Accounting & Finance for Bankers

Basic Of Business Mathematics

Accounting in Banks
Bank accounting and Balance Sheet
Other Accounting
Basic of Mathematics
Suppose you are given two options:
(A) Receive Rs. 10,000 now OR
(B) Receive Rs.10,000 after three years


Option A: Rs. 10,000 Rs. 10,000 + Interest
Option B: Rs. 10,000 Interest Rs. 10,000

This clearly illustrates that value of
money received today is worth more than the same
amount received in future since the amount can be
invested today and generate returns.
Interest

Interest is money paid to the lender by the
borrower for using his money for a specified
period of time
'Simple' or 'flat rate' interest is the amount of interest
paid each year as a fixed percentage of the principal
amount. And is calculated by using the formula
SI = PTR
If the investor does not withdraw the interest
periodically, the maturity value of investment would be
calculated by using the formula
FV (AMOUNT ) = SI +P
Where,
o SI = Simple Interest
o P = Principal
o T = TIME PERIOD
o r = interest rate
o FV= Maturity value after n years
Compound Interest
Compound Interest is the interest that is received on the
original amount (principal) as well as on any interest earned but
not withdrawn during earlier periods. And is calculated by using
the formula
CI = FV P
The maturity value of investment would be calculated by using
the formula
FV= P (1+r)
n
Where,
CI = Compound Interest
o P = Principal
o n = Maturity Period
o k = interest Rate
o F = Total Amount after n years

Compound interest
To find the interest (I) and amount (A) of a given
sum (P) in a given time (n) at compound interest
The amount of P at the end of the first year is PR;
and since, this is the principal for the second year,
the amount at the end of the second year is
PR R or PR
2

Similarly, the amount at the end of the third year is
PR
3
, and so on;hence the amount in n years is PR
n

i.e., A = PR
n

therefore fv = P(1+R
n
)

COMPOUNDING /FUTURE VALUE.
Time Value Money
The time value of money is a way of calculating the value of
a sum of money, at any time in the present or future.
FUTURE VALUE
Is the future worth of a present amount. i.e. is the
investments maturity value that an investor would receive
at the end of the specified period.
The process of calculating future values is called
as COMPOUNDING.

TYPES OF CASH
FLOWS
SINGLE CASH
FLOW
MULTIPLE CASH
FLOW UNEVEN
SERIES
MULTIPLE CASH
FLOWS EVEN
SERIES
Future value of single cash flow
The future Value of single cash flow can be calculated by using
following formula
FV
n
= PV(1+r)
n

Where,
oFV
n
= Future Value of Initial Cash Flow n years
oPV = Initial Cash Flow
or = Annual rate of return
on = Life of Investment

CALCULATION OF FUTURE VALUE OF MULTIPLE FLOW-UNEVEN SERIES
Find out future value of all cash flows individually and sum up
When cash flows occur at the end of the year


o When cash flows occur at the beginning of the year


Where,
o FV
n
= Future Value of all cash flow n years
o CF
n
= Cash flow during year n
o r = Annual rate of return
o n = Life of Investment
0
n
3 - n
3
2 - n
2
1 - n
1 n
r) (1 CF .......... r) (1 CF r) (1 CF r) (1 CF FV + + + + + + + =
1
n
2 - n
3
1 - n
2
n
1 n
r) (1 CF . .......... r) (1 CF r) (1 CF r) (1 CF FV + + + + + + + =

CALCULATION OF FUTURE VALUE OF MULTIPLE FLOW-UNEVEN
SERIES (ANNUITY)
An Annuity represents a series of equal payments (or receipts)
occurring over a specified number of equidistant periods. (say
monthly, quarterly, semi-annually etc.)
Types of Annuity
Regular Annuity: Payments or receipts occur at the
end of each period. examples bonds pay interest at
the end.
Annuity Due: Payments or receipts occur at the
beginning of each period. examples lease rentals or
mortgage payments
Examples of Annuities:
Recurring deposits, PF deposits, Student Loan
Payments, Retirement Savings, Car Loan Payments,
Insurance Premiums, Mortgage Payments, etc.
The cash flow can occur either at the end of the year or
beginning of the year.
oRegular Annuity
0 1 2 3 4 5
I 12% I 12% I 12% I 12% I 12% I
0 1000 1000 1000 1000 1000 FV
5
=?
oAnnuity Due
0 1 2 3 4 5
I 12% I 12% I 12% I 12% I 12% I
1000 1000 1000 1000 1000 0 FV
5
=?




Annuity-Due. With an annuity-due the payments are made at
the beginning rather than the end of the period.

Calculation of Future Value of Multiple Flow-Even series
(Annuity)
The Future Value of Annuity can be calculated by using following
Formulae
o Future Value of Regular Annuity



o Future Value of Annuity Due




NOTE: Where CF
1
=CF
2
=CF
3
==CF
n
=A

(

+
=
r
1 r) (1
A FVA
n
n
r) (1
r
1 r) (1
A FVA
n
n
+
(

+
=
Calculation of Present Value of Single Flow

0 1 2 3 4 5
I 12% I 12% I 12% I 12% I 12%_____I
PV
0
=? 10000
The present value of single cash flow can be calculated by using
following formula


Where,
oPV=Present Value
oFVn = Future Value
or = Annual rate of return
on = Life of Investment

(

+
=
n
n
r) (1
1
FV PV
Calculation of Present Value of Multiple Flow-Uneven Series
The cash flow can occur either at the end of the year or beginning
of the year.
oMultiple Flow-Uneven Series occurring at the end
of the period
0 1 2 3 4 5
I 12% I 12% I 12% I 12% I 12% I
PV
0
=? 0 1000 1500 750 2000 3000
oMultiple Flow-Uneven Series occurring at the
beginning of the period
0 1 2 3 4 5
I 12% I 12% I 12% I 12% I 12% I
PV
0
=?1000 1500 750 2000 3000 0
CALCULATION OF PRESENT VALUE OF MULTIPLE FLOW-UNEVEN
SERIES
Find out Present value of all cash flows & sum up
o When cash flow receivable at the end of the year




o When cash flow receivable at the beginning of the year


Where
oPV
0
= Present Value of all cash flow n years
oCF
n
= Cash flow during year n
or = Annual rate of return
on = Life of Investment
n
n
3
3
2
2
1
1
0
r) (1
CF
... ..........
r) (1
CF
r) (1
CF
r) (1
CF
PV
+
+ +
+
+
+
+
+
=
1 - n
n
2
3
1
2
0
1
0
r) (1
CF
... ..........
r) (1
CF
r) (1
CF
r) (1
CF
PV
+
+ +
+
+
+
+
+
=
Calculation of Present Value of Multiple Flow-Even Series
(Annuity)
The Present Value of Annuity can be calculated by using
following Formulae
o Present value of regular annuity



o Present value of annuity due




NOTE: Where CF
1
=CF
2
=CF
3
==CF
n
=A

(

+
+
=
n
n
0
r) r(1
1 ) r 1 (
A PVA
r) (1
r) r(1
1 ) r 1 (
A PVA
n
n
0
+
(

+
+
=
Present Value of Perpetuity
An annuity of infinite duration is known as Perpetuity.
Present value of perpetuity


OR

Where,
o = Present value of perpetuity
o A = Annual Cash flow
o r = Required rate of return

+
+ +
+
+
+
+
+
=
r) (1
A
... ..........
r) (1
A
r) (1
A
r) (1
A
PVA
3 2 1
r
A
PVA =

PVA












Impact of frequency

Particulars

Annually Semi annually quarterly
Amount at the beginning 10000 10000 10000
Interest for the 1
st
quarter - - 250
Amount at the end of 3 months - - 10250
Interest for the 2
nd
quarter - 500 256
Amount at the end of 6 months 10500 10506.25
Interest for the 3
rd
quarter - - 262.65
Amount at the end 9 months - - 10768.90
Interest for the 4 th quarter 1000 525 269.25
Amount at the end of 12 months 11000 11025 11038.15
Example: Consider, P=10,000, n=1year, r=10% p.a., m = 1 (annually)/2 (Semi-
annually)/4 (Quarterly)
Effective Rate of Return
Find out the effective rate of return for the previous
problem in case of annual, semi-annual and quarterly
compounding.
Effective rate of return



Particulars

Annually

Semi-annually

Quarterly

Normal rate of
Interest
10% 10%

10%

Effective rate of
interest
10% 10.25%

10.38%

Future Value 10000(1.1)
=11000
10000(1.1025)
=11025
10000(1.1038)
=11038
Effective Rate of Return
The rate of interest under annual compounding
which produces the same result as that produced
by an interest rate under multiple compounding. It
can be calculated by using below formula


Where
o r = effective rate of return
o i= normal rate of return
o m = frequency of compounding


1
m
r
1 k
m

+ =
Interest Calculation on bank products
Fixed Interest Rates/Floating Rate
Fixed interest rate does not change during the tenure.
Fixed interest rate are offered to deposits.
Floating interest rate keep change frequently during the
tenure
It is aligned to the market rate.
Usually floating rates are revised every quarter.
Banks usually do not offer deposit with floating rate of
interest.
Banks usually offer loans with fixed rate of interest as
well as floating rate of interest



Calculation of interest on savings accounts
Simple interest concept is adopted
Balances in the account varies day to day depending on the debit
and credit in the account.
So, which balance should be consider for the calculation of
interest?
According to the RBI guidelines, the interest is computed on the
basis of daily balance.-Concept of daily product
Earlier interest for a particular month is computed on the
minimum balance between the 10
th
day and the last day of the
month!!!
The following formula can be used under daily product method
Outstanding balance X Rate of interest x Number of days balance
outstanding/365
Though the interest is accumulated daily, it is usually credited to
the account once in six months [differs from bank to bank].
Example
A page from the pass book of Mr. Chandrus PNB savings bank
account is as follows:
Date Particulars Debit Credit Balance
1-4-11 BF 2000.00
20-5-11 By Cash 1050.00 3050.00
25-6-11 To self 200.00 2850.00
14-7-11 By cheque No. 56894 2000.00 4850.00
17-8-11 By Cash 1750.00 6600.00
21-9-11 To cheque No.312 5000.00 1600.00
Assuming that the interest is credited at the end of the March
and September every year and rate of interest is 4% per annum;
compute the interest at the end of September 11.
Solution
Interest Calculation
2000 x 4/100 x 50/365 = 10.96
3050 x 4/100 x 35/365 = 11.70
2850 x 4/100 x 20/365 = 06.25
4850 x 4/100 x 34/365 = 18.07
6600 x 4/100 x 35/365 = 25.31
1600 x 4/100 x 09/365 = 01.58
Total Interest 73.87

Example current account
A page from the pass book of Bhagwan Traders Co.s
current account is given below. Assume bank overdraft
Limit is Rs.50000 and rate of interest is 10%.
Date Particulars Debit Credit Balance
1-1-07 BF 20000
2-1-07 To cheque No.12 35000 (15000)
10-1-07 By cheque No.31 25000 10000
14-1-07 To cheque No.45 60000 (50000)
17-1-07 By Cash 32000 (18000)
25-1-07 To cash 22000 (40000)
28-1-07 By cheque No.32 42000 2000
Calculate the interest on overdraft for the month of January
Solution
Interest Calculation
15000 x 10/100 x 8/365 = 32.90
50000 x 10/100 x 3/365 = 26.30
18000 x 10/100 x 8/365 = 39.50
40000 x 10/100 x 3/365 = 32.90
Total Interest 131.50

Calculation of interest on fixed deposit
In the fixed deposit, the investor has two options. They
are
o Withdrawal of interest periodically say quarterly, semi-annually
and annually.
o Reinvest of interest and get along with principal amount on
maturity
According to the guidelines of RBI, in both the above
cases the interest will be calculated on the basis of
quarterly compounding.
Customer can withdraw annually, semi-annually and
quarterly. An investor can opt for monthly withdrawing of
interest but he/she will get little less interest because it is
discounted.
Example
Mr. Kartik deposited Rs.10000 in a fixed deposit for a
period of three years. Calculate the amount of interest
he can withdraw if he decided to withdraw interest
o Yearly
o Semi-annually
o Quarterly
o Monthly
Suppose he decided to withdraw interest at the time of
maturity. What is the interest you receive on maturity?
Assume interest rate is 9%p.a.
Calculation of interest on Recurring deposits
In a Recurring Deposit (RD) Scheme, a fixed sum will be deposited every month
for a fixed period.
At the end of the period, the depositor will be paid the total amount of deposit
installments with interest.
Compounding is done once in a three months.(i.e. quarterly)
The FVA formula is used to calculate maturity value of RD (remember the unit
Time Value of Money)



But in the formula, consider effective rate of interest has to be considered which
can be calculated by using formula
( ) r +
(

+
= 1
r
1 r) (1
A FVA
n
n
1
m
k
1 r
m

+ =
Calculation of EMI & Amortization
.
o Where,
A= Equated Monthly Installment (Also EMI)
PV = Present Value (Also Loan amount)
n= period in terms of months
r = Rate of interest per month


Amortization is the split of EMI into the principal and interest
component.
.

.
(

+
+
=
n
n
) r 1 ( r
1 ) r 1 (
A PV
year per t installmen of Number
r
X Balance Beginning EMI in amount Interest =
EMI in amount Interest - EMI EMI in amount Principal =






(

+
+
=
1 ) r 1 (
) r 1 ( r
PV A
n
n
i.e.
Amortization schedule
Month
Opening
Principal EMI Interest Principal
Closing
Principal
1 300000 26659 3000 23659 276341
2 276341 26659 2763 23896 252445
3 252445 26659 2524 24135 228310
4 228310 26659 2283 24376 203934
5 203934 26659 2039 24620 179314
6 179314 26659 1793 24866 154448
7 154448 26659 1544 25115 129333
8 129333 26659 1293 25366 103967
9 103967 26659 1040 25619 78348
10 78348 26659 783 25876 52472
11 52472 26659 525 26134 26338
12 26338 26659 263 26396 -58*
*Rs.-58 is because of rounding off of EMI
CAPITAL BUDGETING
GOAL OF THE FIRM
Maximize shareholders wealth or value of the
firm
FINANCING
DECISION
DIVIDEND
DECISION
INVESTMENT
DECISION
LONG TERM
DECISIONS
CAPITAL
BUDGETING
SHORT TERM
DECISIONS
39
CAPITAL BUDGETING
Meaning of Capital Budgeting
Capital budgeting addresses the issue of
strategic long-term investment decisions.
Capital budgeting can be defined as the
process of analyzing, evaluating, and deciding
whether resources should be allocated to a
project or not.

Appraisal Criteria

41
Methods of
Evaluating
Non Discounting
Methods
Discounting
Methods
Pay Back
Period
Accounti
ng
Rate of
Return
Net Present
Value
Benefit
Cost
Ratio
Internal Rate of
Return
PAYBACK PERIOD
Payback is the number of years required to
recover the original cash outlay invested in a
project.
oWhere Project generates even annual cash flow


oWhere project generates uneven annual cash
flows
Payback period can be found out by adding up the
cash inflows until the total is equal to the initial
cash outlay.
42
Inflows Cash Annual
Project of Outflow Cash Initial
PBP =
ACCOUNTING RATE OF RETURN (ARR)
In this method the capital employed and related incomes are determined
according to commonly accepted accounting principles and practices over
the economic life of the project and then average yield is calculated.
The accounting rate of return (ARR) is a very simple rate of
return:
Average profit Average investment as a percentage.

43
100
Investment Average
taxes & on depreciati after inflows Cash Annual Average
ARR =
2
Outflow Cash Initial
Investment Average =
Net Present Value (NPV)
NPV is the present value of an
investment projects net cash flows
minus the projects initial cash
outflow.
NPV
10 80 60
0 1 2 3
10%
Project L:
-1100.00
9.09
49.59
60.11
118.79 = Sum of PV of cash inflows

NPV= 118.79-100=18.79

NET PRESENT VALUE (NPV)
NPV is the present value of an investment projects net
cash in flows minus the projects initial cash outflow.
NPV = PV of all cash inflows-PV of Initial Cash Flow (i.e.
initial investment)
What does NPV mean?
If NPV is zero means project meets the
expected rate of return of company
If NPV is positive means project gets the
return more than expected rate of return of
company
If NPV is negative means project gets the
return less than expected rate of return of
company

46
BENEFIT COST RATIO

BENEFIT COST RATIO (PROFITABILITY INDEX)
BCR is the ratio between present value of an
investment projects net cash in flows and the
projects initial cash outflow.
What does BCR mean?
IF BCR is equal to 1 means cost is equal to benefit
IF BCR is more than 1 means cost is less than benefit
IF BCR is less than 1 means cost is more than benefit
Acceptance Rule
o Accept the project when PI > 1.
o Reject the project when PI < 1.
o PI =1.one remains indifferent
Merits and demerits are as same as NPV
method.


48
Meaning of IRR


Internal rate of return is the expected rate of return of
project.

IRR of an investment is the discount rate at which the NPV
of the project is equal to zero.

The pv of cash inflow is equal to the present value of cash
outflow

IRR is that particular k, such that the project breaks-even, i.e.,
when NPV = 0.



IRR GRAPHICAL
IRR = 16.13% IRR
DEPRECIATION
Introduction-meaning of fixed asset
A fixed asset is an asset that is held for the purpose of producing or supplying
goods or services and not for sale in the normal course of business.

Whether an asset is a fixed asset or not depends on the purpose for which it is
held.
Land on which a companys factory is build is its fixed asset
Land for a property developer will be a current asset.
Property, plant and equipment tangible physical existence, can be seen and
felt
Intangible assets- no physical existence- they represent legal rights with
associated economic benefits- they are separately identifiable. Eg. Brand
names, patents, license and franchise, copyrights and designs.
Natural resources they have special characteristics oil, natural gas, minerals,
forests
Depreciation is a systematic allocation of the depreciable amount of an
asset over its useful life.
When does depreciation of an asset starts?
It begins from the time an asset is available for use
Is it necessary to charge depreciation even if the market value of the asset
has appreciated?
Yes because depreciation is a process of allocation of past cost and not
valuation
Is depreciation needed for idle assets?
Yes until the asset is fully depreciated
When does depreciation stops?
When the asset is classified as held for sale or when the asset is disposed
off
Causes of depreciation
Need for depreciation
To know the correct profit
To show correct financial position
To make provision for replacement of asset

FACTORS OF DEPRECIATION
The cost of the asset
The estimated residual or scrap value at the end of its life
The estimated number of years of its commercial life
Types of depreciation
The following methods are commonly used for depreciating various assets:
1. Straight line method (SLM)
2. Written down value method (WDV).
3. Sinking fund

ACCOUNTING ENTRIES
1. Asset a/c Dr
To Bank a/c
2. Depreciation a/c Dr
To Asset a/c
Transfer entry:
3. Profit and loss a/c Dr
To Depreciation a/c

Straight line method -formula
.






Depreciation = 100000/5 = 20000 per year
Journal entry
For purchase of machinery
Equipment a/c Dr. 100000
To Bank a/c 100000
Depreciation of Equipment under SLM
Depreciation a/c Dr.20000
To equipment a/c 20000




Annual Depreciation =
Acquisition cost less estimated salvage value
Estimated life in years

An equipment is purchased for Rs. 100000.00 and this asset is expected to be used in
the business for 5 years with salvage value nil. Calculate the annual depreciation to be
charged based on Straight Line Method.
Diminishing balancing Method
M/s. X Ltd, purchased plant and machinery costing Rs.25,000 on 1st April 2008.
It has been decided to depreciate it at the rate of 20 percent p.a. on the written
down value method. Show the plant and machinery account in the first three
years.

Formula or equation for the depreciation calculation may be written as follows:
*First year: 25,000 20% = 5000
**Second Year: (25000 - 5000) 20% = 4,000
***Third Year: [25000 - (5,000 + 4,000)] 20% = 3,200
Balance Sheet of M/s X Ltd

Comparison of SLM with wdv
Methods Merits Demerits
SLM Easy to compute
Suitable for assets that
depreciate with time and are
little affected by wear and tear
due to usage
Undercharges depreciation in early
years when assets are more
productive
WDV Suitable for assets that have
high rates of obsolescence
Helpful when the repairs and
maintenance are high in the
later years
Produces volatility in income

OTHER METHODS OF DEPERCIATION
Double declining method dp as per straight line method is calculated and then
doubled.
Sum of the years digits: take the expected life an asset count back to one and
add the the figure together.
Sinking fund method
Changing the depreciation method
An enterprise shall disclose a change in the depreciation method
and the effect of the change in the current and future periods.
AS 6 requires a depreciation method change to be applied
retrospectively
IFRS accounting does not need retrospective effect
Accounting in Banks

About a business
What are the economic resources
needed to run a business?

ECONOMIC RESOURCES ARE THOSE THAT ARE OWNED BY THE FIRM - ASSETS
Eg. Land, building, Machineries, Motor Vehicles, Mines, Oil wells, Investments in
subsidiaries, sister concerns, in other banks,
Cash in hand and at bank,
sundry debtors ( who owes to the firm for trade sales),
Patent, copyrights, trademark etc


CLAIMS ARE THOSE THAT THE FIRM OWES TO OTHERS - LIABILITIES
Eg. Owners capital, Outside liabilities such as long term loans, external commercial
borrowings, debentures,
Working capital loans (cash credit, overdraft facilities),
sundry creditors (to whom the firm owes for trade purchases)

Types of business entities
Nature and purpose of accounting

Accounting is the process of identifying, measuring, recording ,classifying , summarizing
and analyzing and interpreting the financial transactions.
Systematic classification of business transactions for recording them in the books of
accounts
Recording of events and transactions in the books of accounts called book keeping
Summarizing of the recorded events i.e., preparation of a trial balance from a ledger and
the preparation of balance sheet and profit and loss account from the trial balance
Interpreting the financial transactions from the recorded data and the financial statement
Importance of accounting
1. Income determination -Measurement
of past performance, forecasting future performance
2. Helps in decision making and in review of performance
3. Compliance of regulatory requirements.
4. Financial reporting and disclosure - to prepare financial statements
in the prescribed manner for shareholders / proprietors, creditors,
Debtors, Government, Bankers, Employees etc.,

69
Branches of Accounting
Financial Accounting - Aims at recording and preparation of final
Accounts
Cost Accounting - Is a tool to ascertain total cost of production
Management Accounting - Refers to the use of financial data for
the purpose of planning and decision making, performance
evaluation etc.,
Social Responsibility Accounting
Human Resources Accounting
Inflation Accounting


Types of keeping records
Single entry system
Double entry system
71
Basic Terminologies in
Accounting
TRANSACTION:
Transfer of money or goods or services from one person / account to
another person / account
Ex: Paid cash for goods purchased; Rent received for letting out
services etc.,

EVENTS
Events are neither cash nor credit transactions but it has an impact
on the financial position of a business.
Eg. provision for bad debts, provision for repairs, depreciation,
taxation, transfer of profit towards reserve fund or sinking fund or
investment fluctuation fund, etc.,
Events happen as a result of internal policies or external needs.


Capital

Funds brought in to start business to earn profits. It is a liability
Capital
External
Equity Preference
Internal
Reserves
& Surplus
Categories of capital

Authorized capital
Issued and Subscribed capital
Paid up capital
74

Liability

Obligation of business to be satisfied in future.






liability
Short term
Creditors,
Bills Payable
Overdraft,
Cash credit
Long term
Debentures,
Term loans
75
Creditor: A person to whom some thing is owed. From the above
example, A is called a trade creditor to B and X is a creditor to Y.

Stock: Unsold portion of goods is called stock. Stock may be of raw
materials, semi finished goods or finished goods. Stock is valued
either at cost price or at market price which ever is lower. Stock
remaining unsold at the end of accounting period is called closing
stock.

Debtor: A person who owes something to others For example, A has
sold goods to B on credit, B is called debtor to A. B is regarded as
trade debtor.

Accounting process
Content of financial statements
Profit and Loss account (Statement of Comprehensive Income)
Balance Sheet (Statement of Financial Position)
Cash flow statement (Statement of Cash Flow)
Notes to Financial statements
Management Discussion and Analysis
REFERENCE
Accounting equation, concepts,
principles & standards
Accounting Concepts
Accounting Principles
Accounting Standards
GAAP and IFRS
Difference between IFRS and Indian GAAP
Accounting Principles are classified into :


80
Accounting concepts
Accounting conventions
Accounting principles
The body of doctrines commonly associated with the theory and
procedure of accounting, serving as an explanation of current practices
and as a guide for the selection of conventions or procedure where
alternative exist
81
Assumptions or Conditions
Accounting
concepts

Customs or Traditions
Accounting
conventions
Accounting concepts
Are basic assumptions or conditions upon
which the science of accounting is based.
Are developed by Accountants based on
experience, reasoning and observation.
Are developed for common usage to ensure
uniformity and understanding.

Cost concept
Every business transaction is recorded in the books
of accounts at cost price.
Application
1. Fixed assets are kept at the cost of purchase and
not their market value
2. Every transaction is recorded with the present
value and not any future value
3. Unrealized gains are ignored
4. An item that has no cost is not taken in books
Basic Criteria
1. Relevance
2. Objectivity
3. Feasibility
Money Measurement Concept
Accounting measure only monetary aspects of
the business though non monetary aspects may
affect the business.

Business entity concept
Accounting concept refers to the basic assumptions and rules and principles which
work as the basis of recording of business transactions and preparing accounts.









Hindustan Unilever limited and its subsidiaries are separate legal entities. HUL views
business segments as separate entities while Tata Consultancy Services treat
geographical segments as separate entities.
Profit is a liability.
ENTITY
CONCEPT
Distinct legal
identity
Separate
Existence
Limited Liability
Realization concept
Revenue is treated as realized or earned on that date when the property in the goods
pass to the buyer and he becomes legally liable to pay.
No future income is
considered
Going Concern Concept

Presume business as continuous enterprise and that firm will run for a longer period of
time. Using this concept firms do not expense the entire amount spent on purchase of
assets.
Application
1. Making long term borrowings
2. The fixed assets are valued at cost and not at market value
3. Current assets are valued at cost or market value whichever is less
4. Reserves and provision are created for any future liability
5. Deferred revenue expenses are written off over a number of years




Dual aspect concept
All adjustment regarding outstanding expenses, prepaid income
Deferred revenue expenditure concept arises due to this


Matching concept

Revenue and the expenses incurred to earn the revenues must belong to the same
accounting period.
The determination of profit of a particular accounting period is essentially a process of
matching the revenue recognized during the period and the cost to be allocated to the
period to obtain the revenue

Accounting period concept

All the transactions are recorded in the books of accounts on the assumption
that profits on these transactions are to be ascertained for a specified period.
This period, known as the accounting period, is usually the calendar year
(January 1 to December 31) or the financial year (April 1 to March 31).


Accrual concept
Incomes and expenses should be recognized as when they are earned and incurred,
irrespective of whether the money is received or paid in connection thereof.
Eg. Credit sales for the year 2009 were Rs. 2,00,000.
Cash collected from customer during 2009 was Rs. 1,50,000.

Rent paid for fifteen months in advance on 1st January 2009 and the accounting period is
from 1
st
April to 31
st
March.

Accounting conventions accounting
for full disclosure
Providing honest information relating to the activities of the business
Financial statements should act as means as conveying and concealing
Convention of materiality
All material information must be recorded. What is material depends upon the value of
the items and the circumstance of individual case of business
Convention of conservatism/prudence
While recording transactions, all possible losses must be taken
into consideration while all anticipated profit should be
ignored.
1. Creation of provision for
doubtful debits
2. Creation of contingency reserve
3. Value the stock in hand at lower
of the cost or market value
4. Show the joint life policy at
surrender value of the assets
side of the balance sheet
Convention of consistency
GAAP (generally accepted accounting
principles)
Originated in 1929 in U.S after stock market
crash
Later UK, Australia, Canada and others
adopted GAAP
ICAI through ASB adopted Indian AS in April
1977
IFRS (International financial reporting
Standards) will be mandatory in India on or
after 1
st
April 2011.


Accounting standards
An accounting standards is a selected set of accounting policies or broad guidelines
regarding the principles and methods to be chosen out of several alternatives.
Standards conform to applicable laws, customs, usage and business environment.

What is the objective of accounting standards?
To harmonize the diverse accounting policies and practices at present in use in India.
It ensures uniformity, comparability and qualitative improvement in the preparation and
presentation of financial statement

ICAI constituted ASB on 21
st
April 1977

List of accounting standards
AS 1 Disclosure of Accounting Policies
AS 2 Valuation of Inventories
AS 3 Cash Flow Statements
AS 4 Contingencies and Events Occurring after the Balance Sheet Date
AS 5 Net Profit or Loss for the Period, Prior Period Items and Changes in
Accounting Policies
AS 6 Depreciation Accounting
AS 7 Construction Contracts
AS 8 Accounting for Research and Development (Withdrawn pursuant to
AS 26 becoming mandatory)
AS 9 Revenue Recognition
AS 10 Accounting for Fixed Assets
AS 11 The Effects of Changes in Foreign Exchange Rates
AS 12 Accounting for Government Grants
AS 13 Accounting for Investments
AS 14 Accounting for Amalgamations
AS 15 Employee Benefits

AS 16 Borrowing Costs
AS 17 Segment Reporting
AS 18 Related Party Disclosures
AS 19 Leases
AS 20 Earnings per Share
AS 21 Consolidated Financial Statements
AS 22 Accounting for Taxes on Income
AS 23 Accounting for Investments in Associates in Consolidated Financial
Statements
AS 24 Discontinuing Operations
AS 25 Interim Financial Reporting
AS 26 Intangible Assets
AS 27 Financial Reporting of Interests in Joint Ventures
AS 28 Impairment of Assets
AS 29 Provisions, Contingent Liabilities and Contingent Assets
AS 30 Financial Instruments: Recognition and Measurement
AS 31 Financial Instruments: Presentation


International financial reporting
system
IFRS are a set of international accounting standards stating how particular types of
transactions and events should be reported in the financial statements.
International accounting standards committee(IASC) issues international accounting
standards. So far 41 standards are issued.
In 2001 it was restructured as International accounting standards board (IASB).
Then on the nomenclature is IFRS 1,2,. 8
Indian Scenario
ICAI though Accounting Standards Board (ASB) has issued accounting standards based on
IFRS but has taken into consideration legal, economic and regulatory environment.
ICAI proposed to converge with IFRS w e f April 2011
Table of content
Accounting process
Types of accounts
Rules of accounts
Passing of journal entries

Accounting system
An account is an individual record of increase or decrease in an item.

Personal
account
Real
account
Nominal
account
RULES OF DEBIT AND CREDIT
Identify the type of account
1. CAPITAL 11. REPAIRS
2. CASH 12. FURNITURE
3. BUILDING 13. DISCOUNT RECEIVED
4. PURCHASE 14. ADVERTISEMENT
5. SALES 15. RENT PAID
6. BANK ACCOUNT-BOB 16. REPAIRS
7. SALARIES 17. DIVIDEND RECEIVED
8. COMMISSION RECEIVED 18. BAD DEBTS
9. DRAWINGS 19. RENT RECEIVED
10. SUBSCRIPTION PAID 20. DISCOUNT PAID

PROBLEM
Show what accounts are affected in the following transactions.
1) Madan commenced business with cash Rs. 70000
2) Purchased goods on credit 14000
3) Withdrew for private use 3000
4) Goods purchased for cash 12000
5) Paid wages 5000
6) Paid to creditors 10000
7) Sold goods on credit (cost price Rs18000) 22000
8) Sold goods for cash (Cost price Rs.3000) 6000
9) Purchased furniture for cash 5000
10) Received from debtors 11000


Table of content subsidiary books
Purchase Book
Sales Book
Purchases Return Book
Sales Return Book
Bills receivable
Bills payable

Format of Purchase book
1. CREDIT PURCHASES OF RAW MATERIALS ALONE ARE
RECORDED IN PURCHASE BOOK.
2. DATE OF PURCHASE, SUPPLIERS NAME, PRODUCT
DETAILS, INVOICE NO., TRADE DISCOUNT RECEIVED
(IF ANY), AMOUNT DUE TO THEM ARE RECORDED
SINGLE JOURNAL ENTRY FOR ALL
CREDIT PURCHASES
Sales book
1. ONLY CREDIT SALES ARE RECORDED IN SALES BOOK.

2. NAME OF THE CUSTOMER, SALES INVOICE NO. DETAILS OF GOODS SOLD,
AMOUNT DUE FROM THEM ARE RECORDED













Date Name of the customer LF Outward
Inv
Amount
2008
Jan 1
Mr. Suhas Mangalore 1000
Less: Trade discount 5% 50

101
950
Mr. Reddy Manipal 2000
Less: Trade discount 6% 120
(see note 1,2 and 3)
102
1880
Total 2830
One journal entry for all credit sales

Mr. Subhas 950
Mr. Reddy 1880
To Sales 2830
Credit sales for the month recorded
Debit note
A debit note is a document prepared by the purchaser
to inform the supplier that his account has been
debited with the amount mentioned and for the
reason stated therein.

Purchase return book - format
A defective machine purchased is returned to the supplier. Will it appear
in the purchase return book?
Credit note
A credit note is a document prepared by the seller to inform the
buyer that his account has been credited with the amount
mentioned for the reasons stated therein. Credit notes are
issued to the customers while debit notes are issued by the
customers.

Sales return book format
Bill of exchange
Promissory Note
115



Bangalore
25
th
Feb 2010

On demand (or three months after date) I
promise to pay Mr. Sanjeev or order the
sum of rupees Rs.1000 (one thousand only)
with interest of 5 per cent per annum for
the value received.

Asuthosh
Calcutta











Rs.3000
Bangalore
25
th
Feb 2010
Three months after date, pay me or my or
my order, the sum of rupees Three thousand
only for the value received.
To
B. Rajesh K. Ramesh
10, Gokulam Park Road
Mysore

What is the difference between a bill of exchange and a promissory note?
Bill of exchange Bills receivable
format
A bill of exchange is documentary evidence in writing containing an unconditional
order signed by the maker, directing a certain person to pay a certain sum of money
only to, or the order of, a certain person or to the bearer of the instrument.

Credit sales
Receiving the
accepted bill
from the
customer
B/R
Discounting the
Bill
Bills payable format
Credit
purchases
Accepting the
bill sent by the
supplier
Bills Payable
Promissory note
Promissory note is a promise made by one of the party that it would make the
payment while bill of exchange is an order to the other party to make the payment
There are only two parties in P. Note (1) maker (2) payee while in a Bill of exchange
there can be three parties (1) drawer (2) drawee and (3) payee

Difference between trade discount and
cash discount Trade discount:
It is reduction granted by a supplier from the list price of goods or services bought
other than for prompt payment.
It is allowed to promote the sales
A separate trade discount account is not opened in the ledger because it is shown by
the way of deduction in the invoice itself.
It may vary with the quantity purchased

BANK RECONCILIATION
STATEMENT(BRS)
A bank reconciliation statement is a statement
prepared to explain the causes responsible for the
disagreement between the bank balance as shown
by the cash book and the bank balance as shown by
the pass book as on a particular date.

The importance of the bank reconciliation
statement may be given as follows:

1. To identify the difference and the cause of
difference.
2. To identify the errors committed either in
cash book or pass book.
3. Shows the undue delay in the clearance of
cheques
4. Helps in locating the various entries
entered by bank with regard to bank interest,
bank charges etc...

Types - cash book debit balance and
pass book credit balance
Cash Book
debit
balance
Pass
book
balance is
ascertained
Pass Book
credit
balance
Cash
Book
balance is
ascertained
Types- cash book credit balance and
pass book debit balance
cash book
credit
(overdraft)
balance
Pass
book
balance is
ascertained

Pass book

debit
(Overdraft)
balance
Cash
book
balance is
ascertained
CASE -1
CASH BOOK DEBIT BALANCE GIVEN--
TO FIND PASS BOOK BALANCE
+ Items (Items which increases the Pass Book
Balances or decreases the Cash Book Balance)
Cheques issued but not yet presented.
Credits made by the bank for Interest.
Amount directly deposited by the customers in
our bank A/c.
Interest and dividend collected by the bank.
Cheques paid into the bank but omitted to be
recorded in the Cash Boo

CONT
Items (Items which, decreases the Pass Book
Balance or increase the Cash Book Balance)
Cheques sent to the bank for collection but not
yet credited by the bank.
Cheques paid into the bank but dishonoured.
Direct payments made by the bank.
Bank charges, commission etc. debited by the
bank.
Cheques issued but omitted to be recorded in the
Cash Book.

XYZ Ltd. maintains a current account with the federal
bank. As on 31
st
March 2006, the bank column of its
cashbook showed a debit balance of Rs, 20,000.
However, the bank statement showed a different
balance as on that date. The following are the reasons
for such a difference:

1. Cheque deposited but not yet credited by the bank
4,000
2. Cheque issued but not yet presented 9,000
3. Bank charges 1,000
4. Cheques received by the bank directly 6,000
5. Insurance premium paid by the bank as per standing
instructions not yet intimated 3,000
Solution to Case-1

1. Cheque deposited but not yet credited by the
bank 4,000(-)
2. Cheque issued but not yet presented 9,000(+)
3. Bank charges 1,000(-)
4. Cheques received by the bank directly
6,000(+)
5. Insurance premium paid by the bank as per
standing instructions not yet intimated
3,000(-)

X Ltd. maintains a current account with the Federal bank . As
on 31
st
March 2012, the bank column of its cashbook showed
a debit balance of Rs, 25000
However, the bank statement showed a different balance as on
that date. The following are the reasons for such a difference:

Cheque deposited but not yet credited by the bank 3,000
Cheque issued but not yet presented 2,000
Bank charges debited 3,000
Cheques received by the bank directly 7,000
Insurance premium paid by the bank as per standing
instructions not yet intimated 2,000

Prepare bank reconciliation statement and find out the
balance as per the bank statement

Meaning of trial balance
Trial balance is a statement containing the various
ledger balances on a particular date. It is prepared to
check the arithmetical accuracy of posting of
transactions to the ledger
Gross trial balance
Net trial balance

Preparation of trial balance
The following steps should be followed to prepare a Trial Balance.
a) Prepare the ledger accounts
b) Balance them at the end of accounting period
c) Group all accounts showing debit balance and show them of left hand side of
trial balance
d) Group all those accounts showing credit balance and show them on the right
hand side of trial balance.
e) Total the debits and credits and they must be equal, what ever be the method
of preparing the trial balance.

TRANSFERRING LEDGER BALANCE TO TRIAL BALANCE
Date Particulars
Amount
Rs.
Date Particulars
Amount
Rs.
1-4-04 To balance b/d 2,00,000 30-4-04 By balance c/d 2,00,000
1-5-04 To balance b/d 2,00,000
BUILDING ACCOUNT
Debit balances Amount Rs. Credit balances Amount
Rs.
Cash 22,000 Creditors 15,000
Building 2,00,000 Capital 3,50,000
TRIAL BALANCE AS ON 30
TH
APRIL, 2004
exercise

Rectification of errors
Errors in accounting mean unintentional
mistakes committed by the book keepers in
the books of accounts.
examples
Error in recording a transaction in the financial
or in any subsidiary book
Error in totaling of a subsidiary book
Error in posting a journal entry
Entering an account balance on the wrong
side of the trail balance.

Types of
errors
Compensating
errors
Errors of
omission
Errors of
commission
Errors of
principle
Errors of omission

Omission means failure to do something, so
when a transaction is omitted to be recorded
in a subsidiary book say like purchase book or
in the sales book or when transaction is
recorded in subsidiary books omitted to
posted to ledger
Error of commission

Error of commission take place when some
transaction are incorrectly recorded in the books
of accounts, they are committed in the process of
recording in books, carry forward of the totals or
balances in subsidiary book
Example:
Recording a wrong amount like Rs150 in purchase
book instead of 510
Recording a transaction in two or more subsidiary
books
Wrong balance of a subsidiary book
Errors of principle
An error of principle may arise due to incorrect
classification of expenditure as capital expenditure or
revenue expenditure or due to classification of
receipts as capital or revenue receipts
Examples
Wages paid to workers engaged in installing a machine
debited to wages account instead to machinery
account
Revenue expenditure as capital like repairs to building
debited to building account instead to repairs
Rectify the following errors

Purchase book is undercast (c/f) by 800
Sales book is overcast (c\f) by 900
Purchase return book was carried forward as
890 instead 990
Total of purchase book was 7500 was entered as
6700
3400 in sales book was entered as 4500





Inventory are those assets that are:
a. Held for sale in the normal course of business
b. Are in the process of production for such sale or
c. Are in the form of materials or supplies to be consumed in the production process or
in the rendering of services

Net Realizable value is the estimated selling price in the ordinary course of business less
the estimated costs of completion and the estimated costs necessary to make the sale.
NRV= Selling price- trade discounts - costs to completion marketing selling and
distribution costs.
Methods of inventory
According to revised AS 2 issued by ICAI
the cost of inventories of items that are not ordinarily interchangeable and goods or
services produced and segregated for specific projects should be assigned by Specific
Identification of their individual cost
The cost of inventories other than those for which specific identification of individual
costs is appropriate should be assigned by using FIFO or weighted average cost
formula.
Implication of FIFO method in case of rising or falling prices

Rising price Higher income is reported since old costs
(which are lower than the current cost) are
matched with current revenues. As a result
income tax liability is increased.
Falling price Lower income is reported since old costs
(which are higher than the current cost) are
matched with current revenue. As a result
income tax liability is reduced
Fifo method
Weighted average method
Weighted average cost
1120 /500 =2.24 1210/500 = 2.42
Consignment
meaning
A consignment is the dispatch of goods by its owner
to his agent for the purpose of selling
Seller
(Principal)
Consignor
(Agent)
Consignee
Sells
goods
buyer
Difference between consignment and
sale consignment sale
Ownership is not transferred to consignee Property in goods is transferred from seller
to buyer
Has no right on the goods- bound by
agreement
Has right on the goods purchased
Risk is not transferred to the consignee as
he acts only as an agent
Risk is transferred once sale is made
Goods that are not marketable can be sent
back to the consignor
Buyer cannot return back unless it is faulty
Proforma invoice
Consignor sents an invoice details the goods consigned such as quantity, grade value
etc. Since it is not a sale it is called Proforma invoice.
Account sale Consignee sends a statement of accounts to the consignor
Contents of Account Sale
1. Details of goods sold
2. Expenses incurred ( will be reimbursed by the consignor)
3. Commission due to him
4. Balance payable to the consignor

Commission payable to consignee
1. Ordinary
2. Del Credere

Ordinary commission is paid at a fixed rate on all sales made by him. Collection charges
and bad debt loss must be borne by the consignor.

Del Credere commission is an extra commission over and above the normal, paid to the
consignee for selling goods on credit. Here all losses due to bad debt, collection charges
and discount must be borne by the consignee. This
JOINT VENTURE MEANING
It is a temporary partnership without a firm name
It ceases with the completion of the task undertaken
Co-venturers enter into a contract with each other deciding about their
capital contribution and share of profit.

Distinction between Joint venture and
partnership JOINT VENTURE PARTNERSHIP
NO COMMON NAME HAS A FIRM NAME
PURELY TEMPORARY CONTINUING BUSINESS
CALLED CO VENTURERS CALLED PARTNERS
Liability depends upon the mode of
contract
Liability can be joint and several
Separate book is not a must Separate books of accounts is a must
Follow cash basis of accounting Follow accrual basis of accounting
P/L is ascertained on completion of each
venture
P/L is ascertained at the end of the
accounting period
JOINT VENTURE CONSIGNMENT
Venturers contribute capital and share the
profit or losses according to agreed ratio
Consignee does not contribute any capital
and he is not entitled to profit or loss but
he gets a commission at an agreed rate
Each co venturer can take part in the
management of the venture
Consignee does not take part in consignors
venture and vice versa
Governed by Partnership Act Governed by Agency Act
It is a temporary partnership Principal- Agent relationship
PARTNERSHIP ACCOUNTS

Introduction- meaning
Should a banker needs to know about Partnership accounts?

How does it affect as a lender?

Lets see the meaning of Partnership:
According to Section 4 of Indian Partnership Act, 1932, the term partnership is the
relation between two or more persons who have agreed to share the profits of a
business carried on by all or any of them acting for all


features
1) There must be two or more persons to form a partnership ( Max :10 in case of
banking and 20 in case of general business)
2) There must be an agreement (explicit or implicit) entered into by all the partners
3) There must be a business (or a profession)
4) The business (or profession) must be carried on by all or any of them acting for all
5) The liability of the partners are unlimited
6) For the purpose of law, partners and the firm are not separate entities
7) In India, partnerships are governed by the Indian Partnership Act of 1932

Partnership deed
It is not mandatory but it is advisable to have the deed in writing
It contains- the name of the firm, the names and addresses of the partners, the
nature of business (or profession) carried on by the firm
The place in which the business is operated, the date of commencement of
partnership, amount of capital to be contributed by each partner
The conduct and the powers of each partner, restriction on working of each partner
Ratio in which profits and losses are to be shared, interest on partner capital, interest
on partners drawings, interest on loans given to or taken by partners from the firm
Remuneration ( salary/commission) to partners
Method of valuation of goodwill and their treatment
Procedure to be followed when there is a change in the constitution of the firm
Mode of settlement of accounts in case of retirement, death, dissolution of the firm
Procedure to be followed in event of dispute

Provisions applicable when there is no
express or implied partnership deed
No remuneration must be paid to any partner for taking an active part in the conduct
of business of the firm [as per Sec 13(a)]
The profit and loss must be share by the partners equally {sec 13(b)]
No interest must be allowed on capital contributed by the partners
Interest at 6% must be paid to partners for loans/advances by partners to the firm[sec
13(d)]
No person can be admitted into partnership without the consent of all existing
partners
The books of the firm must be kept in the place of business and every partner must
have an access to inspect them
Method of maintaining capital
accounts Method 1 Fixed capital method
Method 2 Fluctuating capital method

FIXED CAPITAL METHOD
FOR EACH PARTNER TWO ACCOUNTS ARE MAINTAINED
1. PARTNERS CAPITAL ACCOUNT- INITIAL BALANCE IS CARRIED DOWN
EVERY YEAR
2. PARTNERS CURRENT ACCOUNT ALL ADJUSTMENTS REGARDING
INTEREST ON CAPITAL, INTEREST ON DRAWINGS, SHARE IN PROFIT/LOSS
ARE RECORDED
FLUCTUATING CAPITAL METHOD
1. ALL TRANSACTIONS RELATING TO A PARTNER ARE ENTERED IN ONLY ONE
CAPITAL ACCOUNT MAINTAINED BY HIM.
2. NO CURRENT ACCOUNT IS OPENED SEPARATELY
PROFIT AND LOSS APPROPRIATION A/C

To interest on capital
Sagar
Sameer
By net profit xxxxx
To salary to Sameer By interest on drawings
Sagar
Sameer
To capital /current alc
(bal fig)
Sagar
Sameer
Transfer this
amount to
current a/c
Fixed capital method
Sagar Sameer Sagar Sameer
To closing bal c/d 60000 40000 By Opening bal b/d 60000 40000
TOTAL 60000 40000 TOTAL 60000 40000
CAPITAL ACCOUNTS OF PARTNERS
CURRENT ACCOUNT OF PARTNERS
SAGAR SAMEER SAGAR SAMEER
To Drawings By interest on capital
To Interest on
drawings
By salary
To closing bal xxxx By P&L appropriation
By closing bal xxxx
Fluctuating capital method
Sagar Sameer Sagar Sameer
To drawings By bal c/d
To Interest on
drawings
By interest on
capital
To closing bal By salary
By P&L appro a/c
TOTAL XXXXX XXXXX TOTAL XXXXX XXXXX
VALUATION OF GOODWILL
1. Average Profit method
2. Super Profit method
3. Capitalization of Profit method
Admission of a partner
The benefit a new partner will get is:
a. Share in assets and liabilities of the firm
b. Share in the profit/loss of the firm
c. Share in the goodwill enjoyed by the firm

During admission of a partner the following steps are required:
a. Revaluation of assets and liabilities
b. Treatment of goodwill
c. Decision regarding amount of capital to be brought in by the new partner
d. Adjustment regarding accumulated losses and reserves
e. Capital accounts of the partner
SACRIFICING RATIO = OLD RATIO - NEW RATIO
GAIN RATIO= NEW RATIO OLD RATIO
Revaluation a/c
For increase in value of asset
Asset a/c Dr
To Revaluation a/c
For decrease in value of asset
Revaluation a/c Dr
To Asset a/c
For increase in value of liability
Revaluation a/c Dr
To liability a/c
For decrease in value of liability
Liability a/c Dr
To Revaluation a/c
For Profit on revaluation a/c
Revaluation a/c Dr
To Old Partners Capital a/c
Retirement and death of a partner
Reasons
1. Due to old age
2. Retiring partner may not have faith in the future prospects of the firm
3. Difference of opinion among partners
4. Migration to different place
5. Voluntarily decides to retire
6. As per terms of partnership deed


Introduction
Businesses prepare final accounts to show
a summary of all trading activities during
the year.
Individual records would be too detailed
for most people to understand
Final accounts often have to be available
for shareholders, potential buyers,
creditors, lenders
Final accounts of companies
Is quite natural that the businessman is
interested in knowing whether his business is
running on Profit or Loss and also the true
financial position of his business
The main aim of Bookkeeping is to inform the
owner/owners, about the business progress
and the financial position at the right time and
in the right way.

Final accounts of companies
Final accounts
Trading and
profit and loss
a/c
Balance Sheet
Final accounts
Trading and Profit and Loss A/c is prepared to
find out Profit or Loss.
Balance Sheet is prepared to find out
financial position a if concern. It is prepared
with a view to measure the true financial
position at a particular point of time.
Final accounts
For a companys the final accounts would
include trading a/c , profit and loss a/c and
Balance sheet
A banks final account will include profit and
loss a/c and balance sheet.



It is prepared at a particular date and not for a period.
b) it is prepared only after preparation of the Trading and Profit &
Loss A/c. Without
the Profit & Loss A/c it will not give the financial position of the firm
adequately.
c ) Capital is equal to the difference of assets and liabilities.
Therefore the two sides of
the balance sheet must have the same totals otherwise it is an
indication of the
presence of errors.
d) It is not an account but only a statement of assets and liabilities..
e) The balance sheet shows the financial position of a business at
going concern
concept.
Trading account
At the end of each year, it is necessary to ascertain
the net profit or net loss. For this purpose, it is
first necessary to know the gross profit or gross
loss. The trading account is prepared to ascertain
this.
The difference between the selling price and the
cost price of the goods is the gross earning of the
business concern. Such gross earning is called as
Gross Profit.
However, when the selling price is less than the
cost of goods purchased, the result is Gross loss.
To find gross profit or gross loss
For example, if the cost price of Rs. 50,000
and goods are sold for Rs. 60,000 that will
bring in Gross Profit of Rs. 10,000.
For example, if the cost price Rs. 60,000 worth
of goods are sold for Rs. 50,000 that will result
in Gross Loss of Rs.10,000.
Thus the Gross Profit or Gross Loss is indicated
in Trading Account.
Format of trading account
Particulars Rs Rs Particulars Rs Rs
To opening stock xxx By sales xxx
To purchases xxx Less : Sales return xxx xxx
Less purchase return xxx xxx By closing stock xxx
To wages xxx By Gross Loss c/d
(transferred to P&L a/c
xxx
To freight xxx
To carriage inwards

xxx
To manufacturing
expenses
xxx
To octroi duty xxx
To Gross profit c/d
(transferred to P& L a/c
xxx
xxx xxx
Financial Terminology
The Trading Account
Sales
Sales returns/return inwards
Purchases
Purchase returns/return outwards
Cost of sales
Opening stock
Closing stock


On the debit side

1. Opening stock: Stock on hand at the beginning of the year is termed as opening stock.
The closing stock of the previous accounting year is brought forward as opening stock of
the current accounting year. In the case of new business, there will not be any opening
stock.
2. Purchases: Purchases made during the year, includes both cash and credit purchases of
goods. Purchase returns must be deducted from the total purchases to get net purchases.
3. Direct Expenses: Expenses which are incurred from the stage of purchase to the stage
of making the goods in saleable condition are termed as direct expenses. Some of the
direct expenses are:
i. Wages: It means remuneration paid to workers.
ii. Carriage or carriage inwards: It means the transportation charges paid to bring the
goods from the place of purchase to the place of business.
iii. Octroi Duty: Amount paid to bring the goods within the municipal limits.
iv. Customs duty, dock dues, clearing charges, import duty etc.: These expenses are paid
to the Government on the goods imported.
v. Other expenses : Fuel, power, lighting charges, oil, grease, waste related to production
and packing expenses
On the credit side
Sales: This includes both cash and credit sale
made during the year. Net sales is derived by
deducting sales return from the total sales.

ii. Closing stock: Closing stock is the value of
goods which remain in the hands of the trader
at the end of the year.
Financial Terminology The Trading Account
Sales the amount a business sell over the financial year
sometimes called turnover.
Sales returns goods the business has sold that have been
returned by customers because they are unsuitable. They must be
deducted from the sales figure in the trading account.
Purchases the amount of stock the business buys from suppliers
throughout the financial year.
Purchase returns the amount of stock the business has bought
and returns to the supplier because it is unsuitable. This figure
must be deducted from purchases.
Opening stock the stock the business has at the start of the
financial year. This figure would be found by doing a physical
stocktake.
Closing stock - the stock the business has at the end of the
financial year


Prepare trading account
From the following information, prepare a
Trading Account for the year ended 31.12.2011.
2011 Jan 01 Opening stock Rs.15,000.
2011 Dec 31 Purchases Rs.16,500.
2011 Dec 31 Sales Rs. 30,600.
2011 Dec 31 Closing stock Rs. 13,500.
From the following information, prepare a Trading
Account for the year ended 31.12.2011.

Opening stock 75000
Purchases 190000
Sales 4,20,000
Return inward 5000
Return outwards-5000
Wages 84500
Salaries 33000
Freight and carriage 12900
Closing stock 95000
Power and gas 3000
Office rent 2000
PROFIT AND LOSS ACCOUNT

Trading account reveals Gross Profit or Gross
Loss. Gross Profit is transferred to credit side
of Profit and Loss A/c. Gross Loss is transferred
to debit side of the Profit Loss Account.
A profit and loss is prepared to indicate the
net profit or net loss for given accounting year
Profit and loss account
Items appearing on Debit side of the Profit & Loss A/c
he Expenses incurred in a business is divided in too parts. i.e.
one is Direct expenses are recorded in trading A/c., and another
one is Indirect expenses, which are recorded on the debit side
of Profit & Loss A/c.
Indirect Expenses are grouped under four heads:
1. Selling Expenses: All expenses relating to sales such as
Carriage outwards, Travelling Expenses, Advertising etc.,
2. Office Expenses: Expenses incurred on running an office such
as Office Salaries, Rent, Tax, Postage, Stationery etc.,
3. Maintenance Expenses: Maintenance expenses of assets. It
includes Repairs and Renewals, Depreciation etc.
4. Financial Expenses: Interest Paid on loan, Discount allowed
etc., are few examples for Financial Expenses.
Item appearing on Credit side of Profit and
Loss A/c.
Gross Profit is appeared on the credit side of P
& L. A/c. Also other gains and incomes of the
business are shown on the credit side.
Typical of such gains are items such as Interest
received, Rent received, Discounts earned,
Commission earned.

Balance sheet
Balance sheet is financial statement which depicts the financial
position of a company as on specific date
Balance sheet of bank differs from that of companys balance
sheet.
Balance sheet is based on the accounting equation of:

ASSETS= CAPITAL +LIABILITIES

ASSETS: RESOURCES OR THINGS OWNED BY A BUSINESS
CONCERN FOR CARRYING ON BUSINESS


ASSETS
CURRENT
ASSETS
NON CURRENT
ASSETS
CURRENT ASSETS

Assets Which is primarily held for the purpose of being
traded/ expected to be realized within twelve months.

Examples of current assets:
1. Cash
2. Cash Equivalents money with banks
3. Debtors
4. Bills receivable
5. Short term loans and advances
6. Closing stock
7. Other Current Assets (Prepaid expenses, and advance taxes)




Non Current Assets
(a) Fixed assets
(i) Tangible assets-land and building, plant and
machinery , furniture& fittings, vehicles ,premises,
(ii) Intangible assets-Goodwill, trademarks, Copyrights
and patents
(b) Non-current investments: Investment in
equity shares, mutual funds , investment in property ,
govt securities
(c) Long term loans and advances

CAPITAL
CAPITAL REFERS TO THE AMOUNT OF MONEY OR
MONEYS WORTH INVESTED OR INTRODUCED BY THE
PORPRIETOR INTO HIS BUSINESS .
CAPITAL INCLUDES:
Equity share capital
Preference share capital

LIABILITIES
Liabilities are outsiders claims against the
business .
It refers to all amounts owed by the business to
outsiders

LIABILITIES
NON CURRENT
LIABILITIES
CURRENT
LIABILITIES
CURRENT LIABILITIES
Those which are incurred during the normal running of
business to be settled with period of 12 months or
normal operating cycle
LOANS REPAYABLE ON DEMAND
CREDITORS
BILLS PAYABLE
OUTSTANDING EXPENSES LIKE RENT , SALARY
ANY PROVISIONS
NON CURRENT LIABILITIES
Long term borrowings
Other long term liabilities
Format of balance sheet
Name of the Company ..
Balance Sheet as at..
PARTICULARS
FIGURES AT THE
END OF PRESENT
PERIOD
CAPITAL AND LIABILITIES
SHARE CAPITAL

XXX
RESERVES AND SURPLUS XXX

NON CURRENT LIABILITES

XXX

CURRENT LIABILITIES XXX

TOTAL
YYYYY
ASSETS
NON CURRENT ASSETS XXX

CURRENT ASSETS XXX

TOTAL
YYYYY
Adjustments
Adjustments in final accounts simply means bringing into
record all those items which have not been included in the
trail balance.
Rule: It should be dealt twice
1. Closing stock- (1)trading( cr), (2) balance sheet current
assets
2. Depreciation -(1) P & L a/c (dr) (2) balance sheet reduce
it from the asset
3. Prepaid rent- (1) P&L a/c DEDUCT from the respective
account (2) balance sheet current assets
4. Commission received in advance -(1) P&L a/c (cr) deduct
from respective a/c (2) balance sheet current liabilities
Banks balance sheet

Banks Balance sheet as on 31
st
march
2010

22 July 2014 202

22 July 2014 203

22 July 2014 204
Profit and loss account

22 July 2014 205

22 July 2014 206
Schedule No.-1:Share Capital
Equity Share Capital
Authorized Capital
Issued Capital
Subscribed Capital
Called up Capital
Less: Calls unpaid
Paid up Capital
Add: Forfeited shares
Preference Share Capital
Schedule No.2:Reserves & Surplus
General reserve
Statutory Reserve
Share Premium
Investment Fluctuation Reserve
Capital Reserve
Profit & Loss A/c (Surplus)
Schedule No.3-Deposits
Demand Deposit
Savings Deposit
Term Deposit
Schedule No.4:Borrowings
Borrowings from RBI
Borrowings from other banks
Borrowings from institutions
Debentures & Bonds
Schedule No.5:Other Liabilities & Provisions
Bills Payable
Sundry Creditors
Provisions
Outstanding Expenses
Unclaimed Dividend
Schedule No.6:Cash Balance & Balances with RBI
Cash in Hand
Cash with RBI in Current Account & Other
deposits
Schedule 7- Balances with banks and money at call and
short notice
Balances with other banks
Money at call & Short Notice
Schedule 8-Investments
Shares & Bonds
Government Securities
Other approved Securities
Schedule 9-Advances
Bills purchased & discounted
Cash Credits, Overdrafts & Demand
Loans
Term loans
Schedule 10-Fixed Assets
Premises
Furniture and fittings
Land and buildings
Plant and Machinery
Goodwill
Trade marks and patents
& other Fixed Assets
Schedule 11-Other Assets
Interest Accrued (Uncollected interest)
Inter office Adjustment
Tax paid in advance/TDS
Stationery & Stamps
Schedule 12-Contigent Liabilities
Claims against the bank not acknowledge as
debts
Liability for partly paid investments
Liability on account of understanding forward
exchange contracts
Guarantee given on behalf of constituents
Acceptance, Endorsement & other
obligations
Other items for which the bank is
contingently liable