The bank pass book indicates the amount paid into the bank and the amount

withdrawn there from. The pass book balance on any given date must be the same
as the balance shown by the bank column of the cash book on the same date. But in
actual practice the bank pass book balance seldom agrees with the balance shown
by the bank column of the cash book. This happens when some of the transactions
appear in the cash book but not in the pass book or in the pass book but not in the
cashbook.

1. Cheques issued but not presented for payment. When cheques are issued, the entry
in the cash book is made immediately. In the books of the bank, the entry is made only
when the cheque is presented for payment..
2. Cheques paid into the bank but not yet cleared. As soon as the cheques arc
deposited into the bank, the entry is passed on the debit side of the bank column in the
cash book. The customer's account is credited by the bank only when the cheques are
cleared.
3. Interest allowed by the bank. Bank might have credited the account of the customer
with the interest and may have made the entry in the pass bk
4. Interest and bank charges debited by bank. The bank debits the account of the
customer by way of interest on overdraft. It also debits the account of the customers by
way of incidental charges and collection charges.
5. Interest, dividend etc. collected by the bank. Sometimes interest on government
securities or dividend on shares is collected by the bank and is credited to customer's
account. If the entry for these do not appear in the cash book, the balance will differ.
6. Direct payment by the bank Sometimes under standing instructions from the client,
certain payments like insurance premium, club fees etc. are made by the bank.
7. Direct payment into the bank by a customer. Sometimes our customers deposit
money direct into the account in the bank, the corresponding entry for which may not
appear in the cash book, due to delay in necessary instructions by the customers.
8. Dishonor of bill discounted with the bank. Sometimes customers get their bills
discounted with the bank. If the bank is not able to get payment of these bills on the due
date, it will debit the customers accounts with the amount of the bills together with the
noting charges, if any. The customer will pass the entry in his books on receipt of the
information from the bank.
9. Any error committed by the bank Or Customer Besides the above reasons if any
error is committed either by the bank or by the customer himself while recording the
transactions in their respective books it will cause disagreement between the two
balances.
DOUBLE ENTRY SYSTEM

3 TYPES OF ACCOUNTS:
-- REAL: ASSETS OF BUSINESS, TANGIBLE AND
IDENTIFIABLE.
-- PERSONAL: THEY ARE HEADED WITH THE NAME OF
PERSON/BUSINESS/FIRM. DEBTORS OR CREDITORS.
-- NOMINAL: THEY RECORD TRANSACTIONS OF
INTANGIBLES SUCH AS RENT EXPENSES.

RULES:
-- REAL : DEBIT THE ACCOUNT WHEN WE PURCHASE
AN ASSET & CREDIT WHEN WE SELL OR
DEPRECIATE.
-- PERSONAL : DEBIT THE RECEIVER OF GOODS &
CREDIT THE GIVER OF GOODS.
-- NOMINAL : DEBIT LOSSES & EXPENSES, CREDIT
INCOMES & GAINS.
-- IN A LEDGER, ASSETS OR LOSSES HAVE DEBIT
BALANCE WHILE LIABILITIES OR GAINS HAVE
CREDIT BALANCE.
ADVANTAGES OF BANK RECONCILIATION
. VERIFICATION OF ACCURACY OF ENTRIES
. TIMELY CORRECTIVE ACTION
. PREVENTS FRAUDS
. CONTROL TOOL FOR MANAGEMENT

X co .was maintaining account with KRB Bank Ltd. On 31st December,2006, Bank
column of cash book of company showed a debit balance of Rs. 26000.
Cheques deposited into the bank but not credited before 31st December,2006
amounted to Rs.4000
Bank charges of Rs. 500 were debited by the bank but no entry was made by the
accountant of the company.
From the above particulars, find out the balance as per KRB Banks books.
A) Rs.30500
B) Rs.25500
C) Rs.21500
D) Rs.22500

Debit balance in the cash book means

a) Overdraft
b) Favourable balance
c) Temperory overdraft
d) None of the above

Bank reconciliation statement is

A) Ledger account
B) Part of the cash book
C) Statement containing differnece of cash book and bank pass book
D) None of the above

Bank reconciliation statement is prepared by

A) Business man
B) Bank
C) Debtor
D) None of the above

To reconcile the cash book with the pass book the un presented cheques are
A) added
B) subtracted
C) multiplied
D) devided

To reconcile the cash book with the pass book when the cash book is overcast by Rs 100,
Rs 100 will be
A) added
B) subtracted
C) multiplied
D) devided
Undercasting of the credit side of Cash Book has the same effect as overcasting of the
A) Debit side of the pass book.
B) Credit side of the pass book.
C) There is no relevance between the two
D) None of the above
DEFINITION
IT IS A STATEMENT SHOWING CREDIT AND DEBIT
BALANCES FROM THE LEDGER.
HELPS ARITHMETICAL ACCURACY AND FACILITATES
FINAL ACCOUNTS.
BASIC PRINCIPLE :
SINCE IT IS DOUBLE ENTRY BOOK-KEEPING,
HENCE ASSETS AND EXPENSES ARE DEBIT BALANCES
LIABILITIES AND INCOMES ARE CREDIT BALANCES
. IN CASE OF ARITHMETICAL INACCURACY IDENTIFY
CLERICAL/PRINCIPLE ERRORS AND RECTIFY

TYPES OF ERRORS:
A) CLERICAL ERRORS
-- ERRORS OF OMISSION
--- OMISSION OF TRANSACTION FROM BOOKS
--- COMPLETE OMISSION NOT AFFECTING TRIAL
BALANCE
--- PARTIAL OMISSION AFFECTING TRIAL
BALANCE

-- ERRORS OF COMMISSION
--- FIGURE POSTED ON THE WRONG SIDE OR WITH
WRONG AMOUNT

-- COMPENSATING ERRORS
--- ONE ERROR BALANCES ANOTHER ERROR

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

RECTIFICATION OF ERRORS IS A SERIES OF STEPS:

PASS THE CORRECT ENTRY
COMPARE THE WRONG ENTRY WITH THE CORRECT ONE
PASS THE RECTIFICATION ENTRY
IF TRIAL BALANCE DOES NOT TALLY THEN DIFFERENCE IS TRANSFERRED
TO SUSPENCE ACCOUNT

TYPICAL ERRORS:
-- CLERICAL:

A) SALARY PAID 1000/- BUT POSTED AS 10, 000/-.

RECTIFICATION: CREDIT SALARY WITH 9000/-.

B) SALARY PAID 1000/- BUT POSTED IN RENT A/C.

RECTIFICATION: DEBIT SALARY AND CREDIT RENT WITH

1000/-.

C) GOODS WORTH 100/- SOLD TO VIJAY WRONGLY

RECORDED IN PURCHASE REGISTER.

RECTIFICATION: CREDIT SALES AND PURCHASE A/Cs

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

AFTER TRIAL BALANCE IS PREPARED ONE FINDS

D) SALES OF 500/- POSTED AS 5000/- WHILE RENT PAID 500/- POSTED AS 5000/-.
RECTIFICATION: DEBIT SALES WITH 4500/-, CREDIT SUSPENCE WITH 4500/-,
CREDIT RENT WITH 4500/-,
DEBIT SUSPENCE WITH 4500/-.

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

RECTIFICATION: DEBIT SALARY WITH 1000/- SUSPENCE WITH 9000/-;
CREDIT RENT WITH 10000/F) A PURCHASERS DEBIT BALANCE OF 9000/- HAS NOT BEEN TAKEN.
RECTIFICATION: DEBIT DEBTORS, CREDIT SUSPENCE TO THE EXTENT OF
9000/-.

Sales to Navin of Rs.1000 is debited to Ravin A/c. this will be rectified by---- Debiting Navin a/c and Crediting Ravin A/c
Debiting both Accounts
Debiting Ravin a/c and Crediting Navin A/c
Debiting Navin A/c and crediting Sales A/C


i.
ii.
iii.
iv.

sale of Rs.5000 to Suresh is posted to his credit, then rectification is

Credit Suresh to the extent of Rs.10,000
Credit Suresh to the extent of Rs.5,000
Debit Suresh to the extent of Rs.10,000
Debit Suresh to the extent of Rs.5000 Credit

True or False --Trial Balance

1)
2)
3)
4)
5)
6)
7)

Wrong balancing of an account will not affect the trial balance

Trial balance does not ensure arithmetical accuracy
Preparations of trial balance helps in locating accounting errors
Debit balance of ledger account is shown in debit column of trial balance
Fixed deposits with banks shows debit balance
Purchases are shown in the debit side of the trial balance
Banks overdraft is shown on the debit side of the trial balance

CAPITAL AND REVENUE EXPENDITURE

BASIC PRINCIPLE:
. ALL EXPENSES AND RECEIPTS OF REVENUE NATURE
ARE TAKEN TO TRADING AND PROFIT & LOSS ACCOUNT
. ALL EXPENDITURES AND RECEIPTS OF CAPITAL NATURE
ARE TAKEN TO BALANCE SHEET
REVENUE RECEIPTS/PAYMENTS :
. ARE SMALLER IN SIZE(RELATIVELY)
. ARE RECURRING IN NATURE
. THE BENEFITS ARE OVER A SHORTER PERIOD (1 YEAR)
. THE PURPOSE IS TO RUN THE BUSINESS ON A DAY TO
DAY BASIS
. MAINTAIN ASSETS IN WORKING CONDITION

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

THERE ARE CERTAIN EXPENDITURES WHICH ARE

OTHERWISE REVENUE IN NATURE BUT SOMETIMES

UNUSUALLY LARGE AND WHOSE BENEFIT TO THE
ORGANISATION MAY ACCRUE AFTER FEW YEARS.THESE
MAY BE TREATED AS DEFERRED REVENUE EXPENDITURE ,

CARRIED TO THE BALANCE SHEET , AND WRITTEN OFF TO

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

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

REVENUE

Large amount

Relatively small

Improve or enhance earning capacity

Maintain asset

Long duration benefit

Short duration

Non- recurring

recurring

Balance sheet item

Trading /P & L A/c item

DEFERRED REVENUE EXPENDITURE:

LARGE ADVERTISING EXPENDITURE FOR(SAY) LAUNCH OF A PRODUCT
EXPENDITURE FOR RAISING OF FUNDS INCLUDING
PREPARATION OF PROJECT REPORT
INITIAL EXPENSES FOR SETTING UP OF A COMPANY
(1)Cost of replacement of defective parts of the machinery is ----a. Capital expenditure
b. Revenue expenditure
c. Deferred revenue expenditure
(2) Loss of goods due to fire Rs.8000 is a revenue expenditure because---a. It is recurring
b. Amount involved is small
c. Loss is arising out of business operations
(3) Professional fees paid in connection with acquisition of leasehold premises is---a. Capital expenditure
b. Deferred revenue expenditure
c. Revenue expenditure
4)Preliminary expenses , discount allowed on issue of shares are the examples of
a. Capital expenditure
b. Deferred revenue expenditure

c. Revenue expenditure
(5) Machinery costing Rs.10,000, whose current book value is Rs.7000 is sold for Rs.12000 what
is the amount of capital & revenue receipt
a. Capital receipt of Rs. 2000 & Rev. Receipt of Rs.10000
b. Capital receipt of Rs. 9000 & Rev. Receipt of Rs.3000
c. Capital receipt of Rs. 12000 & Rev. Receipt of Rs.Nil
INVENTORY VALUATION
VALUATION OF STOCKS IS IMPORTANT FROM THE POINT OF INCOME
DETERMINATION.
THE DANGER COULD BE OF EITHER OVERVALUATION OR
UNDERVALUATION OF STOCKS RESULTING IN OVERSTATING OR
UNDERSTATING OF PROFITS.
METHODS OF VALUATION:
-- FIFO
-- LIFO
-- AVERAGE OR WEIGHTED AVERAGE COST METHOD
-- BASE STOCK METHOD
-- ADJUSTED SELLING PRICE METHOD

UNDER FIFO GOODS ISSUED TO PRODUCTION IS VALUED AT THE EARLIEST

PRICE WHEREAS THE CLOSING STOCK IS AT THE LATEST PRICE.
UNDER LIFO GOODS ISSUED TO PRODUCTION IS VALUED AT THE LATEST
PRICE WHEREAS THE CLOSING PRICE IS AT THE EARLIEST PRICE.
UNDER WEIGHTED AVERAGE COST METHOD ARITHMETIC MEAN OF TOTAL
PRICE BY TOTAL QUANTITY RECEIVED IS TAKEN FOR VALUATION.
ADJUSTING SELLING PRICE METHOD IS GENERALLY USED BY SMALL
BUSINESSMEN WHO ARE UNABLE TO DIFFERENTIATE VARIOUS COSTS.
HENCE THEY VALUE THE STOCKS AT SELLING PRICE AND THEN REDUCE
ITS VALUE TO THE EXTENT OF ESTIMATED GROSS MARGIN.
BASE STOCK METHOD
IT IS ON THE ASSUMPTION THAT A MINIMUM QUANTITY OF INVENTORY
( BASE STOCK ) MUST BE HELD AT ALL TIMES IN ORDE TO CARRY ON THE
BUSINESS
PRESENTLY ACCOUNTING STANDARDS PERMIT FIFO(HISTORICAL PRICE)
OR WEIGHTED AVERAGE COST METHOD.
VALUE OF STOCK CAN BE ASCERTAINED BY PERIODIC(PHYSICAL
VERIFICATION) OR PERPETUAL INVENTORY ( MAINTAINENCE OF STOCK
REGISTER).

CHARACTERISTICS OF DIFFERENT METHODS OF INVENTORY VALUATION

FIFO :
-- IN RISING MARKET FIFO RESULTS IN HIGHER
PROFITS LOCKING UP OF SCARCE W. C.
-- GOODS ARE SOLD AT CURRENT HIGHER PRICES

WHILE COST OF GOODS REFLECTS LOWER THAN

CURRENT COSTS
-- IN FALLING MARKET FIFO RESULTS IN LOWER
PROFITS

IN THIS CHAPTER IT IS IMPORTANT TO DISCUSS THE VARIOUS

ACCOUNTING CONVENTIONS
CONSERVATISM CONCEPT: RECOGNITION OF INCREASES IN EARNINGS
REQUIRES BETTER EVIDENCE THAN DOES RECOGNITION OF DECREASES
THAT IS EXPENSES
REALISATION CONCEPT: RECOGNITION OF AMOUNT OF REVENUE THAT
HAS CERTAINTY OF REALISATION
MATCHING CONCEPT: RECOGNITION OF REVENUES AND EXPENSES FOR A
CERTAIN EVENT.
METHODS OF VALUATION OF INVENTORY
FIFO

LIFO
Goods issued
valued at earliest
price
Stock valuation at
latest price

AVERAGECOST
Goods issued valued at Found out by dividing total price paid
latest price
by quantity received
Stock valuation at
earliest price

CONSISTENCY CONCEPT: ONCE A CERTAIN METHOD IS DECIDED UPON

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

Let's examine the inventory of Cory's Tequila Co. (CTC) to see how the different inventory
valuation methods can affect the financial analysis of a company.
Month

Units Purchased

Cost/unit

Total Value

January

1,000

Rs10

Rs10,000

February

1,000

Rs12

Rs12,000

March

1,000

Rs15

Rs15,000

Total

3,000

Beginning Inventory = 1,000 units purchased at Rs8 each (a total of 4,000 units)

Income Statement (simplified): January-March*

Item

LIFO

FIFO

Average

Sales = 3,000 units @

Rs20 each

Rs60,000

Rs60,000

Rs60,000

Beginning Inventory

8,000

8,000

8,000

Purchases

37,000

37,000

37,000

Ending Inventory
(appears on B/S)
*See calculation below

8,000

15,000

11,250

COGS

Rs37,000

Rs30,000

Expenses

10,000

10,000

Net Income

Rs13,000

Rs20,000

Rs33,750
10,000
Rs16,250

LIFO Ending
Inventory Cost = 1,000 units X Rs8 each = Rs8,000 Remember that the last units in are
sold first; therefore, we leave the oldest units for ending inventory.

FIFO Ending
Inventory Cost = 1,000 units X Rs15 each = Rs15,000 Remember that the first units in
(the oldest ones) are sold first; therefore, we leave the newest units for ending inventory.

Average Cost Ending Inventory = [(1,000 x 8) + (1,000 x 10) + (1,000 x 12) + (1,000 x
15)]/4000 units = Rs11.25 per unit
1,000 units X Rs11.25 each = Rs11,250 Remember that we take a weighted average of
all the units in inventory
BILLS OF EXCHANGE

BILL OF EXCHANGE IS THE VEHICLE FOR CREDIT

TRANSACTIONS IN BUSINESS; HAS 3 PARTIES:

DRAWER WHO MAKES THE BILL/ CREDITOR;
DRAWEE ON WHOM THE BILL IS DRAWN;
PAYEE -- WHO RECEIVES THE MONEY;
SOMETIMES DRAWER & PAYEE ARE THE SAME.
ACCEPTANCE TO PAY BY THE DRAWEE IS ESSENTIAL.

.
. PROMISSORY NOTE IS SIMILAR ; HAS ONLY 2 PARTIES
BUT SIGNED BY DEBTOR; NOTING NECESSARY.
. ACCOMODATION BILL : THERE IS NO TRANSACTION;
THE BILL IS DISCOUNTED TO RAISE MONEYS FOR
BOTH PARTIES, WHO SHARE THE AMOUNT.
TYPICAL ENTRIES:
. THE ENTRIES IN THE BOOKS OF DRAWER A ARE:
DIRECT BILL TRANSACTION
BILLS RECEIVABLE a/c
DR.
TO DRAWEE B
. CASH a/c
DR.
TO BILLS RECEIVABLE
( BILL IS MET ON DUE DATE)
BILL ENDORSED TO C
. Cs a/c
DR.
TO BILLS RECEIVABLE
( NO ENTRY WHEN BILL IS MET)
BILL SENT FOR COLLECTION
.
BANK FOR BILL COLLECTION a/c
DR.
TO BILLS RECEIVABLE
.
CASH a/c
DR.
TO BANK FOR BILL COLLECTION
( BILL SENT FOR COLLECTION IS MET)
IN CASE OF DISCOUNTING
CASH a/c
DR.
DISCOUNT a/c
DR.
TO BILLS RECEIVABLE
( NO ENTRY WHEN BILL IS MET)
THE ENTRIES IN THE BOOKS OF DRAWEE B:
.. As a/c
DR.
TO BILLS PAYABLE
. BILLS PAYABLE a/c
DR.
TO CASH
( BILL IS PAID)

THERE ARE CASES WHEN BILLS ARE DISHONOURED.

IN THAT CASE THE ENTRIES ARE AS FOLLOWS:

IN As BOOKS:
BILL DIRECTLY SENT FOR PAYMENT
Bs A/C
DR.
TO BILLS RECEIVABLE
TO CASH
( CASH IS THE NOTING CHARGE)
DISHONOUR OF DISCOUNTED BILL
. BILLS RECEIVABLE A/C
DR.
NOTING CHARGES A/C
DR.
TO CASH
(CASH (notary charges) IS PAID TO THE BANK)
-- Bs a/c
DR.

TO BILLS RECEIVABLE

TO NOTING CHARGES
(BILL RETURNED TO A)
DISHONOUR OF BILL SENT BY BANK FOR PAYMENT
BILL RECEIVABLE a/c
DR.
NOTING CHARGE a/c
DR.

TO CASH

TO BANK FOR BILL COLLECTION

( DISHONOUR OF BILL FOR COLLECTION)
. Bs a/c
DR.
TO BILLS RECEIVABLE
TO NOTING CHARGES
(BILL RETURNED TO B)
DISHONOUR OF ENDORSED BILL
. BILLS RECEIVABLE a/c
DR.
NOTING CHARGES a/c
DR.

TO C
Bs a/c
DR.

TO BILLS RECEIVABLE

TO NOTING CHARGES
(BILL RETURNED TO B)
CONSIGNMENT ACCOUNT

WHEN OWNER SENDS GOODS TO HIS AGENT FOR THE PURPOSE OF

SELLING THEN IT IS CALLED CONSIGNMENT.
IT IS DIFFERENT FROM SALE IN THAT THE CONSIGNEE CANNOT DISPOSE
OFF THE GOODS ACCORDING TO HIS CHOICE; DOES NOT RECEIVE ANY

RISK FROM THE CONSIGNOR; CAN RETURN THE GOODS IF NOT

MARKETABLE.

IN CONSIGNMENT ACCOUNTING THERE ARE 3 ACCOUNTS:

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

GOODS SENT ON CONSIGNMENT ACCOUNT.

Consignment Inventory is inventory that is in the possession of the customer, but is

still owned by the supplier.
In other words, the supplier places some of his inventory in his customers possession (in
their store or warehouse) and allows them to sell or consume directly from his stock. The
customer purchases the inventory only after he has resold or consumed it.
The key benefit to the customer should be obvious; he does not have to tie up his capital
in inventory. This does not mean that there are no inventory carrying costs for the
customer; he does still incur costs related to storing and managing the inventor
For a more specific example, consider a bicycle manufacturer that produces a wide range
of bicycles ranging in price from a couple hundred dollars to several thousand dollars. He
has customers (local independent bicycle shops) that stock his low-to-mid-priced models
but are hesitant to stock the more expensive bikes because they do not have the
confidence that their customers are willing to pay that much for a bike. And, if they do
get a customer that wants a high-end bike, they could always special order it for them.
The bicycle manufacturer strongly believes that getting his high-end bikes in the shops
where customers can see and touch them is critical in driving up sales for these models as
well as helping to promote his brand which ultimately drives up sales for the lower cost
models. The solution? Well I think you can take it from here.
This is a classic consignment model because it is the best-case scenario for applying the
consignment inventory model. It works well for:
New and unproven products
The introduction of existing product lines into new sales channels.
Very expensive products where sales are questionable.

A TYPICAL CONSIGNMENT ACCOUNT WILL APPEAR AS FOLLOWS:

DR.
CR
To goods sent on
by consignee
consignment
(goods sold by
(invoice value)
consignee)
To bank
by closing stock
(all expenses incurred by
Consignor in transporting)
To consignee
(all expenses incurred by
Consignee in selling)

To profit & loss a/c

NOTES:
CLOSING STOCK IS VALUED AT COST/INVOICE PRICE + PROPORTIONATE
AMOUNT OF COST INCURRED BY CONSIGNOR IN TRANSPORTING.
IF GOODS ARE LOST IN TRANSIT THE SAME METHOD OF COSTING IS
APPLIED AND THAT AMOUNT IS CREDITED TO THE CONSIGNMENT
ACCOUNT.
NOMINAL LOSSES ARE PROPORTIONATELY CHARGED TO ALL STOCK
WHETHER SOLD OR NOT. ABNORMAL LOSS IS DIRECTLY CHARGED TO P&L
A/C.

APART FROM FIXED RATE OF COMMISSION ON THE GOODS SOLD AN

ADDITION DEL CREDERE COMMISSION IS PAID TO THE CONSIGNEE FOR
ENCOURAGING SALES ON CREDIT BASIS.
HOWEVER THE INHERENT RISKS REMAIN WITH THE CONSIGNEE.
JOINT VENTURE

A joint venture (often abbreviated JV) is an entity formed between two or more
parties to undertake economic activity together. The parties agree to create a new
entity by both contributing equity, and they then share in the revenues, expenses,
and control of the enterprise. The venture can be for one specific project only, or a
continuing business relationship such as the Sony Ericsson joint venture

JOINT VENTURE ACCOUNTS ARE TEMPORARY IN NATURE ; FOR THE

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

THERE ARE 3 ACCOUNTS:

-- JOINT BANK WHICH SHOWS EACH CO-VENTURERS
INVESTMENT;
-- CO-VENTURERS ACCOUNT
-- JOINT VENTURE INTO WHICH THE FINAL
PROFIT/LOSS IS TRANSFERRED.
DIFFERENCE BETWEEN LEASE HIRE PURCHASE AND
LEASE FINANCING

Meaning

A lease transaction is a

HIRE PURCHASE

Hire purchase is a type of

commercial arrangement,
whereby an equipment
owner or manufacturer
conveys to the equipment
user the right to use the
equipment in return for a
rental

instalment credit under

which the hire purchaser
agrees to take the goods on
hire at a stated rental,
which is inclusive of the
repayment of principal as
well as interest, with an
option to purchase

Option to user

Nature of
expenditure

No option is provided to
the lessee (user) to
purchase the goods

Option is provided to

Lease rentals paid by the

lessee are entirely revenue
expenditure of the lesse

Only interest element

included in the HP
instalments is revenue
expenditure by nature

the hirer ( user)

LEASING
Contract between two parties
Owner of an asset transfers his right of use to other party on payment of a fixed
rent periodically
Types >> Finance or Capital Lease
Operating Lease
Service Lease
Leveraged Lease
LEASING AND HIRE PURCHASE

LESSOR (OWNER) GIVES HIS ASSETS TO LESSEE (USER) FOR USE;

RECEIVES LEASE RENTALS IN RETURN, AN AMOUNT WHICH INCLUDES
COST OF DEPRECIATION, COST OF FINANCE, AND ADMINISTRATIVE
EXPENSES OF THE LESSOR.
. LEASING HELPS IN IMPROVING SALES VOLUME OF GOODS; REDUCES
CAPITAL INVESTMENT FOR LESSEE, INCREASES HIS BORROWING CAPACITY,
REDUCES TAX LIABILITY AS RENTALS ARE FULLY TAX DEDUCTABLE,
HOWEVER BURDENSOME.

FINANCIAL LEASE IS THE MOST POPULAR, LONG TERM IN NATURE,

GENERALLY USEFUL FOR PLANT AND MACHINERY.
OTHER TYPES ARE OPERATING AND SERVICE LEASES.
LESSOR RECEIVES LEASE RENTALS, CLAIMS
DEPRECIATION.
LESSEE CHARGES THE LEASE RENTALS PAID TO THE P & L ACCOUNT.
THE LESSOR BREAKS UP THE RENTALS RECEIVED
INTO FINANCE INCOME AND ANNUAL LEASE CHARGE.
FINANCE INCOME = TOTAL RENTALS OVER THE
LEASE PERIOD + RESIDUAL VALUE OF LEASED ASSET
-- COST OF LEASED ASSET ( FAIR VALUE ).

USE SUM OF DIGITS METHOD TO FIND ANNUAL FINANCE INCOME.

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

LEASING AND HIRE PURCHASE

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

THIS AMOUNT IS CARRIED FORWARD IN THE BALANCE SHEET TO BE

CHARGED AGAINST THE WRITTEN DOWN VALUE OF THE ASSET.

Explanation
The concept of lease equalisation account is an equaliser between the capital
recovery inherent in lease rentals and the depreciation chargeable as per Companies
Act.

The objective of the lessor is to write-off an amount equal to the capital recovery
inherent in lease rentals, so as to leave in the revenue statement only the financing charges

HIRE PURCHASE IS DIFFERENT IN THAT THE HIRER IS THE OWNER FOR

THE PURPOSE OF DEPRECIATION. ALTHOUGH ACTUAL OWNERSHIP
PASSES ON THE DATE OF PAYMENT OF LAST INSTALMENT.
THE HIRE PURCHASE PRICE CONSISTS OF CASH PRICE AND INTEREST.
INSTALMENT SALE IS SIMILAR EXCEPT THAT OWNERSHIP PASSES ON
TO BUYER AS SOON AS THE 1ST INSTALMENT IS PAID.
THE 1ST INSTALMENT IN BOTH CASES IS CALLED DOWN PAYMENT.
THE SELLER OF THE ASSET IS CALLED VENDOR

A TYPICAL LEASE TRANSACTION IN THE BOOKS OF THE LESSOR:

Bank
a/c
dr.
to lease rent
(lease rent received)
Lease rent
a/c
dr.
to P & L a/c
(lease rent transferred to profit)
Depreciation a/c
dr.
to asset
(annual depreciation
Of the asset)
P&L
a/c
dr.
to depreciation
(depn. Charged to P & L a/c)
if annual lease charge>depn.
Lease equalisation a/c
dr.
to lease terminal adj.
P & L a/c
dr.
to lease equalisation
if annual lease charge<depn

Lease terminal adj. a/c dr.

to lease equalisation charge.
P&L
a/c
dr.

to other expenses
(all other expenses debited)
IN THE BOOKS OF THE LESSEE :
Lease rent paid
a/c
dr.
to bank
(lease rent paid)
P & L
a/c
dr.
to lease rent
(lease rent charged to P & L)
IF LEASE RENT IS PAID FOR THE ENTIRE PERIOD THE SAME IS ACCOUNTED
FOR IN BANK A/C AND AN ANNUAL AMOUNT IS CHARGED TO P & L A/C
EVERY YEAR

.
.
.
.

A TYPICAL TRANSACTION IN THE BOOKS OF THE HIRER:

Asset a/c
dr.

to vendor
(purchase of asset on H P basisto the extent of the amount agreed)
Vendor a/c
dr.
to bank
(down payment/instalment)
Depreciation a/c
dr.
to asset
(depn. Of asset)
P&L
a/c
dr.
to depreciation
(depn. Charged to P & L)\
P&L
a/c
dr.
to expenses
(any other expenses charged to P & L)
IN THE BOOKS OF LESSEE:
Hirer
a/c
dr.
to sales
(sale of asset on H P basis)
Bank
a/c
dr.
to hirer
(instalment received)

NON TRADING ORGANISATIONS

NON-TRADING ORGANISATIONS ARE NON PROFIT MAKING BODIES,

RENDERING SERVICES TO PUBLIC, COLLECTING MONEYS BY WAY OF

MEMBERSHIP FEES, SUBSCRIPTIONS, DONATIONS. HOWEVER TO

PREVENT MISUSE OF FUNDS, ACCOUNTS ARE MAINTAINED.
RECEIPTS & PAYMENTS STATEMENT CONTAINS REAL
ACCOUNTS, ACTUAL RECEIPTS AND PAYMENTS, BOTH CAPITAL AND
REVENUE ITEMS.
. INCOME & EXPENDITURE STATEMENT CONTAINS
NOMINAL ACCOUNTS, OF REVENUE ITEMS OF INCOME & EXPENSES FOR A
FIXED PERIOD.

A TYPICAL WAY OF CONVERTING RECEIPTS & PAYMENTS STATEMENT

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

DEPRECIATION

DEPRECIATION IS A CHARGE ON PROFITS, TO ACCOUNT FOR THE

FALL IN THE VALUE( NOTIONAL OR OTHERWISE ) OF AN ASSET
DURING THE PERIOD OF USE.
DEPRECIATION OR WRITING OFF OF A CERTAIN PORTION OF AN ASSET
ON AN ANNUAL BASIS IS A PRUDENT WAY OF SAVINGS FOR
REPLACEMENT OF THE ASSET AFTER ITS USEFUL LIFE IS OVER.
SINCE DEPRECIATION IS AN OPERATING COST AND THEREFORE TAX
DEDUCTIBLE, EACH YEAR THE SAVING IS TO THE EXTENT OF (TAX
RATE)* ANNUAL DEPRECIATION.
DEPRECIATION CAN ALSO BE LOOKED IN A DIFFERENT WAY.
DEPRECIATION IS AN ACCOUNTING PROCESS FOR THE GRADUAL
CONVERSION OF THE CAPITALIZED COST OF FIXED(TANGIBLE) ASSETS
INTO EXPENSE.
SIMILARLY, INTANGIBLE ASSETS ARE CONVERTED INTO EXPENSE BY
AMORTISATION.
WHILE ASSETS SUCH AS NATURAL RESOURCES ARE CONVERTED BY
PROCESS CALLED DEPLETION.
WHAT CAUSES DEPRECIATION ?
SIMPLY WEAR AND TEAR
MISHAPS
OBSOLESCENCE
PASSAGE OF TIME
FALL IN VALUE

IN ORDER TO CALCULATE DEPRECIATION THERE ARE BASIC ISSUES

TO BE ASCERTAINED :
-- ESTIMATED USEFUL LIFE OF THE ASSET(YEARS).
-- THE RESIDUAL VALUE OF THE ASSET.
-- METHOD TO BE USED FOR PROVIDING
DEPRECIATION.
METHODS OF DEPRECIATION :
. STRAIGHT LINE METHOD. EQUAL FRACTION OF THE NET COST(COST OF
THE ASSET LESS THE RESIDUAL VALUE) IS CHARGED EACH YEAR.
WRITTEN DOWN VALUE METHOD. EQUAL PERCENTAGE OF THE
WRITTEN DOWN VALUE IN THE BOOKS OF THE COMPANY IS CHARGED
EACH YEAR.
SINKING FUND METHOD. IT IS STRAIGHT LINE METHOD BUT THE
DEPRECIATION CHARGED OR A PORTION OF IT IS KEPT AS A RESERVE,
INVESTED IN MARKETABLE SECURITIES. THE FUND GROWS INTO
REPLACEMENT VALUE OF THE ASSET.

Cost

Rs 140000

Salvage
Value

Rs 20000

Useful life

5 years

Year Depreciation
2006 Rs 1 8,000

=(Rs110,000 - Rs20,000) x 1/5

2007 Rs 1 8,000

=(Rs110,000 - Rs20,000) x 1/5

2008 Rs 1 8,000

=(Rs110,000 - Rs20,000) x 1/5

2009 Rs 1 8,000

=(Rs110,000 - Rs20,000) x 1/5

2010 Rs 1 8,000

=(Rs110,000 - Rs20,000) x 1/5

WRITTEN DOWN VALUE METHOD

Year

Book value at the beginning of the

year

Dep

Dep Expens

ACC Dep Book Value

2006

Rs 1 10,000

40%

Rs44,000

Rs44,000

Rs66,000

2007

Rs 6 6,000

40%

Rs26,400

Rs70,400

Rs39,600

2008

Rs 3 9,600

40%

Rs15,840

Rs86,240

Rs23,760

2009

Rs 2 3,760

40%

Rs 3,760 (*1)

Rs90,000

Rs20,000

2010

Rs 2 0,000

40%

Rs -

Rs90,000

Rs20,000

Total

Rs90,000

(*1) Depreciation stops when accumulated depreciation reaches depreciation base.

Depreciation base = cost - salvage value = Rs110,000 - Rs20,000 = Rs90,000