 Strong audit and internal controls
 Bring down the cost of transaction and thereby improving
operational efficiency
 Paving way for new value added services thereby generating
additional revenue for the Department

33
S K MOHAN 6
 Objectives of CBS
 The key objectives are as below:
 To increase the number of customers
 To provide multiple delivery channels like
internet, mobile banking, ATMs, thereby bringing
access to financial services to the doorsteps of
the customers
 To enable faster money fund transfers to reach
out to more customers
 To become one stop solution for financial
inclusion initiatives of the Government of India

33
S K MOHAN 7
 Functions performed by the Back Office
 Back office functions can be grouped as under :
 Book keeping and accounting – Transaction
processing, maintenance of General Ledger and
other book of accounts
 Deposits – Calculation and posting of interest,
service charges
 Loans – processing end-to-end loan originations,
calculation of EMI, calculation and posting of
interest, penal interest, processing fee,
commission, charges, risk management
 Regulatory compliance – Identifying KYC gaps,
customer grievance redressal system
 e-Banking – handling transactions through
internet, mobile banking or ATMs
 Other functions – Clearing, collection,
remittances
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S K MOHAN 8
 Reconciliation of accounts for payments
involving intermediaries
 Reconciliation of accounts for with
correspondent banks
 Reconciliation of bank accounts with RBI and
other banks and institutions
 Reconciliation of Inter branch entries
 Reconciliation of Inter Office transactions
 RBI guidelines regarding inter office entries
Reconciliation set up and process at the banks

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S K MOHAN 9
cmaskmohan@gmail.com
cmaskmohan@yahoo.com
9839736168

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