Jaiib - 2 Afb - Quick Book Nov 2017

TEACH YOURSELF - JAIIB
SMALL & QUICK BOOK FOR JAIIB-2

(Only 48 hours book to get more than 60% marks)
ACCOUNTING AND FINANCE FOR BANKERS

(For 19.11.2017 Examination)
(A Very useful book and Specially designed for Non-comerce background banker )
Sanjay Kumar Trivedy

sktrivedyiibf@gmail.com / 9987519725
Preface
Dear Friends,
The Globalization has opened up World Economy & the distances between Buyer & Seller are reduced
considerably. The other effect which is witnessed in this scenario is banking. Hitherto, to maintain Bank
account /to operate account, the customer had to visit Branch frequently. This is now reduced as
Customer can open account Online, get Statement of account online & request for Cheque book on line.
He has to visit Bank branch only for submitting KYC Documents & other documents.
Indian Banking is in its most exciting phases. The impact of liberalization has been wide spread and has
thrown up both challenges and opportunities for bankers. Ever increasing competition is a part of
professional life and the banker who is ahead of his peers in terms of knowledge skill, technology and
quick response will be the winner.
Banking/Financial sector in our country is witnessing a sea change and bankers business has become
more complex & difficult in this driven era of knowledge & technology. There are mass retirements
happening due to superannuation & many new recruits are joining the Bank. More than 60% staff
strength is newly recruited in last five to six years.
An official working in the Banking sector has to keep pace with Updated knowledge, skills & attitude, as
the same is required everywhere. Employees play vital role in Banking/service organizations and they
need to be transformed into Knowledge Assets to remain competitive in the dynamic environment and it
is more so with Banks as they are very service sensitive. Thus it is imperative for the bank staff to serve
the clientele with updated information of bank's products & services to accomplish corporate objectives.
This book titled TEACH YOUR SELF JAIIB : Small & Quick Book is first version has many unique
features to its credit & consists of all topics/latest syllabus required for JAIIB examination with clear
concept & simple language with latest changes during 2017-18 (as per IIBF/ JAIIB exams. requirement )
also included. This Book is divided into four Modules namely A, B, C & D & Practice Teat Papers / Test
Yourself based on latest IIBF syllabus for JAIIB examination and each Module is divided into various
chapters as per latest syllabus of JAIIB for exam. Nov. 2017. It has been seen that last so many years in
JAIIB/IIBF Examination, nearly 75-85% questions are very general in nature and in this regard this book is
of immense use.The book is prepared based on last more than 15 years of experience and pattern of
questions asked in the examination. It is quickest book both for revision and fresh preparations (Only
twenty four hour books) to get good scores.
Since long banking sector become hot spot for Science background aspirants and JAIIB-2: ACCOUNTING
& FINANCE FOR BANKERS create all hurdles to pass JAIIB. This book is prepared in such way that science
stream will find this book very interesting & easy to get good marks in JAIIB-2.
All possible care is taken to provide error free information, however, readers may note that the
information given herein is merely for guidance/reference and they need to refer the relevant circulars
& Manuals for full details.
I express my sincere thanks to friends/colleagues for their support in encouraging the idea and
contributing the required resources for release of this TEACH YOUR SELF JAIIB: Small & Quick Book.
I solicit your views on the content and quality of the topics for further improvement.
I wish you all the Success and hope the study material will help in achieving the goal.
Date: 15.11.2017 Sanjay Kumar Trivedy

sktrivedyiibf@gmail.com / 9987519725
Compiled by Sanjay Kumar Trivedy, Chief Manager, Canara Bank, Shrigonda,Ahmed Nagar, Maharashtra 1|Page
About the Author
Mr. Sanjay Kumar Trivedy (Native : Motihari, Bihar), Presently working as Chief Manager ( Scale-IV) in
Canara Bank, Shrigonda branch in Ahmednagar distt. of Maharashtra state. He Joined Canara Bank as
DRO/PO (AEO) on 10.03.1997 and and worked in various places, starting from Maujgarh branch (1997-
2000), Near Abohar(Punjab), Sirsa Main- Haryana (2000-2004), BMC, Jalandhar (2004-2006) Toiladungari,
Sakchi, Jamshedpur(2006-2009), Jhalak near Chaibasa (2009-2011), J B Nagar, Andheri East , Mumbai
( 2011-2013) and then Faculty as well as College in charge ( Principal ) in Regional Staff Training College,
Mumbai (2013-2016), Govt.Link Cell, Nagpur (01.05.2016 to 15.07.2017), Itwari Branch, Nagpur
( 17.07.2017 to 15.09.2017 ) and then Shrigonda Branch ( Since 16.09.2017. ).He won more than 200
awards in various fields of Banking by his Bank Canara Bank, which includes twice gold coin for CASA
mobilization. His best achievement was as an officer/AEO, he converted his Section: Agril Finance into
Hi-tech Agril. Branch at BMC, Jalandhar and while working in Jhalak branch near Chaibasa (Jharkhand),
won twice best Rural banker award from NABARD during 2009-10 &2010-11 in SHG credit linkage &
Farmers Club Formation. During this journey started from 1997 to till date he worked in almost all area
of Banking.
Mr. Sanjay Kumar Trivedy is M.Sc. (Agril), CAIIB, PGDCA, MBA, MBA (Finance),Diploma (IIBF) in Rural
Banking, Treasury, Investment and Risk Management, Commodity Derivatives for Bankers, Advanced
Wealth Management, Certificate (IIBF) in Trade Finance, Certificate in Anti-Money Laundering / Know
Your Customer, Certificate Examination in SME Finance for Bankers, Certificate Examination in Customer
Service & Banking Codes and Standards, Certificate Examination in CAIIB - Elective Subjects ( Retail
Banking & Human Resource Management) & Certificate Examination in Microfinance
Mr. Sanjay Kumar Trivedy has teaching experience of more than 16 years, from Sirsa Main Branch (2000-
2004) , he started teaching to his colleagues/staff and in this long journey he has given good results both
in Promotion test as well as JAIIB /CAIIB examination. He has taken IIBF-JAIIB & CAIIB classes at Mumbai.
He has compiled/authored more than 20 books in last three years related banking - JAIIB, CAIIB, Book on
Promotion Test ( all cadres), Interview , Drishti (Current Banking Topics Interview book for Scale iv &
above), Group Discussion, Certificate course on Customer Service & BCSBI, AML& KYC, MSME Finance for
Bankers, Book on Abroad Posting, Confirmation Test for PO, Banking & Technology and many more books
on day today banking and many more in the offing.
Mr. Sanjay Kumar Trivedy is working in a mission mode to reduce knowledge gap among bankers with
objective to provide educational support free of cost to all in general and bankers in particular with
objective to empower Banker colleagues specially young banker who join the bank in last more than one
decade for their better productivity, Sense of satisfaction, Customer delight with ultimate increase of
quality banking business for their organisations.
He can be only contacted through e-mail: sktiibf@gmail.com & whatsapp no. : 9987519725
The best way to find yourself is to lose yourself in the service of others - Mahatma Gandhi
INDEX
SI. CONTENTS Page No.
No
1. About JAIIB Examination 04-06
2. Syllabus 07-08
3 MODULE : A (BUSINESS MATHEMATICS & FINANCE ) 09-30
4. MODULE : B ( PRINCIPLE OF BOOK KEEPING & ACCOUNTANCY ) 31-65
5 MODULE : C ( FINAL ACCOUNTS ) 66-88
6 MODULE : D ( BANKING OPERATION ) 89-118
7 MEMORY BASED RECALLED QUESTIONS 119-128
8 TEST YOUR SELF : MODEL PRACTICE TEST PAPERS 129-135
There are certain breakthrough moments when you began to think & See the field differently
( Please send Memory based questions on sktrivedycan@gmail.com; sktrivedyiibf@gmail.com )
1. ABOUT JAIIB EXAMINATION
OBJECTIVE: JAIIB aims at providing required level of basic knowledge in banking and financial services, banking technology, customer
relations, basic accountancy and legal aspects necessary for carrying out day to day banking operations.
ELIGIBILITY:
(i) The examination is open only to the ordinary members of the Institute (Any person working in the banking and finance industry whose
employer is an Institutional member of the Institute can apply for membership, for details visit IIBF website).
(ii) Candidates must have passed the matriculation examination or its equivalent. The Institute may, however at its discretion, allow any
candidate from clerical or supervisory staff cadre of banks to appear at the examination on the recommendation of the Manager of the
bank / officer-in-charge of the banks office where the candidate is working, even if he / she is not a matriculate or its equivalent.
(iii) Subordinate staff of recognized Banking / Financial Institutions in India, who are members of the Institute, are eligible to appear at
the examination, provided they have passed the matriculation examination or its equivalent.
(iv) New members are advised of the examination for which they are eligible to appear while intimating their respective
membership numbers.
SUBJECTS OF EXAMINATION :
(1) Principles & Practices of Banking, (2) Accounting & Finance for Bankers & (3) Legal & Regulatory Aspects of Banking
There is no exemption in any of the subject/s for prior qualification/s.
PASSING CRITERIA :
1. Minimum marks for pass in the subject are 50 out of 100.
2. Candidates securing at least 45 marks in each subject with an aggregate of 50% marks in all subjects of examination in a single attempt will
also be declared as having completed the Examination.
3. Candidates will be allowed to retain credits for the subject they have passed in a attempt till the expiry of the time limit for passing the
examination as mentioned below :
TIME LIMIT FOR PASSING THE EXAMINATION :
1. Candidates will be required to pass the examination within a time limit of 2 years (i.e. 4 consecutive attempts).
2. Candidates not able to pass examination within stipulated time period of two years are required to re-enroll themselves
afresh. Such candidates will not be granted credit/s for subject/s passed, if any, earlier.
Time limit of 2 years will start from the date of application for First attempt Attempts will be counted irrespective of whether a
candidate appears at any examination or otherwise.
EXAMINATION FEES : For the examination centres in India
Description Fee
First attempt fee Rs. 2,400/ Plus convenience charges and Taxes as applicable
2nd attempt fee Rs. 1,000/ Plus convenience charges and Taxes as applicable
3rd attempt fee Rs. 1,000/ Plus convenience charges and Taxes as applicable
4th attempt fee Rs. 1,000/- Plus convenience charges and Taxes as applicable
Please Note : Candidates are required to Register for every attempt separately.
As a measure to streamline the traffic for registration, Institute will charge regular examination fee to candidates who registers for
the examination during the regular open period fro registration. For the extended days of registration, late fee of 7200 plus taxes,
will be charged in addition to regular examination fee. This extended days of registration, also gives candidates addition
opportunity to register for the examination, having missed the regular open period of registration.
The fee once paid will NOT be refunded or adjusted on any account.
MEDIUM OF EXAMINATION : Candidates are allowed to attempt the examination either in Hindi or English, and should clearly fill in
their choice of medium at the time of registration of application. In any case change of medium will not be allowed at a later stage.
PATTERN OF EXAMINATION :
(i) Question Paper will contain approximately 120 objective type multiple choice questions for 100 marks including questions based
on case studies / case lets. The Institute may however vary the number of questions to be asked for a subject.
(ii) The examination will be held in Online Mode only
(iii) There will NOT be negative marking for wrong answers.
DURATION OF EXAMINATION : The duration of the examination will be of 2 hours.
PERIODICITY AND EXAMINATION CENTRES :
a) Examination will be conducted on pre-announced dates published on IIBF Web Site. Institute conducts examination on half yearly
basis, however periodicity of the examination may be changed depending upon the requirement of banking industry.
b) List of Examination centers will be available on the website. (Institute will conduct examination in those centers where there are 20 or
more candidates.)
CLASS OF PASS CRITERIA :
1. The Institute will consider the FIRST PHYSICAL ATTEMPT of the candidate at the examination as first attempt for awarding class. In other
words, the candidate should not have attempted any of the subject/s pertaining to the concerned examination any time in the past and
has to pass all the subject as per the passing criteria and secure prescribed marks for awarding class. Candidates re-enrolling for the
examination after exhausting all permissible attempts as per the time limit rule will not be considered for awarding class.
2. First Class : 60% or more marks in aggregate and pass in all the subjects in the FIRST PHYSICAL ATTEMPT
3. First Class with Distinction: 70% or more marks in aggregate and 60 or more marks in each subject in the FIRST PHYSICAL
ATTEMPT.
PROCEDURE FOR APPLYING FOR EXAMINATION : Application for examination should be registered online from the Institutes
website www.iibf.org.in. The schedule of examination and dates for registration will be published on IIBF website.
STUDY MATERIAL / COURSEWARE :

The Institute has developed a courseware to cover the syllabus. The courseware (book) for the subject/s will be available at outlets of
publisher/s. Please visit IIBF website www.iibf.org.in under the menu Exam Related for details of book/s and address of publisher/s
outlets. Candidates are advised to make full use of the courseware. However, as banking and finance fields are dynamic, rules and
regulations witness rapid changes. Therefore, the courseware should not be considered as the only source of information while
preparing for the examinations. Candidates are advised to go through the updates put on the IIBF website from time to time and go
through Master Circulars / Master Directions issued by RBI and publications of IIBF like IIBF Vision, Bank Quest, etc. All these sources are
important from the examination point of view. Candidates are also to visit the websites of organizations like RBI, SEBI, BIS, IRDAI, FEDAI
etc. besides going through other books & publications covering the subject / exam concerned etc. Questions based on current
developments relating to the subject/exam may also be asked.
Cut-off Date of Guidelines / Important Developments for Examinations
In respect of the exams to be conducted by the Institute during May / June of a calendar year, instructions / guidelines issued by the
regulator(s) and important developments in banking and finance up to 31st December of the previous year will only be considered for the
purpose of inclusion in the question papers. In respect of the exams to be conducted by the Institute during November / December of a
calendar year, instructions / guidelines issued by the regulator(s) and important developments in banking and finance up to 30 June of that
year will only be the considered for the purpose of inclusion in the question papers.
The table given below further clarifies the situation :
Particulars Cut-off Date of Guidelines / Important Developments for
Examination/s
For the examinations to be conducted by the Institute for the 31st December 2016
period February 2017 to July 2017
For the examinations to be conducted by the Institute for the 30th June 2017
period August 2017 to January 2018
JAIIB EXAMINATION Nov.- 2017 : REGULAR OPEN PERIOD FOR REGISTRATION (8-9-2017 TO 8-10-2017) - With Normal Examination
fees EXTENDED PERIOD FOR REGISTRATION(9-10-2017 TO 16-10-2017) - With Normal Examination fees plus LATE FEES of Rs 200/-
(Plus taxes as applicable)
ONLINE MODE
Examination DATE TIME SUBJECTS
12-11-2017 ONLINE - Will be given in the admit Letter Principles & Practices of Banking
19-11-2017 ONLINE - Will be given in the admit Letter Accounting & Finance for Bankers
26-11-2017 ONLINE - Will be given in the admit Letter Legal & Regulatory Aspects of Banking
(Examination Eligible for Members Only)
Sr. No. Name of the Exam Attempts For Members(Rs)
First attempt fee 2,400 Plus GST as applicable
Second attempt fee 1,000 Plus GST as applicable
1 JAIIB
Third attempt fee 1,000 Plus GST as applicable
Fourth attempt fee 1,000 Plus GST as applicable
PATTERN OF EXAMINATION : Each Question Paper will contain approximately 120 objective type multiple choice questions, carrying 100
marks including questions based on case study / case lets. The Institute may, however, vary the number of questions to be asked for a subject.
There will NOT be negative marking for wrong answers.
TYPES OF QUESTIONS : 120 Objective Type Multiple Choice Questions - carrying 100 marks 120 minutes and question will be based on
Knowledge Testing, Conceptual Grasp, Analytical / Logical Exposition, Problem Solving & Case Analysis.
TypeofQuestionsBasicallyfour types of MultipleChoiceQuestions askedinExamof WhichType A:ConceptbasedStraightQuestions(70-71

QUES-0.5MARKS EACH);TypeB:Problems&Solutions (20-25QUES- 1.0MARKS EACH);TypeC: AppliedtheorybasedQuestions (10-15
QUES-2.0MARKS EACH); TypeD:CaseStudy&Case-letsbasedQuestions(10-15QUES -2.0MARKS EACH)
QUESTIONS MODELS : TYPES OF QUESTIONS

Type A : MULTIPLE CHOICE QUESTIONS & ANSWERS
The Best Method for assessing working capital limit used by the bank for seasonal Industries is :
1. Operating Cycle Method, 2. Projected Networking Method, 3. Projected Turn over Method & 4. Cash Budget Method
Type B : MULTIPLE CHOICE PROBLEMS & SOLUTIONS
Mr. Ram Kumar is having overdraft account with Canara bank upto Rs.100,000. The present Debit Balance in the account was Rs. 80550.00.
The bank has received attachment order from Income tax deptt. For Rs. 16,200.00. What can the bank do in this situation ?
- Unless the bank is a debtor, there can be no attachment and an unutilized overdraft account does not render the bank a debtor ( but
creditor ) & hence can not attach.
Type C : MULTIPLE CHOICE APPLIED THEORY QUES. & ANS
Financial Institution wish to have the money lent by them repaid in time. Secured advances sanctioned by banks possess what kind of security ?
- Secured Advances have impersonal security i.e. Tangible Security
Type D : MULTIPLE CHOICE CASE STUDIES & CASE LETS (PROBLEMS & SOLUTIONS )
Economic development of a country to a large extent depends upon Agril. & Industrial sectors. Development of agril. Depends upon irrigation
facilities while industrial development on availability of power,good transport and fast communication facilities. All these are called
infrastructure. Read the caselet & explain which industries constitute infrastructure ?
a. Energy, Transport & Communication
b. Irrigation, construction of bridges & dams over Rivers & stable govt. at Centre.
c. Availability of Funds for PMEGP , SJSRY & Indira Awas Yojana
JAIIB EXAMINATION Nov. -2017

REGULAR OPEN PERIOD FOR REGISTRATION (8-9-2017 TO 8-10-2017) - With Normal Examination fees. EXTENDED PERIOD FOR
REGISTRATION(9-10-2017 TO 16-10-2017) - With Normal Examination fees plus LATE FEES of Rs 200/- (Plus taxes as applicable)
SYLLABUS
The details of the prescribed syllabus which is indicative are furnished in the booklet. However, keeping in view the professional nature of
examinations, all matters falling within the realm of the subject concerned will have to be studied by the candidate as questions can be asked on
all relevant matters under the subject. Candidates appearing for the examination should particularly prepare themselves for answering questions
that may be asked on the latest developments taking place under the various subject/s of the said examination although those topics may not
have been specifically included in the syllabus. The Institute also reserves to itself the right to vary the syllabus / rules / fee structure from time to
time. Any alterations made will be notified from time to time. Further, questions based on current developments in banking and finance may be
asked.
Candidates are advised to refer to financial news papers / periodicals more particularly IIBF VISION and BANK QUEST published
by the Institute.
2. Syllabus: JAIIB PAPER II
ACCOUNTING & FINANCE FOR BANKERS
MODULE A BUSINESS MATHEMATICS AND FINANCE
1.Calculation of Interest and Annuities : Calculation of Simple Interest & Compound Interest; Calculation of Equated Monthly
Installments; Fixed and Floating Interest Rates; Calculation of Annuities; Interest Calculation using Products / Balances; Amortisation
of a Debt; Sinking Funds
2. Calculation of YTM : Debt- Definition, Meaning & Salient Features; Loans; Introduction to Bonds; Terms associated with Bonds;
Cost of Debt Capital; Bond value with semi-annual Interest; Current Yield on Bond; Calculation of Yield-to- Maturity of Bond;
Theorems for Bond Value; Duration of Bond; Properties of Duration; Bond Price Volatility
3. Capital Budgeting : Present Value and Discounting; Discounted Technique for Investment Appraisal; Internal Rate of Return (IRR);
Method of Investment Appraisal; NPV and IRR compared; Investment Opportunities with Capital Rationing; Investment Decision making
under condition of uncertainty; Expected NPV Rule; Risk Adjusted Discount Rate Approach for NPV Determination; Sensitivity Analysis for
NPV Determination; Decision Tree Analysis for NPV Estimation; Payback Methods; ARR.
4. Depreciation and its Accounting : Depreciation, its types and methods; Comparing Depreciation Methods
5. Foreign Exchange Arithmetic Fundamentals of Foreign Exchange; Forex Markets; Direct and Indirect Quote; Some Basic Exchange
Rate Arithmetic Cross Rate, Chain Rule, Value date, etc.; Forward Exchange Rates Forward Points; Arbitrage; Calculating Forward
Points; Premium / discount; etc.
MODULE B PRINCIPLES OF BOOKKEEPING & ACCOUNTANCY
1. Definition, Scope and Accounting Standards :
Nature and Purpose of Accounting; Historical Perspectives; Origins of Accounting Principles; Accounting Standards in India and its
Definition and Scope; Generally Accepted Accounting Principles of USA (US GAAP); Transfer Pricing; Overview of IFRS; Difference
between GAAP & IFRS.
2.Basic Accountancy Procedures : Concepts of Accountancy; Going Concern Entity; Double Entry System; Principle of
Conservatism; Revenue Recognition and Realisation; Accrual and Cash Basis.
3.Maintenance of Cash / Subsidiary Books and Ledger : Record Keeping Basics; Account Categories; Debit and Credit Concepts;
Accounting and Columnar Accounting Mechanics; Journals; Ledgers; subsidiary books; etc.
4.Bank Reconciliation Statement : Need for Bank Reconciliation; Causes of Differences; Preparation of Bank Reconciliation
Statement; How to prepare a Bank Reconciliation Statement when Extracts of Cash Book and Pass Book are given; Adjusting the Cash
Book Balance; Advantages of Bank Reconciliation Statement.
5.Trial Balance, Rectification of Errors and Adjusting & Closing Entries : Meaning of a Trial Balance; Features and Purpose of a Trial
Balance; Types of Trial Balance and Preparation of a Trial Balance; Disagreement of a Trial Balance; Classification of Errors; Location
of Errors; Rectification of Errors; Suspense Account and Rectification; Rectification of Errors when Books are closed; Adjusting and
Closing Entries.
6.Capital and Revenue Expenditure
Expenditure; Distinction between Capital and Revenue Expenditure; Deferred Revenue Expenditure; Receipts; General Illustrations.
7.Bills of Exchange : Types of Instruments of Credit; Term and Due Date of a Bill; Certain Important Terms; Accounting Entries to be
Passed; Accommodation Bill etc.
MODULE C FINAL ACCOUNTS

1. Balance Sheet Equation : Balance Sheet Equation; Computation of Balance Sheet Equation.
2. Preparation of Final Accounts: Preparation of Trading A/C;Profit and Loss A/C; Profit & Loss Appropriation Account; Balance Sheet
3.Ratio Analysis : Meaning of Accounting Ratios; Classification of Ratios; Uses of Accounting Ratios; Limitations of Accounting Ratios;
Calculation and interpretation of various Ratios; Different Users and their Use of Ratios.
4.Final Accounts of Banking Companies : Definition and Functions of a Bank; Requirements of Banking Companies as to Accounts
and Audit; Significant Features of Accounting Systems of Banks; Principal Books of Accounts; Preparation and Presentation of
Financial Statements of Banks; CMA Format; Accounting Treatment of Specific Items; Preparation of Profit and Loss Account;
Comments on Profit and Loss Account; Important Items of Balance Sheet; Disclosure Requirements of Banks; Additional
Disclosures prescribed by RBI; Disclosures required under BASEL norms.
5. Company Accounts I & II : Definition and Types of Companies; Distinction between Partnership and Limited Liability Company;
Classes of Share Capital; Issue of Shares; General Illustrations Non-voting Shares; Form of Balance Sheet; Legal Requirements
for Assets; Legal Requirements for Liabilities; Legal Requirements for Profit & Loss A/c; Preparation of Final Accounts
6. Accounting in a Computerized Environment :Meaning, Features of and Terms used in Computerized Accounting; Difference
between Computerized and Manual Accounting; Advantages and Disadvantages of Computerized Accounting; Functions performed
by Computerized Accounting Soft wares available in the Market; Computerization Scope and Experiences in Banking; The Core
Banking Components; Information Security; Internet and World Wide Web Influences on Banking
MODULE D BANKING OPERATIONS

1.Banking Operations & Accounting Functions : Preparation of Vouchers, cash receipt and payment entries, clearing inward and
outward entries, transfer debit and credit entries, what is KYC and what are the different documents to satisfy KYC, verify KYC
and authenticity of documents, operational aspects in regard to opening of all types of accounts, scrutiny of loan applications /
documents, allowing drawals and accounting entries involved at various stages, operational aspects of CBS environment etc.,
Back office operations in banks, handling of unreconciled entries in banks.
3. MODULE A : BUSINESS MATHEMATICS & FINANCE
1. CALCULATION OF INTEREST
Banking business mainly consists of accepting deposits and lending. Bank pays interest to the depositors On lending to customers,
the bank charges a certain interest at a specified rate. The interest is payable either at periodic intervals or at the end of a loan
period. The calculation of the interest will be based on the terms of agreement, i.e. whether at a definite interval or at the period
end. Sometimes, it also happens that the customer is interested in paying a part of principal along with interest. As the customers
pay the principal in instalments, the impact of the interest gets reduced over the tenure of loan. It may also happen that the bank
may want to recover the loan in equal instalments called annuities. Annuities are essentially a series of fixed payments required to
be paid at a specified frequency over the course of a fixed period of time. Payment of annuities may be at the beginning of each
period or at the end of each period. The calculations of annuities are different for each situation. Sometimes, the bank also needs to
make a cost-benefit analysis of the series of annuities and is required to calculate the present value of all the annuities by suitably
discounting the annuities receivable at the end of each period. The sums of the present value of the annuities are compared with the
cash outflow to reach certain decisions.
A. Simple interest : Simple interest is paid by the borrower at the end of each year at a fixed rate (called rate of interest). In other
words no interest is paid on the amount of interest. The simple interest can be calculated as: Interest = principal x rate x time i.e.
I=PRT (where P is principal, R is rate of interest and T is time).
Example : A lends Rs.30000 to B at 9% interest rate. The annual interest would be Rs.2400 i.e. (30000 x 1 x 9)/100. Total
amount payable by the borrower to the lender = Principal + interest.
Amount of instalments: Repayment of the loan can be made on a yearly, half-yearly, quarterly, monthly or even weekly periodicity.
Hence the total amount repayable can be divided by the units of time period in a year. For example in the above case, the total loan
repayable is Rs.32400 (30000 + 2400). If repayment is half-yearly, the amount of instalment would be Rs.16200 (32400/2), if it is
quarterly it would be Rs.8100 (32400/4), if it monthly the amount would be Rs.2700 (32400/12) and so on.
B. Compound interest : When interest is paid by the borrower not on the amount of principal only but on the interest amount that has
accrued also (i.e. accumulated portion of interest), it is called compound interest. In this case, the formula for calculation of interest is
not that simple as in case of simple interest, Formula for calculation of amount due after a certain period on compound rate of
interest is: A= P (1+R)n where 'A' is total amount due after n years., 'P' is the principal amount and 'R' is rate of interest per annum
expressed as fraction.
Formula for half yearly compounding will be modified by reducing rate of interest to half its original value and multiplying time by 2.
Likewise for compounding of interest at quarterly rests, the rate of interest will, be divided by 4 and time period multiplied by 4. So
the formulae under such dispensation will be:- A=P(1+r/2)2n for half yearly compounding and A=P(1+r/4)4n, for quarterly
compounding.
For monthly compounding, the annual rate will be_divided by 12 and time period multiplied by12 making the formula as
A=P(1+r/12)12n
Compound interest will be CI =A-P where CI stands for compound interest, A for total amount due and P for principal amount.
Q. 1 The simple interest in 3 years and the compound interest in 2 years on a certain sum at the same rate are RS. 1,200 and RS. 832
respectively. Find (i) the rate of interest, (ii) the principal, (iii) the difference between the C.I. and S.I. for 3 years.
Ans. Let the principal be RS. P and rate of interest be R per cent p.a. According to the first condition of the question, (p x R x 3)/100 =
1200, P x R= 40,000
According to the second condition of the question, (P+ 832) = P(1 + R/100)2, or, (P+ 832)/P= (1 + R/100)2= (100)2(1 + 832/P) = (100 +
R)2 or, (100)2 + 832(100)2/P= (100 + R)2,
By putting P= 40,000/R from equation 1, we get, [832*R*(100)2]/40,000 = (100 + R)2 (100)2
4[(100)2 + R2 + 2*100*R (100)2] = 832 R , R2+ 200 R = 208 R = R2+ 200 R 208 R = 0
R2 8R = 0,R(R 8) = 0, Either R = 0 or R 8 = 0
Either R = 0 or R = 8, but R cannot be Rs.ero. Hence the rate of interest = 8% p.a.
On using (1), we get P x 8 = 40,000, so P = 5,000
(iii). Rate of compound interest = 8% p.a. and principal = RS. 5,000
Amount due after 3 years = RS. 5,000 x (1 + R)3,= RS. 5,000 x 1.2597 = RS. 6,298.56
Hence, C.I. for 3 years = A P= RS. 6,298.56 RS. 5,000 = 1,298.56
The difference between the C.I. and Si. for 3 years = RS. 1,298.56 RS. 1,200 = RS. 98.56
Amount becoming double of the amount lent : On a compounded basis, when the amount is lent it becomes double after different time
periods depending upon the rate of interest at which it has been borrowed. For this purpose the Rule of 72 can be used. According to
this rule, to find out the time period during which the amount would become double, the number 72 is divided by the rate of interest.
For example, the money lent at 9% would become appx. double in 8 years and the money lent at 8% would become appx. double in 9
years.
A depositor deposits Rs.20000 with the bank at prevailing interest rate of 12%. He wants to take back nearly double the amount of
the deposit. After how many years, he would get the amount as per his desire: 6 years (72/12). He would get Rs.19738 with annual
compounding and Rs.20327 with quarterly compounding.
Rule of '72' enables us to calculate the period during which our deposit or loan will become double. It is to divide'72' by annual rate
of interest and the result will be the period during which the amount will become double. For example if you availed a personaloan
@12% as per rule of '72' it will double in 6 years (72/12). Likewise if you have placed deposit with a bank at 8% rate of interest, the
amount of deposit will be double in 9 years (72/8).
There is a modified version of rule of '72' which is referred to as rule of '69'.It says that period during which the amount will double
will be calculated by dividing 69 by the rate of interest +0.35. To illustrate with 9% rate of interest the period will be 69/9+0.35 i.e.
7.67+0.35 years i.e. around 8.02 years.
Q 2 You borrowed RS. 1,000 at 6 per cent interest. Then, 72 divided by 6 is 12. That makes 12 the approximate number of years it
would take for your debt to double to RS. 2,000, if you did not make any payment.
Ans Similarly, a saving account with RS. 500 deposited in it, earning 4 per cent interest and compounded yearly, will take 18 years for
RS. 500 to double to RS. 1,000 if you do not make any further deposit, as 72 divided by 4 is 18.
C. FIXED AND FLOATING INTEREST RATES : There are two different modes of interest. They are 1.Fixed Rates & 2. Floating Rates also
called as variable rates.
1. Fixed Rate: In the fixed rate, the rate of interest is fixed. It will not change during entire period of the loan. For example, if a home
loan, taken at an interest rate of 12 per cent, is repayable in 10 years, the rate will remain the same during the entire tenure of 10
years even if the market rate increases or decreases. The fixed rate is, normally, higher than floating rate, as it is not affected by
market fluctuations.
2.Floating Rate: In the floating rate or variable rate, the rate of interest changes, depending upon the market conditions.Under
floating rate, the interest rate is usually linked to a benchmark rate which could be the base rate of the bank or any other benchmark
rate of the banking industry. It may increase or decrease depending upon the change in the benchmark rate.For example, if a home
loan is taken at an interest rate of 12 per cent, repayable in 10 years, inApril 2014, and if the benchmark rate increases to 12.5 per
cent in April, 2015, the interest rate of this loan will also be increased to 12.5 per cent. If the loan is under an EMI system, depending
upon the change in interest rate, the repayment period varies, but equated monthly instalment remains the same. However, the
borrower may choose to have the repayment period same and pay a higher EMI.
D.FRONT-END AND BACK-END INTEREST RATES
If the interest is deducted from the principal amount and only the net amount is disbursed, it is called front-end interest. For
example when the bank discounts a bill, the interest applicable for
the tenure of the bill is calculated and is deducted from the bill amount along with other charges and the net amount is paid to the
customer. However, the normal practice in banking industry is to charge back-end interest rate which means that the full amount of
the loan is disbursed and the interest is charged subsequently on monthly/quarterly/agreed basis. For example, in a term loan, the
interest is calculated on the actual daily balances in the account during a period and applied at the end of the period. Obviously, the
front-end interest application results in effective interest rate being more as the borrower gets less amount for use whereas, the
interest is applied on the full amount.
E. CALCULATION OF INTEREST USING PRODUCTS/BALANCES
Calculation of front end interest like in bill discounting is easy as the amount is assumed to be constant over the entire period. For
example, if the tenure of the bill of 2 lac is 3 months and the rateof discount is 16% p.a., the interest amount will be 8000.
In banks, many of the cases of deposit and loan accounts involve calculation of interest on the basis of daily balance in the
customer's account. While this method was prevalent in case of the loan accounts, even in case of Savings Account, the interest is
now required to be calculated on the basis of daily balances. In this method, the closing balance in the account is multiplied by the
number of days for which that balance remains unchanged.
PERPETUITIES
Perpetuity is an infinite series of payments made at fixed intervals. For example, a charitable trust promises a fixed monthly contribution
of Rs.1,000 to a hospital for ever. Since both the institutions are assumed to have perpetual existence, we can term these contributions as
Perpetuity. The examples in business world occur when, perpetual bonds are issued. Here the concept is that the Coupon ( interest) rates
promised on the bonds or any other debt instrument would be perpetual. If the beneficiary of perpetuity has an option to receive a lump
sum instead of perpetuity, he would want to know the present value of the future cash flows from the perpetuity. This gives rise to the
concept of Present value of Perpetuity.
PRESENT VALUE OF PERPETUITY : PV = PMT/I (PMT = Periodical cash flow or installment, I = Rate of Interest )
Compiled by Sanjay Kumar Trivedy, Chief Manager, Canara Bank, Shrigonda,Ahmed Nagar, Maharashtra 10 | P a g e
Equated Monthly Installments (EMI)
EMI is an unequal combination of principal and the interest but it remains constant throughout the repayment period.
How does EMI work : The EMI depends on three factors- the interest rate, the term of the loan and the quantum of the loan. The
number of EMIs and the amount of an EMI are inversely proportional to each other i.e. higher the number of EMI, the lower the
amount. For instance, EMI for a personal loan of Rs.2,00,000/- for a period of 3 years with 21% interest will be around Rs.7536, for a
period of 2 years it will be Rs.10278 and for 4 years Rs.6194.
Calculation of EMI : EMI calculation can be under (a) flat rate system and (b) reducing balance system.
Formulae P x r {(1+r)" / (1+r)" -1)}
where P=principal amount r= rate of interest per instalment period (e.g. if rate of interest is 12% p.a., per month rate will be = 0.01%).
For a principal sum of Rs.50000 at interest rate 12% and loan period one year, the EMI will be as under:
EMI = P x r {(1+r)" / (1-Er)" -1)}
12 12
= 50000 x 0.01 {(1.01) / (1.01) -1)1
= 50000 x 0.01 {1.126825 / 0.126825}
= 50000 x 0.01 {8.88488}
= 500 {8.88488} = 4442.50
Flat rate system: Under this system, the rate of interest on the loan amount is calculated over the full duration of the loan, the
principal and the interest is divided over the number of installments and the value arrived is the EMI. It can be understood
through the following example:
Year Interest paid (Rs.)@21% Principal paid (Rs) Balance of principal
(Rs.)
1st 42000 0 2,00,000
nd
2 42000 0 2,00,000
3rd 42000 0 2,00,000
Total interest paid 126000 1,26,000
Total outflow 3,26,000
EMI (326000 / 36) 9,054
A fiat rate loan is expensive because the interest is calculated on the entire loan amount with taking into account any reduction in
the principal. Thus the effective rate of interest is higher.
Reducing balance method: In this system, the interest is charged on the outstanding balance of the loan, which keeps on
reducing. In that case, the cost of the loan amount on an annual reducing balance method works out to 29% and 35% on a
monthly reducing balance method.
EMI Table Monthly reducing balance
Month EMI (Rs.) Interest paid (Rs.) Principal paid (Rs.) Balance
21% p.a. of
1 ( 1" year) 7536 3500 4036 principal
195964
2 ( 1" year) 7536 3430 4106 191860
3 (1' year) 7536 3358 4178 187682
5
4 (1 ` year) 7536 3284 4250 183432
5 ( 1" year) 7536 3210 4324 179106
6 (1" year) 7536 3134 4400 174706
7 (3" year) 7536 744 6790 35776
8 (3' year) 7536 626 6908 28866
9 (3' year) 7536 506 7030 21836
d
10 (3' year) 7536 382 .7152 14684
rd
11 (3 dyear) 7536 256 7278 7406
12 (3r year) 7536 130 7406 0
Total interest 170078 200000
payment 51 rd
(The information in the table relate to 1 six months of the first year and of last 6 months of 3 year) Again in case of
reducing system, there are three types:
(a) Daily reducing balance method: In this case, there is immediate reduction in principal which reduces the interest calculated
on it. If you have taken a loan of Rs.2,00,000/- at 21% interest for 3 years and you. pay Rs.7520 on June 10, the bank will consider
total outstanding principal as Rs.192480 from next day i.e. June 11. The interest will be calculated on Rs.2,00,000/- from June 1 to
June 10 and from June 11, interest will be calculated on Rs.192480. With a lower outstanding principal, the total interest paid out
reduces and so does the EMI.
(b) Monthly reducing balance method: In this case, the principal component is deducted at the end of every month and then the
interest is calculated on this new outstanding reduced principal. The above table gives the cash outflow on a loan of Rs.2,00,000 at
21% interest for 3 years, when interest is calculated by monthly reducing balance method.
(c) Annual reducing balance method: In this case, the principal component of EMI reduced every month, is summated annually.
Due to this reasons, the interest is calculated on the original loan amount for the entire year. At the end of the year, the
accumulated principal component is deducted from the original loan amount and the interest for the next year rs on this reduced
loan amount. If you have taken a loan of Rs.2,00,000/- at 21% interest for 3 years, the EMI will be Rs.8036.
Payment in the beginning or at the end : If EMI is paid at the beginning of the month (EMI in advance) the borrower locks the
money for the month. On the other hand if it is paid at the end of the month it provides an extra month before the payout. In that
case, the effective rate of interest on the loan goes up.
ANNUITIES
At some point in your life, you may have had to make a series of fixed payments over a period of time such as rent or car
payments or have received a series of payments over a period of time, such as bond coupons. These are called annuities. If you
understand the time value of money and have an understanding of the future and present value, it would be easy to understand
annuities.
Annuities are essentially a series of fixed payments required from you or paid to you at a specified frequency over the course
of a fixed period. The most common payment frequencies are yearly (once a year), semi-annually (twice a year), quarterly
(four times a year), and monthly (once a month). There are two basic types of annuities: ordinary annuities and annuities
due.
Ordinary Annuity: Payments are required at the end of each period. For an illustration, straight bonds usually make coupon
payments at the end of every six months until the bond's maturity date.
Annuity Due: Payments are required at the beginning of each period. Rent is an illustration of annuity due. You are usually
required to pay rent when you first move in at the beginning of the month, and then on the first of each month thereafter.
Since the present and future value calculations for ordinary annuities and annuities due are slightly different, we will first
discuss the present and future value calculation for ordinary annuities.
Time value of money : The money has a time value. Rs.5000 in hand with a person as at present and an amount of Rs.5000 coming in
his hand after, say a year, would carry different values. The same amount of money received in future carries less value because of
time element, during which the money can earn interest. The present value of Rs.5000 to be available after a year, would be less at
present. Hence the concept of future value of an annuity and present value of annuity comes in.
Future value of an Ordinary annuity : A depositor depositing a fixed sum of amount in his account regularly till the end of pre-determined
period at a given interest rate, can find out how much money he would get at the end of the period he has chosen for deposit.
Calculation of Future Value of Annuities
Future Value (FV) for Ordinary Annuity=C X [{(1+i)n-1}/i] where 'C' stands for cash flow per period,'I is the rate of interest , 'n' stands
.
for number of payments. Since in case of annuity due each payment is received, one period sooner, the formula stands modified.
Future Value of Annuity Due will be = C X [{(1+i) n -1}-1} X (1+i)
Calculation of Present Value of Annuities
n
Present Value (PV) for Ordinary Annuity= C X [{1- (1+i) }/i]
n
Present Value (PV) for Annuity Due = C X [{1- (1+i) }/i] x (1+i)
th
For payment made at the end of 4 year = 10000 (1 r)1 = 10000 (1 + 0.05)1 = 10500
For payment made at the end of 5th year = 10000 (1 + r)1 = 10000 (1 + 0.05)1 = 10000
Total = 55256,The above value can be worked out on the basis of formula:
FV = C * [(1 +i)" -11 Where C=Cash flow i=intt.rate n=no. of payments.
55256 = 100000 * [(1 +0.05)5-11=0.05
Present value of an Ordinary annuity : Where a person is receiving regular payment of Rs.10000 per annum for 5 years at 5%
interest rate, he can also calculate the present value of the cash flows he is to receive over the next 5 years as under:
1 1 1
For amount received at the end of 1 year = 10000 (1 + r) = 10000 (1 + 0.05)
= 9524
d 2 2
For amount received at the end of 2" year = 10000 (1 + r) = 10000 (1 + 0.05) = 9070 For amount received at
11 3 3
the end of 3' year = 10000 (1 + r) = 10000 (1 0.05) = 8638
th 4 4
For amount received at the end of 4 year = 10000 (1 + r) = 10000 (1 + .05) = 8227
111 5 5
For amount received at the end of 5 year = 10000 (1 + r) = 10000 (1 + 0.05) = 7835
Total = 43294, The above value can be worked out on the basis of formula:
PV = C * [(1-(1+in Where C=Cash flow i=intt.rate n=no. of payments
PV = 10000 * [(1-(1+0.05)0= 10000 * 4.3294 = Rs.43294
0.05
Future value of an annuity due : A depositor depositing a fixed sum of amount in his account in the beginning of a particular period
at regular intervals at a given interest rate can find out how much money he would get at the end of the period he has chosen for
deposit. Similarly if a borrower is making regular payment of a loan in equal instalments, he can find the cost of loan. For an amount
of Rs.10000 to be paid every year (for 5 years), the future value would be Rs.58019 at 5% interest rate, as under:
5 4
For payment made in the beginning of 1 ' year = 10000 (1 +r )4 = 10000 (1 + 0.05) = 12763
nd 4 3
For payment made in the beginning of 2 year = 10000 (1 + r) = 10000 (1 + 0.05) = 12155
For payment made in the beginning of 3rd year = 10000 (1 + r)3 = 10000 (1 + 0.05)2= 11576
th 2 1
111 1 1
Total = 58019
The above value can be worked out on the basis of formula:
FV = C * [(1 +i)n -11 * (1+i) where C=Cash flow i=intt.rate n=no. of payments
FV = 10000 * [(1 +0.05)"-11 * (1+0.05) = 10000 * 5.53 * 1.05 = Rs.58019

0.05
Present value of an annuity due : Where a person is receiving regular payment of Rs.10000 per annum for 5 years at 5% interest rate,
he can also calculate the present value of the cash flows he is to receive over the next 5 years as under:
For amount received at the end of 51h year = 10000 (1 + r) = 10000 (1 + 0.05) = 10000
h 1 1
For amount received at the end of 4` year = 10000 (1 + r) = 10000 (1 + 0.05) = 9524
rd 2 2
nd 3 3
51 4 4
Total = 45459
The above value can be worked out on the basis of formula:
PV = C * [(1-(1+I )n* (1+i), where C=Cash flow i=intt. rate n=no. of payments
5
PV =10000 * [(1-(1+0.05) 1* (1+0.05) =10000 * 4.33 * 1.05 = 100000 * 4.5459 = Rs.45459
0.05
AMORTISATION OF DEBTS
Amortisation defines the split of EMI into the principal amount and interest. The amortisation schedule or chart shows the
appropriation of fixed monthly repayment towards the principal amount and interest.
The interest is calculated on the principal outstanding at the end of each month by the reducing balance method i.e for the first
month, the interest is calculated on the original principal. Thus the EMI for the first month gets paid with the Principal and
interest component. After the first EMI is paid, the Principal amount gets reduced with the component of Principal paid in the
first instalment. In the same way, for the second month the interest is calculated on the reduced principal. After the second
month, the principal amount is further reduced with the portion of principal payment in second instalment. Subsequently, the
interest for the third month will be calculated on the reduced balance of principal after second instalment is paid and so on. The
majority of each payment at the beginning of loan pays for interest. As time goes on, more and more of each payment covers
your principal.
Amortisation means liquidation (repayment) of an interest bearing loan through periodic payments. With payment of each
instalment, the interest liability comes down. When the loan is amortised through equal payments, the debt becomes the
discounted value of an annuity. The total time period during which this repayment is made is called term of the annuity. The
regular time periods, during which the repayment is affected, are called payment periods.
Present value of annuity: When an investor expects the rate of return on purchase of a bond, equal to the coupon rate, the value
of the bond is equal to its par value. On the other
hand when an investor expects the rate of return on purchase of a bond, more than the coupon rate, the value of the bond is,
less than its par value. Similarly, when an investor expects the rate of return on purchase of a bond, less than the coupon rate,
the value of the bond is more than its par value. When the required rate of return is more than the coupon rate and as the
maturity approaches the discount on bond declines. When the required rate of return is less than the coupon rate and as the
maturity approaches, the discount on bond increases. The bond price is inversely proportional to its yield to maturity.
Future valueof annuity: The future value of annuity can be worked out with the help of the following formula. This helps us to
understand as to how much amount is required to be invested at a regular interval to get a targeted consolidated amount, at the end
of a particular period.
Sr (S=value at the end of the period.
R = --------- (R= Periodic payment)
{(1+r)"-1} ( r= rate per period)
Example 1 (with annual compounding) - X plans to receive Rs.2 lac per annum for the next 20 years at 5% rate of interest. How much
amount he needs to invest?
Solution : We can find it by using the above formula i.e. A = R [1- (l+r) -"/ r] OR = R [1 - {(1/1+r) }/ r]
20
A = 200000 [1- (1+0.05) - / 0.05] = 4000000 x (1 - 0.37689) = 4000000 x 0.62311 = 2492410
Example 2 (with quarterly compounding)- X plans to receive Rs.500 per annum for the next 5 years at 12% p.a. rate of interest to
be compounded quarterly, How much amount he needs to invest now?
Solution : We can find it by using the above formula i.e. A = R [1 -- (1+r) -"/ r]. OR = R [1 - {(1/1+r) "}/ r] Quarterly RoI will be 3%
(12/4)
2
A = 500 [1- (1+0.03) - / 0.03] = 16667 x (1 - 0.55368) = 16667 x 0.44632 = 7439
When the amount of periodic payment is to be calculated and present of annuity for n period at r rate of interest is given, we use
the following formula:
Ar (A=present value)
R ......................... (R= value of annuity per period)
1- 1/
1-(1- 11. (ra rate per period)
Example -1 (with monthly compounding) - X borrowed Rs.250000 for 8 years. The rate of interest
would be 18% p.a.. What will be monthly repayment?
n
So lution : We can find it by using the above formula i.e. R = Ar / [1 - {(1/1+r) }1.
The monthly Rol will be 0.015% (18/12). The no. of months = 12 x 8 = 96.
96
A . 250000 x 0.015 / [1 - (1+0.015) - ] = 250000 x (1 - 0.98028) = 250000 x 0.01972) = 4930.80
Example -2 (with annual compounding for 2 separate loans) --

X borrowed Rs. 10000 now and he plans to borrow Rs.10000 in 2 years from now at 10% p.a., which will be paid in the next 5 years.
What will be the total equal annual repayment?
Solution : We can find it by using the above formula i.e. R = Ar / [1 - {(1/1+r) r].
In this case, the borrowing is on 2 different dates. Hence, first we shall calculate present value of Rs.10000 to be borrowed in 2 years
and then add the amount of Rs.10000 to that amount to calculate the present value of total amount borrowed.
2
Present value of total amount borrowed = 10000 + 10000 / (1+r) " = 10000 + 10000 / (1+0.1)
=, 10000 + 10000 / (1.21) = 10000 + 8264 = 18264.
Now calculation will be on the total amount of Fts.18264.
R = Ar / [1- {(1/1+r) "}/ r].
S
R = 18264 x 0.10 / [1 - {(1/1+0.1) i R -= 18264 x 0.10 / [1 - {(1/1.61051]. R = 18264 x 0.10 / [1 - 0.6209]. R = 18264 x 0.10 / 0.3791 =
4817.73
Amortization Schedule
X cbtains a loan of Rs.4.40 lac at 10% p.a. which is to be repaid in equal quarterly repayments of Rs.1 lac each. We can draw the
amortization schedule on the basis of following:
1. At the end of first quarter he pays Rs.1 lac. For one quarter amount of interest at 10% p.a. or 2.5% per quarter would be 11000
(4.40 lac x 2.5%). Hence in the first quarter the amount of principal amount paid
would be Rs.89000 (1 lac 11000). The remaining principal would be Rs.351000. On which quarterly interest at 2.5% would be
calculated. Then this process would be followed as under:
_Payment Amount Quarterly Interest Principal payment Balance arincipal

1 100000 11000 89000 351000
2 100000 8775 91225 259775
3 100000 6494.40 93505.60 166269.40
4 100000 4156.80 95843.20 70426.20
5 72186.80 1760.60 70426.20 Nil
In the repayment of principal, the ratio of amount of successive instalments = 1+r (1.025) as under:
91225/89000 = 1.025 or 93505.60 / 91225 = 1.025.
Future value of annuity
The future value of annuity can be worked out with the help of the following formula. This helps us to understand as to how much
amount is required to be invested at a regular interval to get a targeted consolidated amount, at the end of a particular period.
Sr (S=value at the end of the period.
R = ---------------------- (R= Periodic payment)
n
{(1+r) -1} ( r= rate per period)
' By using the future value of annuity, the value of sinking fund can also be calculated.
SINKING FUND
Bullet/balloon repayment under which the entire loan amount is repaid at the end of the period (creation of sinking fund)
If the entire loan amount is repaid at the end of the period with accumulated interest, the amount can be easily calculated by applying
the formula for compound inte rest. If the interest is paid periodically, as and when applied, the last installmentwill be equal to the loan
amount and the interest for the last period.
Usually, a sinking fund is created to repay the loan under this method so that funds are readily available for repayment and the cash
flows are not burdened at the time of repayment. The concept of sinking fund is explained below:
When a specified amount of money is needed at a specified future date, it is a good practice to accumulate systematically a fund by means
of equal periodic deposits. Such a fund is called a sinking fund. Sinking funds are used to pay-off debts, to redeem bond issues, to replace
worn-out equipment, to buy new equipment, or in one of the depreciation methods. Since the amount needed in the sinking fund, the time
the amount is needed and the interest rate that the fund earns are known, we have an annuity problem in which the size of the payment,
the sinking-fund deposit, is to be determined. A schedule showing how a sinking fund accumulates to the desired amount is called a
sinking-fund schedule.
A fund created, by gradual periodic deposits, with the objective of getting a targeted amount to pay off future debts, is called a
sinking fund. The sinking funds can be created for a no. of purposes such as repayment of debt in lump sum, redemption of
bonds, replacement of a worn out equipment, buying of a new equipment etc.
This can be done by knowing the future value of an annuity, by using the following formula:
(1+i)n -1 (F=Future value of an annuity), (A= Annuity), (i= rate of interest)
F=A ----------------
i
Example -1 (with monthly compounding) X wants to save Rs.340000 to purchase a car at the end of one year by saving equal
amount every month. If the interest rate is 12% p.a., calculate the amount, he is to deposit at end of each month.
n
Solution : We can find it by using the above formula i.e. F = A [(1+i) - 1 / i].
12
340000 = A [ (1+0.01) 1 / 0.01] 340000 = A [ (1.12683 1 / 0.01]
340000 = A [ 0.12683 / 0.01] 340000 = A [ 0.12683 / 0.01]
340000 = A x 12.683 A = 340000 / 12.683 = 26808.59
Example -2 (with monthly compounding) X saves Rs.1200 each month for one year. If the interest rate is 12% p.a. and
compounding is monthly(a) what is present value of the annuity (b) how much money is repaid (c) what is the future value of the
payments made.
Solution for (a) : The present value of annuity will be calculated as under:
Rate 0.12/12 n = 1 x 12 = 12 A =1200
n 12
F = A [1 (1+r) "/ r]. OR = A[1 {(1/1+r) }/ r] = 1200 [1 {(1/1+0.01) }/ 0.01]
= 1200 [1 {(1/1.12683}/ 0.01] = 1200 [1 {0.88744}/ 0.01]
= 1200 x 0.11256 / 0.01] = 13507.20
Solution for (b) : Total amount paid:
= 1200 x 12 = 14400
Solution for (c) : Future value of payments made i.e. future value of annuity
12
F = A [(1+r)"/ r] = 1200 [(1+0.01) /0.01] = 1200 x [1.12683 /0.01]
= 13521.90
Example -3 (with annual compounding) Firm XYZ purchased a machine for Rs.2 lac which will have a salvage value of 2.20000 after
10 years. The new machine which the firm will purchase after 10 years is expected to cost Rs.3.20 lac lac. The firm wants to save for a
sinking fund. At 10% p.a. rate of interest, how much amount, the firm should save each month. The salvage value is to be taken into
account.
Solution = Rate of interest = 0.10 Period = 10 years FV = 3.20 0.20 = 3.00 lac

300000 = A [(1+r) -1/ r] 300000 = A [(1-1-.10)' 4/ 0.10] 300000 = A [(2.59374 -1/ 0.10]
300001) = A [(1.59374 / 0.10] 300000 = A x 15.9374 A = 300000 / 15.9374 = 18823.65
2. CALCULATION OF YTM
MEANING OF DEBT
Debt means a sum of money due by one party to another. Most businesses need a mix of debt and equity to run their operations. This is called the
capital structure of that firm/company.Debts can arise through bank borrowings, fixed deposits, bonds or other instruments. Where the amount is
fixed and specific, and does not depend upon any future valuation to settle it.
INTRODUCTION TO BONDS
Debt capital consists of mainly bonds and debentures. The holder of debt capital does not receive a share of ownership of the company when they
provide funds to the firm but he becomes a creditor to the firm. In return for loaning this money, bondholders have a right to certain guaranteed
payments during the life of the bond. For an illustration; a company issued a bond of a face value of 100 carrying a coupon rate of 10 per cent for ten
years. This entitles the bondholder to receive ten (10 per cent of 100) for ten years as interest. At the end of tenth year, the bondholder is also
entitled to receive back the invested amount of 100. Irrespective of the level of profits or losses, which the company makes during that period of ten
years, the bondholder is entitled to receive the coupon interest during that period. If the company fails to pay the coupon interest or the redemption
value, at the end of term, the bondholder can take legal recourse against the company. Thus, from the viewpoint of the provider of the debt capital,
debt capital is less risky in comparison to equity capital. It has a further advantage over equity capital from the point of view of the firm. This
advantage relates to the differential tax treatment of interest payments on debt and dividend payments on equity. The interest payments on debt
are said to be tax-deductible, which means that the interest payments are deducted from total income to arrive at the taxable income of the
company. In contrast, dividend payments are not tax-deductible. Thus, two companies with identical operating incomes, but which differ in terms of
their level of debt, will have different taxable incomes and therefore, different After Tax Income computation. This tax deductibility of debt payments
means that the debt capital provides a 'tax-shield' which is not provided by the equity capital and, thus, further lowers the (after-tax) cost of debt
from the point of view of the firm. Bonds are negotiable promissory notes that can be used by individuals, business firms, governments or
government agencies. Bonds issued can be secured or unsecured bonds. In case of a bond, the rate of interest is fixed and is known to the investors.
A bond is redeemable after a specific period. The expected cash flows consist of interest payments plus repayment of principal. Interest is usually
payable at fixed intervals (semi-annual, annual, sometimes monthly). The holder of the bond is the lender (creditor), and the issuer of the bond is the
borrower (debtor). Bonds provide the borrower with external funds to finance long-term investments. Certificates of deposit (CDs) or short term
commercial paper are considered to be money market instruments and not bonds: the main difference is in the length of the term of the instrument.
As the ownership of the bond can be transferred, it is highly liquid in the secondary market. A bond might be sold at above or below par (the amount
paid out at maturity), but the market price will approach par value as the bond approaches maturity
BONDS AND DEBENTURES
The mix of debt and equity of a company is called capital structure of a company. Debt capital is preferable to equity capital both to the company and
the investors as the bond holder gets interest on the bonds irrespective of the amount of profit. He can also force the company to go in for
liquidation. For the company, the debt capital is preferable, due to tax planning, as interest paid is an expenditure on which no tax is required to be
paid. The debt capital has normally the lower overall cost compared with the equity capital. Main components of the debt capital are bonds and
debentures. The buyers of the bonds and debentures, issued by a company are called creditors of the company, who lend money to the company.
The specific interest rate that is carried by a bond is called 'coupon rate'. Various terms are used in the context of bonds that include face value,
redemption value, redemption at discount, redemption at a premium etc. Rate of interest on bonds is fixed.
Face value of a bond and the maturity : The value that is written on the face of the bond is called face value. This value represents the amount that
a company has to return to the bond holder after the specified time period. A specified time period at the end of which the repayment of the face
value is to be made is called 'maturity'.
Redemption and value for redemption : The bonds are repayable according to the terms on which these are issued. The value of bond, which the
bond holders get on maturity of the bond, is known as 'redemption value'. The bonds can be redeemed at a premium or at a discount.
Bond redeemable at premium means the value to be returned to the bond holder would be higher than the face value. Bond
redeemable at discount means the value to be returned to the bond holder would be lower than the face value.
Failure of a company to redeem the bonds : If a company fails to makepayment of interest or principal, the company may be forced to in to
bankruptcy as per the prevailingprovisions of the law includingliquidation.
Terms associated with Bonds
Coupon rate : It is interest rate specified in the bond and the fixed income is dependent on this rate.
Yield to maturity: It is the discount rate which makes the present value of the bond's payment equal to its price. It is a
measure of the average rate of return an investor earns over the bond's life, if it is held till maturity.
Current yield : It is the current return and does not take into account the bond price fluctuations.
Effective yield : Actual yield (instead of the nominal amount) compared to the market situation. It can be less or more than the
current yield.
Rate of return : It is calculated for any particular holding period and is based on the actual income and the capital gain or loss on
the bond over that period.
YIELD TO MATURITY YTM : YTM is the rate of return that an investor can earn, when he purchases a bond and holds it till its maturity. In other
words, it is the discount rate, which equals the present value of the expected cash flows to the current market price or the purchase price.
When an investor expects the rate of return on purchase of a bond, equal to the coupon rate, the value of the bond is equal to its par value. On
the other hand when an investor expects the rate of return on purchase of a bond, more than the coupon rate, the value of the bond is, less than
its par value. Similarly, when an investor expects the rate of return on purchase of a bond, less than the coupon rate, the value of the bond is more
than its par value.When the required rate of return is more than the coupon rate and as the maturity approaches the discount on bond declines.
When the required rate of return is less than the coupon rate and as the maturity approaches, the discount on bond increases. The bond price is
inversely proportional to its yield to maturity.
BOND VALUATION
Loans can be raised by the Govt. and corporations in the form of Bonds. Bonds are the instrument of borrowing with fixed
maturity, fixed value at maturity and interest payment. These are redeemed at par. In return, the Govt. makes promise to return a
specific amount to the bond holders (who are lenders).
Regular payment on the bonds in the form of interest on bonds is called coupon. On maturity the bond holder receives the face
value of the bond.
Let us take an example that a 6% bond is issued by RBI with a face value of Rs.1000 with a maturity period of 3 years. Investor
here gets Rs.1000 on maturity in addition to annual payment of Rs.60 being the coupon.
Calculation of value of bond
Question : Bank purchased 10% 3-year bond with face value of Rs.10000. The current rate of interest (or required rate of return)
on the bond is 8%. What is the present value of the bond.
Solution : Present value = present value of annual coupons + present value of face value on maturity
PV = 1000 (PVIFA 8%, 3 years) + 10000 (PVIF 8%, 3 years)
PV = 1000 (2.577) + 10000 (0.794) (factors taken from PV and FV Value Tables)
PV = 2577 + 7940 = Rs. 10517
Calculation of value with semi-annual interest:
In the above question, the semi-annual interest value can be calculated as under:
The rate of interest will be halved from 8% to 4%, the coupon amount will be halved to Rs.500 and no. of period would be doubled
from 3 years to 6 half years).
PV = 500 (PVIFA 4%, 6 years) + 10000 (PVIF 4%, 6 years)
PV = 500 (5.242) + 10000 (0.790) = 2621 + 7900 = 10521
Current yield
The current yield on a bond could be less than or more than the yield to maturity. For instance, if a bond is issued for Rs.1000 for 3
t d d d
years at 10% coupon, its return would be Rs.100 at the end of 1s , 2' year and 3r year. In the 3r year the face value will also be
received by the bond hold. Hence the return is 10%.
Now let us assume that some one else purchases this bond for Rs.1136.16. The return on this investment shall not be 10% because
this time the return of Rs.100 will be available for an investment of Rs.1136.16.
Current Yield = coupon amount / purchase price x 100 = 100 / 1136.16 x 100 = 8.8%.
Rate of return
The rate of return takes into account the capital gain or capital loss also.
For example, if an investor purchases 6% bond with a 3 year maturity for Rs.1010.77. He sells it for Rs.1020 next year. The return of
this investor is not only Rs.60 being interest he has earned for one but also the difference in price at which purchased and sold (i.e.
capital gains in this case) of Rs.9.33 (1020 -1010.77). Rate of return = (coupon income + price change)/ investment
Rate of return = (60 + 9.33)/ 1010.77 = 0.686 or 6.86%
Yield to maturity (YTM)

YTM is the rate of return or discount rate earned by an investor which equals the present value of future cash flows to the current
market price / purchase price.
Example Bank purchased for Rs.85, a Rs.100 bond with 8% p.a. coupon rate and maturity period of 9
years. Find out the rate of return (i.e. YTM) if the bond is held till maturity.
Solution : In this case the YTM will be calculated as under: (kd means YTM)
85 = 8 (PVIFA kd%, 9 years) + 100 (PVIF kd%, 9 years).
For calculation of actual YTM, we assume 2 YTM of 12% and 10%.
At 12% discount rate the present value will be: (The factor values have been taken from Tables)
= 8 (PVIFA 12%, 9 years) + 100 (PVIF 12%, 9 years).
= 8 x 5.328 + 100 x 0.361 = 42.62 + 36.10 = 78.72
At 10% discount rate the present value will be:
= 8 (PVIFA 10%, 9 years) + 100 (PVIF 10%, 9 years).
= 8 x 5.759 + 100 x 0.424 = 46.37 + 42.10 = 88.47
It can be observed that the purchase price of Rs.85 falls within the above value of Rs.78.72 and Rs.88.47. With the help of following,
we can calculate the YTM:
Kd = Lower discount rate + different between 2 discount rates x (PV at lower discount rate - CMP / absolute difference in PV)
Kd = 10 + (12-10) x (88.47 85.00 /88.47 78.72) Kd = 10 + (2) x 3.47/ 9.75)
Kd = 10 + (2 x 0.356) = 10 + 0.712 = 10.71%
Theorems on Bond value - Important points to remember:
1. When an investor expects the rate of return (say 10%) on purchase of a bond, equal to the coupon rate (say 10%), the value
of the bond is equal to its par value.
Example : Bank purchased 3 year bonds with face value of Rs.100. The coupon rate is 10% and current market interest is 10%.
Calculate the present value of the bond.
PV = FV/(1 r) Here the annual coupon is Rs.10. At the end of 3rd year the bank receives Rs.100 +
10. r = Discount rate.
PV = Rs.10 + R$.10 + Rs.110
z
(1+r) (1+r) (1+r)3
PV = Rs<10, + Rs.10 + ___
2 3
(1+0.1) (1+0.1) (1+0.1)
PV = a.10 + R5,110
1.10 1.21 1.331
.
9.09 4 826 + 82.65 = 100
2. When an investor expects the rate of return on purchase (say 11%) of a bond, more than the coupon rate (say 10%), the value
of the bond is, less than its par value.
PV = FV/(1 r) n Irere the annual coupon Is rzs.n. At the end of 3rd year the bank receives Rs.100 ' 10. r
Discount rate.
3
PV &5, 9, + P5..110
2 1
(1+0 (1+r) (1+0
.PV = R$.111. RS,.11.0
3
(1+0.11) (1.+0.11):' (14-0,1,1)
PV R.U..LQ
1.11 1.2321, 1.3075
9.01 + 8,12 x 80.43 = 97.56 (Hence the value is less than the par value)
3. When an investor expects the rate of return on purchase (say 9%) of a bond, less than the co-upon rate (say 10%), the value of
the bond is more than its par value.
PV = FV/(1 r) " Here We annual coupon is Rs.10. At the end of 3rd year the bank receives Rs.100 +
10, r = Discount rate.
PV = Rs,10 + Rs,,11.0.
2 3
(1+0 (1+r) (1+r)
AV 7-- Rs.10 + Rs.10 + Rs.110
2 3
(1+0.09) (1+0.09) (1+0.09)
PV = Rs,10 ,Rs,10 + Rs.110 1
1.09 1.1881 1.2950
9.17 + 8.42 + 84.94 = 102.53 (Hence the value is more than the par value)
Interest rate risk

The YTM of bond fluctuate with the interest rate movement due to which the bond investment carries interest rate movement risk.
With market interest rate falling, the investors of bonds, gain. On the other hand with increase in current market interest rates, the
investor are bound to lose.
Duration of bond
The holding period for which the interest rate risk disappears is called 'duration of a bond'. Hence, it is expressed in time period.
The duration has following properties:
1. Duration period isles than the maturity period.
2. On a zero coupon bond, the bond duration = maturity period
3. In case of a perpetual bond, the duration = 1 + r / r. (r is current yield)
4. Difference between duration and given maturity period is greater if the coupon paying bonds' term to maturity is longer.
5. Duration and yield to maturity are inversely related.
6. The duration is smaller when coupon rate is larger.
7. With increase in frequency of coupon payments, the duration decreases.
8. Duration of the bond declines, when the bond approaches maturity.
Calculation of duration : The duration can be calculated by
(a) determining the cash flows from the holding bond
(b) determining the present value of these cash flows by discounting the flows with the discount rate (YTM)
(c) multiplying each of the present value by respective no. of years left before the present value is received
(d) adding these products and dividing the present value to get the duration. The procedure is given in the example below.
Example : Bank holds 3 years bonds with face value of Rs.1000 and coupon rate of 6% payable half-yearly. The current yield is 10%
on this bond.
1. What is the present market value of the bond?- a Rs.1000 b R s . 9 4 2 . 3 4 c Rs.898.49 d Rs.857.91
Solution : Annual coupon is Rs.60 (1000 x 6%). Hence Half yearly = Rs.30. Period as per
Macaulay's duration method is given in negative.
1 2 3 4 5 6
PV / Price i.e.
Present Value 898.49
Present value /Price) x
Period (HY) Coupon in Rs. of coupon (2
Factor period [ 1 x 5
x 3) Dur ati o n ( PV j ____________
-0.50 30.00 0.952381 28.57 0.0318 -0.0159
-1.00 30.00 0.907029 27.21 0.0303 -0.0303
-1.50 30.00 0.863838 25.92 0.0288 -0.0433
-2.00 30.00 0.822702 24.68 0.0275 -0.0549
-2.50 30.00 0.783526 23.51 0.0262 -0.0654
-3.00 30.00 0.746215 768.60 0.8554 -2.5663
Total 898.49 1.000 -2.7761
2. What is the duration in the above case:
a 3 years b 2.9054 years c 2.7761 years d 2.6190 years
3. Calculate the modified duration in the above case: a 3 years b 2.9054 years c 2.7761 years d 2.6190 years
Solution : Modified duration or MD = duration / (1 + r) = 2.7761 / 1.06 = 2.6190
4. In the above case, if the yield changes from 10% to 10.5% what will be percentage in value:
a 1.3095% b 1.2293% c 1.1205% d 1.0000%
Solution : Percentage change in value = MD x numerical change in the stated yield = 2.6 190 x 0.5 = 1.3095 %
5. What will be change in the value of the bond? - a Rs.10.00 b Rs.10.50 c Rs.11.21 d Rs.11.77
Solution : Change in value of bond = Value x percentage change = 898.49 x 1.3095= 11.77
6. What will be the new value of bond after increase in yield from 10% to 10.5% - a 898.49 b 892.13 c 886.82 d 871.13
Solution Original valuechangein value= 898.49 11.77= 886.82
Answers: 1-c 2-c 3-d 4-a 5-d 6-c
Bond Price Volatility
The sensitivity of the bond price to changes in the interest rates is called Bond Volatility.
The extent of change in the bond prices for a change in YTM measures the interest rate risk of a bond. The
interest rate risk is function of interest rate elasticity. Interest rate elasticity is always a negative number due
to inverse relationship between YTM and bond price. Interest rate elasticity is calculated as:
Interest rate elasticity = %age change in price for bond in price t / %age change in YTM for
bond.
Example : Bank has a 10% 10 year bond with face value of Rs.100. If the current market rate changes from
10% to 11%, the price of the bond will change:
= 10 x PVIFA (11%, 10) + 100x PVIF (11%, 10) = 94.09.
Interest rate elasticity = %age change in price for bond in price t / %age change in YTM for bond.
Interest rate elasticity = (-5.91 / 100) x 100 10% = 5.91%..
3. CAPITAL BUDGETING
Money has a time value, i.e. a given sum of money has greater value if it is received earlier as it can be profitability invested. To illustrate,
consider an investor, who is evaluating an investment opportunity that requires an immediate outlay of Z 1,00,000, that will generate
income in subsequent years. In deciding whether to go ahead with the investment, the investor will be concerned with how much income
generation will be there in the future. A rational investor will be unwilling to undertake the investment if he knows that he will receive less
than what he can earn as interest.
Thus, if the project has the life of one year, P is the immediate outlay and r is the rate of interest, his return should be more than the
sum F, where
F = P(1 + r) = (1,00,000)(1 + .10) = 1,10,000 (current rate of interest r = 10%)
And if the project has the life of 2 year, and the rerurn is only at the end of 2 years, his return should be more than the sum F, where
2 2 2
F = P (1 + r) = 1,00,000 (1 + r) = 1,00,000 (1 + .10) = 1,21,000
Clearly, if the investor has to choose the project, he has to compare the yield on the investment to the yield from project's cash flow, i.e. if
the project has the life of two years then his return should be more than 1,21,000. This illustration clarifies the importance of the timing
of the receipt or expenditure of cash flows and that it is not sufficient to treat the money to be received in the future as having the same
value as the money to be received immediately. If the decision maker is to be able to make a choice about whether to go ahead with an
investment or is to be able to rank the investment opportunities where there is more than one alternative, then a way must be found to
allow money to be received at different points of time to be compared. One way of making the comparison is to use the approach
adopted above; namely to work out what the value of money to be received now will be at any point in the future.
Capital Budgeting is the process of planning capital investment, which will have a regular and recurring stream of returns over a series
of years in future. It is defined as use of today's funds to generate tomorrow's profits. The purpose of such investments may be for
following:
a) Expansion : Expansion of the capacity.
b) Diversification : Diversifying into new product lines,
c) Replacement : Replacement of capital assets.
A single investment possibility is referred as a project. The object of appraising a project is to provide whether to accept it or reject it.
The rule, however, remains the profitability of the project i.e. relating cash-in-flows over the life of project with its cash-out-flows or
outlays.
There are 2 types of appraisal techniques to evaluate capital budgeting decisions : (a) conventional method and discounted cash flow.
The conventional method include (i) return on capital or investment and (ii) payback period and discounted cash flow methods include
(i) net present value and (ii) internal rate of return.
DISCOUNTED CASH FLOW TECHNIQUES

Financing fixed assets either by replacement of existing assets or addition of new assets forms part of any company's overall capital budget and
this kind of budgeting is extremely difficult due to uncertainties of future economic conditions and need for ensuring reasonable return on the
long term investment. The capital budgeting decisions are based on (a) conventional method of (i) return on capital or investment and (ii) payback
period and (b) discounted cash flow methods of (i) net present value and (ii) internal rate of return.
CONVENTIONAL METHODS - RETURN ON CAPITAL OR INVESTMENT
This is calculated as a percentage of operating profit on total investment and is a crude
method of estimating financial viability of the project and suffers from following:
a the percentage indicator will vary from year to year in view of the variations in operating profit. It may be difficult to identify one figure which
correctly represents the return on the total capital employed.
b The term capital is vague and is subject to more than one interpretation. It is not clear whether the return should be calculated on the equity
capital or total owned resources plus borrowed funds.
C it is not clear as to what should be operating period of the project on which the return on capital should be calculated. There is no basic
assumption regarding the total economic life of the project in this technique.
d It ignores the time value of money concept. A rupee earned tomorrow is worth fess than a rupee in hand today. Earlier we get the
return, it carries greater value to us.
CONVENTIONAL METHODS - PAYBACK METHOD
It is commonly used method of investment appraisal in view of the simple mode of its calculation. The payback period represents the number of
years it takes for the operating earnings from a project to recoup the total investment on the project and is computed taking into account:
Net investment / Profit before depreciation and tax = Payback period (years).
The method is useful both for firms with plenty of investment opportunities but limited financial resources and for those projects which have
obsolescence risk i.e. larger wear and tear.
The method has following limitations:
a It can lead to incorrect ranking of industrial projects as the method ignores return of the project after the payback period.
b The method does not give us any objective cut-off criterion. What should be the minimum or maximum payback ?
c The projects which have low return initially but a longer economic life may be preferable to those projects which have high
earning capacity initially but have shorter life span.
d This method like return on investment ignores the time value of money.
eThis method attaches undue importance to the quick yield and gives the impression that the projects have little or no development significant. It
is a not enough to recoup the investment. The principal concern of the investor is to optimise the return/benefits. In view of the aforesaid
limitations, the payback method is better accepted as a secondary method of investment appraisal rather than the final criterion for investment.
The calculation is made from the year investment is made to the period when the capital has been recovered plus the project has
yielded a minimum return on the investment. This can be examined in the light of the following:
Discounted Cumulative
present value
Year Cash flow Present value of Re.1 at 11% cash flow

0 (2500) 1.000 ( (2500)
2
1 1000 0.901 9 (1599)
2 1000 0.812 8 ( 787)
3 1000 0.731 7 ( 56)
4 1000 0.659 6 603
The payback of 3.1 years in the above project = 5
3 + 56/659 = 3.085 (say 3.1 years)
DISCOUNTED CASH FLOW METHODS

It is stated to be realistic and rational method of investment appraisal and takes into account the actual timing of cash outgo and cash inflow. It is
rational as it fulfills the needs of modern financial management and economic analysis of projects. Any investment appraisal technique should
serve the objective that it should help the analyst in ranking projects in order of preference and it should give a cut-off criterion which should be
used to accept or reject the project. The DCF techniques can meet these objectives.
The technique involves discounting cash flows at discount rate carefully selected taking into account the prevailing cost of credit or
the return from competing projects within the frame-work of undernoted assumptions:
a DCF technique clearly recognises the time value of money. Both the compounding and discounting processes may be used to express the time
value of money. In compounding, the present sum grows as the interest at a given rate is added. Discounting is reverse of compounding.
From a future value the present value is determined at a discount rate.
b DCF focus attention on cash receipts and expenditures as against profits after depreciation on accrual basis of receipts and
expenses.
c it is assumed that all operating cash inflows or outflows are assumed to take place at the end of the year in question, for
simplifying the calculations.
d The cost of capital, opportunity cost of capital or discount rate is selected by the management having regard to various relevant
factors.
DCF criteria is based on total cash flow over the life of the project and as such it is independent of annual variations of cash flows.
The important rules regarding application of DCF techniques are as under:
a Higher the rate of discount applied in calculation, the less point there is in spreading the exercise over distant years. This may be 50% for 7-8
years, 20% for 16-17 years and 12% for 25-26 years.
b Higher returns in later years of project's life do not materially affect the DCF rate. What really matters is the cash flow during the early years.
Or shorter the period during which positive returns are received, higher would be rate of return.
c Higher the rate of discount, the more important are the returns earned during the early years of an assets life.
Limitation of DCF
a The application of DCF technique has become primarily the function of the finance manager. Other departments of a project have little say in
assumptions selected for DCF calculations. This adversely affects the reliability of the DCF criterion. An acceptable DCF rate of return is one
which is the result of a composite managerial, economic and technical assessment of the project over a fairly long period. Such an integrated
forecast is the dream of every project analyst which is rarely realised.
b The external effects of the project such as pollution, noise congestion etc. are not ordinarily accounted for in DCF calculations for financial
analysis. As a result, the economic cost-benefit analysis is necessary. The full utility of DCF therefore depends on the fact whether or not the
exercise is comprehensive one including economic cost-benefit analysis, particularly in case of large and complex projects.
c Future being uncertain, no investment appraisal technique can accurately forecast the future viability of projects. Reliability of
DCF, as such, is no better than other conventional methods.
d It is difficult to estimate the economic life of a project. Some assets depreciate faster than others. Some projects need major
replacement or renovation within 4-5 years of their working. No general rule such as assumption of project life of 15 years in
all cases, would yield a helpful solution.
e Irregular cash flows including a negative cash flow following some positive flows, pose a problem, which would yield more than
one IRR.
f There is an unresolved controversy whether or not inflation should be taken into account while finalising cash outlays for DCF. it
is claimed that inflation has come to stay and any financial forecasting which does not take into account the impact of inflation
is by and large meaningless.
g It is difficult to forecast the future salvage/terminal value of assets. The current practice of valuing fixed assets only at 5% of their
original value is somewhat arbitrary.
There are two principal measure of DCF, namely Net Present Value and Internal Rate of Return:
DISCOUNTED CASH FLOW (DCF) METHODS
DCF takes into account the actual timing of cash outgo and cash inflow. It is based on total cash flow over the life of the project.
There are two principal measures of DCF, i.e. NPV & IRR.
Net present value (NPV) : NPV is the difference between cash outflows at base period and present value of future cash inflows. It
helps the bank to ascertain, whether a oroject should be taken up for financing or not.
Project A Project B
Year Discount rate Cash inflow NPV (DCF) 10% Cash inflow NPV
0 5000 (-)5000 -5000 (-) 5000

1 0.91 1100 1000 1125 1024
2 0.83 1210 1000 1235 2025
3 0.75 1330 999 1355 1016
4 0.68 1460 997 1485 1010
5 0.62 1500 931 1525 945
Total 6600 4927 6725 5020
Net present value 4927 - 5000 = (-) 73 5020-5000 = 20

This is initial investment in the project is an outflow.
In project A while the cash outflow is 5000 (original investment), the future cash inflow is 6600 and its net present value at 10% discount
rate is 4927. Hence the NPV is less than Zero (i.e. 73). On the other hand, for project B, against cash outflow of 5000, the net present
value of the inflow of 6725 is 5020 which is more than Zero. Hence, the project B can be taken up for financing.
If the above project had positive NPV and many other projects also had positive NPVs the choice would be limited by raising the discount rate
and by selecting that project which has the highest present value relative to investment expenditure. For calculating NPV, we require a statement
of cash outgoes and inflows, assumptions regarding total economic life of the project and a rate of discount. The selection of economic life and
rate of discount can pose certain problems.
In the case of industrial projects, it is customary to assume a working life of 10-20 years depending upon the expected life of the equipment. The
selection of rate of discount depends on a composite of factors such as:
a Weighted average of the borrowing rate for funds.
b The expected rate of return from the competing projects.
c The company's internal record of growth.
d An acceptable price earnings ratio for equity shares and
e The industrial growth rate assumption accepted by the government or planning authorities.
INTERNAL.RATEOFRETURN (IRR)
IRR is the rate of discount that makes the discounted value of the net cash flow from a project just equal to the amount which has
to be invested to obtain that net cash flow.
It is also that rate of discount which gives the project NPV equal to zero and the cost benefit ratio equal to one.
In the illustration given above for Project-A, where the cash flow revealed negative NPV of 73, the IRR would work out to 8.15%.
The rate of discount would make the outflow (Rs.5000) equal to the total flow of positive returns. But the rate being below 10%,
which is the assumed cost of capital, the proposal would be rejected. We can consider another illustration:
The IRR can be calculated, for another project assuming discount rate of 30% and 35%, as under:
1 2 3 4 5 6
Year Cash flow Discount factor Discounted or Discount factor Discounted or
(30%) present value - (35%) present value -
0 -1500 - 1500 1500
1 500 0.769 384 0.741 370
2 750 0.592 444 0.549 412
3 1000 0.455 455 0.406 406
4 1000 0.350 350 0.301 301
NPV 133 -11
On the basis of NPV and discount rates, the IRR shall be calculated. It should be between 30% and 35%, as under:
Lower Difference Net present value of the cash flow at

Discount between X lower discount rate / Absolute
Rate the two difference between the NPV of cash
discount flow stream at the two discount rate
rates
= 30 a- 5 (133/144) = 30 + 5 (.924) = 34.62%
Limitation of IRR method :
1. When done manually, It is very time consuming. First we have to calculate NPV by using 2 discount rates (which must be
positive for one discount rate and negative for another discount rate) and then through interpolation, the IRR is calculated. (but if
done by using MS Excel in computer, the calculation is very fast).
2. The relationship between NPV and discount rate is not linear (one point decrease in discount rate does not lead to same
increase in NPV). Hence use of extrapolation can lead to approximate and not the exact result. At 30% discount rate, the NPV is
133 and at 35% discount rate it is -11. Hence, increase in discount rate from 30% to 35% leads to fall in NPV of 144 (absolute
difference between 133 and -11). If a linear relationship is assumed, the increase in discount rate from 30% to 35%, should lead to
increase in NPV to 0.924 (133/ 144 = 0.924%) x 5% = 4.62%. Hence IRR appx should be 30 + 4.62 = 34.62%
Investment decisions under Uncertain conditions
In conditions of certainty, the investment decision can be taken on the basis of net present value and IRR parameters,. But when
the cash flows are uncertain and depend on a no. of factors, the following methods can be used:
1. Expected net present value (ENPV) rule
2. Risk adjusted discount rate approach
3. sensitivity analysis.
1. Expected net present value (ENPV) rule:
In this approach, the investment decision will be taken on the basis of multiple set of cash flow estimates taking into account
different scenarios.
Example A company has an investment option and there are two important factors that can impact this (a) the economic activity
level (b) competitive products launched by competitor. The economic activity can be with a normal annual growth of 20% and
abnormal growth of 40%. Similarly the chances of introduction of new product are 20% in one case and 50% in other case. The life
of product is assumed as 3 years.
Situation Competitive Product (40% No competition (60% chances)

chances)
Rising Economy (10% growth) 10 x 40 = 4% 10 x 60= 6%
Rising Economy (20% growth) 20 x 40 = 8% 20 x 60 = 12%
Decision making : Based on the above, decision can be taken as under:

1. For independent project = Those projects can be taken up where the NPV is positive and those can be rejected, where is
negative. 2. For mutually exclusive investment = Projects with highest ENPV can be taken up if it is positive.
2. Risk adjusted discount rate approach for NPV determination:
The risk averse investor require higher rate of return to compensate them for taking on that risk. The following method can be
followed:
1. Determine the rate of return, required to take up the investment with zero risk
2. add on this rate of return to the risk premium.
3. This rate is to be taken for the discount rate at which NPV is to be calculated. Illustration:
Type of project Class of Risk premium Risk free rate Discount rate (risk premium + risk
_ risk (%) (%) free rate)._
Repayment of bank Low 1 10 11
loan
Modernisation Medium 3 10 13
Increase in sale volume High 5 10 15
Introduction of new Very high 7 10 17
product
Decision making : Decision would be on the basis of acceptable discount rate.
3. Sensitivity analysis for NPV determination:
The objective of this approach is to identify the factors that are most sensitive to the profitability from the investment.
Under this method the following process is followed:
1. Beginning is made with best estimates of the various cash flow.
2. In sensitivity analysis, each of the information used in NPV calculation is varied one at a time, (by keeping others constant) to
determine its impact on the NPV.
Item Original cash Cash flow value at which

flow % age change
estimate NPV = 0
Cost of fixed assets 2000 2500 25%
Labour cost 100 150 50%
Raw material cost 50 70 40%
Sales Revenue 500 400 20%
The investor makes use of this information for the purpose of decision making.
4. DEPRECIATION AND DEPRECIATION ACCOUNTING

MEANING OF DEPRECIATION
Depreciation is a charge to profit and loss account for the fall in value of an asset during each year of its use.
The Institute of Chartered Accountants of England and Wales defines depreciation as follows:
`Depreciation represents that part of the cost of the fixed asset to its owner which is not recoverable when the asset is finally put out
of use by him. Provision against this loss of capital is an integral cost of conducting the business during the effective commercial life
of the asset and is not dependent upon the amount of profit earned.'
The above definition brings out the following facts about depreciation:
(i) Depreciation is a part of the operating cost.
(ii) It is a reduction in the value of the asset.
(iii) The decrease in the value of an asset is due to its use, caused by wear and tear, or by other reasons.
(iv) The decrease in the value of an asset is gradual and continuous.
Depreciation means reduction in the value of a fixed asset over the years. This is a continuing process due to which the book value of the assets
declines. The rate at which this value declines varies from asset to asset depending upon a number of factors such as wear and tear, passage of
time, obsolescence, fall in market price etc. Charging depreciation is a process of distribution of cost of the fixed assets over the useful life of the
asset.
Objective of charging depreciation
The depreciation is charged in order to ascertain the profit and loss appropriately, record proper value of the assets and retain
profits for replacement of the asset.
Basis for charging depreciation:
The elements that are taken into account for fixation of rate of depreciation and charging the depreciation are (a) the original cost of the assets
(including installation etc), (b) the expected time period for commercial use of the asset and (c) expected sale value (called scrap value) at the end
of the commercial use of the asset. The depreciation is debited to the profit and loss account and credited to respective fixed asset account.
Methods of charging depreciation
There are a number of methods for charging depreciation, which include:
1. Straight Line Method
2, Declining balance method (or written down value method)
3. Double declining balance method
4. Accelerate depreciation
5. Sum of the years' digits.
Important terms:
1, Original cost (new machinery) = Invoice cost + tax + transportation charges Installation charges
nd
2. Original cost (2 hand machinery ) = Contract price + renovation or repair before installation + tra nsportation charges +
Installation charges
3. Written down value = Original cost amount of deprecation
4. Scrap value = The amount which is expected to be realized by sale of the asset, at the end of useful years of life of the asset.
5. Calculation of depreciation rate percent = 100 / no. of useful years of life of asset. (Example No. of years = 8. Rate of
depreciation = 100 / 8 = 12,5% )
6. Amount of Depreciation if scrap value is not given = (Original cost) / estimated useful life (Example No. of years = 8.
Original cost = Rs.100000. Amount of depreciation = 100000 / 8 = Rs.12500
7. Amount of Depreciation if scrap value is given = (Original cost scrap value) / estimated useful life
Example No. of years = 8. Original cost = 100000. Scrap value = 20000. Amount of depreciation = 80000 / = Rs.10000
Methods of Depreciation
Straight Line Method or fixed instalment method
Under SLM method, the depreciation is charged on the original value of the asset inclusive of its installation and transportation
cost but excluding scrap value, if any. For example, an asset has been purchased for Rs.2 lac including tax and Rs.10000 has been
incurred on its installation and another Rs.5000 on its transportation etc. If it is also estimated that its scrap value is Rs.35000, at
the end of 4 years' commercial use, the amount of annual depreciation would be Rs.45000 ((200000+10000+5000-35000)/4).
Merit of the SLM:
(1). It is very simple method. (2) The depreciation is calculated on original cost. (3) Depreciation is equal for all year. (1) Value will
be reduced to Zero at end of the useful life of the asset.
Demerits: (1) Interest on capital is not taken into account. (2) Although depreciation is same, but expenditure on repair and
renovation increases with passage of time.
Written down value method or diminishing balance method
Under WDV method depreciation is charged at fixed rate on the reducing balance (called written down balance i.e. original cost less
depreciation). This also means that the cost of the asset reduced by the scrap value is to be written off over its expected commercial
nd
life. In the above example, the rate of depreciation of 25% will be applied on Rs.180000 during the first year, while during the 2
year it will be on Rs.135000 (180000-45000), when the amount of depreciation would be Rs.33750 (25% of Rs.135000).
The depreciation is calculated on written down value i.e. reducing balance. Hence, the amount of depreciation from year to year
will be different and it will never be Zero.
Merit of the SLM:
(1). The depreciation is calculated on depreciated value i.e. reducing balance (3) The amount of depreciation from year to year
wilt be different i.e. declining (3) The value will never be Zero.
Demerits: (1) The asset value will never be zero.
Double declining balance method
Under double declining balance method, the depreciation is charged as under:
1. Calculate the depreciation as per SLM method.
2. The amount of depreciation charged in the first year will be double of this amount.
3. Calculate the rate of depreciation in %age terms.
4. Apply the rate for charging depreciation for the remaining years.
5. When the written down value remains less than the amount of depreciation as per SLM, the entire amount of WDV will
become amount of depreciation.
The process is explained as under: Example:
A machinery costs Rs.1 lac. The first year depreciation is Rs.20000 under SLM. Calculate depreciation for all the years:
Solution:
Depreciation for first year = 20000 x 2 = 40000. (Depreciation % = 40000 / 100000 = 40%)
Written down value = 100000 40000 = 60000
nd
Depredation for 2 year = 60000 x 40% = 24000
d
Depreciation for 3r year = 36000 x 40% = 14400
th
Depreciation for 4 year = 21600 x 40% = 8640
Depreciation for 5th year = 12960 x 40% = 5184. But depreciation for 5th year would be Rs.12960 (as the WDV is less than the
amount of depreciation as per Straight Line Method).
Sum of the years' Digits
This method is used where higher amount of depreciation is to be charged initially and greater tax benefit is to be taken in early
years. The calculation is as under:
1. Estimate the expected life of the assets.
2. Count back to one and add the figures together.
3. Make the calculation as under: Exa rnple:
A machinery costs Rs.63000 lac. Its useful life is estimated as 6 years. Calculate depreciation as per sum of years digit.
Solution:
st
6 year useful life = 6 + 5 + 4+ 3 + 2 + 1 = 21 1 year depreciation =
/16
6/21 x 63000 = 18000 2 year depreciation = 5/21 x 63000 = 15000
3'3 year depreciation = 4/21 x 63000 = 12000

th
4 year depreciation = 3/21 x 63000 = 9000
th
5 year depredation = 2/21 x 63000 = 6000
6th year depreciation = 1/21 x 63000 = 3000
Accelerated depreciation
This method is used for faster write-off of assets (like computers) compared to straight line method. in other words there is
greater tax shield.
Change in method of depreciation from one method to another:
The method of depreciation can be changed both with prospective effect (for future) or with retrospective effect (from past
date). In case of retrospective effect, it will be essential to adjust the depredation already charged till the date of change. For
that purpose, we have to calculate the amount of depreciation according to the old method, and as per proposed method.
The difference in both the calculations will be adjusted by debiting or crediting the asset account and crediting and debiting
the depreciation head in the profit and loss account. In the subsequent period, the depreciation will be charged according to
the new method, For instance, for a machinery purchased for Rs.2 lac (commercial life 5 years and no scrap value), when
t
depreciation method during the 1' two years is SLM and subsequently changed to WDV, the following adjustment would be
needed.
5
Amount of depreciation for 1 ` two years would be Rs.40000 x 2 = P.s.80000 and written down value of the asset Rs.120000 (2 lac
d
80000). The amount of depreciation for the 3' year would be Rs.30000 (25% of WDV of Rs.120000). This will result in increase
I
in profit by Rs.10000 in the V year because in the SLM, the amount of depreciation would have been Rs.40000.
Effect of shift from one method to another : Whenever there is shift in method of depreciation from SLM to WDV, the amount of
depreciation declines, due to which the profit increases along with increase in the written down value of the asset. This also
increases the net worth of the promoters of the business.
On the other hand, a shift from WDV to SLM method increases the amount of depreciation and reduces the profit, book value of
the assets and net worth.
Depredation Accounting
Depreciation is a charge on profit and loss account. It represents that part of the cost of the fixed asset to its owner which is not
recoverable when the asset is finally put out of use by him.
This means that (a) depreciation is a part of the operating cost (b) it is reduction in value of the asset. Causes of
depreciation:
1. Wear and tear due to use
2. Passage of time
3. Obsolescence i.e. something new has been developed.
4. Accident
Objective of charging depreciation
The depreciation is charged in order to (a) ascertain the profit and loss appropriately, (b) record proper value of the assets and (c)
retain profits for replacement of the asset.
Accounting entries or Journal entries:
Depreciation Dr
To fixed asset account Cr.
Solved Examples
1 Machinery worth Rs.82000 is purchased and the firm spent Rs.8000 on its installation. Its effective
rd
commercial life is estimated as 10 years and scrap value Rs.10000. What will be written down value at the end of 3 year,
under straight line method?.
w
Answer The amount of annual depreciation would be Rs.8000 (820008000-10000, divided by 10). For 3 years it will be
Rs.24000 (8000 x 3).
The WDV would be Rs.66000 (90000-24000).
2 In the above question, if the method would have been written down value method, what would be the amount of depreciation
for 3 years and WDV of the machinery?
st nd d
Answer For 1 year the amount of depreciation would be Rs.8000, for 2 year Rs.7200 (80000-8000 x 10%) and for 3r year
Rs.6480 (72000-7200 x 10%). The total depreciation for three years would be Rs.21680. There would be saving of Rs.2320
(24000-21680) on account of change in the method of depreciation. To that extent profit would increase along with the WDV
of the fixed asset.
3 A firm purchased machinery worth Rs.76000 on January 01, 2003 and its life is expected to be 8 years, with scrap value at the
end Rs.12000. What is amount of depreciation.
Solution Depreciation = (Cost-Scrap value) / no. of years of expected economic life = 76000-12000 / 8
= Rs.8000 per annum
Accounting Standard (AS-6) relating to Depreciation
Accounting Standard is issued by Institute of Chartered Accountants of India. It deals with all depreciable assets excepts assets like
forests, plantations, wasting assets, expenditure on research and development, goodwill, livestock and land.
As per this standard, the depreciation is a measure of the wearing out, consumption or other loss of value of a depreciable asset
arising from use or obsolescence etc.
Depreciable assets are those that are expected to be used during more than one accounting period and these have limited useful
life. These are held for use and not held for sale.
5. FOREIGN EXCHANGE ARITHMETIC

In banks, when we talk of 'Foreign Exchange', we refer to the general mechanism by which a bank converts the currency of one
country into that of another. Foreign trade gives rise to foreign exchange, Foreign trade is transacted (i.e. expressed and paid for)
either in the currency of the exporter's country or that of the importer's country or that of a third country (like Pound Sterling, US
Dollars, etc.), acceptable to both the exporter and the importer. In foreign trade, the exporter supplies the goods and the importer
has to make the payment of the price of those goods. The importer, however, will make the payment in his nation's currency and
the exporter will require the payment in his country's currency. This, therefore, involves the conversion of currencies and transfer
of funds from one country to another. Foreign exchange is thus, the concomitant of foreign trade. It is the general mechanism by
which the settlement of debt arising out of the operations of international trade, services and finance is effected. This requires the
conversion of the currency of one country into its equivalent in the currency ofanother country
Foreign Exchange is a commodity. Forex transactions (sale/purchase) are regulated in India under : FEMA 1999.Objective of FEMA:
To facilitate external trade and orderly management and development of inter-bank forex markets in India. Inter-bank forex market
regulated in India by : RBI. Inter-bank forex market timing: 9 am to 5 pm (Saturday-closed).Foreign Currency rates are fixed in India
by: Market forces of demand and supply (Higher demand - higher rate).Foreign trade is regulated by: DGFT. In India direct rates is
used W.e.f. 1.8.1993,.
Introduction
1. In India, forex transactions are subject to Foreign Exchange Management Act 1999.
2. The Act came into operation with effect from 1.6.2000.
3. The main objective of the Act is to ensure orderly conduct of forex transactions.
4. In India, exchange control is exercised by RBI and trade control is exercised by DGFT (Director General of Foreign Trade.
5. Only Authorised persons i.e. who are authorised by RBI can undertake forex transactions. Authorised persons would include
Authorised Dealers (AD) and Full fledged money changers.
6. Banks have three types of correspondent bank accounts namely Nostro, Vostro and Loro accounts.
7. Nostro account: It means our account with you. The account of a bank in India with a foreign correspondent bank abroad in
Foreign currency is called Nostro account. For example, account of PNB Delhi with City Bank New york.
8. Vostro account: It means your account with us. The account of a foreign correspondent bank abroad with a bank in India in
Indian Rupees will be a Vostro account. For example, account of City Bank New York with PNB Delhi.
9. Loro Account: Their account with them. For example, PNB has account with City Bank New York. For PNB, this account is
Nostro account. Similarly account of BOB with City Bank New York is Nostro account for BOB. Far PNB, this account of BOB
is Loro account.
Exchange Rates
1. Direct Rate: When foreign currency is fixed and value of home currency is variable, it is Direct rate e.g. US$1= Rs 61.43;
2. Indirect Rate: When home currency is fixed and value of foreign currency is variable, it is Indirect rate e.g. Rs 100= US $
1.63.
3. In India, direct rates are applied. When direct rates are applied, the principle is "Buy Low and Sell High".
4. In India, rates are determined by market forces of demand and supply and not by RBI or any other agency.
5. The exchange rate for purchase or sale of foreign currency are most unfavourable as holding cost of currency is high.
6. The difference between buying & selling rate is called Dealer's spread
DIRECT QUOTATION
In a direct quotation, there is a variable unit of the home currency and fixed unit of the foreign currency. When it is quoted that 1 US = Rs.49.10, it
is a direct quotation. With a view to make profit, the rule followed for quotation is buy low and sell high. For instance, if the US $ is purchased at
Rs.48.90 and sold at Rs.49.10, there will be gain to the dealer. By buying low, the dealer will be required to pay
lesser units of home currency and by selling high, he would receive more units of home currency.
INDIRECT QUOTATION
In an indirect quote, there is fixed unit of home currency and a variable unit of foreign currency. When Rs.100 = US $ 2.04 is quoted, it is a case of
indirect quotation. The principle followed in indirect quotation to earn profit is to buy high and sell low. By buying high, the dealer will get more
US $ per Rs.100 and by selling low he would have to part with lesser US $.
Direct Rates Indirect Rates

1 US $ = Rs.49.40 Rs.100 = US $ 2.51
TWO WAY QUOTATIONS : Banks quote two rates in foreign exchange quotation out of which one is for buying and the other for selling. For
instance, when the quotation is US $ 1 = Rs.48.90 - 49.10, the buying rate on the basis of principle of buy low and sell high, would be Rs.48.90 and the
selling rate Rs.49.10. The buying rate is also called a 'bid rate' and the selling rate as 'offer rate'.
rd
CROSS RATES OR CHAIN RULE : When rate between two currencies is not directly available, it has to be calculated through a 3 currency which is
called cross rate. This is done by using chain rule.
For example, US $ 1 = Rs.50.00 and US $ 1 = Euro 0.7500. Euro 1 = 50 / 0.75 = Rs.66.67
A bank is offered to purchase an export bill of Pound 100000 and the inter-bank rates are US $ 1 = Rs.50.00/10 and Pound 1 = US $
1.5000/10.
In this case, the bank will purchase pounds at given US $ rate of Rs.50 and deliver rupees to exporter. Bank will sell pounds in London in inter-bank
market at US $ 1.50. The amount will be worked with chain rule. Pound 1 = 1.50 x 50 = Rs.75.
SPOT TRANSACTIONS & FORWARD TRANSACTIONS
In a contract, the actual payment in rupees and receipt in say US $ may take place on the same day, two days later or a month
later.
Value date : While quoting the rates, the banks take into account the time factor i.e. how much is going to be taken to get the purchased currency
credited to the NOSTRO account abroad. This date is known as value date. There are three time frames for this i.e. cash value, torn value and spot
value.
Cash Value : When the payment is rupees and receipt in US $ takes place on the same day, it is called a cash transaction or value
today.
Tom value and spot value
When the payment is rupees and receipt in US $ takes place after some time (due to time involved in administration of the
transaction) it may be torn rate (where deal is settled on the immediately succeeding working day) and spot transaction when it is
settled within 48 hours.
Date of Contract Delivery Date / settlement date Rate to be used

Oct 12, 2015 Oct 12, 2015 Cash/ Ready Rate
Oct 12, 2015 Oct 13, 2015 Tom Rate
Oct 12, 2015 Oct 14, 2015 TT or Spot Rate
Exchange margin While selling or buying foreign exchange banks retain sufficient margin to cover the administrative cost, cover the exchange
fluctuation and also to make some profit on the transaction. This is done by adding or reducing the margin from the prevailing market rate.
The exchange margins were previously prescribed by FEDAI. These were (a) 0.025% to 0.080% for TT purchase rate (b) 0.125% to
0.150% for bills purchase rate (c) 0.125% to 0.150% for TT selling rate and (d) 0.175% to 0.200% for bills selling rate.
Fineness of the quotation : At the time of calculation of merchant rates, the calculation can be up to 5 decimal places which are
rounded off to the nearest multiple of 0.0025. A dollar rate of 42.12492 will be rounded off as 42.1250
Problem-I: A mail transfer is received on June 15, by International Bank from its correspondent bank in New York for $ 10000 which is to be paid to
saving bank customer of the bank. The correspondent bank has credited the International Bank's account for an equal amount. Calculate the
exchange rate assuming that (a) inter-bank spot rate is 1$ = 42.25/42.27 (b) bank requires an exchange margin of 0.080% (c) rounding to be done in
nearest rupee.
Solution : (1) Rate to be applied = TT buying rate (bank has received the foreign exchange) = 42.2500(2) Less exchange
margin @ 0.080% on the rate of 42.25 = 00.0338
Rate payable (1 2) = 42.2162
Amount payable for $ 10000 = Rs.422162
Forwardrate calculation: Premium is added to the spot rate to work out the forward rate. Discounted is deducted from the spot rate.
This makes the transaction beneficial to the bank.
The forward premium includes interest differential.
While calculating the bills buying rate, where the forward is at a premium, the bank will round off the transit and
usance period to the lower month.
While calculating the bills buying rate, where the forward is at a discount, the
bank will round off the transit and usance period to the higher month.
Forward rates are quoted though forward margins or forward differentials (which can be either premium or discount). For
example Euro 1 = US $ 1.2000/10. One month forward 30-28, 2 month forward 60-55 and 3 months forward 95-90.
In this case Euro is at a discount and in that case, the US $ is at a premium.
In this case, the one month forward US $ can be purchased at the following rate:
SpotEuro 1 = US$ 1.2010 0.0028= 1.1982
In this case, the one month forward Euro can be sold at the following rate:
SpotEuro 1 = US$ 1.2000 0.0030= 1.1970
Premium or discount onforwardtransactions
The forward rate of a currency is normally either costlier or cheaper than its spot rate. The difference between the spot rate and
forward rate is called forward margin or swap points. When the forward margin is at premium the forward rate will be
higher/costlier than the spot rate. Similarly, if the forward margin is at a discount, the forward rate shall be lower or cheaper than
the spot rate.
Under a direct quotation, the premium is added to thespot rate for reaching the forward rate and discount is deducted from the
spot rate to arrive at the forward rate.
If US $ is quoted on a particular day as spot at US $ 1 = Rs.48.90/49.10, this would be interpreted as buying rate of
Rs.48.90 and selling rate as Rs.49.10.
Factors such as (a) rate of interest prevailing at home centre and the concerned foreign currency centre, (b) demand and supply
position of the foreign currency, (c) speculation about spot rates and (d) exchange control regulations generally determine the
premium or discount.
ForwardPremium Forward discount
Spot rate 1 US $ = Rs.48.10 Spot rate 1 US $ = Rs.48.10
Forward 1 US $ = Rs.48.30 Forward 1 US $ = Rs.48.00
Forward Points: Forward rate comprises spot rate and forward points being interest rate differentials. For example if spot rate is
Euro 1 = US$ 1.4000 and 3 months forward is 1.4300, the difference of 200 points is called forward point. The forward point is
determined by (a) supply and demand position of the currency (b) market expectation (c) interest rate difference between two
countries.
How to calculate forward differential : Euro 1 = US $ 1.40, Euro Interest rate is 6% and US$ rate is 12%. If a person borrows Euro 100
for year and by converting these into US$ invests as deposit for one year, the flow will be as under:
(1) Euro Spot borrowing 100 + interest 6. Total outflow = 106
(2) US $ - Gets 140 US$ (for 100 Euro at 1.40) + get interest of 12 for one year = 152
(3) If US$152areconvertedinto Euro at1.40=108.57.Hencegain(1) (3) =US$2.57
In this case the Euro 106 = US$ 152. Hence Euro 1 = 1.4340
Here the difference between the spot rate 1.40 and 1.4340 = 0.340 is the forward differential.
How to calculate forward points (or the SWAP cost) : Euro 1 = US $ 1.40, Interest rate differential is 6%. For a 90 days forward
calculate the forward points.
Spot rate = 1.40. Int differential = 6% Forward period = 90 days (no. in a year to be taken
360 days) Forward points = (Spot rate x interest rate differential x forward period) I no. of days in the year x 100 = (1.4000 x 6 x 90) /
360 x 100 = 0.0210.
How to calculate interest differential from forward points : In the above example, the calculation can be made with the help of
formulae:
Interest rate differential = (forward points x no. of days in the year x 100) / (Spot rate x forward period) = (0.0210 x 360 x 100) / 1.40
x 90 = 6%
How to quote forward rate:The forward can be at premium or forward can be at a discount. In case of direct quotation, the premium
is added in the spot rate and discount is deducted from the spot rate both in the buying or selling rate.
When there is premium : Let us take an example. Euro/US$ spot rate = 1.3200/20 and forward differential one month 20-25, 2
months 40-45 and 3 months 60-65. This shows that Euro is at a premium here.
A. 2 month Euro buying rate (bid rate) = 1.3200 + 0.0040 = 1.3240 and selling rate (offer rate) = 1.3220 + 0.0045 = 1.3265.
Hence, the bid and offer rate would be = 1.3240/65
When there is discount : Let us take an example. Euro/US$ spot rate = 1.3200/20 and forward differential one month 25-20, 2
months 45-40 and 3 months 65-60. This shows that Euro is at a discount here.
A 2 month Euro buying rate (bid rate) = 1.3200 - 0.0040 = 1.3160 and selling rate (offer rate) = 1.3220 - 0.0045 = 1.3175.
Hence, the bid and offer rate would be = 1.3160175
Arbitrage
Arbitrage is an operation to make risk free profits by undertaking simultaneous transactions of (a) safe and purchase of foreign
currencies OR (b) borrowing or fending of foreign currencies.
In the above example of calculation of forward differential, the following calculation was made :
Euro 1 = US $ 1.40, Euro Interest rate is 6% and US$ rate is 12%. If a person borrows Euro 100 for one year and by converting these
into US$, invests as deposit for one year, the flow will be as under:
(1) Euro - Spot borrowing 100 + interest 6. Total outflow = 106
(2) US $ - Gets 140 US$ (for 100 Euro at 1.40) + gets interest of 12 for one year = 152
(3) If US $ 152 are converted into Euro at 1.40 = 108.57.
Hence gain (1) - (3) = US$ 2.57
In this case the Euro 106 = US$ 152. Hence Euro 1 = 1.4340
Here the difference between the spot rate 1.40 and 1.4340 = 0.340 is the forward differential .
Test your self
01 Which of the following is a direct quote:
a 1 Pound sterling = US $ 1.70 b 1 US $ = Rs.48.90 c Rs.100 = US $ 2.10 d a and b
02 Which of the following is a direct quote:
a 1 Pound sterling = US $ 1.70 b 1 US $ = Rs.48.90 c Rs.100 = US $ 2.10 d a and c
03 A person wants to remit Euro and there is no quotation with the bank for Euro. Bank works out the rate through Re/$ rate and
$/Euro rate. This is called:
a bid rate b offer rate c cross rate d floating rate
04 Forex rate in Delhi is 1 US $ = 48.80/90. In London the 1 US $ = 0.60 pound sterling. What is the buying rate for Re/Euro. a 81.51
b 81.33 c 80.67 d 80.34 (Hint-48.80 / 0.60)
05 Forex rate in Delhi is 1 US $ = 48.80/90. In London the 1 US $ = 0.60 pound sterling. What is the selling rate for Re/Euro. a 81.51
b 81.33 c 80.67 d 80.34 (Hint-48.90 / 0.60)
06 Forex rate in Delhi is 1 US $ = 48.80/90. In London the 1 Euro = US $ 1.60/65 pound sterling. What is the cross rate for Euro. a
78.08 b 77.92 c 77.65 d 77.02
07 Forex rate in Delhi is 1 US $ = 48.80/90. In London the 1 Euro = US $ 1.60/65 pound sterling. An exporter wants an export bill of
Euro 50000 to be purchased by the bank. E-low much amount will be given to the exporter in domestic currency.
a 3851000 b 3882500 c 3904000 d 3896000
08 If the exchange of currencies (delivery) is to be completed on the same date, which of the following rates will be used: a cash or
ready rate b TOM rate c Spot rate d Forward
09 if the exchange of currencies (delivery) is to be completed on the next date i.e. tomorrow, which of the following rates will be
used:
a cash or ready rate b TOM rate c Spot rate d Forward
rid
10 If the exchange of currencies (delivery) is to be completed on the 2 working day, which of the following rates will be used:
11 If the exchange of currencies (delivery) is to be completed after the spot date, which of the following rates will be used:
12 Spot rate is 1 US $ = 48.10 and 2 months forward is available at 1 US = 48.50.
a Forward is at a premium b Forward is at a discount
c Spot is at a premium d Spot is at a discount
13 A foreign exchange sale purchase agreement is made on January 04, 2009 and deliveries are completed on Jan 05, 2009. Which
of the following rate will be applied:
14 1 Euro = US $ 1.3280/90. One month forward = 36-33, 2 month forward = 73-71. If bank has to buy one month forward, the rate
will be: a 1.3158 b 1.3212 c 1.3257 d 1.3299 (Hint-Here the Euro is at a discount i.e. $ at a premium. To purchase
the base rate would be 1.3290 less premium 0.0033)
15 1 Euro = US $ 1.3280/90. One month forward = 36-33, 2 month forward = 73-71. If bank has to sell one month forward, the rate
will be: a 1.3244 b 1.3208 c 1.3158
d 1.3136 (Hint-Here the Euro is at a discount i.e. $ at a premium. To sell the base rate would be 1.3280 less premium 0.0036)
16 1 Euro = US $ 1.3280 spot and forward rate is US $ 1.3480. The difference of 200 points in this case is called: a exchange
difference b forward discount c forward premium d forward points
17 1 Euro = US $ 1.60. Interest for Euro is 4% and for US $ 6%. A person borrows Euro$ 100 one year. Assuming that there is no
change in Euro and $ rate, what will be gain of the person borrowing in Euro and converting them in $ and after one year converting
$ into Euro.
a Euro 1 b Euro 2 c Euro 3 d inadequate information
(Hint-On 100 Euro interest for one year is Euro 4 hence total outflow of Euro is 104. On the other hand, on $ 160 interest at 6% will
be $ 9.60. Hence total $169.60 which at exchange rate of 1.60 is converted into Euro 106. Accordingly gain is Euro 2 i.e. 106-104)
18 In the above problem, what will be Euro-$ rate (i.e. forward rate).
a 1 Euro = $ 1.6403 b 1 Euro = $ 1.6352 c 1 Euro = $ 1.6308
d 1 Euro = $ 1.6286 (Hint-169.60/104)
19 In the above problem what is the forward differential between spot and one year forward: a 0.0308 b 0.0312 c 0.0326 d 0.0343
(Hint-Forward rate - spot rate = 1.6308 - 1.6000)
20 1 Euro = US $ 1.40. Interest for Euro is 3% and for US $ 6%. A person borrows Euro$ 100 one year. Assuming that there is no
change in Euro and $ rate, what will be gain of the person borrowing in Euro and converting them in $ and after one year converting
$ into Euro.
a Euro 1 b Euro 2 c Euro 3 d inadequate information
1 B 2 C 3 C 4 B 5 A 6 A
7 C 8 A 9 B 10 C 11 D 12 A
13 B 14 C 15 A 16 D 17 B 18 C 19 A 20 C
4. MODULE B PRINCIPLES OF BOOK KEEPING & ACCOUNTANCY
1. DEFINITION, SCOPE AND ACCOUNTING STANDARDS
Accounting often is called the language of business. The basic function of any language is to serve a s a means of communication. In
this context, the purpose of accounting is to communicate or report the results of business operations and the financial health of the
organisation.
The most apt definition is given by the 'American Institute of Certified Public Accountants', which is as under:
Àccounting is an art of recording, classifying and summarising, in a significant manner and in terms of money, transactions and
events which are, in part at least, of a financial character, and interpreting the results thereof'.
Many people take bookkeeping and accountancy to mean one and the same, but the two are different Accountancy is a wider concept and
includes bookkeeping. Bookkeeping means recording the business transactions in the books of original entry and in the ledgers. On the
other hand, accountancy means the compilation of accounts in such a way that one is in a position to know the state of affairs of the
business.
Financial statements, normally, mean the balance sheet, profit and loss account, statement of changes in the financial position (which
may be either a fund flow statement or a cash flow statement), explanatory statements, notes and schedules forming part of the
financial statement. The objective of a financial statement is to provide information about the financial position, performance and
changes in the financial position of an enterprise. The users of a financial statement include government authorities, e.g. income tax
department, sales tax department, etc., shareholders, investors, business associates, directors, banks and financial institutions, etc.
Accounting is the language of business, communicating through the financial statements the financi
results and performance of an enterprise, to various users of such financial statements. It is in the interest of all that the financial
statements exhibit a 'true and fair' view of the state of affairs of an entity.
Any language has a set of rules called grammar. Recording of events in accounts also has its own set o rules and criteria. Such
rules, are called the 'Accounting Standards' (AS).
Accounting often is called the language of business. The basic function of any language is to serve a s a means of communication.
In this context, the purpose of accounting is to communicate or report the results of business operations and the financial health
of the organisation.
The most apt definition is given by the 'American Institute of Certified Public Accountants', which is as under:
Àccounting is an art of recording, classifying and summarising, in a significant manner and in terms of money, transactions and
events which are, in part at least, of a financial character, and interpreting the results thereof'.
Many people take bookkeeping and accountancy to mean one and the same, but the two are different Accountancy is a wider concept
and includes bookkeeping. Bookkeeping means recording the business transactions in the books of original entry and in the ledgers. On
the other hand, accountancy means the compilation of accounts in such a way that one is in a position to know the state of affairs of
the business.
Financial statements, normally, mean the balance sheet, profit and loss account, statement of changes in the financial position (which
may be either a fund flow statement or a cash flow statement), explanatory statements, notes and schedules forming part of the
financial statement. The objective of a financial statement is to provide information about the financial position, performance and
changes in the financial position of an enterprise. The users of a financial statement include government authorities, e.g. income tax
department, sales tax department, etc., shareholders, investors, business associates, directors, banks and financial institutions, etc.
Accounting is the language of business, communicating through the financial statements the financial results and performance of an
enterprise, to various users of such financial statements. It is in the interest of all that the financial statements exhibit a 'true and fair' view
of the state of affairs of an entity.
Any language has a set of rules called grammar. Recording of events in accounts also has its own set o rules and criteria. Such
rules, are called the 'Accounting Standards' (AS).
Book-keeping means maintenance of a proper and systematic record of books of account by a business enterprise, which means
that it is a process of making original records. All transactions are recorded in the books of the business in terms of their
monetary value after proper verification. It involves 4 activities i.e. (a) identifying the transactions of financial character from
amongst various other transactions, (h) measuring them in terms of money, (c.) recording them in the books of primary entry
and then (d) classifying them.It has nothing to do with the interpretation of such accounting and is different from accounting.
Accounting on the other hand has a large scope and begins where the book-keeping ends. It is a long process which begins with
summarizing the already recorded transactions, interpretation of all business transactions or statement and communicating the
results to the interested parties. Accounting can be classified as (a) financial accounting, (b) cost accounting and (c) manaoement
accounting.
Basic objective of accounting :
To maintain systematic records of business,
To make calculation of profit or loss i.e. to ascertain the results of the operations;
To depict the financial position i.e. to ascertain the financial position of the business;
To make the financial information available to the management and other interested groups of users of the information.
To satisfy the requirements of law such as Companies Act, Income Tax Act etc.
Features of accounting
It is an art of recording, classifying and summarizing business transactions. It summarizes the data in the form of (a) trial
balance (b) profit and loss account (c) balance sheet.
It records the transactions in terms of money.
It records the transactions of a financial character
It interprets the financial data
V AR I O U S K I ND S O F AC C O U NT I NG
Stewardship Accounting : This accounting system associated with accounting by Stewards (which were employed by wealthy
persons to manage their property earlier). Its need arises to keep record of business transactions, the property, debts etc.
Financial Accounting : This accounting system is concerned with the financial state of affairs of a business. Th e results of the
financial operations are called Financial Accounting. It includes working out the profits or losses and net worth. Financial
accounting is done more for the use of the owners, creditors, regulatory authorities, taxing authorities and investors etc. and is
done on a post-facto basis. Further it should be acccurate as it is subject to audit.
Cost Accounting : It involves estimating the cost in advance. This accounting helps in analyzing the expenditure involved with a
view to ascertain the cost of various products produced by an organisation for the purpose of fixation of their prices and
exercising proper control over the cost being incurred.
Management Accounting : Management accounting is the process of identification, measurement, classification, analysis,
preparation, interpretation and communication of information that assists the management of a business in taking decisions for
fulfillment of business objectives. It is meant for the business managers who require detailed meaningful information for decision
making and is prospective in nature i.e. estimates for future.
Social Responsibility Accounting : SRA takes into account the social effects of business decisions in addition to the economic
consequences.
Human Resources Accounting : HRA is a process of identifying and measuring data about human resources and communicating
the information to interested parties. It involves the investment in people and their replacement cost.
Origin of accounting principles
The Greeks, Romans, Egyptians and Babylonians had well developed well maintained system of recording keeping.
th
The present day book-keeping has its origin in the practices employed by merchants in Italy during 15 century. This practice later on
was known as 'double entry book keeping' system.
In India, the accountancy started during the regime of King Chandragupta (Kautilya, one of his ministers, wrote a book on
accountancy named Arthashashtra.
INDIAN ACCOUNTING STANDARDS
The Accounting Standards are issued under the authority of the Council of the ICAI. The Accounting Standards Board (ASB) was
constituted by the Institute of Chartered Accountants of India in April, 1977 with a view to harmonise the diverse accounting
policies and practices in India. The main function of the ASB is to formulate Accounting Standards.. ASB determines broad areas
in which Accounting Standards need to be formulated. While formulating the Accounting Standards, ASB gives consideration to
the International Accounting Standards issued by the International Accounting Standards Committee and integrates them in the
light of applicable laws, customs, usages and business environment prevailing in India. ASB also issues Guidance Notes on the
Accounting Standards and gives clarifications on issues arising there from.
ICAI has issued the Compendium of Accounting Standards (ASs) as on July 1, 2003, covering ASs 1-28 Accounting Standards
Interpretations and General Clarifications. It is expected by ICAI that the Accountants responsible for preparation of the financial
statements must prepare the same with prudence and taking into account the guidelines and suggestion of the Accounting
Standards Board.
When a mandatory accounting standard is not followed, the Auditors who are member of ICAI, are to quality their audit report.
SEBI and Companies Act also require the auditors to quality the report.
As per Section 211 of Companies Act , if a financial statement does not comply with the accounting standard, the company shall
disclose the deviation from accounting standard, provide reasons for deviation and the financial effect if any.
Accounting standards are mandatory for:
1. Enterprise whose equity or debt securities are listed on a stock exchange or who are in the process of getting them listed.
2. Other commercial, industrial and business reporting enterprises whose turnover for an accounting period is more than Rs.50
cr.
Summary of Indian Accounting Standard
No. Title of the accounting standard Date from which mandatory
AS 1 Disclosure of accounting policies 1-4-1991 companies. 1-
4-1993 - for all
AS 2 (Revised) Valuation of inventories 1-4-1999
AS 3 (Revised) Cash flow statements 1-4-2001
AS 4 (Revised) Contingencies and events occurring after the balance sheet 1-4-1995
date
AS 5 (Revised) Net profit or loss for the period, prior period items and 1-4-1996
changes in accounting policies
AS 6 (Revised) Depreciation accounting 1-4-1995
AS 7 (Revised) Construction contracts 1-4-2003
AS 8 Accounting for research and development withdrawn wef date of applicability
of as 26
AS 9 Revenue recognition as in case of as 1 above
AS 10 Accounting for fixed assets as in case of as 1 above
AS 11 (Revised) Accounting for the effects of changes in foreign exchange 1-4-1995
rates
AS 12 Accounting for government grants 1-4-1994
AS 13 Accounting for investments 1-4-1995
AS 14 Accounting for amalgamations 1-4-1995
AS 15 Accounting for retirement benefits in the financial statements 1-4-1995
of employers
AS 16 Borrowing costs 1-4-2000
AS 17 Segment reporting 1-4-2001
AS 18 Related party disclosures 1-4-2001
AS 19 Leases assets leased during periods
commencing on or after 1.4.2001
AS 20 Earnings per share 1-4-2001
AS 21 Consolidated financial statements 1-4-2001
AS 22 Accounting for taxes on income see note 5
AS 23 Accounting for investments in associates in consolidated 1.4-2002
financial statements
AS 24 Discontinuing operations 1-4-200411-4-2005
AS 25 Interim financial reporting 1-4-2002
AS 26 Intangible assets 1-4-2003 / 1-4-2004
AS 27 Financial reporting of interests in joint ventures 1.4-2002
AS 28 Impairment of assets 1-4-2004/1-4-2005
AS 29 Provisions, contingent liabilities and contingent assets In the process of being finalised
LATEST CHANGES IN INDIAN ACCOUNTING STANDARD

The Ministry of Corporate Affairs (MCA), Government of India has notified the Companies (Indian Accounting Standards) Rules, 2015.
The MCA has outlined the roadmap for implementation of International Financial Reporting Standards (IFRS) converged Indian
Accounting Standards for banks, non-banking financial companies, select All India Term Lending and Refinancing Institutions and
insurance entities. Currently, 39 new Ind ASs have been notified.
d ^ ring
about standardization in presentation. The Accounting Standards intend to harmonize the diverse accounting policies followed in the
preparation and presentation of financial statements by different reporting enterprises so as to facilitate intra-firm and inter-firm
comparison.
The RBI has advised that scheduled commercial banks (excluding RRBs) shall follow the Indian Accounting Standards as notified
under the Companies (Indian Accounting Standards) Rules, 2015, in the following manner:
A) Banks shall comply with the Indian Accounting Standards (Ind AS) for financial statements for accounting periods beginning
from April 1, 2018 onwards, with comparatives for the periods ending March 31, 2018 or thereafter. Ind AS shall be applicable to
both standalone financial statements and consolidated financial statements. Comparatives shall mean comparative figures for
the preceding accounting period.
B) Banks shall apply Ind AS only as per the above timelines and shall not be permitted to adopt Ind AS earlier.
The RBI has also advised Banks to take note of the Press Release dated January 18, 2016 issued by the MCA which states that
notwithstanding the roadmap for companies, the holding, subsidiary, joint venture or associate companies of banks shall be required
to prepare Ind AS based financial statements for accounting periods beginning from April 1, 2018 onwards, with comparatives for the
periods ending March 31, 2018 and thereafter.
/^ hanges
need to be planned, managed, tested and executed in advance of the implementation date.
^ alent)
comprising members from cross-functional areas of the bank to immediately initiate the implementation process.
d /^
quarterly intervals.
The critical issues which need to be factored in the Ind AS implementation plan include the following:
a) Ind AS Technical Requirements: Diagnostic analysis of differences between the current accounting framework and Ind AS,
significant accounting policy decisions impacting financials, drafting accounting policies, preparation of disclosures, documentation,
preparation of proforma Ind AS financial statements, timing the changeover to Ind AS, and dry-run of accounting systems and end-
to-end reporting process before the actual conversion.
b) Systems and Processes: Evaluate system changes assessment of processes requiring changes, issues having significant impact
on information systems (including IT systems), and develop / strengthen data capture system, where required.
c) Business Impact: Profit planning and budgeting, taxation, capital planning, and impact on capital adequacy.
d) People: Evaluation of resources: Adequate and fully dedicated internal staff for implementation, comprehensive training
strategy and program.
e) Project Management: Managing the entire process-holistic approach to planning and execution by ensuring that all linkages
are established between accounting, systems, people and business, besides effective communication strategies to
stakeholders.
/^ dequacy of capital, taking into
account the Basel III capital requirements and place quarterly progress reports to their Boards. Banks also need to be in
preparedness to submit proforma Ind AS financial statements to the Reserve Bank from the half-year ended September 30, 2016,
onwards.
dZ d Z/all hold
periodic meetings with banks in this regard.
Banks shall disclose in the Annual Report, the strategy for Ind AS implementation, including the progress made in this regard. These
disclosures shall be made from the financial year 2016-17 until implementation.
d /d AS direction and strategy and in overseeing
the development and execution of the Ind AS implementation plan.
d^ Z ict
compliance of the same.
APPLICABILITY FOR COMPANIES:
d/^ /^ th a net
worth equal to or exceeding 500 crore INR beginning 1 April 2016.
This will also require comparative Ind AS information for the period of 1 April 2015 to 31 March 2016. Listed companies as well as
others having a net worth equal to or exceeding 250 crore INR will follow 1 April 2017 onwards.
Ind AS will also apply to subsidiaries, joint ventures, associates as well as holding companies of the entities covered by the
roadmap.
INTERNATIONAL ACCOUNTING STANDARDS
At international level, the International Accounting Standards Board (earlier International Accounting Standards Committee
!ASC, till the year 2000) has been prescribing in public interest, the standards to be observed in the presentation of audited
financial statements. It is also promoting their world-wide acceptance and observance.
Generally Accepted Accounting Principles (United States)
In the United States (US), the generally accepted accounting principles (abbreviated as US GAAP or simply &NAP), are
accounting rules used to prepare, present, and report financial statements for a wide variety of entities, including publicly-
traded and privately-held companies, non-profit organizations, and governments. Generally GAAP includes local applicable
accounting framework, related accounting law, rules and accounting standard.
Similar to many other countries practicing under the common law system, the United States Government does nc't directly set
accounting standards, US GAAP is not written in law, although the U.S. Securities And Exchange Commission (SEC) requires that it
should be followed in financial reporting by publicly-traded co rnpanies. The Financial Accounting Standards Board (FASB) is the
highest authority in establishing generally accepted accounting principles for public and private companies, as well as non-profit
entities. For local and state governments, GAAP is determined by the Governmental Accounting Standards Board (GASB), which
operates under a set of assumptions, principles, and constraints, different from those of standard private-sector GAAP. Financial
reporting in Federal Government entities is regulated by the Federal Accounting Standards Advisory Board (FASAB).
The US GAAP provisions differ from international financial reporting standards in certain respects.
Basic objectives: Financial reporting should provide information that is:
useful to present to potential investors and creditors and other users in making rational investment, credit, and other
financial decisions.
helpful to present to potential investors and creditors and other users in assessing the amounts, timing, and uncertainty of
prospective cash receipts.
about economic resources, the claims to those resources, and the changes in them.
Basic concepts : To achieve basic objectives and implement fundamental qualities GAAP has four basic assumptions, four basic
principles, and four basic constraints.
Assumptions
Business Entity: assumes that the business is separate from its owners or other businesses. Revenues and expenses should be
kept separate from personal expenses.
Gahm Concern: assumes that the business will be in operation indefinitely. This validates the methods of asset capitalization,
depreciation, and amortization. Only when liquidation is certain this assumption is not applicable.
Monetary Unit principle: assumes a stable currency is going to be the unit of record. The FASB accepts the nominal value of
the US Dollar as the monetary unit of record unadjusted for inflation.
The Time-period principle implies that the economic activities of an enterprise can be divided into artificial time periods.
Princi ples
Cost principle requires companies to account and report based on acquisition costs rather than fair market value for most
assets and liabilities. This principle provides information that is reliable (removing opportunity to provide subjective and
potentially biased market values), but not very relevant. Thus there is a trend to use fair values. Most debts and securities are
now reported at market values.
Revenue principle requires companies to record when revenue is (1) realized or realizable and (2) earned, not when cash is
received. This way of accounting is called accrual basis accounting,.
Matching principle. Expenses have to be matched with revenues as long as it is reasonable to do so.
Expenses are recognized not when the work is performed, or when a product is produced, but when the work or the product
actually makes its contribution to revenue. Only if no connection with revenue can be established, may cost be charged as
expenses to the current period (e.g. office salaries and other administrative expenses). This principle allows greater
evaluation of actual profitability and performance (shows how much was spent to earn revenue). Depreciation and Cost of
Goods Sold are good examples of application of this principle.
Disclosure principle. Amount and kinds of information disclosed should be decided based on trade-off analysis as a larger
amount of information costs more to prepare and use. Information disclosed should be enough to make a judgment while
keeping costs reasonable. Information is presented in the main body of financial statements, in the notes or as
supplementary information
Constraints
Objectivity principle: the company financial statements provided by the accountants should base on objective evidence
Materiality principle: the significance of an item should be considered when it is reported. An item is considered significant
when it would affect the decision of a reasonable individual.
Consistency principle: accounting procedures should follow industry practices.
Prudent principle: when choosing between two solutions, the one that will be least likely to overstate assets and income
should be picked.
Departures from GAAP
Under the American Institute Of Certified Public Accountants (AICPA) Code of Professional Ethics, a member must depart from
GAAP if following the GAAP would lead to a material misstatement on the financial statements, or otherwise be misleading. In
the departure the member must disclose, if practicable, the reasons why compliance with the accounting principle would result
in a misleading financial statement. The departures may take place when there is new legislation, the evolution of new forms of
business transactions, an unusual degree of materiality, or the existence of conflicting industry practices.
Setting GAAP
The following organizations influence the development of GAAP in the United States.
(a) United States Securities and Exchange Commission (SEC)
The SEC was created as a result of the Great Depression. The SEC encouraged the establishment of private standard-setting
bodies through the AICPA and later the FASB. The SEC works closely with various private organizations setting GAAP, but does
not set GAAP itself.
(b) American Institute of Certified Public Accountants (AICPA)
In 1939, urged by the SEC, the AICPA appointed the Committee on Accounting Procedure (CAP). During the years 1939 to 1959
CAP issued 51 Accounting Research Bulletins. In 1959, the AICPA created the Accounting Principles Board (APB), whose mission
was to develop an overall conceptual framework. It issued 31 opinions and was dissolved in 1973. After the creation of the FASB,
the AICPA established the Accounting Standards Executive Committee (ACSEC). It publishes:
1. Audit and Accounting Guidelines, which summarizes the accounting practices of specific industries (e.g. casinos, colleges,
airlines, etc.) and provides specific guidance on matters not addressed by FASB or GASB.
2. Statements of Position, which provides guidance on financial reporting topics until the FASB or GASB sets standards on the
issue.
3. Practice Bulletins, which indicate the AcSEC's views on narrow financial reporting issues not considered by the FASB or the
GASB.
(c) Financial Accounting Standards Board (FASB)
This structure is composed of 3 oraanizations: the Financial Accounting Foundation, the Financial Accounting Standards Advisory
Council (FASAC), and the Financial Accounting Standards Board (FASB).
(d) Governmental Accounting Standards Board (GASB)
Created in 1984, the GASB addresses state and local government reporting issues. Its structure is similar to
that of the FASB's.
Precedence of GAAP-setting authorities
In the United States, GAAP derives, in order of importance, from:
1. issuances from an authoritative body designated by the American Institute of Certified Public Accountants(AICPA) Council (for
example, the Financial Accounting Standards Board Statements, AICPA Accounting Principles Board Opinions, and AICPA
Accounting Research Bulletins);
2. other AICPA issuances such as AICPA Industry Guides;
3. industry practice; and
4. into para-accounting literature in the form of books and articles.
TRANSFER PRICING
Transfer pricing refers to the pricing of goods and services within an organization which is multi-divisional. When different
divisions of a large organisations function as profit centres (say branches within a bank), they have the responsibility for their
own return on capital employed. When they transact business amongst themselves (say one branch is mobilizing deposits and
the other branch makes use of those funds for lending OR in case of a company the manufacturing division sells goods to the
marketing division OR goods are sold by the parent company to a subsidiary company in the same country or in another country).
The price at which these goods or services are transferred from within the organisation, impact the profits of the respective
units.
Transfer price is influenced by a no. of factors such as capability of the accounting system, custom or import duties in case of
cross-border transfers, tax on profits etc.
Arrn's length pricing method in transfer pricing:
Sirxce, with the help of transfer pricing the multi-national organizations can manipulate the tax rules (showing higher profit in
low tax countries and lower profits in higher tax countries), most of the countries follow the Arm's Length Principle as defined in
the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administration of Organisation for Economic Cooperation
and Development (OECD).
Arm's Length pricing means price which an independent buyer would pay to another independent seller (called non-desperate
parties) for similar products at similar terms and conditions.
Methods under Transfer pricing based on OECD guidelines:
(1). Comparable Uncontrolled Price Method (2). Cost Plus Method (3). Resale Price Method. (4). Nontraditional methods (a) profit
split method and (b) transactional net margin method,
1. Comparable Uncontrolled Price Method : This method compares the price at which a controlled tra hsaction is conducted
with a price at which a comparable uncontrolled transaction is conducted.
2. Cost plus method: This is used generally for trading of finished goods. Under this method, the price is determined by adding a
mark-up to the cost incurred by the selling unit in manufacturing or purchasing those products. For example price paid for
deposit raised by a bank branch + some profit margin for lending these funds to other branch.
3. Resale price method: In this method instead of adding a mark up to the production cost as in case of Cost + method, a mark
up is deducted from the sale price.
4. Profit split method: This method is applied when business is too integrated (and is difficult to split). Example HO of a bank
charging some part of the total cost incurred on marketing.
5. Transactional net margin method: It is a unified version of cost plus method and resale price method. This is considered to be a relatively accurate
and easy method to calculate the arm's length price.
INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)
IFRSs are the principles based set of standards which establish broad rules. These are the standards and interpretations adopted by the International
Accounting Standards Board (IASB). Many of the standards forming part of IFRS are the previous International Accounting Standards (IAS). In April
2001 the IASB adopted all IAS and continued their development, calling the new standards IFRS.
Objective of financial statements: To provide information about the financial position, performance and changes in the financial position of an
entity that is useful to a wide range of users in making economic decisions.
Financial statements ; With issue of revised standard (IAS 1) i.e. Presentation of Financial Statements in Sep 2007, which is effective for annual
periods beginning on or after 1 January 2009, the IFRS financial statements consist of:
'balance sheet' which will become 'statement of financial position'
'income statement' to be called 'statement of comprehensive income'
'cash flow statement' which will become 'statement of cash flows'.
notes, including a summary of the significant accounting policies.
IFRS status in India

In July 2007, the Institute of Chartered Accountants of India announced the move towards convergence with IFRS w.ef, 1st April, 2011. In early 2010,
the Ministry of Corporate Affairs released the IFRS roadmap and convergence plan for India for convergence as under:
Select companies from 1st April, 2011 onwards
Insurance companies from 1st April 2012 onwards
Banks and NBFCs from 1st April 2013 onwards
(The above time limits have been withdrawn and new dates are yet to be announced)
In pursuance of G-20 commitment given by India, theprocess of convergenceof Indian Accounting Standards with IFRS has been carried out in Ministry
of Corporate Affairs. 35 Indian Accounting Standards converged with International Financial Reporting Standards (henceforth called IND AS) have been
notified by the Ministry. These are IND ASs 1, 2, 7, 8, 10, 11, 12, 16, 17, 18, 19, 20, 21, 23, 24, 27, 28, 29, 31, 32, 33, 34, 36, 37, 38, 39, 40, 101, 102, 103,
104, 105, 106, 107 and 10B.
The Ministry of Corporate Affairs will implement the converged standards in a phased manner. The date of im lementation will be notified at a later
date.
DIFFERENCE BETWEEN US GAAP AND IFRS
GAAP is the accounting standard used in the US, while IFRS is the accounting standard used in over 100 countries around the
world. GAAP is considered more of a rules based system of accounting, while IFRS is more principles based. Both GAAP and
IFRS aim to provide relevant information to a wide range of users. However, GAAP provides separate objectives for business
entities and non-business entities, while the IFRS has one objective for all types of entities.
GAAP requires financial statements to include a balance sheet, income statement, statement of comprehensive income, changes
in equity, cash flow statement, and footnotes. It is recommended that the balance sheet separates current and noncurrent assets
and liabilities, and deferred taxes are included with assets and liabilities. Minority interests are included in liabilities as a separate
line item. IFRS requires financial statements to include a balance sheet, income statement, changes in equity, cash flow
statement, and footnotes. The separation of current and noncurrent assets and liabilities is required, and deferred taxes must be
shown as a separate line item on the balance sheet. Minority interests are included in equity as a separate line item.
The following list gives an overview of the other differences between the accounting frameworks used by GAAP and IFRS at a
broad, framework level.
AREA GAAP IFRS

Definition Generally accepted accounting principles (GAAP) refer to International Financial Reporting Standards are
the standard framework of guidelines for financial designed as a common global language for business
accounting used in any given jurisdiction; generally known affairs so that company accounts are understandable
as accounting standards or standard accounting practice. and comparable across international boundaries.
Purposeof the US GAAP Framework has no provision that expressly Under IFRS, company management is expressly
framework requires management to consider the framework in the required to consider the framework if there is no
absence of a standard or interpretation for an issue. standard or interpretation for an issue.
Underlying The "going concern" assumption is not well- developed in

IFRS gives prominence to underlying assumptions
assumptions the US GAAP framework.
such as accrual and going concern
Objectivesof In general, broad focus to provide relevant info to a wide In general, broad focus to provide relevant info to a
financial range of stakeholders. GAAP provides separate objectives for wide range of stakeholders. IFRS provides the same
statements business and non-business entities. set of objectives for business and non-business
entities.
Qualitative Relevance, reliability, comparability and understandability. Relevance, reliability, comparability and
characteristics GAAP establishes a hierarchy of these characteristics. understandability. The IASB framework (IFRS) states
Relevance and reliability are primary qualities. that its decision cannot be based upon specific
Comparability is secondary. Understandability is treated as a circumstances of individual users
user-specific quality.
Definition of an The US GAAP framework defines an asset as a future The IFRSframework defines anass( a resourcefrom
asset economic benefit which futureeconcbenefit will flow to the company.
Fixed assets fixed assets such as property, plant and equipment are IFRS allows another model revaluation model - which
valued using the cost model i.e., the historical value of the is ba on fair value on the date of evaluai less any
asset less any accumulated depreciation subsequent accumulE depreciation and impairment
losse
Inventory valuation LIF0,_FIFO or weighted-average cost FIFO or weighted-average cost
Intangibles In GAAP, acquired intangible assets (like R&D and in IFRS, they are only recognizE
advertising costs) are recognized at fair value the asset will have a future econc
benefit and has a measured reliab
2. BASIC ACCOUNTING PROCEDURES

As with language, accounting has many dialects. There are differences in terminology. In dealing with the framework of
accounting theory, one is confronted with a serious problem arising from the differences in terminology. A number of words and
terms have been used by different writers to express and explain the same idea or notion. Thus, confusion abounds in the
literature as far as the theoretical framework is concerned. For the recording of transactions, there are certain basic rules laid
down based on experience, reason, usage and necessity. These are the fundamental ideas or the basic assumptions underlying the
theory and practice of financial accounting and form the broad working rules for all accounting activities developed and accepted
by the accounting profession.
The accounting framework on the basis of which the statements are prepared is based on certain elements which are popularly
known as concepts or principles or rules, such as:
a: Entity concept
b: Money measurement concept
c: A going-concern concept
d: Cost concept
e: Conservatism concept
f: Dual aspect concept
g: Accounting period concept
h: Accrual concept
I: Realisation concept
J: Matching concept
k:: Materiality concept.
l: Consistency concept
m: Full disclosure concept
Entity concept : For the purpose of accounting, a business concern is considered to be an entity, separate from the promoters, owners, share-holders,
investors etc. For example, when A puts in Rs. 1 lac in a business, it would be considered that he has given Rs. 1 lac to his business, which his business
would show as an amount payable (or liability) to A. In other words the accounts are maintained for this entity as distinct from the person(s) connected
with it. Although this distinction is easily understandable in case of company cases, but at times confusions get created in respect of proprietary or
partnership concerns. Whatever the position, the recording of transactions has to be in terms of their effect on the business entity considering the
owners, creditors, suppliers, customers etc. as the parties transacting business with the entity.
Money measurement concept :Accounting is done for those transactions only which can be expressed in monetary terms and this makes the
heterogeneous elements such as land, plant, machinery, building, stocks etc. comparable meaningfully. The aspects or the events which cannot be
expressed in monetary terms cannot be accounted for, howsoever important those may be. For instance, the quality of the operations (a liability if
poor and an asset if good) or the quality of efforts of the staff and dedication with which these are put in (liability if put in without dedication but an
asset if put in with complete dedication) cannot be recorded in monetary terms, hence, do not find place in the accounting.
This concept also becomes important in understanding the state of affairs of the business. For instance, if two business concerns have the piece of
land of the same size but located at different places and purchased on the same date, it may be taken as an asset having equal value unless value is
specified. But when monetary value is expressed, the financial worth of the entities may come out to be different.
Going concern concept : The accounting is based on the premise that the entity would remain a going (continue to be in business) concern for an
indefinitely long period and not a concern which is likely to be wound up in near future and the promoters or any one else, has no intention to
liquidate the business in a foreseeable future.This is essential because the assets are normally recorded and carried in the books at their cost less
depreciation and not at their liquidation (realisable) value. For a concern which is to continue in business, the value is equal to the cost less
depreciation, if any. Similarly the liabilities are carried at values that reflect what the business owes and not at values for which the creditors would
settle for, in case of liquidation.As a matter of exception, at times the business entity reflects certain signals which point out that the concern is
unlikely to remain a going concern or likely to cease its activities. The accounting for such business concern has to be done taking into account the
fact that it is ceasing to be a going concern and the assets have to be taken at realisable value.
Cost concept : Assets which a business entity may acquire would generally be recorded at their cost i.e. the amount or the price at which the
acquisition has been affected. This cost becomes a reference point for all subsequent accounting and a small example would clarify the matter. An
asset purchased at Rs. 1 lac would be recorded in the books at Rs. 1 lac in spite of its value increasing or decreasing for any reasons, over a time
period. The concept of cost, brings in objectivity in reckoning the value of the assets in the absence of which subjectivity can influence the accounting.
For instance, in the above example, the value of the asset for A could be Rs. 90000 and for B (depending upon his own information, perception or
consideration) it may be Rs.1.20 lac. In the preparation of accounts by A, he is likely to take into account the asset at Rs. 90000 while by B, the value
may be taken at Rs. 1.20 lac. Similarly the inflationary or deflationary conditions may create accounting problems in respect of the assets held by the
business for use over a long period.
Conservatism concept: Closely related to the cost concept is the concept of conservatism which modifies the cost concept in respect of current
assets. The concept stipulates that no profits should be anticipated (as these may materialise or not and may result in non-acceptance of accounting
figures by the users), but all possible losses must be accounted for. The current assets, as per this concept, are generally valued at cost price or
market price, whichever is lower. The concept itself may appear to be not in line with the general accounting principle of consistency on the basis of
cost or market value, but the practice followed by the accountants is generally conservative even at the cost of consistency. The adoption of this
principle also helps in creation of secret reserves and to that extent it may be said that the financial statements do not reflect or depict the true
position of the business. However, when the conservatism is applied with due caution, care and sound justifications, the position becomes more
acceptable.
Dual aspect concept : This concept of accounting is the most fundamental and provides the conceptual basis for accounting mechanics. Because of
this concept the resources owned by an entity should be equal to the liability, since each transaction has two aspects. A simple example would clarify
the matter. Let us assume that Z contributes Rs. 50000 as cash to his business which is placed by the business entity in a bank. The accounting records
of the transaction reflect this amount as owner's equity on the liability side and the deposit in the bank, as the asset. If a sum of Rs. 10000 is spent out
of the above amount to purchase stocks, the amount of Rs. 50000 would still be shown as the liability and Rs. 40000 as bank deposit and Rs. 10000 as
stocks on the assets' side. If a loan of Rs. 15000 is raised to acquire fixed assets worth Rs. 35000 (and a part of bank deposit is used to purchase these
fixed assets), the position would be reflected as under:
Owner's equity Rs. 50000 Fixed Assets Rs. 35000
Loan raised Rs. 15000 Stocks Rs. 10000
Bank deposit Rs. 20000
Total Rs.65000 Rs.65000
This also is known as the principle of double entry, in book keeping.
Accounting period concept :Though a business continues indefinitely according to the going concern concept,. but its performance measurement
has to be done after a reasonable time period and not after a long or uncertain period of time, which would not be desirable since it may create a
position of uncertainty. Hence, the business is segmented into appropriate parts for judging the performance shown in each such identified
segment. Such segment is known as an accounting period, say of a year or a quarter or an half-year. At the close of such accounting period,
financial statements are prepared.
Accrual concept :This concept takes into account the accounting of receipt or payment or otherwise recording a transaction (which actually might
have taken place/ materilised or not), to be considered as part of and relating to the accounting period. For example, the business may raise a loan
from a bank, the interest on which is payable to the bank immediately after the close of the accounting period. In the accounting period, a
provision on accrual basis would be required to be made irrespective of the fact that the payment would be made after the close of accounting
period. This is generally done in respect of profit and loss or trading and manufacture account. A payment or receipt account on the other hand,
reflects actual receipt and payment and does not generally take into account the accrual.
Realisation concept :This concept gives recognition to a particular transaction as having been complete at a particular point of time, when the benefit
is actually passed on to the party to whom it is due. For instance, if Z, in order to sell goods to Y purchases raw material, the goods would not be
considered to be have passed on to Y unless these are actually delivered.
Matching concept : This concept stipulates that all the transactions relating to a particular aspect of the business should be taken into account to
reach the correct position. For instance, if we have to work out the profit or loss position, all the revenue income items and all the revenue
expenditure items must be taken into account. Adjustments, if any, are required to be made for all the expenses which have not become due or for
income which has not been received but has become due or has accrued.
Materialityconcept : According to this concept, while preparing the accounts, all the material details must be taken into account which may
influence the decision of the investor when that comes to his notice. The insignificant items, however, can be ignored. It also needs to be taken into
account that the identification of an item/information being material or non-material, is a very subjective term and needs to be used very carefully.
Consistency concept : The concept of consistency stipulates that accounting practices must remain the same for all the periods if the accounts are
to reflect the true and comparable position. For example, if the depreciation has been charged in one particular year on straight-line method, for
the next accounting period it should not be charged on a written-down value basis by shifting from straight line method, since it would effect the
cost pattern in the manufacturing account.
Full disclosure concept : The information must be disclosed fully and fairly as the person preparing it believes to be correct in terms of accepted and
established norms. Adequate information must be provided for the users to get appropriate benefit from that information. It should not lead the
user to draw the conclusions, which he would not accept in case he comes to know that it is not correct. Hence, a true and fair view of the accounts
must be reflected by the financial statements. Many times, it becomes difficult to incorporate the full information within the body of the financial
statements and in such circumstances, the information can be given in the shape of annexures or appendices.
ACCOUNTING GLOSSARY
Asset Any thing which enables the firm to get cash or some benefit in future, is an asset which include fixed
asset, current assets.
Accrued Liabilities Also known as outstanding liabilities or expenses. For example, accrued wages,
accrued rent, accrued taxes and accrued interest andso on. They typically
represent obligations for certain services for which payments are yet to be made and are indirect
source of financing.
Annuity A series of receipts or payments of a fixed amount for a specified number of years. Alternatively, a
pattern of cash flows that are equal in each year, i.e. equal annual cash flows.
Balance Sheet Statement of assets and liabilities at a specific date. This is part of final accounts of a firm.
Bonus Shares Dividend paid in form of equity shares and not in cash.
Book Value The value of an asset, a liability or equity, as recorded in the accounts of a firm. The book value of an
ordinary share is equal to the paid-up capital plus retained earnings i.e. net worth.
Capital The amount that the promoter invests in the business, which he can claim from the business, as it is liability of the
business and asset for the promoter. It can be called net worth or owner's equity.
Current liability The liabilities which are payable in the near future say during the next 12 months and include liabilities such as
creditors, bank overdraft, expenses payable etc.
Capital Outlay required for acquiring an asset from which benefits would be available beyond one year.
Expenditure
Collection Period The average period taken to collect receivables. It is equal to the average credit sales
divided by the number of days in a year.
Credit Period The time given to a buyer to make full payment for credit purchases beyond the expiry of which the
payment becomes outstanding.
Current Assets Assets which can be converted into cash within a year.
Current Liabilities Liabilities that are payable within a year.
Creditors The persons to whom the money is owing by the firm, when goods are purchased by the firm on credit.
Debtors The persons who owes money to the firm to whom the goods have been sold by the firm on credit.
Drawings It represents the amount of money or value of goods which the promoters withdraw for personal use.
Discount (Trade discount) It is allowed when a buyer purchases goods above a certain quantity or certain amount. It is deducted
from the invoice.
Discount (Cash It is allowed when payment is made before a certain date. It is not deducted from invoice.
discount)
Equity Capital Long-term funds provided by the owners of a firm and consists or ordinary share capital and retained
earnings.
Financial Analysis The use of financial data to evaluate the financial position of a firm.
Fixed Assets Long-term assets that would be in use for longer than one year.
Income Statement It presents the net income of a firm for a period of time (say a quarter of year).
Purchase Purchase means purchase of goods only (and not the capital goods i.e. fixed assets) either in cash or on
credit.
Revenue Expenditure The expenditure which is incurred on purchase of goods or availing of services for running the business, whose
benefit is available during the short period and only once.
Revenue It is the result of operations and increases the inflow of assets and also the increase in owner's equity,
if the net result is profit.
Sales It stands for sale of goods only and not other assets.
Accounting Conventions
Convention of Conservatism
Closely related to the cost concept is the concept of conservatism which modifies the cost concept in respect of current
assets. The concept stipulates that no profits should be anticipated (as these may materialize or not and may result in non-
acceptance of accounting figures by the users), but all possible losses must be accounted for. The current assets, as per this
concept, are generally valued at cost price or market price, whichever is lower. The concept itself may appear to be not in line
with the general accounting principle of consistency on the basis of cost or market value, but the practice followed by the
accountants is generally conservative even at the cost of consistency. The adoption of this principle also helps in creation of
secret reserves and to that extent it may be said that the financial statements do not reflect or depict the true position of the
business. However, when the conservatism is applied with due caution, care and sound justifications, the position becomes
more acceptable.
Convention of Materiality
According to this concept, while preparing the accounts, all the material details must be taken into account which may influence
the decision of the investor when that comes to his notice. The insignificant items, however, can be ignored. It also needs to be
taken into account that the identification of an item/information being material or non-material, is a very subjective term and
needs to be used very carefully.
Convention of Consistency
The concept of consistency stipulates that accounting practices must remain the same for all the periods if the accounts are to
reflect the true and comparable position. For example, if the depreciation has been charged in one particular year on straight-line
method, for the next accounting period it should not be charged on a written-down value basis by shifting from straight line
method, since it would effect the cost pattern in the manufacturing account.
Convention of Full disclosure
The information must be disclosed fully and fairly as the person preparing it believes to be correct in terms of accepted and
established norms. Adequate information must be provided for the users to get appropriate benefit from that information. It
should not lead the user to draw the conclusions, which he would not accept in case he comes to know that it is not correct.
Hence, a true and fair view of the accounts must be reflected by the financial statements. Many times, it becomes difficult to
incorporate the full information within the body of the financial statements and in such circumstances, the information can be
given in the shape of annexures or appendices.
SYSTEMS OF BOOK-KEEPING
While recording business transactions, the organisations follow different kinds of account systems. Broadly, there are two
systems of book keeping:
Single entry system, where the transactions have only single effect.
Double entry system, where each transaction has two aspects.
SINGLE ENTRY BOOK-KEEPING SYSTEM
Under this system, both the aspects (debit and credit) of a transactions may not be recorded nor set rules are followed. Normally
under this system, the cash book and personal ledgers are kept (i.e. real and nominal accounts are not maintained). For example,
when cash is paid to a creditor, it may be recorded on the credit side (payment) of the cash book and on debit side of the
customer's personal account. But when rent is paid, it will be recorded on the credit side of cash book without making any entry
in the rent account, as the nominal accounts are not maintained. Similarly, for depreciation no entry is made either on debit or
on credit side, because depreciation is a nominal account and fixed asset is a real account, which are not maintained. This system
is also called as the system of ' accounts from incomplete records'.
DOUBLE ENTRY BOOK-KEEPING SYSTEM
Double entry book keeping means that each debit in an account will have a matching credit to another account. A transaction is
not complete till there is a credit based on a matching debit. For recording a transaction properly, the knowledge of the rules of
'Debit' and 'Credit' is essential. When to debit and when to credit depends upon the nature of a transaction.
It can be observed that following types of transactions are common to almost every type of business, viz.:
business enters into dealings with a number of persons or firms for sale and purchase of goods and services, for loans,
borrowing etc;
business possesses some property, e.g., cash, furniture, stock, etc., to carry on the business;
business pays certain expenses, e.g., rent of the shop or factory, salaries, wages, printing and stationery, advertisement,
commission, electricity charges, etc., arid that there are certain sources, sale of goods, commission earned, interest earned
etc. from which the income of the business is derived.
In order to keep full record of transactions, the business has to keep:
the account of each person or firm with whom it deals, which are called personal accounts;
the account of each property in the business, which are known as real accounts; and
the account of each head of expense or income called nominal accounts.
Principles of double entry system
1. In each financial transaction, 2 parties are involved.
2. All business transaction, 2 aspects are involved (1) receiving of benefit and (2) giving of benefit. In other words, each debit has
a corresponding credit.
3. Both these aspects (debit and credit), are recorded in books of account. One account is debited and other account is credited
for the same amount at the same time.
Merits of double entry system
1. Complete record of business transactions (personal and impersonal accounts)
2. Ensures arithmetic accuracy.
3. p & L account can be prepared and position of profit or loss can be ascertained.
4. Balance sheet can be prepared to know the position of assets and liabilities.
Revenue recognition and realization
Revenue is recognised only when sale is actually made. Till realisation of sale, no sale is said to have been complete and no profit
can be taken to have arisen. In this way, the business enterprise cannot inflate its profits by recoiling incomes that are likely to
accrue.
ACCRUAL AND CASH BASIS
Thy accrual system takes into account only those transaction where the right to receive the amount or obligation to pay the
amount, in an accounting period has arisen (irrespective of whether actually received or paid or not).
If the amount of sale is received in advance it will not be treated as part of the sale. Similarly if the amount is not actually
received at the time of sale, it will be taken as a sale, if the right to receive has been created. In the amount has been incurred
as expenditure before the obligation has arisen it will not be taken as expenditure and if the payment has not been actually
made, but obligation has arisen, it will be taken as expenditure.
In cash system, the revenue is recognised as earned, if it has been actually received. Similarly, payment sha II be considered as
expenditure, if actually made.
PERSONAL ACCOUNTS
Personal accounts can be of the following form :
(i) Natural persons' accounts. For example, proprietor's account, suppliers' accounts, receivers' accounts (like Mohan's A/c,
Sunil's A/c).
(ii) Artificial persons' and body of persons' accounts. For example, any limited company's account, bank account, insurance company's
account, any firm's account, any government's account, any institution's account, any club's account.
Representative personal accounts. When an account represents certain person or persons, it is called a representative personal account. In the
books of account, the name of the actual parties appear, but the amounts outstanding against these accounts are added and put under one
common title (since they are of the same nature). For example, if a business is not able to pay salary for the last two months to all the workers or
some of them, the workers will be treated as the creditors of the business (since they have given the services but in exchange they have not been
paid for). The amount due to these employees will be added and put under one common title "Salaries Outstanding Account", which becomes a
personal account representing the employees. Similarly, if a business is not able to get rent of (say) 20 shops, all tenants of those shops stand as
debtors and the amount due to them is added and put under common head "Rent Receivables Account", which is again a personal account
representing so many tenants. Other examples of the personal accounts of this nature are:
(a) Unexpired insurance account,
(b) Rent prepaid account.
(c) Interestoutstandingaccount.
(d) Interestprepaidaccount.
(e) Interest received in advance account.
REAL ACCOUNTS
Real accounts are of the following two forms :
(i) Tangible real account. Tangible real account are the accounts of such things which can be touched, felt, measured, purchased, sold, etc.
Examples - land account, building account, furniture account, stock account, cash account (Please note that bank account is a personal account
and not a real account because bank account is the account of some banking company which is an artificial person).
(ii) Intangible real account. They are the accounts of such things which can not be touched, felt, measured, etc. Examples are -
goodwill, trade marks, patent rights etc.
NOMINAL ACCOUNTS
Nominal accounts are those accounts which are in name only. They are simply used to define the nature of transactions. Examples of such
accounts are, the salary of a manager in a factory, the commission given to a commission agent, the wages paid to a worker, the freight paid to
carrier of goods, the interest paid to lender of money. In fact, they all get cash in lieu of services rendered by them. Cash is the real thing which
exists and salary, commission, wage, carriage, interest, etc. are only away of describing the nature of head for which cash has been paid.
Similarly, if a business received interest, dividend, or discount, the interest, dividend and discount accounts are nominal accounts because they
describe the heads from which business has gained. Hence, all accounts representing expenses and incomes are nominal accounts. In the
absence of these nominal heads, it will be very difficult for the management to know the amount paid separately on account of salary, wages,
commission and on what head of expense, the money spent is unreasonable and what steps should it take to avoid it.
PRACTICE EXERCISE FOR IDENTIFICATION OF A/CS
You have given the following items from the account books of a firm. Please classify them under various heads of accounts:
1 Land & Building
2 Loan account with bank
3 Vehicle Account
4 Partners' capital account
5 Expenses payable
6 Expenses paid on account of salary
7 Expenses paid in advance
8 Sales account (i.e. stock account)
9 Rent paid
10 Rent payable
Personal accounts : 2, 4, 5, 7, 10, Real Accounts : 1,3, 8 Nominal accounts : 6, 9
ACCOUNTING EQUATIONS
It may be understood that the assets of the business should always be equal to the liabilities (i.e. capital + outside liabilities) and the total revenue
minus total expenses would result either in profit or loss and this profit or loss would become part of the capital.
Capital or owner's equity = Assets outside liabilities
Asset = Capital + outside liabilities
Outside liabilities = Assets-capital
Income i.e. profit = Revenue Expenses
Revenue = Expenses + profits
A caselet would clarify the above equations, as under:
A business has cash balance of Rs.37000, furniture worth Rs.1000, goods Rs.6000 and debtors nil which are financed by creditors of Rs.4000 and
promoter's capital of Rs.40000. Out of the available goods, the business sells goods valuing Rs.5000 for Rs.8000. The accounting equation will be
as under:
Assets = Liabilities
Transaction Cash Furniture Goods Debtors = Liabilities Capital
Old balance 37000 1000 6000 0 = 4000 40000
Transaction 0 0 -5000 8000 = 0 3000*
New balance 37000 1000 1000 8000 = 4000 43000
"Goods have been sold on profit of s. which is credited to capital account of the promoter From the goods account, the value will
be reduced to the extent of their cost price only.
Examples on equation
Examine the following transactions and state whether the statement is correct or incorrect:
1. Assets = Liabilities + capital, is the basic equation in a balance sheet.
2. Capital liabilities = Assets
3. A firm has assets worth Rs.24000 and liabilities of Rs.6000. The capital would be equal to Rs.30000.
4. A balance sheet which does not have any outside liability would have the same amount of capital and assets.
5. When a firm increases its term loan from the bank, its capital is reduced to that extent. (Answer: 1 & 4 are
correct and 2,3 &5 incorrect)
ACCOUNTING CONVENTIONS
While recording the transactions, the following general traditions are followed:
For Assets : Any increase in assets is recorded on the left-hand side (i.e. by debiting the asset account) and decrease on the right hand side (i.e. by
crediting the account). Hence increase in the amount of an asset is the result of debit to the account and decline in the balance is due to credit to
the account. For example, with purchase of machinery worth Rs.2 lac, the machinery account would be debited which will increase the balance
to that extent. Subsequently, when the depreciation amount is credited in the account, the balance in the account would decline.
For liabilities : Any increase in liabilities is recorded on the right hand side (i.e. by crediting the liability account) and the decrease on the left hand
side (i.e. by debiting the account). Hence, the increase in the amount of a liability account is due to credit to the account and decrease in balance
due to debit to the account. Bank loan of Rs.3 lac obtained by the firm, would be credited to the bank account and would increase the balance
payable to the bank. The payment of annual instalment of the loan would be posted on the debit side and would reduce the balance in this
account.
Profit or loss : The profit would be credited to the capital account and loss would be debited to the capital account. This will affect
the balance in the capital account, accordingly.
INCREASE AND DECREASE OF ASSETS AND LIABILITIES
Type of Transaction Example
Increase in one or more assets and Use of cash for purchase of an assets e.g. purchase of machinery for cash which increases the
decrease in another asset balance in machinery account and reduces the balance in cash account. With this only the asset
side of the balance sheet undergoes change.
Decrease in asset and decrease in Withdrawal of cash by the promoter of the firm which reduces the balance of cash and
capital also reduces the capital. This changes the composition of both sides of the balance
sheet
Decrease in asset and decrease in Payment of dues payable to creditors of the firm which reduces the cash balance on the one hand
liability and the balance in the creditor's account on the other hand (both sides effected)
Increase in asset and increase in Purchase of an asset on credit say stocks of goods, which will increase the stocks and also the
liability amount of creditors (both sides effected).
Increase in asset and increase in Introduction of additional capital by the promoters of the business which increase balance in the
capital capital account and also the cash account (both sides effected)
COMPARATIVE POSITION OF NOMINAL AND PERSONAL ACCOUNTS

At times, for the new learners of book keeping it becomes difficult to make a distinction between a nominal account and personal account, due to
use of similar kind of names. For example, the amount of interest when paid, becomes a nominal account but when it is still payable or has been
received in advance, it is part of the personal account. The following example would clarify the position further.
Transaction Nominal account Personal representative account
Interest/Rent Payment Interest/Rent paid interest/rent prepaid OR interest/rent
outstanding
Interest/Rent receipt Interest/Rent received Interest kent received in advance OR
interest/rent outstanding for receipt
Salary payment Salary paid Salary paid in advance OR salary outstanding for payment
Salary receipt Salary received Salary received in advance OR salary

outstanding for receipt
Commission or Discount Commission/discount Commission/discount payable OR commission
payment paid outstanding for payment
Commission or Discount Commission/discount Commission/discount due but not received OR commission/discount
receipt received received in advance
Any other income receipt Income received Income due but not received & outstanding OR received in advance
Any other expenditure Expenditure incurred Expenditure due but not incurred & outstanding OR incurred in
advance
RULES FOR 'DEBIT' AND 'CREDIT'

By relating the nature of account with the rules of debit or credit, no difficulty is faced in properly debiting or crediting an account. For three types of
accounts - personal, real and nominal - the rule of debit and credit in each type of account has been laid down as under:
Personal account
Debit the receiver (on sale of goods on credit to a person, his account would be debited)
Credit the giver (on purchase of furniture on credit, the seller's account is credited)
Real account
Debit what comes in (when cash is received, cash account is debited)
Credit what goes out (when furniture is purchased for cash, the cash account is credited)
Nominal account
Debit all losses and expenses (when salary is paid to an employee instead of his personal account, the salary expenses
account is debited)
Credit all gains and income (when commission is received, the commission account is credited rather than the person, from
whom the commission is received)
It may be repeated that the "receiver" and "giver" in the case of a personal account ; the "coming in" and "going out" in the case of a real account ;
and "expenses" and "gains" in the case of nominal account - all are to be judged from the business point of view and not from the owners' point of
view.
Exercise for applicationfor rule, for debit or credit
What rule will be used for debit or credit of the following transactions:
1 Receipt of cash 2 Sale of goods on credit
3 Introduction of more capital by the promoter 4 Payment of wages
5 Withdrawls of funds by the promoter 6 Purchase of goods on credit
Answers:
1 Debit the cash, as real account is debited for what comes in.
2 Credit the goods account and goods have parted with credit what goes out in case of real account
3 Credit the capital account Credit the giver, the promoter is giver of the capital
4 Debit the wages account Debit all expenses
5 Debit promoter's drawing account Debit the receiver, the promoter is the receiver of the withdrawn amount , 6 Credit the
seller Credit the giver.
SUMMARY OF EFFECT OF DEBIT & CREDIT TO VARIOUS ACCOUNTS
Name of the account Effectonbalancewhenaccount Effect on balance when account is
isdebited credited
Asset Accounts Balance Increases Balance Decreases
Liability Accounts Balance Decreases Balance Increases
Capital account Balance Decreases Balance Increases
Expenses account Balance increases Balance Decreases
Income or revenue a/c Balance Decreases Balance Increases
COMPARATIVE POSITION OF NOMINAL AND PERSONAL ACCOUNTS

At times, for the new learners of book keeping it becomes difficult to make a distinction between a nominal account and personal
account, due to use of similar kind of names. For example, the amount of interest when paid, becomes a nominal account but
when it is still payable or has been received in advance, it is part of the personal account. The following example would clarify the
position further.
Transaction Nominal account Personal representative account

Interest/Rent Payment Interest/Rent paid Interest/rent prepaid OR interest/rent outstanding
Interest/Rent receipt Interest/Rent received Interest/rent receivedin advance OR interest/rent
outstanding for receipt
Salarypayment Salarypaid SalarypaidinadvanceORsalaryoutstandingforpayment
Salary receipt Salary received Salary receivedinadvanceORsalary outstandingforreceipt
CommissionorDiscountpayment Commission/discountpaid Cornmis.siontdiscount payable OR commission

outstandingforpayment
CommissionorDiscountreceipt Commission/discount Commission/discount due but not received OR
received commission/discountreceivedinadvance
Anyotherincomereceipt Incomereceived Income due but not received & outstanding OR
received in advance
Anyotherexpenditure Expenditureincurred Expenditure due but not incurred & outstanding OR incurred in
advance
MEANING OF DEBIT AND CREDIT BALANCE IN ACCOUNTS

-Accounts such Cash in hand, current account with bank, fixed -Accounts such as capital, loan obtained from banks,
assets, sundry debtors, drawings,' other assets including institutions, friends/relatives, creditors,
stocks,losses, prepaid expenses,expenses of all kinds, bills payable, overdrafts, profit from business,
have debit balance. outstanding expenses, interest on drawing,
- Amount is due to the firm i.e. it is from others such Sundry have credit balance.
debtors. - Amount is due to be paid to the promoters of the firm,
- Firm has some property or asset equal to the balance in the account such as capital.
like machinery.. - Amount is payable by the firm to outsiders such as long term
-Firm has incurred loss or expenditure which is shown as intangible liabilityor short term liability
asset like accumulated loss or patent. - Firm has earned profit which will become part of the
A debit balance is either an asset such as cash, furniture OR it is capital.
loss or expense such as rent paid, salary paid etc. A credit balance means that it is either a liability such as
promoters' capital or sundry creditor or income earned, such as
interest
3. MAINTENANCE OF CASH/SUBSIDIARY, BOOKS & LEDGER

Business transactions involve the exchange of value either in the form of money or of goods or services measured in terms of money. Bookkeeping
or accounting is the systematic recording of transactions with a view to ascertaining the financial position of the business. Maintenance of accounts
of all recognised business concerns is what is known as the 'Double Entry Book Keeping' system. According to this system, every business
transaction has a two-fold financial aspect, which means that it affects two accounts, one account to be debited, and the other credited with a like
amount. This is the fundamental principle of double entry bookkeeping
A business has to maintain books which can be either the books of original entry or the principal books. While a journal is a book of prime or
original entry, the ledger is a principal book. In addition to journals, a business may use certain other books such as sales book or purchase books
and such other books which are called subsidiary books. In fact these subsidiary books are used in a large business where every entry is not possible
to be routed through the journal process, due to large volume of transactions.
Books of original entry or subsidiary books, are by themselves not complete. After preparation of ledger accounts only, the information recorded
in these books becomes meaningful. The principal books or ledgers are used to record the transactions relating to that particular aspect of
business and also to prepare a trial balance and final accounts.
JOURNALS & LEDGERS
A business has to maintain books which can be either the books of original entry or the principal books.
The journal is a book of prime or original entry, the ledger is a principal book. In addition to journals, a business may use certain other books such as
sales book or purchase books and such other books which are called subsidiary books, In fact these subsidiary books are used in a large business
where every entry is not possible to be routed through the journal process, due to large volume of transactions.
Books of original entry or subsidiary books, are by themselves not complete. After preparation of ledger accounts only, the information recorded in
these books becomes meaningful. The principal books or ledgers are used to record the transactions relating to that particular aspect of business
and also to prepare a trial balance and final accounts.
Important Terms
Posting : It refers to transferring the debit and credit items from the journal or cash book to the respective account in the ledger.
While making posting in one account, proper reference is to be given, for the corresponding transaction.
Balancing : It refers to equalizing 2 sides of an account by placing the difference amount on one side, where the total is shorter than
the other side. If debit side is larger, the difference amount will be placed on credit side and vice versa. While opening the account in
the next accounting period, this difference amount would appear on the debit side.
Cash discount : It is discount given to the buyer by seller, for payment before due date. Trade discount : It is discount given to the
buyer by seller, for purchase of goods.
JOURNALISING
Business transactions are recorded on the basis of various documents such as cash memo, invoice or bill, receipts, pay-in-slips, cheques, debit
and credit notes etc. Depending on the nature of transactions, the accounts are debited or credited by following the debit credit rules. The
process of recording the transaction at first stage through a book called JOURNAL, is called journalizing. Journal reduces the possibility of errors, it
provides an explanation of the transaction and it makes available, the chronological record of all transactions.
Steps in Journalising : For the purpose of journalizing the following steps are followed:
1. Ascertaining whether there is increase or decrease in the asset or liability.
2. Deciding whether the amount will be written on debit side or credit side and of which account.
3. Recording the transaction accordingly.
FORMAT FOR JOURNAL
Date Particulars Ledger Folio Debit Amount Credit Amount
For example, if a person starts business by contributing Rs.50000 as cash, this will create a balance of Rs.50000 in cash account
and also similar balance in the capital account. If the business already exists, this transaction would increase the balance in these
two accounts. The journal entry Would take place in the following manner.
Cash account Dr. Rs.50000
To Capital account Cr. Rs.50000
if out of the available cash balance, a sum of Rs.20000 is used to purchase furniture, the cash balance will be reduced and balance in the furniture
account would be created and the entry would be recorded as under:
Furniture account Dr. Rs.20000
To cash account Cr Rs.20000
At times there may be complex entries involving more than one debit or credit. For example if a creditor (say B) permits discount of Rs.300 for a
cash payment made against his dues of Rs.6000, the entry would be recorded as under:
B's account Dr Rs.6000
To discount account Cr Rs. 300
IMPORTANT JOURNAL ENTRIES
Nature of Transaction Account to be debited Account to be credited
Commencement of business with cash Cash account Capital account or any other
liability account
Purchase of assets or goods out of cash Asset account or purchase Cash account
account
Purchase of assets or goods on credit Asset account or purchase Seller's account or Creditor's
account account
Sale of assets or goods for cash Cash account Asset or sale account
Sale of assets or goods on credit Buyer's or Debtor's account Asset or sale account
For any type of expenses which are due Expenses account (respective head) Cash account for cash payment. In case of on
within the accounting credit, account of the supplier of the service
period
For any type of income due within the Cash account for cash entry or account Income Account (respective head)
accounting period of the buyer of services for on-credit
entry
For outstanding expenses Expenses account (respective Outstanding expenses a/c
head)
For pre-paid expenses Pre-paid expenses account Expenses account (respective
head)
For outstanding or accrued income Account of the person from whom such Income account (respective head)
income is to be received
For income received in advance Income account (respective head of Income received in advance
account) account
Depreciation on fixed assets Depreciation account Asset account on which
depreciation charged
For goods taken for personal use Drawing account Respective asset account
Payment made by cheque to Creditor's account Bank account
creditors
Payment received by way of Bank account Debtor's account
cheque from debtors
For transfer of opening stock Trading account Opening stock account
For transfer of Closing stock Closing stock account Trading account
More examples of 'how to journalize' are available in the Final Accounts section of this book, which may be referred by the
readers for better understanding.
LEDGER
A ledger is a set of accounts in which various accounts are opened. It is a book or register which contains permanent record of all transactions in
a summarized manner. This is also called the Principal Book. Ledgers are used for preparing the final accounts with the help of trial balances.
The ledger contains all the three types of accounts namely personal accounts, real accounts and nominal accounts. A ledger has two sides i.e.
debit side and credit side. Each side contains information such as date, particulars, folio and amount. For preparing a ledger, following steps are
essential:
1. Passing the journal entries relating to business transactions;
2. Posting of opening balance, if any and then posting the journal entries according to their debit or credit aspect, in the
respective account.
3. Working out the closing balance, after posting of all entries, which is called balancing of ledger accounts
FORMAT OF LEDGER
Debit Transactions : Credit Transactions
Date Particulars Folio Amount Date Particulars Folio Amount
This process has been shown in the following exercise.

EXERCISE FOR JOURNALISING & LEDGER PREPARATION Please journalise the following
entries and post them for preparation of ledger account:
1 Purchased goods on credit from Ramesh Chander Rs.15000
2 Sold goods to Harish on Credit for Rs.10000
3 Purchased machinery for cash Rs.25000
4 Sold goods for cash to Manish for Rs.12000
Solution: Journal entries:
1 Goods account Dr. 15000
To Ramesh Chander Cr 15000
2 Ha r i s h D r . 1 0 00 0
To Goods account Cr 10000
3 Machinery account Dr 25000
To cash account Cr 25000
4 Cash account Dr. 12000
To goods account Cr 12000
It may be assumed that the cash account has opening balance of Rs.50000 and goods account Rs.25000. For the above
entries, the following ledger accounts can be prepared:
Dr. Cash account
To balance b/d 50000 By machinery 25000
account
To sales 12000 By balance 37000

account c/d
Total 62000 Total 62000
r. Goods account Cr
To opening 25000 By Harish 10000
balance b/d account
To Ramesh 15000 By cash 12000
Chander account
By balance 18000
c/d
Dr. Ramesh Chancier account Cr
To balance c/d 15000 By goods 15000
account

Dr. Harish account Cr
To goods 10000 By balance 10000
account c/d

Dr. M ac hi ner y acc o unt Cr
Date I Particulars I Folio I Amount [Date Particulars I Folio I Amount
To cash 25000 balance 25000
By
account
c/d

For more on ledger accounts, the readers may refer the Section 'Final Accounts'.
On the above pattern, the readers may prepare the ledger account after journalising for the following case:.
Practical case: Journalise and prepare ledger accounts for the following transactions.
April 01, 2004 Opening balance in cash account Rs.40000, in bank account Rs.50000, goods account Rs.4 lac, Machinery account
Rs.3 lac, creditors Rs.10000 and bank loan account Rs.20000, capital Rs.7.60 lac
July 12 Sold Goods to Ramesh for Rs.18000 and trade discount allowed 10%
July 12 Purchased goods from Harish for cash Rs.28000
Aug 16 Rent of office paid for Rs.2500 in cash
Sept 28 Cash withdrawn from bank for personal use Rs.7500
Sept 30 Charge depreciation @ 5% on machinery
Answer : The closing balance in these accounts would be as under:
Cash account: 17000 Goods Bank account 42500
account 410000 Bank Machinery 285000 Creditors: 10000
/oan:20000 Ramesh account : 16200
Rent account : 2500 Discount : 1800
Depreciation: 15000 Capital Rs.740700
CASH BOOK
Cash book may be defined as the record of transactions concerning cash receipts and payments. Transactions involving cash, cheques, bank
drafts, postal orders, notes etc. which are considered like cash, are routed through cash book. This is designed in such a way that this serves
the purpose of journal transactions as well as ledger. This is divided into two parts - the left-hand side is used to record cash receipt (by
following the rule applicable for real account - debit what comes in) and the right-hand side is used for recording payments (real account-
credit what goes out). By giving the cash book the shape of a ledger account the fundamental rule, that every entry must first be recorded in
the book of prime entry and then posted to ledger, has been discarded.
Cash book may be a single column cash book, double column cash book (i.e. cash book with discount column) and three column cash book
(i.e. with discount and bank column). Cash book can also be maintained as a petty cash book. Format for all kinds of cash books are given as
under:
Single Column Cash book
Receipt Payment
Date Particulars LF Amount Date Particulars LF Amount
Cash Book with Discount Column or Double Column Cash book

Receipt Payment
Date Particulars LF Discount Amount Date Particulars LF Discount Amount
Cash Book with Discount Column or Double Column Cash book
Receipt Payment
Date Particulars LF Discount Cash Bank Date Particulars LF Discount Cash Bank
Practical case for Cash book entries
Enter the following in the cash book with discount and bank columns.
1 Cash book is showing opening balance of Rs.14800 and bank balance of Rs.11000
2 Firm paid Rs.660 for purchase of goods and Rs.600 for purchase of stationery.
3 A cheque has been received from Mr. Ramesh for Rs.1100 and another cheque has been received from Mr. Suresh for Rs.900.
He has been allowed discount of Rs.100.
4 Cash has been received from Mr. Munish Rs.3000 which along with cash from cash in hand for Rs.1000 deposited in the bank.
5 Staff paid salary by way of cheque Rs.3000
6 Promoter withdrew Rs.4000 from bank for personal use.
Importantpointstoberemembered:
1 When a cheque is received as payment, it is debited to bank column. But if it is not deposited on the same day, on date of receipt, it will be
debited to cash column and on date of actual deposit, cash account would be credited and bank account debited.
2 Cash column always carry debit balance but bank column can have debit balance (in case of current account) and credit
balance, when there is overdraft position.
3 If a cheque is received and then endorsed in favour of anyone else, it will be posted as debit and as credit entry, to keep the
record of the entry.
PETTY CASH BOOK
Petty cash book is maintained for day to day small expenses such as payment on account of postage, stationery, conveyance, travelling,
cartage etc. For incurring these expenses, an advance is allowed to the petty cashier called 'lmprest'. Out of this, imprest advance, expenditure
is incurred and record is maintained as per following format. The total of each column of expenses is directly posted to the ledger, by treating
the Petty cash book as a journal.
Format of Petty Cash Book
Dr Cr
Receipt Cash Date Voucher No. Total Postage Stationery Conveyance Travel
book expense expenses expenses expenses
SUBSIDIARY BOOKS
A business organisation has to maintain various subsidiary books which include the following. By maintaining separate books in this manner,
the accounting work can be divided amongst various persons, there is saving of time, proper information is available to the business
organisation and it facilitates the checking work.
Purchase book : It is used to record credit purchases (and not cash purchases) of goods or material or stores, which are to be used for
production or trading purposes. Purchase of fixed assets such machinery etc. is not be routed through this book. This book will show debit
balance. The amount of purchases, in case of discount, is arrived at, after deducting the trade discount.
Purchase returns book or returns outwards: This book is required to record the return of goods and material, which was
purchased earlier and has been returned for various reasons. This book shows, credit balance.
Sales book : In this book, all credit sales (and not cash sales) of goods and material relating to the manufacturing or trading activity is
recorded. Sale of machinery or other fixed assets is not to be recorded in this book. This books shows credit balance. Entries in the sale book
are made on the same pattern as in case of purchase book (i.e. after accounting for the trade discount).
Sales returns book or returns inward : When goods sold by a firm are returned to it by its customers, such entries are recorded in this book. It
shows debit balance.
Bills receivable book : In this book, receipt of promissory notes or hundies, in favour of the firm are recorded. It shows debit
balance.
Bills payable book : It his book, record of issue of promissory notes by the firm or hundies drawn on the firm and accepted for
payment are recorded. It would show credit balance.
Cash Book : In this book, a business firm records receipts and payments of cash including those with the bank. Details about this
have been given above.
Journal proper : Any entry which could not be recorded in any of the above books is recorded in this book. Posting
Posting is the process of entering in the ledger, the information given in the journals (both special and general). Posting from the journal or
cash book is done periodically, may be, weekly or fortnightly or monthly as per the requirement of the business or volume of transactions.
Where the amount is to be debited, it would be written on the left hand side after entering the date and particulars (beginning with the word
'To' from the journal. The amount would be written on the right hand side for the credit entries, beginning the particulars with the word 'by'.
However, for the sake of simplification at certain places, we have used a different format for ledger posting which is similar to the
saving bank ledger being used in banks.
RELATIONSHIP BETWEEN JOURNAL AND LEDGER

The journal and the ledger are the most important books of the double entry system of accounting and are indispensable for a
systematic system. Following are the points of comparison between these two types of books :
The journal is the book of first entry (book of original entry) ; the ledger is the book of second entry (subsidiary book).
The journal is the book for chronological record ; the ledger is the book for analytical record.
The journal, as a book of source entry, ordinarily has greater weight as legal evidence than the ledger.
The unit of classification of data within the ledger is the accounts and the unit of classification of data within the journal is
the transaction.
4. BANK RECONCILIATION STATEMENT
The Bank Statement is received periodically, say every month. We check it for clerical errors and if any ors are found, we obtain a revised statement
containing no errors. The balance in this statement gives us a firm starting point to proceed for:
1. Finding out entries which do not require change in cashbook (these entries are present in the cashbook but not in the bank statement). These
entries give us the 'Adjusted bank balance'.
2. Finding out clerical mistakes in our cashbook and rectifying them
3. Finding out entries which require change in our cashbook (these entries are present in the statement but not in the cashbook)
Based on these 3 steps, we can prepare a statement called 'Bank Reconciliation Statement'. It is pertinent to note that step 1 gives the adjusted
bank balance which is a notional figure and not the actual balance in the account with the bank while steps 2 and 3 result in actually changing the
balance in the cashbook by correction of errors and posting of missing entries. This cashbook balance should be equal to the adjusted bank balance
as arrived in step 1. This is the balance which goes to the trial balance and balance sheet.
In a business, the majority of transactions of receipts and payments take place through the bank account. In the cash book of a trader, a separate
bank column is provided on both the sides. Cheques received from the customers and others are shown on the debit side in the cash book,
whereas cheques issued to suppliers and others are shown on the payments side. We have seen in the earlier paragraphs that the dates of the
cash book and pass book entries differ. The cheques deposited and issued are recorded in the cash book on the date when the cheque is
deposited or issued. However, in the bank entries, debit and credit will appear only on the presentation of cheques to it and on clearance of
cheques through the clearing house. The banks will honour their customers' cheques only when there is sufficient balance in their accounts. This
requires the trader to compare his cash book balance with that shown by the bank. A bank reconciliation statement is, therefore, prepared at
regular intervals, say, at the end of the month. It is prepared to explain the causes of differences and take the necessary follow up action
Reconciliation is a statement with the help of which a party reconciles its cash book with the bank pass book based on certain
causes of different between these two books.
Why need for reconciliation? The need for reconciliation of cash book with the pass book or vice versa arises due to the fact that two different
Organisations i.e. the firm and the bank, maintain, in their books, accounts of each other, which are operated by them at different times. Certain
transactions take place first at the end of the firm while other transactions take place first with the bank. For example, when a cheque is received
by the firm from some of its debtors, it deposits the same in the bank. While depositing the cheque with the bank, the firm debits bank's account
where as bank credits firm's account only on its collection. Till the time, the cheque is credited by the bank, the balance in the firm's cash book
and balance in the bank account would be different. This will have to be tallied with each other through the process of reconciliation. Similarly
there are certain debits or credits which bank enters first in its books, for instance, the monthly interest or collection charges, which party
responds after receipt of statement of account. Hence there is always some disagreement in the cash book (where the firm records transactions
with bank) and in the pass book (where the bank records transactions with the firm).
Reasons for the difference:
1 cheques issued by the party but bank has not paid any of those cheques to the debit of party's account,
which may be on account of non-presentation by the payee or dishonour of the cheque.
2 cheques or cash or other instruments deposited with the bank which bank has not credited so far either
because of non-collection so far or dishonour or credit to some other account
3 Error in recording the transaction in the cash book
4 Credits allowed by the bank to party's account say for interest or dividend payment
5 Deposit of money by some customer of the party directly into the bank
6 interest and other charges debited by the bank
7 debit by the bank on the basis of standing instruction already given
8 other direct payments made by the bank such as subscriptions, insurance payment etc.
9 dishonour of bills or cheques discounted/purchased by the bank.
10 Bills under collection collected by the bank and credited to the account
Nature of balances - The credit balance in the pass book means that party has a credit balance, like in case of current account, with the bank and
debit balance means that the party owes money to the bank e.g. cash credit or overdraft account. In the books of the party (i.e. cash book), this
position is opposite i.e. a credit balance in cash book means that party owes money to the bank and a debit balance in the cash books means that
the bank is debtor and owes money to the firm. We can also say that a debit balance in cash book and a credit balance in the pass book
represents current account with the bank and credit balance in cash book and debit balance in pass book represents overdraft or cash credit.
Nature of transactions - Various transactions between a firm and bank can be categorized into 4 segments:
A Debit of bank account in cash book by the party : For instance deposit of the cheques/other instruments by the firm with the bank for
collection, when the party debits the bank in its books but bank credits the firm's account after collection. Similarly if the cash is deposited
with the bank, the bank might have credited the amount to some other account.
B Credit of bank account in cash book by the party : For instance issue of cheque by the party when the firm credits the bank account but the
bank debits party's account, after presentation of the cheque for payment by the payee (e.g. debit of interest, incidental or other charges
or some wrong debit relating to
another account).
C Debit of firm's account in pass book by the bank : For example, certain direct debits by the bank on the basis of agreement/arrangement
at the time of opening of the account or subsequent authority in the form of standing instructions. Here the bank debits first and
party credits the bank after receipt of statement of account or even some wrong credit relating to some other account.
D Credit of firm's account in pass book by the bank : For example, direct credits by the bank on account of deposit of money by the customers
of the firm directly into the bank or receipt of dividend etc. directly in the bank, to be credited to firm's account.
It needs to be noted that all transactions between the firm and the bank can be covered under the 4 above categories to make the task of
reconciliation easy. For example, the cheques deposited by the firm and dishonoured on sending for collection by the bank are part of Item A
above. Similarly a cheque issued by the firm and dishonoured on presentation by the bank, can be classified under B. A cheque issued by the
individual partner of a firm and through mistake debited to firm's account can be categorized as direct debit under C. Cash deposited by the
partner in his personal account and wrongly credited in the firm's account can become part of category D.
MASTER RECONCILIATION TABLE

Category I II III IV
Balance as per/ Nature Cash book Cash book Cr Pass book Cr Pass book
of transaction Debit (means (means current Dr (means
(means CA) overdraft) a/c) overdraft)
Cheques, cash or other instrument deposited (-) (+) (+) (-)
by the party but not credited by the bank as yet
in party's account due to non-realisation or
dishonour or credit to some other account**
Cheques issued by the party bank has not paid (+) (-) (-) (+)
it so far due to non-presentation by the payee
or dishonour of the cheque**
Amount directly debited by the bank for (-) (+) (+) (-)
charges, interest, subscription insurance,
compliance of some standing instructions etc
or debit of amount relating to some other
account***
Amount directly credited by Bank on account of (+) (-) (-) (+)
refund, receipt of dividend, realisation of some
bills sent for collection etc. or credit of some
account relating to another account***
(the sign (+) means add the amount of the transaction, in the opening balance of the related book and the sign(-) means subtract
from the opening balance)
Important Note :
** These are the transactions where the party makes the entry first and bank responds subsequently.
*** These are the transactions where the bank makes the entry first and customer responds the entry subsequently.
Procedure for reconciliation:
Whenever the task of reconciliation is taken in hand, the following procedure can be adopted:
a Make comparison of two books i.e. cash book and pass book to locate the transactions which appear in one of books and not the other
b Take balance of one book as starting point, say balance as per cash book or pass book. This balance can be credit balance or debit
balance. This gives rise to four situations (debit or credit balance as per cash book or as per pass book), as given in the table below.
c Adjust the balance with starting point by adding the amount of transaction or deducting the amount of transaction depending upon the
nature of the transaction as indicated in the table below.
d The opposite balance at the end of these adjustment will be answer (if balance is credit in cash book it will be debit in pass book and vice
versa)
e Make use of the following table to place various items to find out the balance
Illustrationonreconciliation
1 The debit balance as per firm's cash book is Rs.5877. Cheques worth Rs.3000 were issued but out of that cheques worth Rs.987 only have
been presented. Further cheques worth Rs.1419 deposited in the bank have not been collected so far and bank has debited Rs.225 on
account of incidental charges. What will be balance as per pass book.
Solution In this problem, we are given situation at Category l above i.e. debit balance with the bank (or a current account).
Hence it can be solved in the following manner:
Balance as per cash book Rs.5877 Dr
A Cheques issued, not presented + 2013 Rs.7890 Dr
(at the time of issue, bank would have been credited due to which debit balance in cash book with the bank would have been reduced. By
adding the amount, the balance as per cash book and bank pass book will tally).
B Cheques deposited, not credited 1419 Rs.6471 Dr
(at the time of deposit of the cheque, the bank would have been debited due to which debit balance in cash book with the bank, would have
been increased. By deducting the amount, the balance as per cash book and bank pass book will tally).
C Charges debited by the bank - 225 Rs.6246 Dr
(with this debit at the bank, the credit balance in pass book would have declined. In order to tally the same with cash book
its amount will also have to be reduced in the cash book).
Balance as per pass book Rs.6246 Cr
(The balance in the pass book will be just opposite of the balance in cash book)
2 In the above question, if the balance would have been overdraft in cash book (i.e. credit balance as per cash book), the
reconciliation would have been as under:
Solution This case falls in Category-II above, where the credit balance as per pass book has been given. It can be placed in the
following manner:
Balance given as per cash book: Rs.5877 Cr
A Cheque deposited, not credited + 1419 Rs. 7296Cr
B Cheque issued, not presented - 2013 Rs.5283Cr
C Amount debited by the bank + 225 Rs.5508 Cr
Balance as per cash book Rs.5508 Dr
3 The bank pass book had shown credit balance of Rs.10500 and on scrutiny it has been found that the cheque amounting to Rs.750
deposited with the bank has not been collected as yet and cheque issued for Rs.1200 has not been presented so far. Bank debited Rs.35on
account of a subscription and credited Rs.800 on account of cash deposited by a customer of the firm directly into the bank and Rs.130 on
account of dividend collection. What will be the balance as per cash book?
Solution This case falls in Category - III above, where the credit balance as per pass book (current account) has been given. It can be placed in
the following manner:
Balance given as per pass book: Rs. 10500 Cr
A Cheque deposited, not credited +750 Rs. 11250 Cr
B Cheque issued, not presented -1200 Rs. 10050 Cr
C Amount debited by the bank + 35 Rs. 10085 Cr
D Amount credited in bank - 800 & 130 Rs. 9155 Cr
Balance as per cash book Rs. 9155 Dr
4 In the above question, if the balance would have been overdraft (i.e. debit in the pass book), the reconciliation would have
been done in the following manner:
Solution This case falls in Category - IV above, where the debit balance (overdraft) as per pass book has been given. It can be
placed in the following manner:
Balance given as per pass book: Rs.10500 Dr
A Cheque deposited not credited - 750 Rs. 9750 Dr
B Cheque issued not presented + 1200 Rs.10950 Dr
C Amount debited by the bank - 35 Rs.10915 Dr
D Amount credited by bank + 800 & 130 Rs. 11845 Dr
Balance as per cash book Rs.11845 Cr
5 On Dec 31, 2003, the bank column of the cash book of a firm had shown a debit balance of Rs.4610 and on scrutiny it is found
that:
st
a cheques amounting to Rs.6300 which were issued to creditors and entered in the cash book before 31 December, were not presented
for payment until that date.
b cheques amounting to Rs.2500 had been recorded in the cash book as having been deposited into the bank on Dec 31, but
were entered in the bank statement on January 01, 2004
c cheque of Rs.730 paid into the bank was dishonoured before Dec 31, but no intimation was sent by the bank to the firm.
d A dividend of Rs.380 paid direct to the bank had not been recorded in the cash book.
e Bank interest and charges amounting to Rs.420 had been charged in the bank statement, but not entered in the cash book
f No entry has been made in the cash book for a trade subscription of Rs.100 made by the bank, to the debit of firm's account.
g A cheque issued for Rs.10 has been entered in the cash book twice.
h A cheque of Rs.270 drawn by proprietor had been charged to firm's account erroneously.
What will be balance as per pass book?

Solution This case falls in Category-I above, where the debit balance (i.e. current account) as per cash book has been given. It
can be placed in the following manner:
Balance given as per cash book: Rs.4610 Dr
A Cheque deposited not credited - 2500, 730 Rs. 1380 Dr
B Cheque issued, but presented + 6300,10* Rs. 7690 Dr
C Amount debited by the bank - 420,100,270 Rs.6900 Dr
D Amount credited in the bank + 380 Rs. 7280 Dr
Balance as per pass book Rs.7280 Cr
nd
*This amount to non-presentation of cheque issued once but recorded twice, as the cheque will never presented 2 time once
it is paid..
5.TRIAL BALANCE, RECTIFICATION OF ERRORS & ADJUSTMENT ENTRIES
In the earlier units, we have learnt how business transactions are recorded in the journal. These entries are posted to various accounts
in the ledger. The books of account are written on the basis of double entry system of bookkeeping. It means every debit has a
corresponding credit. Thus, when a summary of these debits and credits is prepared, it must tally. Such a list of balances is known as
Trial Balance.
MEANING OF A TRIAL BALANCE
The Directory for Acc.owitcuits, written by Eric. L. Kohler, defines Trial Balance as - a list or abstract of balances or of total debits and total
credits of the accounts in a ledger the purpose being to determine the
equality of posted debits and credits and to establish a basic summary for financial statements.
Mr. Carter defines Trial Balance as - a list of those debit and credit balances which are extracted from various accounts in the ledger
and balance of cash in hand and cash at bank, as shown by cash book, are also included in it.
Thus, from the above two definitions, a simple definition can be drawn. Trial balance is a statement showing debit and credit balances taken
from ledger including cash and bank balances as on a particular date
TRIAL BALANCE
When all the accounts of a business concern are balanced off, they are put in a statement, debit balances on one side and credit balances on
the other side. The statement so prepared is called a Trial Balance. The total of the debit side of trial balance must be equal to that of its credit
side. This is based on the principle that in double entry system, for every debit there must be a credit. The preparation of a trial balance is an
essential part of the process because if the total of both the sides is the same, it is proved that books are at least arithmetically correct. It must
be remembered that equalizing the two sides of a trial balance is not the sole and conclusive proof of the complete correctness of books.
It is prepared as on a particular date when balances of all ledgers are transferred to the trial balance.
Objectives:
To ascertain arithmetic accuracy of ledger accounts;
To help in preparation of final accounts;
To help in locating errors
FORMAT FOR TRIAL BALANCING
Ledger accounts - Debit Balance Credit Balance
Name of the account It generally contains the balances of It generally contains the balance in capital,
cash, bank, opening stock, fixed assets, discount creditors, all kinds income accounts,
allowed, debtors, bills receivables, all kinds discounts received, bills payable, bank
of expenses paid, drawings, purchase, sales returns, overdrafts, purchase returns, sales,
bad debts, depreciation etc. reserves etc.
Methods : There are four methods for preparing a trial balance:
Totals method : Total of each side of debit or credit of an account is used.
Balance method : Where onlythe balancein theaccountis placed
Totals & Balance method : Where both these are placed simultaneously
Totalsexcluding closed a/cs : Wheretotal is placedforrunningaccounts.
Limitations of Trial balance: Agreement of trial balance is not a proof of accuracy. lnspite of agreement of balance certain errors may still be
there such as transaction not entered in the journal, wrong amount has been written on both sides of the journal, wrong amount has been
posted in the ledger, an entry has been omitted from posting in the ledger, altogether or an entry has been posted twice in the ledger.
DISPOSAL OF TRIAL BALANCE ITEMS
The balances appearing in the trial balance must go either to the income statement i.e. trading & manufacturing account OR
profit and loss account OR to the balance sheet. In order to decide the place where a particular balance should be taken,
following rules may be utilised:
(i) Debit side of trial balance - Balance appearing on the debit side of the trial balance may either be a loss or expense or an asset. If the
debit balance of the account represents such an item that it is likely to benefit over a period of time in future, it is an asset and is taken to the
asset side for the balance sheet. Land, building, machinery, tools, bills receivable, debtors balances, bank and cash balance, and balance of
stock-intrade, are examples of assets. Besides, there are some more items like preliminary expenses, development expenditure, heavy
amount spent on advertisement etc. which are shown in the balance sheet as assets (as the benefit from such activities normally continues to
come to the business for more than one year). If the nature of the account is such that the benefit out of it has already expired then it is an
expense, and is taken to the debit side of trading account or profit and loss account as the case may be. Cost of goods sold, wages, cartage,
freight, commission rent, salary, insurance, stationery, postage and carriage are examples of expenses.
(ii) Credit side of trial balance - When the balance appearing on the credit side of the trial balance of the account is payable to a party, may
be immediately or in future, it is a liability and is taken to the balance sheet. Examples are : capital of partners/promoters, share capital, loans
obtained, creditors, outstanding expenses. If the balance is not payable, it is a gain or revenue and is taken to the income statement. Examples
are - sale of goods or services, income from interest, rent, dividend etc.
Nature of account Disposal

Personal account If debit balance, asset in the balance sheet and
If credit balance, liability in the balance sheet
Real account Asset in the balance sheet, as it will have only debit balance
Nominal account If debit balance it will be expense either in the trading & manufacturing account or profit
& loss account. And
If balance is credit, it will be income in any of these account.
DIFFERENT TYPES OF ERRORS -EXAMPLES OF DIFFERENT TYPES OF ERRORS:
Error Explanation and example
Error of principle When a real or personal account transaction is treated as a nominal account item. Machinery
installation charges debited to wages, as installation was done by the factory labourers
Error of omission When there is complete omission to record a transaction e.g. cash sales of Rs.5000 not
recorded. Neither cash account debited nor sales account credited. OR Though cash has
been debited but sales not posted to the sales book.
Error of commission -Where posting has taken place but there is some mistake. The example for each case above, are given as
under:
-Sales of Rs.5670 recorded as Rs.6570
-Sales of Rs.5670 recorded in the purchase book
-Balance of Rs.34000 in the sales book taken as Rs.43000 in the trial
balance
-In the debtors' ledger, debited an amount of Rs.5400 as Rs.4500 to the
debit of buyer of goods on credit
-The amount of Rs.2000 on account of goods sold to one Mr.Ramesh on credited, credited to his
account instead of debiting his account
Compensating error Cash received from Ramesh Rs.2500 debited to cash account for Rs.2000 and cash paid to Mr. Dinesh
Rs.2500 recorded in the cash book as Rs.3000.
Howthe errorsaffectTrial Balance
Error at the time of The ledger account would reflect wrong balance due to which the trial balance will not tally
posting to ledger
Error in carry - Due to wrong carry forward, the balance in the ledger account would be different from what
forward it should be. Hence trial balalice will not tally
Error in balancing If a ledger is not balanced correctly, it will show a different balance due to which trial balance
the account will not tally
Error in casting trial balance If debit or credit balance from a ledger account is not taken correctly to the trial balance both
sides will not agree
Error in preparing When there is any mistake in preparing creditors' or debtors' schedules, the total will be
schedules carried to trial balance incorrectly, due to which the trial balance will not tally.
Errors not disclosed by trial balance that donot effect the trial balance:
(a) Omission of any entry altogether from the subsidiary books
(b) Making an entry of a transaction in a wrong subsidiary book
(c) Posting of an amount in a wrong account on correct side
(d) Some error of principle
(e) Some compensating error
Errors disclosed by trial balance that effect the trial balance:
The trial balance, in general, discloses any error which affects one side of the account. Some of the examples are as follows :
(a) Error in casting the book of subsidiary records.
(b) Error in carrying forward the total of one page to another page.
(c) Error in posting from the books of original record to ledger.
(d) Error in balancing the account.
(e) Error in preparation of debtors' schedule and creditors' schedule.
(f) Forgetting to carry forward a balance of an account to the trial balance.
(g) Posting an amount on the wrong side of the account
(h) Omitting to post an amount from a subsidiary book
( i) Omitting to post the totals of subsidiary books into the ledger
( j ) Omission in writing the cash book balance in the trial balance
(k) Writing a balance in the wrong column of the trial balance
(I) Totalling the trial balance wrongly
RECTIFICATION OF ERRORS
During the process of accounting, it is possible that certain errors creep in un-intentionally which may result in non-tally of the trial balances or
problem in reflection of a fair account of profit, assets and liabilities. In order to see that the final compilation of accounts is error free, these
errors are to be located and then removed.
Detection of errors and correction: After identification of various errors, one can proceed with rectification of these errors, depending upon
the nature of the error having taken place and when it is detected. If an error has been detected immediately after the transaction, it can be
corrected immediately by neatly deleting the entry without any over-writing. But if the error is detected at a later stage, it will have to be seen
whether it is one-sided or two-sided.
One sided error effect one account and can be corrected without any journal entry. For instance, if the purchase book is undercast by
Rs.15000, the error affects only the purchase book and can be rectified by debiting Rs.15000 to the purchase account by making an entry
reading 'to under-casting of purchase book Rs.150000'. Similarly if commission of Rs.300 paid to Mr. X has not been posted to commission
account, the entry can be made reading as 'by omission of posting of commission Rs.300'.
Illustrations:
a Sales book has been undercast by Rs.30000
(The sales book should be credited by Rs.30000 as it was credited short earlier by that amount by writing the narration by
undercasting of the sale book Rs.30000)
b Depreciation of Rs.1000 on machinery has been debited twice to the depreciation account.
(The depreciation account would be credited as "by double posting of depreciation ... Rs.1000)
Two side error affect two or more account and can be corrected by a journal entry. For instance, the sale of machinery for cash for Rs.2 lac has
been posted in the sales book. The error would be rectified by debiting the sale account and crediting the machinery account. The following
illustration would clarify the matter:
Wrong entry that has been made : Cash Dr
To sales Cr
Correct entry that should have been: Cash Dr
To machinery Cr
Entry for rectification : Sales a/c Dr
To machinery Cr
Illustration:
a Minor repairs to machinery debited to machinery account
Repairs account Dr
To machinery account Cr
b Rent paid to landlord debited to landlord's personal account

Rent account Dr
To landlord's account Cr
Suspense account : It is also possible that the business has not been able to locate the difference in the totals of trial balance and he wants to
prepare the final accounts. In such circumstances, the difference is adjusted in the suspense account. It may be noted that this is only a
temporary measure and this will make the trial balance appear to have tallied. This is used to rectify all one-sided errors and those not
affecting the trial balance cannot be rectified by opening suspense account. For example, if the purchase book has been cast short by
Rs.2000, the trial balance debit side would also be Rs.2000 short. To rectify this, the following entry would be passed:
Purchase account Dr.2000
To suspense account Cr.2000.
Differentkinds of errorsand methodto rectifythose errors
Where omission has taken place : Entry will be passed by way of journal and then accounted for.
Where error of principle has occurred : Head of account wrongly debited or credited would be credited or debited accordingly and the head
which was to be actually debited or credited would be debited or credited. For example if the sale of machinery has been credited to goods
account, the entry will be rectified by debiting the goods account and crediting the machinery account.
In case of compensating error : In case of such errors which may be posting on the wrong side of the same account or to a wrong
account.
If it is on the wrong side of the same account, it will be rectified by debiting or crediting the account to the credit or debit of suspense account
(for example rent paid account instead of being debited has been credited error would be rectified by debiting the rent account and crediting
suspense account..
Where it affects two accounts, rectification should be done by debiting and crediting the respective account (e.g. if goods sold to
Ramesh have been routed through purchase account, Ramesh account would be debited and purchase account would be
credited).
In case of over-casting or under-casting : Where an account is over-cast or under-cast, the rectification would be done through suspense
account. If purchase is overcast, suspense account would be debited and purchase account would be credited. For under-cast purchase
account, purchase account would be debited and suspenSe account would be credited.
Steps to be taken for rectification of errors
The following steps are required to be taken:
A identify the error and understand the nature of the error (for instance, the wages of labourer of the production unit of a
factory, charged to wages account although his services have been used for construction of factory building error of
principle)
B identify the heads of accounts which have been affected due to this error (building account should have been debited instead
of the wages account in the above case);
C entry to be passed or action to be taken to rectify the error (debit the building account and credit the wages account, which will not only
reflect the true position of profits but also record the actual position of building account in the above case)
Rectification of Errors when books are closed
If the difference still remains after applying all the checks, it is carried forward to the balance sheet on the appropriate side. Personal
-
accounts will be carried to next year. For nominal account, a new account 'Profit and LO -5S Adjustment Account' will be opened to
rectify the error. The balance in the account will then be directly transferred to capital account
SUMMARY OF ADJUSTMENT ENTRIES FOR VARIOUS KINDS OF TRANSACTIONS

Nature of transactions Account to be debited Account to be credited
(along with name of financial (alongwith name of financial
statement) statement)
Outstanding/unpaid expenses (like rent, wages, Respective expenses a/c (profit and loss Expenses outstanding (balance sheet)
depreciation etc) account)
Prepaid expenses Prepaid expenses (balance sheet) Respective expenses a/c (profit and loss
(such as insurance, commission etc) account)
Income accrued/due not received (Any kind of Accrued income (balance sheet) Respective income account (profit and loss
income) account)
income received in advance (any kind of income) Respective income a/c(profit and loss Income received in advance (balance
account) sheet)
Provision against doubtful debts Expenses provisions doubtful debts Provision for doubtful debts (balance
(profit and loss accounts) sheet)
More provisions for doubtful debts (for the additional Expenses provisions doubtful debts Provision for doubtful debts (balance
amount only) (profit and loss accounts) sheet)
Writing-off of bad debts Expenses : write-off bad debts (profit andRespective party's account (balance
(when no provision is already available) loss account) sheet)
Write-off of bad debts Provision for doubtful Respective party's account (balance
(when provision is already held) debts (balance sheet) sheet)
Write-off of bad debts Provision for doubtful debts Respective party's account (balance
(when adequate provision is not held) (balance sheet) Expenses write-off of sheet)
bad debts for shortfall amount ( P & L
Account)
Excess provision on doubtful debts Provision for doubtful Expenses provisions-doubtful
debts (balance sheet) debts (profit and loss account)
Interest on capital not paid Expenses: Interest on capital (Profit Capital account /balance sheet)
and loss account)
Interest on drawings Capital or drawings account (balance Income-interest on drawings (profit and
sheet) loss account)
HOW VARIOUS ADJUSTMENTS AFFECT DIFFERENT ACCOUNTS

Transaction Trading account Profitiloss account Balance Sheet
Closing stocks Credit Side Asset Side
Depreciation Debit side Reduction from Fixed

Asset
Expenses outstanding Addition to related exp. a/c Addition to related exp. a/c To be shown as liability
debit side debit side
Prepaid expenses Reduction from related Reduction from related To be shown as an asset
exp. a/c exp. a/c
Accrued income Addition to related To be shown as an asset
income account
Income received in Reduction from related To be shown as liability
advance income a/c
Interest on capital Int account to be Add to amount of capital
debited
Interest on drawing intt account to be Reduction from capital
credited
Provision for bad debts Debit to P&L account Reduction from amount of debtors
Discount on debtors Debit to discount account to Reduction from amount of debtors

P&L a/c
Commission payable to
Manager*
*If commission is to be calculated before charging such commission = Net profit before such commission x rate / 100
If commission is to be calculated after charging of such commission = Net profit before such commission x rate / 100+rate.
ADJUSTMENT ENTRIES
After completion of the process of trial balancing or drawing final accounts, at times, subsequently, it may come to the notice of the
management that certain expenses which were to be incurred have not been paid and certain expenses have been paid in advance. Similarly
there may be some income which was due to be received, but has not been received so far and some income which was still not due has been
received. As a result, the actual position of profit or loss may not be reflected unless these are adjusted in the final accounts. The summary of
some of the adjustments is given as under:
SUMMARY OF ADJUSTMENTS WITH JOURNAL ENTRIES

Natureof transaction Account to be debited Account to be credited
Closing stocks Closing stocks Trading account
Outstanding expenses Concerned Expenses account Outstanding expenses a/c
Prepaid expenses Prepaid/unexpired expenses Concerned expenses account
account
Accrued or outstanding income Accrued income Concerned income account
Income received in advance Concerned income account Income received in advance
Depreciation Depreciation account Asset account
Interest on capital Interest on capital a/c Capital account
Interest on drawings Capital account Interest on drawings a/c
Interest on loan Interest account Interest outstanding a/c
Bad debts Bad debt provision account To debtor's account
Making provision for bad debt Profit and loss account To provision for bad and doubtful debt
account
Provision for discount on debtors Discount allowed a/c To provision on debtor's account
Provision for discount on creditors Provision for discount on creditors To profit and loss account
Accidental loss, say fire Loss by Fire To trading account for stock of goods or
other asset's account which has BEEN
damaged
Commission payable on profits Expenditure Commission on profits Commission payable on profits
Drawings of goods by the promoter Drawings account Purchase account

Goods received but bill not Purchase account Suppliers account
received
Claim admitted by insurance Insurance company Trading account
company but money not received
Returns inwards Returns inward Debtor's account
Returns outward Creditor concerned Returns outward account
PRACTICAL CASES FOR PREPARATION OF LEDGER ACCOUNTS AND FINAL ACCOUNTS In the following cases, the readers will be able to
understand as to:
How the individual transactions are journalized?
How they are to be posted in the ledger accounts?
How ledger accounts are to be balanced?
How the outstanding balances in individual accounts are to be treated in trial balance?
How the trial balances are to be disposed off?
How the trading& manufacturing account and profit & loss account and balance sheet is to be prepared?
Case -1
The readers may journalise and do the ledger posting on the pattern of case No.2. The trial balance, profit & loss account and
balance sheet based on this case are given hereunder:
A partnership firm undertakes following transactions in their business during a particular period.
1. Introduces capital of Rs. 54,500/- and purchases goods worth Rs. 4,000/-, Furniture Rs. 500/- and balance keeps as cash in
hand.
2. An amount of Rs. 10,000/- out of the cash balance is used for construction of building.
3. Goods worth Rs. 3,000/- are purchased and payment is made out of balance in the Bank account
4. Goods worth Rs. 25,000/- are purchased from Ashok on credit.
5. A sum of Rs. 200/- is paid as carriage in cash.
6. Goods worth Rs. 2,600/- are sold for cash.
7. Goods worth Rs. 4,600/- are sold to Mahender on. credit.
8. A sum of Rs. 1,200/- is paid as freight in cash.
9. A sum of Rs. 8,000/- is deposited with the Bank.
10. Salary to an employee for Rs. 600/- is paid in cash.
11. Rs. 2,000/- are withdrawn from the Bank.
12. A sum of Rs. 3,000/- is brought in cash as capital.
13. An interest of Rs. 2,000/- is paid on the capital.
Trial Balances
Cash 37600 Capital 59500
Debtors 4600 Creditors 25000
Stocks 24900
Furniture 500
Building 10000
Bank Account 3000
Carriage inward 200
Carriage outward 1200
Salary 500
Interest 2000
Trading & Manufacturing account
To purchases 321500 By sales 7100
To carriage inward 200 Closing stocks 24900
Gross loss 200
Profit and loss account
To gross loss 200
To salary 500
To carriage-outward 1200
To Intt on capital 2000 Bynet loss 3900
BALANCE SHEET
Capital 59500 Stocks 24900
Less loss 3900 Building 10000
Net amount of Capital 55600 Bank 3000
Creditors 25000 Cash 37600
Debtors 4600
Furniture 500
6. CAPITAL EXPENDITURE AND REVENUE EXPENDITURE

At the end of the year, a trial balance is prepared and from trial balance final accounts, i.e. trading and profit and loss account and
balance sheet are prepared. Trial balance shows the debit and credit balances taken out from the ledger. These balances, then,
are carried forward to the trading, profit and loss A/c and the balance sheet. All expenses and receipts of revenue nature are
shown in the trading and profit and loss account and all expenses and receipts of a capital nature are taken to the balance sheet.
It is, therefore, necessary to know, what is meant by revenue and capital expenses and revenue and capital receipts and their
importance in preparation of final accounts.
An expenditure is decided 'capital' or 'revenue' depending upon a number of factors, such as 1.Nature of the expense
2.Effect on revenue earning capacity, 3.Benefit from the expenditure
Capital expenditure is the kind of expenditure which provides benefit over a long period. The expenses that can be taken as capital expenditure
include the expenses connected with purchase/creation of a fixed assets, which result in acquisition of a permanent asset, OR incurred for
improvement of a fixed asset, that help in acquiring the rights to carry on business or acquire a tangible asset. (For example, the expenses relating to
purchase of land, building, plant and machinery, equipment, acquiring licences or patents etc.) There are certain expenses which appear to be
revenue expenses but actually these are capital expenditure and include expense incurred in connection with repairs of old building for the first time,
wages paid to a factory worker to produce tools or to fix a machinery, legal charges in connection with the purchase of land or building, interest paid
on capital for acquiring an asset till it is ready for use, pre-operative and preliminary expenses etc.
Revenue expenditure is the expenditure, the benefit of which will not be available for a period of more than one year. In other words, the
expenses incurred in regular course of a business i.e. day to day running of the business, upkeep of fixed assets, purchase of stocks and goods,
depreciation etc.
Distinction between capital and revenue expenditure
Capital expenditure Revenue expenditure
Incurred for acquisition of fixed asset Incurred for conduct of business
Increase the earning capacity of the business Incurred for maintenance of fixed asset
Benefit available for more than one year Benefit available during the year only
Shown in the balance sheet Shown in trading/profit & loss account
Deferred revenue expenditure is unusually heavy expenditure of revenue nature, the benefit of which would be available to the business for a
period of more than one year but no tangible asset has been created. For example, the expenses incurred in connection with marketing of a
product including advertising, voluntary retirement scheme. These assets are written off over a period of times (say 3-5 years).
CAPITAL RECEIPT AND REVENUE RECEIPT

Capital receipts are the amounts that are received in the form of capital introduced by the promoters, term loan received from banks and
the sale proceeds from fixed assets. Such receipts do not affect the profit or loss. These either increase the liability or reduce the assets.
Revenue receipt on the other hand is the amount received in normal and regular course of business such as by sale of goods and service. These
affect the profit and loss position. There are shown on the credit side of the profit and loss account.
Implications of classification of capital expenditure as revenue expenditure or vice versa: When such classification takes place, this is called
error of principle and it results in understatement of assets and also of profits or overstatement of losses, when a capital expenditure is
categorized as revenue expenditure.
On the other hand, where a revenue expenditure is treated as capital expenditure, it may become cause of overstatement of capital,
assets and profits and understatement of losses, if any.
Co mposite receipt : At times one part of a receipt may be revenue receipt and another part, a part of capital receipt.
Example : If a fixed assets is sold for a price greater than book value, the amount up to book value is capital receipt and amount
above book value is revenue receipt.
If t is sold at greater than book value and cost price up to book value, it is capital receipt. Between book val ue and cost, it is
revenue receipt. Above cost price, it is capital receipt.
Implications of classification of capital expenditure as revenue expenditure or vice versa:
When such classification takes place, this is called error of principle and it results in understatement of assets and also of
profits or overstatement of losses, when a capital expenditure is categorized as revenue expenditure.
On the other hand, where a revenue expenditure is treated as capital expenditure, it may become cause of overstatement of
capital, assets and profits and understatement of losses, if any.
Classification of Capital and Revenue expenditure / receipts in balance sheet I profit and loss account
Capital Capital Receipt Revenue expenditure Revenue Receipt
Expenditure
Treatment in balance It is asset in the It is liability in the Does not form part or Does not form part of
sheet Balance sheet balance sheet balance sheet balance sheet
Treatment in profit Does not form part of Does not form part It is expenses in the Profit & It is income in the
and loss account P & L a/c of P & L a/c loss account profit and loss a/c
7. BILLS OF EXCHANGE
The main journal is sub-divided into a number of journals. This list includes; bills receivable journal and bills payable journal. When
transactions of a similar nature are many, a separate journal will be maintained. Let us first learn the basic entries for bill
transactions and then we will learn to record these in separate journals, i.e. bills receivable and bills payable journals.
TYPES OF INSTRUMENTS OF CREDIT
In a business, credit transactions play very important role. For manufacturing goods, a manufacturer purchases raw materials, the
majority of which will be on credit. Once the goods are manufactured, these will be sold to wholesalers and retailers. Here also the
manufacturer will give credit to his wholesalers or regular customers. Thus, credit passes on from the manufacturer to the wholesaler and
from the wholesalers to retailers and from the retailer to the ultimate consumers. Credit may also be granted by a moneylender, a banker
or a financial institution. Credit is, generally, provided by obtaining, a written document called 'Instrument of Credit'. This serves as a
proof of existence of credit. The most commonly used instruments of credit are: 1. Bills of Exchange & 2. Promissory Notes
PROMISSORY NOTE (Section 4)
PN is an instrument (a) in writing, (b) containing an unconditional undertaking (or promise), (c) signed by the maker, (d) to pay
a certain sum of money, (e) to or to the order of a certain person or to the bearer of the instrument
Types of Promissory Note: There are two types of PNs, i.e. Demand Promissory Note (which is payable on demand) and Usance
Promissory Note (payable in future after a pre-decided definite period).
Parties : There are two parties i.e. maker or promisor (who promises to pay in case of bank loan, it is borrower)
and payee or promise (to whom it is payable in case of a bank loan, the bank).
PROMISSORY NOTE
Stamp Duty July 18, 2017
Rs.10000
I promise t o pay. t wo mont hs aft er dat e, t o Mr. Kulj eet Singh or his order. a sum of Rs. 10000 for
value received
To ;
Kuljit Singh Sd/
59. The TViall, Suresh Kumar
Delhi 128, Ca mp Roa , Luc know
BILL OF EXCHANGE (Section 5)
A bill of Exchange (BE0) is an instrument (a) in writing, (b) containing an unconditional order, (c) signed by the maker, (d)
directing a certain person to pay (e) a certain sum of money only (f) to, or to the order of, a certain person or to the bearer of the
instrument.
BILL OF EXCHANGE
Stamp Duty July 18, 2017
Rs.10000
Two months after date, Pay Mr. Satish Kumar or order. a sum of Rs. 10000 for value received
To ;
Kuljit Singh Sd/
59. The TViall, Delhi Suresh Kumar
128, Camp Roa, Lucknow
accepted
S d/ K u i j i t S i n g h
Parties to a BOE: U/s 7

Drawer: The person (including a minor) who orders to pay (say seller of goods). He is the creditor. (Suresh Kumar in the above example)
Drawee: Who is directed to pay (say a buyer of goods). He is the debtor. A minor cannot be drawee as he cannot incur liability. (Kutilt
Singh as above)
Payee: Who is authorised to obtain the payment (Satish Kumar as above),
Acceptor: The drawee becomes acceptor on acceptance of BOE for payment (KuIA Singh as above).
Accommodation bill of exchange
The bills that are drawn without any actual sale or purchase i.e. consideration, are called accommodation bills. Such bills after
acceptance are returned by drawee/acceptor, back to the drawer, who discounts the same with his bank and utilises the money.
The drawer and drawee may also agree to share the proceeds of discounting. In that case, they also share the charges. Near
due date of payment, the drawer remits the money to the drawee, to make payment of the bill on due date.
BILL OF EXCHANGE PROMISSORY NOTE

1. An unconditional order to pay 1. An unconditional promise
2. Creditor is the drawer 2. Debtor is the drawer / maker
3. Acceptance by drawee / acceptor 3. Acceptance by maker not required
4. 3 parties (drawer, payee, drawee) 4. 2 parties (maker and payee)
5. Noting by Notary on dishonour required 5. Noting not required
CHEQUE
As per Sec 6 a cheque is (a) a bill of exchange (b) drawn on a specified bank and (c) not expressed to be payable otherwise
than on demand. It includes electronic image of a truncated cheque and also an electronic cheque.
Parties to a cheque are drawer (the account holder), drawee (the bank with whom the account is maintained), payee (the person
named in the cheque).
Features : 1. Drawee of a cheque can be a bank only. 2. It has all essential elements of bill of exchange. 3. Signatures on cheque should
tally with those on record of the bank.
Cheque different from Bill of Exchange ?
Cheque sill of Exchange
It could be made payable to bearer or order Cannot be made payable to bearer.
It can be drawn on a bank i.e. drawee could be bank only Could be drawn on any person, competent to contract
No acceptance for payment is required Without acceptance for payment, the drawee is not liable
No grace period is allowed before payment. It is payable on Grace period could be allowed up to 3 days.
demand
It can be crossed It cannot be crossed
Can be made payable on demand only Can be made payable on demand or after so many days.
Te rms a ss o ci ate d w ith bill of e xc ha n e

1. Holder He is the person who is the legal owner of the instrument. Actual possession of the instrument and consideration is not
compulsory to be a holder.
2. Holder in Due Course He is the person who is the legal owner of the instrument. Actual possession of the instrument and
consideration is compulsory to be a holder in due course. Payee of a cheque obtained for consideration is a holder in due course, if
he possesses the cheque. If he does not possess the cheque, he is holder only.
3. Honour and dishonour of the bill When the drawee of the bill makes payment of the bill on due date, the bill is said to be
honoured. When it is not paid on due date, it is said to have been dishonoured.
4. Discounting of bill- When holder of the bill endorses the bill in favour of other party, before its due dates and obtains payment, it is
called discounting of the bill.
5. Endorsement of the bill When the holder transfers the bill to another person.
6. Retirement of the bill When the bill is paid before its due date.
7. Renewal of the bill When drawee of the bill makes part payment of the bill and requests the drawer to issue fresh bill for the
balance amount.
8. Accommodation bill A bill which is drawn without consideration i.e. without actual sale or purchase.
Notary Public An official appointed by the Govt. to exercise powers for certifying the dishonour of the bill.
10. Noting An entry by the Notary Public on the bill of exchange or separate paper that the bill has been dishonoured.
11. Protesting A certificate by the Notary Public that the bill of exchange has been dishonoured.
12. Rebate- The allowance given to the drawee by the drawee for payment of the bill before due date.
Bills receivable and bills payable book
Bills receivable book When a bill is drawn and accepted by the drawee, it is entered into bills receivable book. The bills receivable
account is debited and debtors' (customer) account is credited. Total amount of such bills, at the end of, say, a month, is debited to
bills receivable account.
Bills payable book : When a bill is drawn by supplier is received and accepted by the firm, it is entered into bills payable book. The
bills payable account is credited and supplier (seller) account is debited. Total amount of such bills, at the end of, say, a month, is
credited to bills payable account.
Bill of exchange: As per Sec 5, BoE is an instrument in writing, containing an unconditional order, signed by maker, directing a certain
person to pay a certain sum of money only or to the order of a certain person or to the bearer of the instrument In a Bill of Exchange, the
person ordering for payment is called Drawer and the person directed to pay is called Drawee. The beneficiary is called payee.
Demand Bill: A bill Of exchange payable on demand or at sight or on presentment is called Demand Bill.
Usance Bill: A bill of exchange payable after some time is called Usance Bill.
Documentary bill: which is accompanied by document of title to goods like railway receipt, bill of lading, etc.
Clean bill: is one which is not accompanied by any document of title to goods.
Inland bill: which is drawn or made in India and is either payable in India or on a person resident in India.
Foreign bill: is one which is not an Inland Bill i.e. it is drawn outside India or if drawn in India is payable outside India on a person resident
outside India. Foreign Bills are issued in more than one part.
Accomodation Bill: means a bill issued without consideration and dealing in such bills is called kite flying.
Interest Rate: If in a bill of exchange or promissory note, interest rate is not mentioned, it will be 18% p.a.
Calculation of Due Date
o Usance bills should be presented for acceptance within a reasonable time.
o The reasonable time is given under section 105 of NI Act. As per section 105, reasonable time means as per usage and practice
of the area.
o The drawee is allowed 48 hours excluding public holiday to accept the bill.
o If a Usance bill is payable after date, its due date is calculated from date of the bill and if it is payable after sight, its due date is
calculated from the date of acceptance.
o As per section 22 of the N l Act, three days of grace are allowed in the case of Usance bills and Usance promissory notes. But if
the due date is fixed on a particular day or days of grace are specifically prohibited, the same need not be given.
o Days of grace are allowed only in case of Usance Promissory Note or Usance Billof Exchange and not in the case of demand bill
or demand promissory note.
o As per Section 25 of the Act, if a bill or promissory note matures for payment on public holiday under NI Act, 1881 (Sunday or any day
th th
declared to be public holiday by the Central Government) it falls due on immediate next preceding business day. Since 26 Jan, 15
nd
August and 2 October are national holidays and if the bill falls due on any of these dates, then preceding business day will be the
due date.
o If the period of usance is given in days, then the day from which due date is to be calculated is excluded.
Due consideration should be given to leap year in which February has 29 days.
o If the period of usance is given in months and there is no corresponding day in the month in which bill matures, last day of the
st st
month is taken into account. For example, a bill dated 31 Dec payable two months after date will fall due on 31 Feb without
th td
grace period. But since February has only 28 days, 28 February will be considered and after 3 days of grace, 3 March will be
due date.
Dishonour of a Bill, Noting and Protesting and Liability of Parties
If the drawee does not accept the bill within stipulated period it is treated as dishonoured by non acceptance.
If a bill after being accepted is not paid on due date, it is said to have been dishonoured due to non payment.
When a promissory note or bill of exchange has been dishonoured by non-acceptance or non-payment, it may be got noted or
protested with Notary Public.
Provisions relating to noting and protesting applicable only in case of dishonor of promissory note or bill of exchange whether
payable on demand or usance bill or usance promissory note.
Noting and protest is optional in case of Inland bills.
If a bill is dishonoured by non acceptance, then the drawer will be primarily liable on the bill.
If a bill is dishonoured due to non-payment (it means it was accepted), acceptor (drawee) will be primarily liable on the bill and
drawer's liability will be secondary.
In the process of business, an organisation has to draw bills on the buyers of the products or have to accept the bills drawn by
the creditors from whom the material has been purchased. Under the bills there are various parties such as the drawer (who
makes the bill), the drawee (who is liable on the payment of the bill) and the payee (who is entitled to receive the payment). A
drawee becomes !labile for payemtn only on acceptance of the bill. The bills may be demand bills (payable on demand) or
usance bills (payable after some time after acceptance). The bills may be classified as trade bills (where actual sale/purchase
transaction takes place) or accommodation bills (where actual sale or purchase transaction does not take place).
Following journal entries are required to be passed in the case of bills.
Inthe booksofthe drawer
A When goods are sold:
Drawee account Dr
To Sales account Cr
B. When bills are made and accepted by the drawee:
Bills receivables account Dr
To drawee's account Cr
C When payment is received:
Cash account Dr
To bills receivables Cr.
D When bill is discounted with the bank:
Bank account Dr
Discount account Dr
To bills receivable Cr
6d
E When bill is endorsed to 3 parties:
Endorsee's account Dr
F If discount is allowed to buyer and he retires at a discount:
Bank account Dr
Rebate account Dr
G When bill is dishonoured for non payment & it was not discounted
Drawee account Dr
To bills receivable account Cr.
H When bill is dishonoured and it was discounted with bank
Drawee account Dr
To bank account Cr
I When bill is dishonoured and it has been endorsed
Drawee account Dr
To endorsee's account Cr.
J Goods sent for collection:
Bills for collection account Dr
To bills receivables Cr.
K On realization:
Bank account Dr
To bills for collection Cr
Inthebooksofthedrawee
A When goods are purchased::
Purchase account Dr
To Drawer account Cr
B. When bills are accepted by the drawee:
Drawer account Dr
To bills payable account Cr
C When payment is made:
Bills payable account Dr
To cash account Cr.
D When payment is made on rebate:
To bank account Cr
To rebate account Cr
E When bill is dishonoured whether discounted by the drawer with his bank or endorsed or not:
To drawees account Cr
Inthebooksof endorsee
A When bill is received:
Bills receivable account Dr
To drawer's account Cr
B When bill is paid or cash received
Cash account Dr
To bills receivable account Cr
C When bill is dishonoured:
Drawees account Dr
To bills receivable account Cr
Illustration:
X has drawn two 60 days bills of exchange on Y for Rs.3000 and for Rs.4000. Y accepts these bills for payment and X discounts the bill of Rs.3000
114
with its bank at a discount rate of 5% and endorses the 2 bill of Rs.4000 in favour of Z. Y meets the payment liability of bill of Rs.3000 but bill of
Rs.4000 is returned unpaid and dishonouned. Pass journal entries in the books of X and Y.
Book of X
At the time of acceptance:
Bills receivable account Dr Rs.3000
Bills receivable account Dr Rs.4000
To Y's account Cr Rs.7000
At the time of discount:
Bank account Dr Rs.2850
Discount account Dr. Rs. 150
To bills receivable Cr Rs.3000
At the time of endorsement:
Z's account Dr. Rs.4000
To bills receivable Cr Rs.4000
On dishonour of bill:
Y's account Dr. Rs.4000
To Z's account Cr Rs.4000
Books of Y : On acceptance
X's account Dr. Rs.7000
To bills payable Cr Rs.7000
On payment and dishonour:
Bills payable Dr Rs.7000
(for payment)
To X's account Cr Rs.7000
(for dishonour)
Average Due date
When a person owes a no. of debts due on different dates and instead of settling these accounts on their respective due dates, he may propose
to settle all the debts on a particular date. An average due date is an equated date on which a single payment may be made in lieu of several
payments due for payment on different dates so that none of the parties is put to loss of interest. Let us assume that 5 payments are due on
different dates say on Oct 08 for Rs.5000, for Nov 11 Rs.3000, for Nov 12 Rs.2250, for Dec 10 Rs.6000 and for Dec 18 for Rs.400.
The average due date would be worked out as under:
Duedate Amount No.ofdaysfromstarting Product
fromduedate
0 5000 0
34 3000 102000
44 2250 99000
6000 63 378000
4000 71 284000
20250 863000
th
No. of days = 863000 / 20250 = 43 days appx. Hence the average due date would be Oct 08 + 43 days = Nov 20 .
5. MODULE C
FINAL ACCOUNTS
BALANCE SHEET
Assets are equal to the liabilities. The liabilities consist of claims of owners and claims of outsiders. The claims of the owners mean
the paid up capital plus balance of reserves and surplus. The sum of the capital and the balance of reserves and surplus is also
called the net worth. For the business, net worth is the liability of the business towards the owners. In other words, it is the claim
of the owners against the assets of the business. As per one of the concepts of accountancy, the business and its owners are
considered as two separate and distinct entities. All the transactions of the business are recorded in the books of the business from
the point of the business, not its owners.
A Balance Sheet /Financial Statement is organized collection of information or data prepared as per certain acceptable accounting
norms & procedures. Financial statement mainly consists of Balance sheet (the position of assets and liabilities as on particular
date), Profit and loss account (the income and expenditure statement for a Particular period), Funds flow statement & cash Flow
statement.
BALANCE SHEET EQUATIONS
The assets of the business should always be equal to the liabilities (i.e. capital +outsideliabilities) and the total revenueminus total expenses would
result either in profit or loss and this profit or loss would become part of the capital.
Capital or owner's equity = Assets outside liabilities
Asset = Capital + outside liabilities
Outside liabilities = Assets-capital
Income i.e. profit = Revenue Expenses
Revenue = Expenses + profits
Equation of Trading Account

The purposeof preparingthe TradingAccountis tocalculatethe Gross Profitor Gross Loss of a concern duringa particularperiod. Thefollowing
equations are useful for determination of Gross Profit or Gross/ Loss :
Gross Profit = Sales - Cost of Sales
Sales =Costof Sales + Gross Profit(or)
Sales = Stock in thebeginning + Purchases + Direct Expenses - Stock at the end + Gross Profit
summary
1. Assets are equal to the liabilities.
2. The liabilities consist of claims of owners and claims of outsiders.
3. The claims of the owners mean the paid up capital plus balance of reserves and surplus.
4. The total of the capital and the reserves and surplus is called the net worth.
5. For the business, net worth is the liability of the business towards the owners.
6. Net worth is the claim of the owners against the assets of the business.
7. As per Business Entity Concept, the business and its owners are considered as two separate and distinct entities.
8. All the transactions of the business are recorded in the books of the business from the perspective of the business, not its
owners.
Computation of Balance Sheet Equation

1. If there is any change in the assets or the liabilities, the owners' claim or the capital will change correspondingly. If assets
increase and liabilities do not, the capital will increase
2. If there is a reduction in the amount of assets or an increase in the amount of liabilities it will result in reduction in the amount
of capital.
Examples:
1. A firm commences business with Rs 20,000 as capital. It means capital is Rs 20,000 and assets in the form of cash are also Rs
20,000.
2. If the firm purchase furniture of Rs 1900, cash will decline by Rs 1000, and a new asset in he form of furniture will emerge. The
total of the assets will be Rs 19000 + Rs 1000 = Rs 20,000. Thus there is no change in Balance Sheet Equation as Capital (Rs
20,000) = Assets ( Rs 19000 + Rs 1000 i.e. Rs 20000)
3. Assuming that firm's capital is Rs 20,000 and asset is in the form of cash of Rs 20,000. The firm purchases goods for Rs 3,000 on
credit. The cash will remain same, goods will increase by Rs 3,000 and total assets will be Rs23,000. On liability side, Rs 3,000 is
payable to the supplier of goods i.e. creditor. Therefore, the balance sheet after this transaction will be
Capital - Rs 20,000 + Creditor Rs 3000 = Cash Rs 20,000 + Goods Rs 3000
1. Thus, the total assets will be equal to the total of liabilities and the capital.
2. The left hand side shows the total liabilities of the firm or shows the sources from which the funds have been
obtained.
3. The other side of the balance sheet, i.e. asset side, shows how the funds have been invested by the business.
ACCO UNTING TRADITIONS
While recording the transactions, the following general traditions are followed:
For Assets : Any increase in assets is recorded on the left-hand side (i.e. by debiting the asset account) and decrease on the right
hand side (i.e. by crediting the account). Hence increase in the amount of an asset is the result of debit to the account and
decline in the balance is due to credit to the account. For example, with purchase of machinery worth Rs.2 lac, the machinery
account would be debited which will increase the balance to that extent. Subsequently, when the depreciation amount is
credited in the account, the balance in the account would decline.
For liabilities : Any increase in liabilities is recorded on the right hand side (i.e. by crediting the liability account) and the
decrease on the left hand side (i.e. by debiting the account). Hence, the increase in the amount of a liability account is due to
credit to the account and decrease in balance due to debit to the account. Bank loan of Rs.3 lac obtained by the firm, would
be credited to the bank account and would increase the balance payable to the bank. The payment of annual instalment of
the loan would be posted on the debit side and would reduce the balance in this account.
Profit or loss : The profit would be credited to the capital account and loss would be debited to the capital account. This will
affect the balance in the capital account, accordingly.
Significance of Debit and Credit in different accounts
Debit Credit
Personal In a new account, it implies that the person has In a new account, credit implies the person has become
account become debtor of business. creditor of the business.
In an old account, the amount recoverable from him In an old account, the amount payable to him has
has increased. increased.
If he is an existing creditor, the If he is an existing debtor, the
amount amount
Real recoverable
A new assetfrom
hashim haspurchased
been decreased.or business has recoverable
An from
assets hashim hassold
been decreasedor its value has
Account purchased more of that assets declined due to depreciation.
Nominal There has been some expense or loss. There has been some income or gain
account
SUMMARY OF EFFECT OF DEBIT & CREDIT TO VARIOUS ACCOUNTS

Name of the account Effect on balance when Effect on balance when account is ,
account is debited credited
Asset Accounts Balance Increases Balance Decreases
Lia bility Accounts Balance Decreases Balance Increases
Capital account Balance Decreases Balance Increases
Expenses account Balance Increases Balance Decreases
Inc ome or revenue a/c Balance Decreases Balance Increases
MEANING OF DEBIT AND CREDIT BALANCE IN ACCOUNTS
Debit balance in the account means Credit balance in an account means
Accounts such Cash in hand, current account with bank, Accounts such as capital, loan obtained from
fixed assets, sundry debtors, drawings, other assets including banks, institutions, friends/relatives, creditors, bills payable,
stocks, losses, prepaid expenses, expenses of all kinds, have debit overdrafts, profit from business, outstanding expenses,
balance interest on drawing, have credit balance.
Amount is due to the firm i.e. it is from others such as Sundry Amount is due to be paid to the promoters of the firm,
debtors such as capital.
Firm has some property or asset equal to the balance in the account Amount is payable by the firm to outsiders such as long
like machinery term liability or short term liability
Firm has incurred loss or expenditure which is shown as intangible Firm has earned profit which will become part of the
asset like accumulated loss or patent capital.
A debit balance is either an asset such as cash, furniture A credit balance means that it is either a liability such as
OR it is loss or expense such as rent paid, salary paid etc promoters' capital or sundry creditor or income earned,
such as interest
INCREASE AND DECREASE OF ASSETS AND LIABILITIES
Type of Transaction Example
Increase in one or more assets and Use of cash for purchase of an assets e.g. purchase of machinery for cash which
decrease in another asset increases the balance in machinery account and reduces the balance in cash
account. With this only the asset side of the balance sheet undergoes change.
Decrease in asset and decrease in capital Withdrawal of cash by the promoter of the firm which reduces the
balance of cash and also reduces the capital. This changes the
composition of both sides of the balance sheet
Decrease in asset and decrease in liability Payment of dues payable to creditors of the firm which reduces the cash balance on the
one hand and the balance in the creditor's account on the other hand (both sides
effected)
Increase in asset and increase in liability Purchase of an asset on credit say stocks of goods, which will increase the stocks and also
the amount of creditors (both sides effected).
Increase in asset and increase in capital Introduction of additional capital by the promoters of the business which increase
balance in the capital account and also the cash account (both sides effected)
Some Solved examples

Nitesh purchased goods for cash for Rs. 20,000.
The effect of this transaction on balance sheet equation will be that the cash will reduce by Rs. 20,000 and another asset
stock will appear for Rs. 20,000 leaving the total of assets and liabilities unchanged.
The accounting equation expressing it will be as follows:
Cash + Stock = Liabilities + Capital
80,000 + 20,000 = 0 + 1,00,000
Nitesh purchased goods on credit for Rs. 15,000.
This transaction will further increase stock by Rs. 15,000 but on the other side it will create a liability in the form of creditors. The
new accounting equation will be written as:
Cash + Stock = Creditors +Capital
80,000 + 35,000 = 15000 + 1,00,000 Nitesh purchased furniture for Cash Rs. 20,000.
This transaction will reduce cash by Rs. 20,000 and increase assets by Rs. 20,000.
Cash + Furniture + Stock = Creditors + Capital
60000 + 20,000 + 35,000 = 15,000 + 1,00,000
From the above transactions It can be concluded that every transaction has double effect and in each case
Assets=Liabilities+
Capital.
Solved Examples:
If the Capital of a business is Rs. 1,00,000 and outside liabilities are Rs. 60,0000. Calculate total assets of the business.
Sol: Assets = Liabilities + Capital, 60,000+ 100,000= Rs. 1,60,000
If total assets of a business are Rs. 1,75,000 and net worth (Capital) is Rs. 1,25,000. Calculate creditors.
Creditors(Liabilities) = Assets - Capital= 1,75,000 - 1,25,000 = Rs. 50,000
2. P R EP A R AT I O N OF F I N AL A C C OU N T S
One of the main objective of bookkeeping and accountancy is to prepare the Profit and Loss account for the accounting period and to
draw the balance sheet as at the end of the accounting period in such a way that a fair and correct picture emerges regarding the
operations and the financial position of the enterprise for all the stakeholders and other users. The balances in the ledger accounts,
resulting from the financial transactions throughout the year, are used for preparing the financial statements. For doing this, certain
entries are posted which represent not the financial transactions but non-transaction adjustments. While the companies, registered as
per Companies Act 2013, have to prepare the financial statements on the formats prescribed by them under various Acts, other business
entities normally follow the established practices so that their financial statements give a fair and accurate picture.
Financial Statements report the profitability and the financial position of the business at the end of accounting period. The term
financial statement includes atleast two basic statements. These are:
a) Income statement (Trading and Profit and Loss Account) which shows results of business operations during an
accounting period. b)Statement of Financial Position (Balance sheet) which shows financial position of an enterprise at
a specified point of time. These two financial statements are termed as a Final Accounts.
Income Statement: It is divided into two parts:
(i)The first part is called 'Trading Account'. It shows the Gross Profit or Gross Loss.
(ii)The second part is called 'Profit & Loss Account'. It shows the Net Profit or Net Loss.
(i)Tradinq Account:
Trading account is prepared for calculating the gross profit or gross loss arising or incurred as a result of trading activities
of a business such as buying and selling of goods. Excess of sales over the amount of purchases and expenses directly
connected with such purchases is termed as Gross Profit.
(ii)Profit and Loss Account:
A Profit and Loss Account is an account into which all gains and losses are collected in order to ascertain the excess of gains over the
losses or vice versa.
A Profit or Loss Account is started with the amount of gross profit or gross loss brought down from the Trading Account.
All those expenses and losses which are of indirect nature like administrative expenses, selling expenses, distribution
expenses etc. are debited to Profit and Loss account. Profit and Loss account is a nominal account and all expenses are
shown on debit side and all incomes and gains are shown on credit side.
Balance Sheet:
A balance sheet is statement prepared with a view to measure the exact financial position of the business on a particular
date. A balance Sheet is a summary of the Personal and Real Accounts. Debit balances of all Personal and Real accounts
are put on a right hand side known as Asset side whereas the credit balances are put on a left hand side known as
Liabilities side. The totals of two sides of the Balance Sheet must be equal. If the totals are not equal, It indicates an error
somewhere.
BA SI C C O NC E PT S U S E D I R E PA R A TI O F FI NA NC I A ST AT E M E N T:
1) Concept of Equity 2) Concept of money measurement 3) concept of monetary unit 4) Concept of Going Concern
5) Concept of Cost and Conservatism 6) Concept of accounting 7) Accrual concept 8) Concept of Realization 9) Concept of Matching
FORMAT OF BALANCE SHEET

Liabilities Assets
Net worth/Equity Funds brought in by the promoters as Fixed Assets :Assets which are purchased for long term and not
their investment in business or generated by and meant to be sold but used for production.
retained in business Land & Building,Plant & Machinery
Share capital/partner's capital/ Paid up equity share Vehicles,Furniture & Fixture
capital,/owners funds Office equipment,Capital Work in Progress These are
Reserves & Surplus e.g. General Reserve, Capital represented as under:
Reserve, Revaluation Reserve and Other Original value (Gross Bock) Less depreciation
Reserves),Retained Earnings Net Block or book value or written down
Undistributed Profits,Preference share capital (not Value Method
redeemable within 12 years)
Long term liabilities: Non Current Assets:

Liabilities which are not due for payment within 12 Assets which cannot be classified as current or
months from the date of the Balance Sheet) fixed or intangible assets Book Debts or Sundry Debtors more
Term loans from financial institutions; than 6 months old/ Disputed Debts, Investment of long term
Term loan from banks; Debentures/Bonds; nature in shares,
Deferred payment liability;Preference Shares govt. securities, associates or sister firms or
redeemable within 12 years; companies. Long term security deposits. Unquoted
Fixed Deposits maturing after one year; investments; Investments in subsidiaries or sister concerns;
Provision for gratuity; Unsecured Loans Loans & Advances to directors, officers; Accounts receivables in
respect of sale of plant &
machinery; Advances to concerns in which directors are
interested; Deposits with customs port trust etc
Intangible & fictitious Assets Which do not have physical
existence. For example: Goodwill, Patents, Trade Mark, Copy
Right, Preliminary or pre operative expenses, other formation
expenses, debit balance of P & L account, accumulated losses,
bad debts, Capital issue expenses e.g. discount on issue of
share & debentures, commission on underwriting of shares &
debentures; Deferred revenue expenditure
e.g. Advertisement
Short term for CurrentyLiabilities Liabilities which are Current Assets : Cash in hand, Bank balance
due for payment within 12 months from the date of the including fixed ,deposits with banks. Stocks/inventory (such as
balance sheet and are to be repaid out of proceeds of raw material, stock in process, finished goods, consumable
current assets,Short term borrowings from banks (C/C, stores and spares),Book debts/Sundry debtors/Bills Receivable/
0/D or B/P, B/D limits) for working capital.,Sundry/trade Accounts receivable/ debtors, Government and other trustee
creditors/creditors/ Account payable,Bills Payable / securities
trade acceptances (other than for long term purposes e.g. sinking funds, gratuity
Fixed Deposits from public payable within one funds etc.),Readily Marketable/quoted govt. or other securities
year,Short duration loans or deposits meant for sale,Interest accrued and
Provision for taxation, Proposed Dividends, Provision for receivables,Advance payment of taxes,
bonus, unclaimed dividend. pre-paid expenses,Advance payments for merchandise;
Deposits from dealers, selling agents etc. unexpired insurance
Advance payments from customers,
outstanding expenses and Accruals e.g. wages &
salaries, rent; expenses payable
TOTAL TOTAL
Contingent Liabilities: which may or may not arise. For example: aairns against the company not acknowledged as debts; Arrears of
fixed cumulative dividends; Bills discounted but not matured and shown in the Balance Sheet; Letter of Credit; Guarantees given by
the company on behalf of its subsidiary company, employees etc.
Expanded Accounting Formula:
The expanded accounting equation shows the relationship between the income statement and the balance sheet. The Owner's
Equity component of the accounting equation can be broken down into two parts - revenue and expenses. Revenues, also called
sales revenues, are what the business earns for providing its product or service to customers. Expenses are what it costs the business
to, provide the product or service to the customers. The relationship between revenues and expenses is simple. If revenues are
greater than expenses, then the business generates a profit. If revenues are less than expenses, then the business sustains a loss.
The expanded accounting equation, after you consider sales revenue and expenses, is: Assets = Liabilities + Owner's Equity +
Revenue - Expenses - Drawings
Where: Revenues increase Owner's Equity; Expenses decrease Owner's Equity: Drawings decrease Owner's Equity
3. RATIO ANALYSIS
Accounting ratios are relationships, expressed in mathematical terms, between accounting figures, which are connected with each
other in some manner. Obviously, no purpose will be served by comparing two sets of figures which are not at all connected with
each other. Moreover, absolute figures are also unfit for comparison.
Ratios are important tools for financial analysis and are used by owners, investors, bankers, creditors, rating agencies and other
interested persons. For calculating ratios, figures, provided in the financial statements, i.e. the P & L a/c and the Balance sheet, are
used. Ratios can be used for inter-firm or intrafirm comparison in order to know the trends and position of various financial
parameters. While using the ratios, we should be careful about the various situations in which the firms operate and also methods
used in arriving at the figs. in the financial statements. The main ratios are the profitability ratios, solvency ratios and, the turnover
ratios
How ratios are expressed : Ratios can be expressed in the following different ways: In %age terms such as net profit to sale ratio
(being 23%),In proportion such as current ratio (being 2:1),In no. of times such as stock turn over ratio (being no of times )
Classification of ratios
Theratioscanbeclassifiedas(a)Traditionalratios(b)Functionalratios:
1.Traditional classification Itis based on thesourceofinformation from financial statements.Itcan be
(a) Profitand lossaccount ratios (whereinformationis taken from P& Laccount
(b) Balancesheetratios(wherethesourceofinformationisbalancesheetand
(c) Composite ratios or inter-statement ratios (where the information is taken from profit and loss account and the balance
sheet.
2. Functional classification : When ratios are classified on the basis of how they serve as a tool for analysis. This can be:
(a) Profitabilityratios b)Activityratiosorturnoverratios c)Solvencyorleverageratiosorfinancialratios.Thesecanbeshorttermsolvencyratioslikecurrent
ratioorlongtermsolvencyratioslikedebtequityratio.
Types of ratios
Asabanker,onewouldnormallydependuponfourtypesofratiosnamely:
a: Liquidityratios, b.Leverageorsolvencyratios, c.Profitabilityratios, d.Activityratios.
LIQUIDITY RATIOS
Theratiowhichindicatetheliquidityofthefirmarecurrentratio,acidtestratioorquickratioandnetworkingcapital.
1. Current Ratio
Thecurrentratioistherelationshipbetweenthecurrentassetsandcurrentliabilities.Theratiohelpsinknowingaboutthe
liquiditypositionofafirmduringthecourseofayear.Itcanbeworkedoutasunder:
Current assets / Current liabilities
2. Acid Test or Quick Ratio or Liquidity ratio

Thequickratioistheratiobetweenquickcurrentassetsandcurrentliabilities.Theratiomeasuresthecapacityoftheorganisationtopayoffcurrentliabilitiesof
theurgentnatureimmediately.
Quick assets include cash/bank balances + receivables upto 6 months + quickly realisable securities such as govt.
securities or quickly marketable/quoted shares and bank fixed deposits. It can beworked out as under:
Quick assets I Current liabilities

If thecashand bank balances are Rs.2lac,receivables Rs.5lac, quickly realisablesecuritiesRs.1lacand currentliabilities Rs.10lac, thequick ratio would be
0.8:1.
LEVERAGE ORSOLVENCYRATIOS
The long term solvency can be judged by solvency ratios, most importance of which, is debt-equity ratio and debt service coverage
ratio (DSCR).
DebtEquityratio
The ratio is important one sinceit shows the dependenceof theunit on outside long term finance. A debt-equity ratio of 2:1is considered desirable by
the banks and Reserve Bank. It can be worked out as under:
Long term outside liabilities/Tangible net worth
(Wherelongterm outsideliabilitiesareliabilities of longterm nature andtangiblenet worth is total of capital and reserves and surplus reducedby intangible
assets.
Interpretation Higher the ratio, more the pressureon the liquidity of the organisation, when repayment of liabilities falls due. Lower the debt equity of
a firm compared to another firm, the better it is.
For instance, if a firm is having capital of Rs.200 lac, the free reserves and surplus of RS.300 lac and long term loans or liabilities of Rs.800lac, thedebt
equity ratio would be 1.6:1. Similarly when the Debt equity ratio for a firm declines say from 1.6 : 1to 1.2:1, it is considered better.
FixedAssetsRatio:Ratio is calculated as : Fixed Assets / Long term funds.(Fixed assets include net fixed assets and trade investments and Iong
term funds include capital, reserves and long term loans)
Debtor service coverageratio(DSCR)
The ratio explains the relationship between the funds available for servicing the long term outside liabilities (where servicing means regular payment of
interest on long term liabilities and also payment of due amount of principal on year to year basis) on the one hand and amount of interest and
instalment of long term outside liabilities on the other side. This ratio is used for judging repayment capacity and fixing the repayment schedules for
term loans in banks and financial institutions.
It could be worked out by taking into account net profit + depreciation + annual amount of interest charged (or chargeable) on the long term
liabilities / annual amount of interest charged (or chargeable) on the long term liabilities + annual amount of instalment payable on the long term
liabilities. For instance, if a firm's net profits are R..5.3 lac, depreciation Rs.2 lac, interest payment Rs.1 lac and the annual instalment Rs.2 lac, the
DSCR would be 2 ( (3+2+1) / (1 + 2)
Generally the banks or financial institutions consider a DSCR at 2 as comfortable.
Tangible net worth = Net worth less intangible assets
Tangible assets = Total assets less intangibleassets
ACTIVITY RATIOS
These ratios measure the efficiency of the organisation in using deploying the available funds, particularly the funds raised on short term basis. The
followingratios could beworked out:
a: Inventory turnover:
Sales/Averagestocks(averageofopeningandclosingstocks)(itcanalsobecalculatedas
costof sales/averagestock)
b: Debtor turnover :
Sales /averagedebtors(averageofopeningand closingreceivables)(itcan also becalculated as
creditsales /averagedebtors).
c: Fixed assets turnover : Sales / Fixed assets.
d: Current assets/ working capital turnover
Net sales / average working capital i.e. current assets
If the amount of net sales in firm is Rs.200 lac and the average working capital Rs.50 lac, the working capital turnover ratio would be 4 (200/50). In
the following year if the ratio comes down to, say 3, it reflects inefficiency in use of working capital by the firm.
e: Debtors' velocity or debt collection period
Average Book-debts / sales x 12(can be calculated as average Book-debts / credit sales x 12) This ratio indicates as to how
much time the firm is taking in recovering the amount of credit sales.
PROFITABILITYRATIOS
Profitability indicates the efficiency of the organisation in generation of income and surplus out of the operations of main business.
1. Return oninvestment or Return on capital employed or Overall Profitability Ratio)

This is thebasicprofitability ratio andcanlet us know,asto how much the organisation is earningonits capital employed.The ratio can be worked outas
under:
Profit before tax and interest / Investment (or capital employed) x 100
Where, the 'return' is net profitbeforeinterest& tax and ìnvestmentorcapital employed'means tangiblenetworth of the shareholders'funds and
outsideterm liabilities.
For example, if the net profits before tax are Rs.30 lac and the investment Rs.120 lac, the return on investment shall be 25% (30 / 120 x100).
2. Returnonequity
This ratio provides information about the earnings, which the funds put in by the promoters/shareholders or the ones retained in the business,
generate. The ratio can be worked out as under:
Net profits / owned funds (or tangible net worth) x 100
For example if the net profits are Rs.3lac and tangible net worth Rs.10 lac, the return on equity would be 30%.
3. Gross Profit & Net Profit Ratio

The gross profit is considered to be the surplus of sales over the cost of goods sold and the ratio can be worked out as under:
Gross Profit / Net Sales x 100
4. The net profit is the surplus of gross profit after meeting other expenses. This can be before tax or after tax and is finally appropriated to meet the
tax liability(if taken before tax provisions),dividend payment or drawings and to retain a part in the business, which is converted into the capital
employed. The ratio can be worked out as under:
Net profit* / Sales x 100 (*The net profit could be before or after tax. )
5. OperatingProfitratio
The ratio denotes the margin of profit on the main operations revealing the operational efficiency of the unit. The ratio is worked out, to see that
the main activity remains viable for long time, as under:
Operating Profit / Sales x 100
where the operating profit represents profit minus net other income or profit from un-related activity.
6. EarningPerShare(EPS):
The ratio denotes per share profit of a company. It can be used to compare 2 different companies" profitability. To calculate the ration only the no. of
equity share is taken (and not of preference shares). It can be calculated as under: Net profit after tax and preference dividend/ no. of equity
shares.
It help in understanding market pricing of the equity share.
6. Price Earning Ratio (PER)

The ratio indicates the current market price vis-a-vis the earning per share. It can be calculated as under: Market price of the equity
share / earning per share
Different users of ratios

Long term creditors Shortterm lenders(Banks) Shareholders
Fixed charges cover = Quickratio---
Income before interest and tax / Quick assets / current liabilities Earning per share =
Interest charges Profit available for equity holders / no. of
equity shares
Debt service coverage ratio = Current ratio = Dividend Yield ratio =

Cash profit for debt service / annual Current assets / current liabilities Dividend per share / market price
interest and principal per share
WHATTHECHANGEINRATIOSMEAN
If a firm realises book debts in cash No change in current assets, quick ratio, current ratio or net working capital.
If afirm realisesold assets or noncurrentassetsincashor sell fixedassetsincash: currentassets,quick ratio,currentratioornetworkingcapitalwillall
improve
If a firm issues bonus shares There is no change in any ratios
If a firm issues rights shares Current ratio, quick ratio, net working capital, debt equity ratio, net worth will improve
If a firm revalues its fixed assets and creates revaluation reserve: Net worth and tangible networth increase. Debt equity ratio declines /
improves. There is no effect on current assets or quick assets or current ratio and quick ratio.
If increase in long term sources is more (say 125%) than increase in long term uses during a year liquid asset would increase, liquidity would
improve.
If increase in long term is uses more (say 125%) than increase in long term sources during a year liquid asset would decrease, liquidity would
decline.
Lower and higher break even point : A firm with lower break even point has better chances for earning profits. A firm with higher break even earns
lower profits.
If break-even point of a firm goes up It is an indication of dedine in profits
If break-even point of a firm goes down It is an indication of increase in profits
If debtor-turnover ratio increase It shows efficiency in recovery
If debtor-velocity ratio decrease It shows firm is allowing credit to buyer of its products for a lesser period
If stock-turnover ratio increase It is better use of stocks
If current ratio increases and quick ratio remain constant It shows higher %age of stocks in or lower %age of receivables in total current assets.
If current ratio is constant and quick ratio increases It shows lower %age of stocks or higher %agein receivables in total current assets.
PRACTICE TEST
Classify the following assets and liabilities for Balance Sheet of M/s ABC Company for the year as on 31.3.2016.
Cash 200 Good will 300
Provision for Expenses 200 Capital 2000
Vehicles 1000 Sundry Debtors 1600
Unsecured loans (Long term) 800 Term Loan 2000
Investment in other firms 300 Plant and Machinery 2500
Pre Operative Expenses 200 Sundry Creditors 1200
Stocks 2000 Reserves 1000
Prepaid expenses 200 Expenses payable 200
Security Deposit 200 Bank Borrowings / cash credit 1400
Land and building 1500 Debentures 1200
Sales 10000 Net profit 500
Interest on Term Loan 300 Depreciation 200
Calculate Current Ratio / Quick Ratio / Net working Capital / Debt Equity Ratio / Debt Service Coverage (consider that installment
during the year is 400) Ratio / Stock turnover ratio / Debtor Turnover ratio / Debtor velocity ratio / Net profit %.
Answer:
LIABILITIES ` ASSETS
OWNERSFUNDS FIXEDASSETS
Capital 2000 Land and Building 1500
Reserves 1000 Plant and Machinery 2500
BTOTAL(NetWorth) 3000 Vehicles 1000
LONGTERMLIABILITIES SUBTOTAL(FixedAssets) 5000
Unsecured Loans 800 NONCURRENTASSETS(NCA)
Term Loan 2000 Investment in Firms 300
Debentures 1200 Security Deposit 200
SUBTOTAL(Term Liabilities) 4000 SUBTOTAL(Total NonCurrentAssets) 500
CURRENTLIABILITIES INTANGIBLEASSETS
Provision for Expenses 200 Goodwill 300
Sundry Creditors 1200 Pre Operative Expenses 200
Expenses Payable 200 SUB TOTAL(Total Intangible 500
Assets)
Bank Cash Credit 1400 CURRENTASSETS
SUB TOTAL(Current Liabilities) 3000 Cash 200
Sundry Debtors 1600
Stocks 2000
Prepaid Expenses 200
Total Current Assets - Subtotal 4000
GRAND TOTAL (Total of 10000 GRAND TOTAL (Total of 10000
Liabilities) Assets)
Calculations:
Networth Capital + Reserves 2000+1000 3000
Intagible assets 500
Tangible NW NW - Intangibles 3000 500 2500
Long Term Liabilities 4000
Long Term Sources LTL + Networth 4000+3000 7000
Current Liabilities 3000

Short Term Sources (= Current Liabilities) 3000
Outside Liabilities (=LTL+CL) 4000+3000 7000
Long Term (= Fixed Assets+ NCA+ 5000+500+500 6000

Uses Intangible Assets
Current Assets 4000

Gross Working (= Total CA) 4000
Capital
Short Term Uses (CA) 4000
Net Working Capital CA CL 4000-3000 1000
Quick Assets CA Stocks& Prepaid Exp 4000-2200 1800
Current Ratio CA CL 4000 3000 1.33:1
Quick Ratio QA CL 1800 3000 0.66:1
Debt Equity Ratio LTL TNW 4000 2500 1.66:1
DSCR (Profit + Depreciation + TL Interest) (TL Installment + TL Interest)

500+200+300 = 1000 1.4 (1000700)
400+300 = 700
Stock Turnover Sales Stocks 10000 2000 5 times
Ratio
Drs T/o Ratio Sales Sy Debtors 100001600 6.3 times
Debtors Velocity (Sy DrsSales) x 12 (160010000) X 12 1.92

Ratio months
Net Profit % (NP Sales) x 100 (500 10000) x 100 5%
Return on NW (NP TNW) x 100 500 2500 x 100 20%
4. FINAL ACCOUNTS OF BANKING COMPANIES
A banking company means and includes any company which carries on the business or which transacts business of banking in
India. A banking company is generally governed by the provisions of the Companies Act, 2013 and specifically by the Banking
Regulation Act. The Banking Regulation Act of 1949 came into force on 16th March, 1949 as a result of the long-felt need to
regulate the banking business in India and protect the interests of number of depositors.
As per Section 5(c) of the Banking Regulation Act, 1949 a "Banking Company" means any company which transacts the business
of banking in India. A banking business is generally governed by the provisions of theth
Companies Act 1956, and specifically by the
Banking Regulation Act. The Banking Regulation Act 1949, came into force on 16 March 1949, as a result of long-felt need to
regulate the banking business in India and protect the interest of number of depositors. The existence of well-organized,
regulated and efficient banking system is pre-requisite for economic growth. Banks are agencies responsible for mobilizing and
channeling of funds in a country. The major institutions carrying business, in India, indude:
(a) Nationalized Banks. (b) State Bank of India and Associates Banks. (c) Foreign Banks having branches in India.
(d) Co-operative Banks. (e) Rural Banks, and (f) Private Sector Banks
DEFINITION AND FUNCTIONS OF A BANK
Banking has been defined by Section 5 of the Banking Regulation Act and means: accepting of deposits of money from the
public, for the purpose of lending or investment and the deposits are repayable on demand or otherwise by cheque, draft,
order or otherwise
REQUIREMENTS OF BANKING COMPANIES AS TO ACCOUNTS AND AUDIT
Preparation of Financial Statements and Accounting Date (Section 29)
A Company registered under the Companies Act, 2013 is required to present its financial statements, i.e. balance sheet and
profit and loss account in the formats laid down in the Schedule III annexed to the Companies Act. Similarly, banking company,
(since it is a company) is also required to prepare and submit its accounts in a specified format. The Banking Regulation Act
gives the format of the balance sheet and the profit and loss account in which the accounts of bank should be presented and
this format is given in the third schedule annexed to the Banking Regulation Act. RBI has issued guidelines to follow the new
form A (proforma balance sheet) and form B (proforma profit and loss account) by all banking companies doing business in
India. The Government has notified that accounts of the banking companies shall be closed on 31st March every year as
against 31st December earlier. In practice, banks also close books on 30th September for internal purposes.
Signatures
Section 29 of the Act requires that the financial statements of banking companies incorporated in India should be signed by the
manager or principal officer of the banking company and by at least three directors (or all the directors in case the number is less than
three). The financial statements of a foreign banking company are to be signed by the manager or agent of the principal office in India.
The provisions of section 29 are also applicable to nationalised banks, State Bank of India, its subsidiaries, and regional rural banks.
Audit (Section 30)
Accounts must be audited by a person, duly qualified under any law, for the time being in force, to be an auditor of
companies. However, every banking company is, before appointing, reappointing or removing any auditor, required to obtain
the prior approval of the Reserve Bank of India.
Submission of Accounts (Secs 31 and 32)
Three copies of the balance sheet and profit and loss account prepared under Section 29 together with auditors' report under
Section 30 must be submitted to the Reserve Bank of India within three months from the end of the period to which they
refer. However, it can be extended up to a further period of three months by RBI (Section 31).
Section 32 of the Act requires a banking company (but not other types of banks) to furnish three copies of its annual accounts
and auditor's report thereon to the Registrar of Companies at the same time when it furnishes these documents to the RBI.
Publication of Accounts
Rule 15 of the Banking Regulating (Companies) Rules, 1949 prescribes that accounts and auditors' report shall be published in
a newspaper circulating in a place where a banking company has its principal office, within six months from the end of the
period to which they relate
REQUIREMENTS OF BANKING COMPANIES AS TO ACCOUNTS AND AUDIT

Section 29 to 34 A of the Banking Regulation Act deal with accounts and audit of Banking Companies. At the end of each calendar
year or at the expiration of twelve months ending on such date as the Central Government may specify in this regard, every
banking company incorporated in India, in respect of business transacted by its branches in India, shall prepare with reference to
that year or period, a Balance Sheet (Form A) and Profit & Loss Account (Form B) as on the last working day of that year or the
period in the forms set out in the Third Schedule of Banking Regulation Act.
The Balance Sheet and the Profit and Loss Account must be signed by the manager or Principal officer and by at least three
directors or all directors if there are not more than three directors in case of a banking company incorporated in India.
Under Section 30 of the Banking Regulation Act, the Balance Sheet and Profit and Loss Account prepared in accordance with
Section 29 shall be audited by a person duly qualified under any law for the time being in force to be an auditor of companies.
Every banking company is required to take previous approval of the Reserve Bank of India before appointing, reappointing and
removing any auditor or auditors. In addition, RBI can order special audit of the banking companies accounts if it thinks fit in the
public interest of the banking company or its depositors.
FEATURES OF ACCOUNTING SYSTEMS OF BANKS:
The book keeping and accounting system of a banking company is substantially different from that of a trading or
manufacturing enterprise. A bank maintains a large number of accounts of various types for its customers. Presently, most of
the bank's accounting is done on Core Banking Solutions (CBS) wherein all accounts are maintained on huge servers with
posting being effected instantly through vouchers, debit cards, internet banking etc. Bank's accounts are kept by using the
following accounting measures:
(a) Voucher Posting: Vouchers are used to record transactions as when they occur. Entries in the personal ledger are made
directly from vouchers.
(b) Voucher Summary Sheets: The vouchers are entered into different personal ledgers on daily basis and afterwards they are
summarized collectively on voucher summary sheets and their totals are posted in the general ledger.
(c) Daily Trial balance: The general ledger trial balance is prepared and tallied everyday.
(d) Continuous Checks: All entries made in personal ledgers and summary sheets are checked by using the maker and author
concept. So the maker and author are not the same person. This is done so that mistakes are detected and rectified on the same
day.
Voucher or Slip System of Ledger Posting:
The types of slips used in banks are Pay-in-slips, with drawl form and cheques etc. Under this system, entries are made in the
accounts of customers in the ledger directly from various slips rather than subsidiary books or journals and afterwards a Day
book is written. After this, entries in the accounts of customers are tallied with the daybook. Thus, ledger posting and day book
writing are carried out simultaneously so as to save time.
PRINCIPAL BOOKS OF ACCOUNTS
The Principal Books of Accounts are:
(a) The General ledger (b) Profit and Loss ledger
(a) The General Ledger: It contains accounts of all personal ledgers, the profit and loss account and different asset accounts.
Apart from this, there are certain additional accounts termed as Contra accounts which are kept in respect of those transactions
which have no direct effect on bank's position. e.g bills sent for collection, L/C op9ned, guarantees given. The various accounts in
the ledger are so arranged that a balance sheet can be easily prepared from the balances.
(b) Profit & Loss Ledger: It is the general practice of some banks to keep one account for Profit and Loss in the General Ledger
and then maintain separate books for the detailed accounts. These books have separate columns for each head of revenue or
expense. Few banks also maintain separate books for debits and credits and some maintain revenue accounts in the General
ledger.
Various Subsidiary Books such as Personal Ledgers for Current Accounts, Fixed Deposits, Loan Overdrafts etc and separate Bill
Register for bills purchased, inward and outward bills for collection are also maintained on daily basis.
RBI Disclosures
The users of the financial statements need information about the financial position and performance of the bank in making economic
decisions. They are interested in its liquidity and solvency and the risks related to the assets and liabilities recognised on its balance
sheet and to its off balance sheet items. in the interest of full and complete disclosure, some very useful information is better provided,
or can only be provided, by notes to the financial statements. The use of notes and supplementary information provides the means to
explain and document certain items, which are either presented in the financial statements or otherwise affect the financial position
d
and performance of the reporting enterprise.. Under Basel 2 also, Market discipline (3' Pillar), has been given lot of importance but it
works only if market participants have access to timely and reliable information, which enables them to assess banks' activities and the
risks inherent in these activities.
Minimum Disclosures
At a minimum, the items listed in RBI circular should be disclosed in the 'Notes to Accounts'. The disclosure listed is intended only
to supplement, and not to replace, other disclosure requirements under relevant legislation or accounting and financial reporting
standards.
Summary of Significant Accounting Policies
Banks should disclose the accounting policies regarding key areas of operations at one place (under Schedule 17) along with Notes
to Accounts in their financial statements. A suggestive list includes Basis of Accounting, Transactions involving Foreign Exchange,
Investments Classification, Valuation, etc, Advances and Provisions thereon, Fixed Assets and Depreciation, Revenue
Recognition, Employee Benefits, Provision for Taxation, Net Profit, etc.
Disclosure Requirements
in order to encourage market discipline, RBI developed a set of disclosure requirements which allow the market participants to assess
key pieces of information on capital adequacy, risk exposures, risk assessment processes and key business parameters which provide a
consistent and understandable disclosure framework that enhances comparability. Banks are also required to comply with the
Accounting Standard 1 (AS 1) on Disclosure of Accounting Policies issued by the Institute of Chartered Accountants of India (ICAO. The
enhanced disclosures have been achieved through revision of Balance Sheet and Profit & Loss Account of banks and enlarging the scope
of disclosures to be made in "Notes to Accounts". In addition to the 16 detailed prescribed schedules to the balance sheet, banks are
required to furnish the following information in the "Notes to Accounts":
Summary of disclosures (RBI Master Circular Jul 01, 2014)
There are 3 groups of disclosures, namely (1) General disclosures, (2) Disclosures related to Accounting Standards and (3)
Additional disclosures.
General Discloses:
1 Capital
2 Investments
2.1 Repo Transactions
2, 2 Non-SLR Investment Portfolio
2.3 Sale and Transfers to/ from HIM Category
3 Derivatives
3.1 Forward Rate Agreement/ interest Rate Swap
3. 2 Exchange Traded Interest Rate Derivatives
3. 3 Disclosures on risk exposure in derivatives
4 Asset Quality
4. 1 Non-Performing Asset
4. 2 Particulars of Accounts Restructured
4. 3 Details of financial assets sold to Securitisation/ Reconstruction Company for Asset Reconstruction
4. 4 Details of non performing asset purchased/sold
4. 5 Provisions on Standard Assets
5 Business Ratio
6 Asset Liability Management - Maturity pattern of certain items of assets and liabilities
7 Exposures
7.1 Exposure to Real Estate Sector
7.2 Exposure to Capital Market
7.3 Risk Category wise Country Exposure
7.4 Details of Single Borrower Limit (SGL), Group Borrower Limit (GBL) exceeded by the bank
7.5 Unsecured advances
8 Disclosure of Penalties imposed by RBI
Disclosure related to Accounting Standards:
1 Accounting Standard 5 Net Profit or Loss for the period, prior period items and changes in accounting policies
2 Accounting Standard 9 Revenue Recognition
3 Accounting Standard 15 Employee Benefits
4 Accounting Standard 17 Segment Reporting
5 Accounting Standard 18 Related Party Disclosures
6 Accounting Standard 21- Consolidated Financial Statements
7 Accounting Standard 22 Accounting for Taxes on Income
8 Accounting Standard 23 Accounting for Investments in Associates in Consolidated Financial Statements
9 Accounting Standard 24 Discontinuing Operations
10 Accounting Standard 25 Interim Financial Reporting
11 Other Accounting Standards
Additional Disclosures
1 Provisions and contingencies
2 Floating Provisions
3 Draw Down from Reserves
4 Disclosure of Complaints
5 Disclosure of Letters of Comfort (LoCs) issued by banks
6 Provisioning Coverage Ratio (PCR)
7 Bancassurance Business
8 Concentration of Deposits, Advances, Exposures and NPAs
9 Sector-wise advances
10 Movement of NPAs
11 Overseas Assets, NPAs and Revenue
12 Off-balance Sheet SPVs sponsored
13 Unamortised Pension and Gratuity Liabilities
14 Disclosures on Remuneration
15 Disclosures relating to Securitisation
16 Credit Default Swaps
17 Infra-Group Exposures
18 Transfers to Depositor Education and Awareness Fund (DEAF)
19 Unhedged Foreign Currency Exposure
20 Liquidity Coverage Ratio
Basel Committee Disclosures
DF-1 Scope of Application and Capital Adequacy
DF-2 Capital Adequacy
DF-3 Credit Risk: General Disclosures for All Banks
DF-4 Credit Risk: Disclosures for Portfolios subject to the Standardised Approach
DF-5 Credit Risk Mitigation: Disclosures for Standardised Approach
DF-6 Securitisation: Disclosure for Standardised Approach
DF-7 Market Risk in Trading Book
DF-8 Operational Risk
DF-9 Interest Rate Risk in the Banking Book (IRRBB)
DF-10 General Disclosure for Exposures Related to Counterparty Credit Risk
DF-11 Composition of Capital
DF-12 Composition of Capital- Reconciliation Requirements
DF-13 Main Features of Regulatory Capital Instruments
D F-14 Full Terms and Conditions of Regulatory Capital Instruments
D F-15 Disclosure Requirements for Remuneration
Accounting Treatment of Specific Items
1. Discounting, Collection & Acceptance of Bills There are the following
functions:
1. Discounting 2. Collection of bills 3.Acceptances on behalf of customers
101, Discounting: A bank may straight away purchase a Bill (Discounting). In this case, after reducing discount charges, the balance
amount is credited to the account of the customer. The discount charges are credited to discount received account, The total of
both is debited to 'Bills purchased and discounted account'. This account is an Asset.
Rebate on Bills Discounted: When a bank discounts a bill of exchange, the full amount of the discount earned is credited FRONT
END to the discount account. But all bills discounted may not mature for payment by the close of the year (i.e. 31st March).
Hence, the unexpired portion (unearned portion) of such discount account is carried forward by debiting the Discount A/c and
crediting Rebates on Bills Discounted A/c.
The Rebate A/c is shown on the liability side of the Balance Sheet as income received, which has not accrued before the close of the
year. Immediately on commencement of next financial year the Rebate Aic is closed by transfer to the credit of Discount A/c.
EXAMPLE -1
The following information is available in the books of a Bank as on 31st March, 2015:
Bills discounted 1,37,05,000
Rebate on Bills discounted (as on 1.4.2014, 2,21,600
Discount received 10,56,650
Details of bills discounted are as follows:
Value of bill (Rs.) Due date Rate of Discount
18,25,000 05.6.2015 12%
50,00,000 12.6.2015 12%
28,20,000 25.6.2015 14%
40,60,000 06.7.2015 16%
Calculate the rebate on bills discounted as on 31.3.2015 and give necessary journal entries. Solution
Statement showing rebate on bills discounted
Value Amount Due Date Days after 31.3.2015 Rate of discount Discount
18,25,000
50,00,000 05.6.2015 (30+ 31+5) = 66 12% 39,600
28,20,000 12.6.2015 (30+31+12) = 73 12% 1,20,000
40,60,000 25.6.2015 (30+31+25) = 86 14% 93,021
1,37,05,000 06.7.2015 (30+ 31+ 30+ 6) = 97 16% 1,72,633
Rebate on bills discounted on 31.3.2015 4,25,254
Journal Entries
(i) Rebate on bills discounted Account Dr. 2,21,600
To Discount on bills Account 2,21,600
[Being opening balance of rebate on bills discounted account transferred to discount on bills account]
(ii) Discount on bills Account Dr. 4,25,254
To Rebate on bills discounted Account 4,25,254
[B eing provision made on 31st March, 2015]
(iii) ) Discount on bills Account Dr. 8,52,996
To Profit and loss Account 8,52,996
[B eing transfer of discount on bills, of the year, to profit and loss account)
Credit to Profit and Loss A/c will be as follows: 10,56,650 + 2,21,600 4,25,254 = Rs. 8,52,996
EXAMPLE-2
Calculate Rebate on Bills discounted as on 31 December, 2014 from the following data and show journal entries:
Date of Bill Rs. Period Rate of Discount
(i) 15.10.14 25,000 5 months 8%
(ii) 10.11.14 15,000 4 months 7%
(iii) 25.11.14 20,000 4 months 7%
(iv) 20.12.14 30,000 3 months 9%
Solution (a) Calculation of Rebate on Bills Discounted
Rs. Due Date Days after 31 Discount Rate Rs.
December 2011
25,000 18-03-2015 31 + 29 + 18 = 78 8% 426.22
15,000 13-03-2015 31 + 29 + 13 = 73 7% 209.42
20,000 28-03-2015 31 + 29 + 28 = 88 7% 336.61
30,000 23-03-2015 31 + 29 + 23 = 83 9% 612.30
Total 1584.55
Journal Entry
Dec. 31 Interest and Discount Account Dr. 1584.55
To Rebate on Bills Discounted 1584.55 (Being the provision for unexpired discount required at the end of the year)
DETAILED EXAMPLES
From the following information, prepare Profit and Loss A/c of a Bank as on 31-3-2017 : (Rs.000 )
2015-16 Item 2014-15
14,27 Interest and Discount 20,45
1,14 Income from investment 1,12
1,55 Interest on Balances with RBI 1,77
7,22 Commission, Exchange and Brokerage 7,12
12 Profit on sale of investments 1,22
6,12 Interest on Deposits 8,22
1,27 Interest to RBI 1,47
7,27 Payment to and provision for employees 8,55
1,58 Rent, taxes and lighting 1,79
1,47 Printing and stationery 2,12
1,12 Advertisement and publicity 98
98 Depreciation 98
1,48 Director's fees 2,12
1,10 Auditor's fees 1,10
50 Law charges 1,52
48 Postage, telegrams and telephones 62
42 Insurance 52
57 Repair & maintenance 66
Prepare the Profit and Loss account and also give necessary Schedules. Other information:
(i) The following items are already adjusted with Interest and Discount (Cr.):
Tax Provision ('000 ' ) 148
Provision for Doubtful Debts ('000 ) 92
Loss on sale of investments ('000 ' ) 12
Rebate on Bills discounted ('000 ' ) 55
(ii)Appropriations :
25% of profit is transferred to Statutory Reserves 5% of profit is
transferred to Revenue Reserve.
Solution
Profit and Loss Account for the year ended 31-3-2017 (000's )
Schedule Year ended Year Ended
31-3-2016 31-3-2017
I Income
Interest Earned 13 2586 1696
Other Income 14 822 734
Total 3408 2430
II. Expenditure
Interest Expended 15 969 739
Operating Expenses 16 2096 1697
Provisions and Contingencies 240
Total 3305 2436
Ill. Profit/Loss
Net Profit/Loss (-) for the year 103 6
()
Profit/Loss (-) brought forward (6)
Total 97 (6)
IV. Appropriations
Transfer to Statutory Reserve 25.75
Transfer to Other Reserve, Proposed 5.15
Dividend
Balance carried over to Balance Sheet 66.10
Total 97.00
Schedule 13 - Interest Earned

I. Interest/Discount 22,97 14,27
IL Income on Investments 1,12 1,14
III. Interest on Balances with RBI and other inter-bank fund 1,77 1,55
IV. Others
Total 25,86 16,96
Schedule 14 - Other Income

I. Commission, Exchange and Brokerage 7,12 7,22
IL Profit on Sale of Investments 1,22 12
Less: Loss on sale of Investments (12) 1,10
Total 8,22 7,34
Schedule 15 - Interest Expended
I. Interest on Deposits 8,22 6,12
IL Interest on RB1/inter-bank borrowings 1,47 1,27
Total 9,69 7,39
Schedule 16 - Operating Expenses
I. Payments to and provision for employees 8,55 7,27
IL Rent, taxes and lighting 1,79 1,58
III. Printing and stationery 2,12 1,47
IV'. Advertisement and Publicity 98 1,12
V_ Depreciation on the Bank's Property 98 98
VI. Director's fees, allowances and expenses 2,12 1,48
VII. Auditor's fees and expenses (including branch auditors) 1,10 1,10
VIII. Law charges 1,52 50
IX. Postage, telegrams, telephones etc. 62 48
X_ Repairs and maintenance 66 57
Xt. Insurance 52 42
Xi I. Other Expenditure
Total 20,96 16,97
5. ACCOUNTS OFCOMPANIES
Proprietary and partnership forms of business are suitable where capital requirement is small. When a big industrial unit is to be set up and
where capital requirement is very large, generally, a limited company is formed. Formation of a company is governed by the rules and
regulations as contained in the Companies Act. There are different types of companies such as Private Company, Public Company,
Government Company, Holding Company, Subsidiary Company, Companies Limited by Guarantee, etc. A company is an artificial person. The
public contributes towards its share capital. The persons who own the shares are called shareholders and they are owners of the company.
They elect their representatives to look after the day-to-day affairs of the company. There are two types of shares a company can issue, viz.,
equity and preference. Preference shareholders have a preference over equity shareholders as to payment of dividend and repayment of
capital at the tine of winding up of a company. Shares of a company are freely transferable, subject to certain restrictions in case of a Private
Company. Liability of a shareholder is limited to the extent of shares held by him.
Important note : Reference to various sections in this chapter relates to Companies Act 1956. Companies Act 2013 has been
notified / implemented w.e.f. 1.4.2014
A company (also called joint stock company) is an association of persons who contribute money to a common pool (called paid up
capital of the company) and use it for common purpose. A company is formed by way of incorporation under the provisions of
Companies Act 1956.
Important features of a company
1. It is an incorporated association which comes into existence with issue of certificate of incorporation by Registrar of
Companies.
2. A company is an artificial or legal person, without any physical existence.
3. A company has a perpetual succession which means that death or insolvency of its members does not affect the existence of
the company.
4. The companies are artificial persons and are represented physically by the common seal. It is affixed on all important
documents as per the resolution passed by Board of the company.
5. The shareholders have limited liabilities to the extent of the unpaid value of shares subscribed by a shareholder.
6. The shares of a company are freely transferable (there are restrictions in case of private company).
Different Types of Companies

The classification of companies is on the basis of (a) their incorporation (b) ownership and liability.
Based on Incorporation Based on Ownership Based on Liability
Chartered Company: Established under Private company: Its Articles place restriction on (1) no. Limited by shares:
a special charter issued by Head of a of members at 50, (2) right of transfer of shares, (3) Liability of
State such as East India Company. Such invitation to public to subscribe to its shares. (min paid shareholder is limited to
companies do not exist in India up capital Rs.1 lac) the unpaid amount of
Statutory Company: Established Public Company: A company which not a private shares subscribed.
under a special Act passed by company (min paid up capital Rs.5 lac) Limited by
Central or State Govt. such as LIC of Govt. Company: Where shareholding min 51% is held by Guarantee: Liability
India; Govt. of the shareholder to the
Registered Company: Companies extent of amount
Holding Company: Which holds majority (min guaranteed by him
registered under companies Act 51%) of shares of another company,
1956 such as Reliance Industries, Infosys Unlimited liability:
Technologies etc. Subsidiary Company: Which is controlled by Shareholder's liability
Foreign Company: Companies another companyom anan is unlimited.
incorporate outside India but having One person company : A company having one
place of business in India. shareholders only (as per Companies Act 2013).
Small Company : A company other than a public
company but with max paid up capital of Rs.50 lac
or turnover of Rs.2 cr.
Partnership and Company - Distinction
Partnership Joint Stock Company
Formation By way of agreement between partners By certificate of incorporation issued by
Registrar of companies
Legal Status Not a separate legal entity Separate legal entity
Existence Dissolved with death or insolvency of a Death or insolvency of a member or
partner director does not affect the existence.
Ownership Joint by partners Jointly by shareholders
Transfer of ownership Share of partner cannot be transferred Shares can be freely transferred in case
of public company.
No. of members Min 2 max 100 Min 2 max 200 in case of private
company and min 7 and max no limit in
case of a public company
Share of profit As per agreement Profit received as dividend

Management All partners can participate Board of Directors only and not the
individual shareholders.
Share capital
Whenever a company wishes to raise capital it has to issue shares by way of a prospectus. Prospectus is an invitation to the public
to subscribe to the shares or debentures which is signed by directors.
So far as share capital is concerned, it may be categorized as Authorised, issued, subscribed or paid up capital.
Nature of Capital Description

Authorised capital Maximum amount of capital, that a company could raise and is stated in the capital clause
in MOA of the company
Issued capital The amount which has been offered to public for subscription. It can be
maximum us to the authorized capital
Subscribed capital The no. of shares and the face value of the shares which the prospective shareholders
want to take up.
Paid up capital The amount actually received from the shareholder against the allotted shares.
Illustration : The capital clause in Memorandum of Association of a company states its authorised capital comprising 7 lac shares
of Rs.10 each. Company has decided to raise capital from public to the extent of 4 lac shares of Rs.10 each. It also decides to invite
Rs.5 per share for the time being. Company receives applications for 10 lac shares at Rs.5 per share. The company has allotted 4
lac shares of Rs.10 each against part payment of Rs.5 per share. In this case,
Authorised capital = Rs.70 lac
Issued capital = Rs.40 lac
Subscribed capital = Rs.10 lac (subscribed capital cannot be more than the issued capital)
Paid up capital Rs.20 lac
Types of share capital
Equity share capital and preference share capital : The company can raise either equity shares or preference shares.
Equity : While the equity shares have voting rights and they are entitled for varying rate of dividend subject to availability of
profits and declaration of dividend by the company but they are paid the dividend after the preference share holder.
Preference shares: The preference share holders get a fixed rate of dividend and get the dividend before the equity shareholders
subject to availability of profits for distribution. They have only special voting rights and do not participate in the management of
the company. Preference shares can be :
1. Cumulative or non-cumulative in cumulative shares, if dividend is not paid in a particular year, it will be paid in the next
year as the right to claim dividend is not exhausted.
2. Redeemable or non-redeemable : Redeemable means the value of which will be paid back to the shareholder after a pre-
determined period
3. Participating or non-participating : Participating means where subject to certain conditions, the shareholders ca n exercise
the voting rights i.e. they can participate in the decision making..
Non-voting Shares
Equity shares can be issued without voting rights also subject to certain conditions as under:
1. Issue is authorised by Articles of Association
2. Special Resolution from shareholders fixing the price and also the rate of dividend
3. Max 25% of paid up capital of the company, can be non-voting shares.
4. Only a public company can issue such shares. Shares with voting rights cannot be converted into non-voting shares.
Bonus Shares
These are the share issued to the existing shareholders out of the reserves of the company. It is also called capitalization of
reserves. It can be done (a) by making partly paid shares as fully paid shares or (b) issue of new shares called bonus shares. It
can be done with SEBI permission only, if the Articles of Association provide for that.
Sweat Equity Shares
U/s 79 A, of Companies Act. these shares are issued to employees or directors at a discount or for consideration other than cash.
Employees Stock Option Plan (ESOP)
Under this, the company allows an option to its employees to apply for shares at a pre-determined price during a specified period.
Issue of shares
Shares can be issued by a company at par, i.e. at the face value or at a premium i.e. in addition to face value, some additional
amount equivalent to premium or at a discount.
For instance, if a company issues a Rs.10 share at Rs.10, it is at par. But if the same share is issued at a face value in addition to Rs.5
as a premium, it would be called at a premium.
When a company agrees to issue a share of Rs.10 for say Rs.8, it is called to have been issued at a discount. Section 79 of
Companies Act stipulates that the rate of discount should not be more than 10% unless the Company Law Board approves and
shares must be issued within 2 months of sanction of Company Law Board and one year should have lapsed since last issue of
such shares, when company wants to issue such shares again.
The amount of a share is called by a company in instalments as under:
1. part amount with application.
2. part amount on allotment
3. balance amount on calls.
Application money : The amount which the shareholders send along with the share application at the time of applying for a share
is called application money.
Allotment money and call money : The basis of allotment are decided by a company in consultation with a regional stock
exchange. A company can call the amount due on shares in instalment i.e. at the time of application and subsequently after
allotment or in further instalments called calls. When after allotment of the shares by the company, it calls the money, this is called
allotment money. Similarly, if the entire money has not been called by the company at the time of calling allotment money, then
any money called there after would be known as call money. Call money may be called in one call or in more than one calls.
Calls in advance and calls in arrear : Where a shareholder makes payment of money when the amount has not been called as
yet by the company (say payment of call money along with allotment money), this is called call in advance. Such amount is a
liability of the company which is to be shown separately than the subscribed capital. In the absence of any provisions in the
Articles of Association, company is required to pay interest 6% on this amount.
On the other hand, when the company has already called the money, but the shareholder has not paid the money, this becomes
calls in arrear, on which the company can charge interest @ 5% p.a. To find the exact amount of paid up capital, this amount would
be deducted from the share capital.
Over-subscription and under-subscription : When a company receives subscription from public more than the issued amount, it is
called over-subscription. If a company decides to retain the over-subscription or part thereof, this can be done by exercising 'Green
shoe option'. On the other hand when the company receives the money which is less than the issued amount of share capital, this
is a situation of under-subscription.
Illustration : Against issued capital of 5 lac shares of Rs.10 each, if a company receives applications for 6 lac shares, it is a situation
of over-subscription while if the company receives applications for 4 lac shares only, it is a situation of under-subscription. The
company cannot proceed with allotment in case of under-subscription if the amount is less than 90% of the issued capital.
Under-writing : In order to save itself from such a situation, the companies normally approach the underwriters to support the
issue, which means that in the event of under-subscription, the amount of shortfall would be subscribed by the underwriters to the
extent of their under-writing commitment.
Forfeiture and re-issue of shares : When a shareholder fails to pay the due amount on the shares subscribed by him, the
company has the right to forfeit the share capital and also forfeit the amount already deposited by the shareholder. It may be
noted that in the process of forfeiture, it is the amount of share capital i.e. face value of the share, that is forfeited. Before
forfeiture, a reasonable notice of 14 days is required to be given to the shareholder.
After forfeiture, the company may proceed with re-issue of the same share which can be done at par, at a premium or at a
discount.
Bonus shares and rights shares : When a company issues shares out of its free reserves it is done by way of issue of bonus shares.
This increases the share capital of the company and to that extent reduces the free reserves. As a result, there is no change in the
net worth of the firm with issue of bonus shares.
But when a company issues additional capital and gives the option to existing shareholders to subscribe, failing which offer would
be given to prospective shareholders, this is called rights issue. Rights issue results in increase in the paid up capital.
Issue of shares for cash and for a consideration other than cash : A company normally issues shares on receipt of cash. But shares
can be issued to the vendors (fixed assets suppliers) of the company in lieu of making payment to them. These may be issued to
existing promoters in consideration of goodwill. These shares can be issued at par or at a premium or at a discount.
ISSUE OF SHARES AT A PREMIUM
When shares are issued by a company at a price higher than the face value, it called issue of shares at a premium. Amount of
premium is decided by the Board of Directors of the company.
The premium can be used by a company for (a) buy back of shares (b) issue of fully paid bonus shares (c) writing off of preliminary
expenses or discount on issue of shares or debentures (d) payment of premium in redemption of preference shares or debentures.
ISSUE OF SHARES AT A DISCOUNT
When shares are issued by a company at a price below the face value, it called issue of shares at a discount. Permission of
Company Law Board is required for this purpose. The following aspects are also to be taken into account for this:
1. Members' resolution must specify that the rate of discount would not exceed 10% of face value of the share.
2. Share are to be issued within 2 months.
3. Shares cannot be issued within one year from date of commencement of business.
The journal entry would be:
Share allotment account Dr.
Discount on issue of shares Dr.
To share capital account.
ISSUE OF DEBENTURES
A company can also raise money from sources other than shareholders by borrowing the money through another instrument
called debenture. A debenture holder is a creditor of the company, he gets fixed interest stated before the word debentures (say
6% debentures or 10% mortgage debentures). The debentures are issued for a fixed period after which they are paid, which is
known as redemption period. The debentures can be redeemable or non redeemable, convertible or non-convertible, secured or
unsecured They are shown as a liability of long term nature by the company, in its balance sheet.
Debentures can be issued at par or at a premium or discount, redeemable at par or redeemable at a premium or at a discount.
Premium on debentures is shown as a reserve while discount on debentures is shown as an asset. Premium on redemption of a
discount is shown as a liability.
The debentures are paid/redeemed by the company on maturity either by issue of new shares or debentures or by creating a
sinking or insurance fund or by creating a debenture redemption reserve. Any profit earned by a company on redemption is shown
as part of the capital reserve of the company. But if there is any loss on redemption, it is debited to profit and loss account.
Important facts about company accounts
The following facts must be kept in mind, while dealing with a company's accounts relating to issue of shares by a company:
1. An equity share carries the voting rights.
2. Preference share holders have voting right when the dividend is outstanding for more than 2 years for cumulative preference
shares and for 3 years in case of non-cumulative preference shares.
3. Forfeited shares when reissued can be issued at a discount provided the reissue price plus the amount already received from
defaulting shareholder is not less than the amount credited as paid up on reissue of the share.
9. It is mandatory to cancel the discount on issue of shares account at the time of forfeiture of shares which were issued at a
discount.
S. Preference share enjoys the preferential right only in respect of return of capital on winding up of the
company. It does not have a right to get the dividend.
6. Entries for surrendering the shares are the same as are applicable in case of forfeiture of shares.
7. Capital redemption reserve is available for declaring fully paid bonus shares.
8. A company can purchase its own shares as well as debentures.
9. A convertible preference share can be converted into equity shares.
10. At the time of issue of shares, an applicant is required to pay minimum 5% of the nominal value of the share as application
money.
11. Face value is the value of a share stated on the share certificate. Paid-up value represents the amount called by the company
and paid by the shareholder, which may be or may not be equal to the face value.
12. Shareholders are not entitled to get dividend on the amount paid as calls-in-advance.
13. Unless permitted by the Central Govt. a share cannot be issued at a discount exceeding 10% of the nominal value. A company
can issue shares at a discount when minimum one year has lapsed since commencement of business.
14. A partly paid preference share cannot be redeemed.
15. Balance of share forfeited account after reissue of the forfeited shares is transferred to capital reserve.
16. Transfer to capital redemption reserve account is permitted from profit and loss account and dividend equalization account.
ISSUE OF SHARES.BY COMPANIES : A PRACTICE CASE
A newly promoted company has recently raised capital through a public issue, the particulars of which are given as under. You are
requested to make journal entries and also prepare ledger accounts and balance sheet.
1 No. of shares offered 10000
2 Face value of the share Rs.10
3 No. of share for which applications received - 20000
4 Amount payable with application Rs.3, on allotment Rs.2 and on first and final call Rs.5.
5 No. of share for which applications are not eligible at all 1000 for which amount will have to be
refunded immediately.
6 No. of shares for which allotment money when called not received 1000
t
7 No. of shares for which 1s /final call money not received when called - 1000
st
8 The company subsequently forfeits partly paid shares on which allotment money and 1 call money has
not been received and forfeits the amount already received for these shares.
9 Later on the company reissues the forfeited shares at a discount of Re.1 per share. Discount is allowed
to the debit of forfeited account.
It is assumed that shares are the same on which the allotment money has not been received.
Journal entries
On Receipts of application money
Bank Dr. 60000
To share application account. Cr. 60000
(with actual amount received irrespective of shares offered)
On allotment of shares
Share Application account. Dr.30000
To share capital account. Cr. 30000
(application money on 10000 shares allotted at Rs.3 per share received.)
When allotment money becomes due
Share allotment account Dr. 20000
To share capital account. Cr.20000
(sum due on allotment on 10000 shares at Rs. 2 per share allotted.)
On receipt of allotment money
Bank account Dr.18000
Share allotment account Cr. 18000
(for 9000 shares R5.2 per share not received on 1000 shares)
On refund of ineligible application
Share application account. Dr.3000
To Bank account. Cr.3000
(being the full amount received and returned)
On refund of un-allotted application
Share application account. Dr.27000
To Bank account. Cr.27000
(being the excess amount received and returned)
1st & final Call
Share 1st call account Dr.50000
To share capital account. Cr.50000
(amount due on first call on 10000 shares at 1?s.5 per share)
On receipt of call money
Bank account. Dr. 45000
To share 1st call account. Cr.45000
(amount received against first call for 9000 shares g Rs.5)
On transfer of amount in arrears on a/c of allotment of 1st call to a separate a/c
Calls in arrears Dr.7000
To share allotment account Cr.2000
To share 1st call account. Cr. 5000
(amount still due on these calls for 1000 shares)
On Forfeiture of partly paid shares
Share capital account Dr.10000
(1000 share forfeited )
To calls in arrear account Cr.7000
(for amount that remained unpaid)
To share forfeited a/c. Cr.3000
(for amount already received for 1000 shares Rs.3 per share as application money)
On reissue of forfeited shares
Cash / bank account Dr.9000
(for actual amount received 6.) as.9 per share)
Share forfeited account. Dr.1000
(Tor discount allowed at Re.1)
To share capital Cr. 10000
(amount credited as paid up or called up on the reissued shares)
On transfer of balance in share forfeited account to capital reserves
Share forfeited account Dr.2000
To share reserve account Cr.2000
Share capital account
Dote Particulars Dr Cr Balance
By share application 30000 30000
By share allotment 20000 50000
B share 1' call 50000 100009
To forfeited account 10000 90000
By Bank share appn 10000 100000
Bank account
Date Particulars Dr Cr Balance
To share appn 60000 60000
By share appn 3000 57000
By share appn 27000 30000
To share allotment 18000 48000
-
To share V call 45000 93000
To share capital 9000 102000
Capital reserve account
Date Particulars Dr Cr Balance
By share forfeited a/c 2000 2000 j
Balance Sheet
Liabilities Amount Assets Amount 1
Share capital 100000 Bank 102000
Capital reserve 2000
Toot& 102000 102000 1
6.ACCOUNTING IN A COMPUTERISED ENVIRONMENT

In the good olden days, accounting records were prepared manually using a few accounting machines such as a mechanical calculator.
But after the Second World War and with the advent of computers, specially in the advanced countries, the use of computers and its
peripherals, in the maintenance of accounts and preparation of financial statements have constantly increased. In modem times, it is
difficult to imagine a scenario where accounts are kept manually. Even very small business entities have shifted to computerised
accounting with the advent of personal computers which have now become household commodities like the television, refrigerator,
etc.
Nowadays, many organisations perform their accounting work on computers ignoring the manual method of bookkeeping. Modern
accounts are more like computer-keeping rather than bookkeeping.
MEANING OF COMPUTERISED ACCOUNTING
A large no. of business firms and organization maintain their accounts on a computer system. The performing of accounting functions through
computers is called Computer Accounting. The computer performs a large no. of accounting functions the important among them being:
1. It captures business transactions in the form of accounting entries.
2. The accounting entries are then used to prepare financial statements.
3. The financial statements are prepared based on accounting standards.
4. Various financial reports are prepared from the data available in the financial statements
When the above functions are performed by using a computer, the system so developed is called Computerised Accounting
Data: Data mean any facts, observations, assumptions or occurrences. In accounts they mean accounting entries to be passed in
books of account to prepare financial statement.
Software: Acomputer is run on the basis of a set of instructions called the software programme developed by a computer
professional called the programmer.
Computerised Accounting: Computerised accounting means maintaining books of account and preparing financial
statement using a computer.
Internet: Internet is the inter-connection between several computers of different types belonging to various networks
all over the globe.
World Wide Web (WWW): WWW is a series of servers that are interconnected through hypertext. Hypertext is a method
of presenting information in which certain text is highlighted that, when selected, displays more information on the
particular topic. The highlighted items are called hyperlinks and allow the users to navigate from one document to
another that may be located on different servers.
Accounting software : For the purpose of computer accounting, various kinds of software and operating languages, are available that range from
COBOL to FOXPRO and ready made software such as Tally, spread sheets, data base software.
Essential requirementfor computerizedaccounting:
Computerized accounting is possible with the availability of qualified staff, well versed with such operations.
Computer hardware, software and stationery are very costly and result in higher cost if level of operations is small.
There is apprehension of data or information loss, if proper back up is not created.
Data and information available in the computer system can get corrupted or even lost, due to virus. Various
accounting functions in computerized accounting : The computer can take care of following types of accounting
functions:
Maintenance of books
Inventory and receivablemanagement
Generation of various types of reports
Preparation of final accounts
Networking for various locations
USE OF COMPUTERS FOR BANKING
A combination of computers and communication technologies is at present enabling international banks and financial institutions to expand their
reach and offer technology based products to a wide spectrum of clientele which was unthinkable in olden days. Banks being essentially the
processors of information in large quantities, use the information technology (IT) to achieve the:
ability to handle larger volumes of business with the desired level of efficiency;
maximisingprofitabilityof operations and
exercising a strict vigil on costs. International banks have achieved the above objectives while Indian banks have started entering
recently in the areas such as:
collection, storage and processing of information in administrative offices
toning up book-keeping efficiency at branches by computerising back office operations
full branch computerisation
setting up automated teller machines (ATMs).
VARIOUS BANKING SERVICES THROUGH COMPUTERS
Faster remittanceservices
Anywhere banking and ATMs
Tele-Banking
Homebanking
Cashmanagement
Role of computers in accounting
The most popular system of recording of accounting transactions is manual which requires maintaining books of accounts such as Journal, Cash
Book, Special purpose books, ledger and so on. The accountant is required to prepare summary of transactions and financial statements
manually. The advanced technology involves various machines capable of performing different accounting functions, for example, a billing
machine. This machine is capable of computing discount, adding net total and posting the requisite data to the relevant accounts.
Components of Computerisedaccounting software:
1. Preparation of accounting documents
2. Recording of transactions
3. Preparation of Trial Balance and Financial Statements
Computerised Accounting
Transaction processing system (TPS) is the first stage of computerized accounting system. The purpose of any TPS is to record, process, validate
and store transactions that occur in various functional areas of a business for subsequent retrieval and usage.
TPS involves following steps in processing a transaction: (1) Data Entry, (2) Data Validation, (3) Processing and Revalidation, (4)
Storage, (5) Information and (6) Reporting.
It is one of the transaction processing systems which is concerned with financial transactions only. When a system contains only human
resources, it is called manual system; when it uses only computer resources, it is called computerized system and when it uses both human and
computer resources, it is called computer-based system.
NEED AND REQUIREMENTS OF COMPUTERSIED ACCOUNTING
The need for computerized accounting arises from advantages of speed, accuracy and lower cost of handling the business
transactions.
Numerous Transactions, Instant Reporting, Reduction in paper work, Flexible reporting, Accounting Queries, On-line facility,
Scalability, Accuracy, Security
Difference betweenManual accountingand Computerisedaccounting
Point of Difference Manual Accounting Computerised Accounting
1. Recording Recording of financial Data content of these transactions
transactions is through books is stored in well designed data base.
of original entry
2. Classification Transactions recorded in the books No such data duplications is made. In order to
of original entry are further classified produce ledger accounts the stored transaction
by posting them into ledger data is processed to appear as classified so that
accounts. This results in transaction same is presented in the form of report.
data duplicity The generation of ledger accounts is not
3. Summarising
Transactions are summarised to necessary condition for trial balance.
produce trial balance by ascertaining
the balances of various accounts. There is nothing like making adjusting
Adjusting entries are made to entries for errors and rectifications.
4. Adjusting adhere to the principle of matching. The preparation of financial statements
Entries The preparation of financial assumes the availability of trial balance.
Statements
5. Financial statements is independent of
producing the trial balance.
Advantages and Disadvantages of Using Computerized Accounting Advantages :

Speed,Automatic document production, Accuracy ,Up-to-date information ,Availability of information
Management information, Tax return, Legibility, Efficiency, Staff motivation, Cost savings, Reduce frustration, The ability to deal in multiple
currencies easily
Disadvantages: Cost, Reliance, Fraud, Additional software, Human error, Training, Time
Functions performed by Accounting Software available in the market
Most of the accounting software applications on the market provide the following features and capabilities, to improve all facets of
financial planning, management, control, and analysis. The most basic features include:
General Ledger Management , Controlling and Budget Management, Cash Management, Financial Forecasting, Fixed Asset
Management, Compliance Management
6. MODULE D: BANKING OPERATIONS
Banking is a service oriented industry performing various functions. A branch of a bank provides the point of contact for the customer
utilizing the services of the bank. The branch performs the front office functions like opening of accounts both for liabilities and assets,
receiving loan applications, accepting/ disbursing cash, accepting/paying cheques/drafts etc.
FUNCTIONS OF A BANK
Banking as defined by Section 5 of the Banking Regulation Act means the accepting, for the purpose of lending or investment, of
deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, and order or otherwise.
"Any company which is engaged in the manufacture of goods or carries on any trade and which accepts deposits of money from
public merely for the purpose of financing its business shall not be deemed to transact the business of banking within the meaning of
this clause."
In addition to banking business, a bank is permitted under Section 6 of the Banking Regulation Act, 1949 to engage in certain classes of
business which are incidental to the business of banking. Section 8 of the Act ibid prohibits a bank from buying, selling or dealing in goods
except in connection with the realisation of a security held by it or in connection with the business of collection or negotiating bills of
exchange.
1) PRIMARY FUNCTION:
a) Accepting Deposits: The main kinds of deposits are:
i) Current Account Deposits or Demand Deposits , ii) Fixed Deposits or Time Deposits
b) Advancing of Loans: Different types of loans and advances made by Commercial banks are:
i) Cash Credit ii) Demand Loans, iii) Short-term and Long termLoans
2) SECONDARY FUNCTIONS:
i) Overdraft Facility
ii) Discounting Bills of Exchange
iii) Agency Functions
a) Transfer of Funds b0 Collection and Payment of Various Items , c) Purchase and Sale of Foreign Exchange
d) Purchase and Sale of Securities e) Income Tax Consultancy ,f) Trustee and Executor
3) GENERAL UTILITY FUNCTIONS:
a) Locker Facility b) Traveller's Cheques c) Letter of Credit d) Underwriting Securities e) card business
Banks perform Para banking activities like:
a) Equipment Leasing, Hire Purchase and Factoring Services
b) Investment in Venture Capital Funds
c) Mutual Fund Business
d) Money Market Mutual Funds
e) Portfolio Management Service
f) Primary Dealership Business g)Underwriting of Corporate Shares and Debentures
g) Retailing of Government Securities i) Insurance business j) Pension Funds Management k) Merchant Banking l) Derivatives
FRONT OFFICE AND BACK OFFICE IN A BANK
Front office is a business term that refers to bank's departments that come in contact with clients. These include the marketing, sales,
and customer relations operations of the bank. The front office staff directly produces the revenue, in contrast to back office staff, who
perform administrative and other support functions for the front office. Although the operations of a back office are seldom prominent,
they are a major contributor to the banking business. Back offices may be located somewhere other than the bank branch or bank
office. Many are in areas and countries with cheaper rent and lower labor costs. Generally, the branches of banks perform the function
of the front office and conduct a variety of banking business under one roof. The basic banking business receiving deposits and making
loans and advances as well as most other banking services take place at the branch level, in the normal course.
OUTSOURCING OF SERVICES BY BANKS
The banking industry, like many other industries, uses outsourcing. The extensive use of outsourcing is for reducing costs as well as
making use of expertise not available internally. However, a number of risks are associated with outsourcing of some of the activities
by banks. RBI has issued guidelines to bring such outsourced activities under the regulatory purview and to ensure that the banks
adequately address the risks associated with outsourcing of activities.
Definition: The "outsourcing" is defined as "a bank's use of a third party (either an affiliated bank within a corporate group or a bank
that is external to the corporate group) to perform activities on a continuing basis that would normally be undertaken by the bank
itself, now or in the future". 'Continuing basis' would include agreements for a limited period.
Scope of RBI guidelines includes:
(a) Activities that should not be outsourced
(b) Bank's role and regulatory and supervisory requirements
(c) Risk management practices for outsourced financial services
(d) Role of Board of Directors and senior management
(e) Evaluation of risks
(0 Evaluating the capability of the service provider
(g) Outsourcing agreement
(h) Confidentiality and security
(i) Responsibility of DSA/DMA/Recovery Agents (1) Monitoring of outsourced activities
(k) Redressal of grievances related to outsourced services (1) Reporting of transactions to Financial Intelligence Unit (m) Off-shore
outsourcing of financial services
Regular audits either by the internal auditors or external auditors of the bank should assess the adequacy of the risk management
practices adopted in overseeing and managing the outsourcing arrangement, the bank's compliance with its risk etc.
Activities which cannot be outsourced: The banks should not outsource core management functions including internal audit,
compliance function and decision-making functions like, determining compliance with Know Your Customer (`KYC') norms for
opening deposit accounts, according sanction for loans (including retail loans) and management of inVbstment portfolio.
Risk Associated with Outsourcing of Activities
Factors that may contribute significantly to operational risk include the following:
(i) Requirement to process high volumes of transactions within a short time through the large-scale use of IT.
(ii) Use of electronic funds transfer (EFT) or other telecommunication system to transfer large sums of money, with the resultant
risk arising from payments to incorrect parties.
(iii) Conduct of operations in many geographically dispersed locations, dispersion of transaction processing and internal controls.
This may result in control breakdowns which may remain undetected or uncorrected.
(iv) Intra-day payment risk.
(v) Handling of large volumes of cash and financial instruments, which are subject to the risk of loss, arising from theft and
fraud by employees or other parties.
(vi) The need to adhere to differing requirements, thereby, leading to risk that operating procedures may not comply with
regulations in all the jurisdictions.
BANKING OPERATIONS MANUAL:
The Banking Operations Manual is prepared on the basis of banking law practices and attempts to provide operations
guidelines to the staff of the bank engaged in carrying banking operations. The manual is used keeping in view any changes in
rules and practices over time. It brings at one place the important aspects of Banking Operations for reference of the
functionaries at the delivery point of the customer services in the bank and is useful as a basic guide for the Front Office
Banking operations. Each bank has its own Banking Operations Manual covering all the functions performed by it. While the
basic structure is based on the same legal framework and RBI guidelines, the difference lies in special products and policies of
each bank. The operations manual of the bank requires frequent updating to reflect not only the important regulatory changes
that have been brought about by Reserve Bank of India but also implementation of Core Banking solutions at almost all levels in
the banks. For example, if a bank is engaged in portfolio management of its clients, there will be separate operating instructions
for that. But there are certain basic activities like opening of accounts, handling cash, clearing, loans and advances, remittances,
etc which are undertaken by every bank. Also, KYC process has become an inseparable part of banking and each bank's
operational manual is likely to contain detailed instructions about it. Customer service is also an important area about which
the operating staff should be well versed with. In the subsequent chapters, operating guidelines on KYC norms/customer
service and the basic banking activities have been detailed, for serving as illustrative guidelines.
2. OPERATIONAL ASPECTS OF KYC/CUSTOMER SERVICE

The objective of KYC/AML/CFT guidelines is to prevent banks from being used, intentionally or unintentionally, by criminal elements
for money laundering or terrorist financing activities.
KYC procedures also enable banks to know/understand their customers and their financial dealings better which in turn help them
manage their risks prudently.
Definition of Customer
For the purpose of KYC policy, a 'Customer' is defined as: a person or entity that maintains an account and/or has a business
relationship with the bank;
one on whose behalf the account is maintained (i.e. the beneficial owner). ['Beneficial Owner' means the natural person
who ultimately owns or controls a client and or the person on whose behalf a transaction is being conducted, and includes a
person who exercise ultimate effective control over a juridical person]
beneficiaries of transactions conducted by professional intermediaries, such as Stock Brokers, Chartered Accountants,
Solicitors etc. as permitted under the law, and
any person or entity connected with a financial transaction which can pose significant reputational or other risks to the
bank, say, a wire transfer or issue of a high value demand draft as a single transaction.
KYC Guidelines have been issued by RBI under Section 35-A of Banking Regulation Act to check Money Laundering i.e., using of
banking channel for conversion of illegal funds into legal funds and financial frauds.
Guidelines: Based on recommendations of Financial Action Task Force (FATF) on Anti Money Laundering standards and on
Combating Financing of Terrorism.
Four Pillars: (i) Customer acceptance policy; (ii) Customer identification procedures: (iii) Categorisation of customers; & (iv) Risk
Management.
Customer Acceptance Policy: Banks are required to verify the identity and address of the customers before opening of accounts
to avoid fictitious / benami accounts.
Categorization of Customers: Customers to be categorized into low, medium and high risk keeping in view risk perception,
th
volume / turnover, social & financial status etc. The risk categorization should be reviewed once in 6 months - 15 May and Nov.
Know Your Transactions: Banks to monitor and keep record of high value cash transactions of Rs. 10 lac above and send report of
Cash transactions of Rs.10 lac and above to Financial Intelligence Unit (FIU) at Finance Ministry. Cash transaction report (CTR) for
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each month to be sent by 15 of close of the month. Further banks not to accept cash receipt of Rs 50,000 and above for issue of
DD, TT, MT, TC's.
Suspicious Transaction Report (STR): To be submitted within 7 days of date of transaction.
Proof of Identity / Address: To open a bank a/c, the customer needs to submit a 'proof of identity and proof of address' together
with a recent photograph. The Govt. of India has notified six documents as 'Officially Valid Documents (OVDs) for proof of
identity. These six documents are:
a) Passport, b) Driving Licence, c) Voters' Identity Card, d) PAN Card, e) NREGA Card and f) Aadhaar Card
If these documents also contain the address details, then it would be accepted as 'proof of address'. If the document
submitted by the customer for proof of identity does not contain address details, then he will have to submit another officially
valid document which contains address details.
Small Account: A person not having the above documents can still open a bank a/c known as 'Small Account' by submitting
his recent photograph and putting his signature or thumb impression in the presence of the bank official.
i) The 'Small Accounts' have following limitations:
a) Balance in such a/cs at any point of time should not exceed Rs.50,000/-.
b) Total credits in one year should not exceed Rs.1,00,000/-
c) Total withdrawal and transfers should not exceed Rs.10,000/- in a month.
d) Foreign remittances cannot be credited to such accounts.
ii) Such accounts remain operational initially for a period of 12 months and thereafter, for a further period of 12 months, if the
holder of such an account provides evidence to the bank of having applied for any of the officially valid documents within
twelve months of the opening of such account. The bank will review such account after 24 months to see if it requires such
relaxation.
Normal Account: A normal account can be opened by submitting a copy of any one of the following documents:
a) Identity card with person's photograph issued by Central / State Govt. Deptt., Statutory Authorities, PSUs, Banks, and Public
Financial Institutions; or
b) Letter issued by a gazetted officer, with a duly attested photograph. This, however, is not a general rule. It is left to the
judgement of the banks to decide whether simplified procedure can be adopted for any customer.
Periodical Updation: Banks are required to periodically update KYC records. This is a part of their ongoing due diligence on
bank accounts. Different periodicities have been prescribed for updation of KYC records depending on the risk perception of the
bank. KYC is required to be done at least every two years for High Risk customer; at least every eight years for Medium Risk
customer and every ten years for Low Risk customers.
This exercise would involve all formalities normally taken at the time of opening the account. In case of customers categorized
in Low risk category by the bank, if there is no change in status with respect to the identity (change in name, etc.) and/or
address, the customer may submit a self-certification to that effect at the time of periodic updation. In case of change of
address of such 'low risk' customers, he could merely forward a certified copy of the document (proof of address) by mail /
post, etc. Physical presence of such low risk customer is not required at the time of periodic updation. Customers who are
minors have to submit fresh photograph on becoming major.
Failure to Submit Documents for Periodical Updation: If the customer do not provide his KYC documents at the time of
periodic updation, bank has the option to close his account. Before closing the account, the bank may, however, impose
'partial freezing' (i.e. initially allowing all credits and disallowing all debits while giving an option to the customer to close the
account and take his money back). Later even all credits also would not be allowed. The 'partial freezing' however, would be
exercised by the bank after giving him due notice.
Partial Freezing: Partial freezing is imposed in following ways: a) While imposing 'partial freezing', banks has to give due notice
of three months initially to the customers before exercising the
option of 'partial freezing'.
b)After that a reminder for further period of three months would be issued. Thereafter, banks may impose 'partial freezing' by
allowing all credits and disallowing all debits with the freedom to close the accounts.
c) If the accounts are still KYC non-compliant after six months of imposing initial 'partial freezing,' banks may disallow all debits and
credits from/to the accounts, rendering them inoperative. d)Thus, one year after the account is due for updation, if the customer
does not provide the necessary documents / information, the account would become fully inoperative i.e, neither credits nor
debits would be allowed in the account. However, the account holders can revive the accounts by submitting the KYC documents.
e-KYC: e-KYC refers to electronic KYC and is possible only for those who have Aadhaar numbers. While using e-KYC service,
the person has to authorise the Unique Identification Authority of India (UIDAI), by explicit consent, to release his identity /
address through biometric authentication to the bank branches / business correspondent (BC). The UIDAI then transfers the
persons data comprising name, age, gender, and photograph of the individual, electronically to the bank/BC. Information thus
provided through e-KYC process is permitted to be treated as an 'Officially Valid Document' under PML Rules and is a valid
process for KYC verification.
Introduction: For opening a bank a/c, introduction is not required. Customer Staying at one City but his Address Proof is of
other City: For example, a customer is staying in Chennai but his address proof shows his address of New Delhi, the bank can open
a bank account in Chennai even if the customer permanent address is in New Delhi and he does not have a proof of address for
Chennai. In that case, he can submit an officially valid document (proof of address document) of his New Delhi address together
with a declaration about your Chennai address, for communication purposes.
Transfer of Bank A/C from one Place to another: It is possible to transfer an account from one branch to another branch of
the same bank. There is no need for KYC exercise again. However, if there is a change of address, then he would have to submit a
declaration about the current address. If the address in the 'officially valid documents'/ 'proof of address' is neither permanent
nor current address, a new proof of address would be required within six months. In case of opening an account in another bank,
however, he would have to undergo KYC exercise afresh.
Customer having Different Accounts: If a customer has opened an account with a bank, which is KYC compliant, then for
opening another account with the same bank, furnishing of documents is not necessary.
KYC Compliance: Full KYC exercise is necessary for:
a) Credit / Debit / Smart / for purchaser of Gift Cards and also in respect of add-on/ supplementary cards.
b) All those who want to make domestic remittances of Rs. 50,000/- and above and all foreign remittances.
c) Demand Draft / Payment Order / Travellers Cheques for Rs.50,000/- and above can be issued only by way of debiting the
customer's account or against cheques.
d) All customers who do not have accounts with the banks (known as walk-in customers) have to produce proof of identity and
address while purchasing third party products from banks if the transaction is for Rs.50,000 and above.
Requirement of Pan Number: PAN number needs to be quoted for transactions, such as, account opening, transactions above
Rs.50,000 (whether in cash or non-cash), etc.
CUSTOMER SERVICE IN BANKS (RBI guidelines)
The guidelines are only illustrative and not exhaustive
1. Business and working hours: All customers who enter the banking hall before the close of business hours may be attended to by
the branches. The working hours of the staff should be fixedly minutes before the start of business hours at all branches in
metropolitan and urban centres so that job can be started at commencement of Banking Hours.
2. Display of time norms: Time norms for specified business transactions should be displayed prominently in the banking hall. so
that it attracts the customers' attention as well as that of the employees for adherence.
3. Extension of business hours for non-cash transactions: Staff at the counters may undertake the following. transactions during
the extended business hours (branches to indicate the timings):
1. non-voucher generating transactions: (i).issue of passbook/statement of accounts; (ii) issue of cheque book; (iii) delivery of
term deposit receipts/drafts; (iv) acceptance of share application form; and (v) acceptance of clearing cheques/bills for
collection
2. voucher generating transactions: (i) issue of term deposit receipts (TDR); (ii) acceptance of cheques for locker rent due; (iii)
issue of travellers' cheques; (iv) issue of gift cheques; (v) acceptance of individual cheques for transfer credit
4. Uninterrupted Service: No counter remains unattended during the business hours.
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5. May I Help You counter: All branches, except very small ones, should have "Enquiry" or "May I help you" counters. Such
counters may exclusively attend to enquiries or may be combined with other functions depending upon the requirement. Such
counters should be near the entry point to the banking hall.
6. Ramps at Automated Teller Machines (ATMs)/branches: All existing ATMs/future ATMs to be provided with ramps so that wheel chair
users/persons with disabilities can easily access them. The height of the ATM should be such that it does not create an impediment in its
use by a wheelchair user_ Ramps to be provided at the entrance of the bank branches, so that the person with disabilities/wheel chair
users can enter the bank branches and conduct business without much difficulty.
7. Identity badges: Each employee may wear on his person, identity badge with photograph and name.
B. Complaint box and book: A Complaint cum Suggestion Box may be kept in the bank premises at a prominent place. Complaint Book with
adequate number of perforated copies in each set may also be maintained to instantly provide the complainant with an acknowledged
copy of the complaint.
9. Advisory Services on deposit schemes: The banks should provide assistance/guidance to customers in the area of investment
of funds in the various deposit schemes vis-a-vis the requirement of the customers
10. Brochures/pamphlets for guidance of customers: Banks may make available to the customers, brochures/pamphlets in
regional language/Hindi/English giving details of various schemes available and terms and conditions thereof. Such brochures may
also contain, among others, dos and don'ts for smooth handling of day-to-day banking transactions.
11. Banking facilities to the visually challenged: All the banking facilities such as cheque book facility including third party cheques, ATM
facility, Net banking facility, locker facility, retail loans, credit cards etc to be provided to the visually challenged without any
discrimination. From 1.7.2014, 100% of the new ATMs installed (earlier at least one third of new ATMs) as talking ATMs with Braille
keypads.
12.Fair Practices Code - Display of Bank/Service Charges: Banks have the freedom to prescribe service charges with the approval of their
Boards. However, the charges should be reasonable and not out of line with the average cost of providing these services. Banks should also
take care to ensure that customers with low volume of activities are not penalized.
13.Display of information - Comprehensive Notice Board: Banks should put-up on a notice board important aspects or indicators on
'customer service information', 'service charges', 'grievance redresser and 'others'. The notice board should be updated on a periodical
basis. Banks should display information
relating to interest rates and service charges in their premises as well as post it on their websites, to enable the customer to obtain the
desired information at a glance. The banks should display at their offices/branches the service charges relating to the following services in
the local languages: (a) Services rendered free of charge; (b) Minimum balances to be maintained in the SB account; (c) Charges leviable for
non-maintenance of minimum balance in SB account; (iv) Charges for collection of outstation cheques; (v) Charges for issue of Demand
Draft; (vi) Charges for issue of cheque books, if any; (vii) Charges for account statement; (viii) Charges for account closure, if any; (ix)
Charges for deposit/withdrawal at ATM locations, if any;
Cheque Drop Facility and the Facility for Acknowledgement of cheques: No branch should refuse to give an acknowledgement on cheques being
tendered by customers at their counters.Customers should be made aware of both options available to them i.e., dropping cheques in the drop
box or tendering them at the counters.
Infrastructure provision: Banks should provide adequate space, proper furniture, drinking water facilities, clean environment,
(which include keeping the walls free of posters) etc., in their premises.
Term Deposit Maturity Intimation in Advance: Banks should send, as a rule, intimation for maturity dates of term deposits well in
advance to their depositors in order to extend better customer service.
Other areas in which RBI guidelines/operating instructions for the staff are issued:
1. Savings bank passbooks/statement of accounts
2. Furnishing remitter details in pass book/pass sheet/account statement for credits
3. Claims in respect of missing persons
4. Safe Deposit Lockers.
5. Enabled Financial Inclusion
6. Periodical visits by senior officials.
7. Security arrangements
8. Customer charges for use of ATMs for cash withdrawal and balance enquiry
9. Electronic Payment Products (RTGS, NEFT, NECS and ECS variants)
10. Collection of account payee cheques - Prohibition on crediting proceeds to third party account
11. Provision of Note Counting Machines on counters
12. Immediate Credit of Outstation Cheques
13. Time frame for collection of cheques
14. Additional Measures for Quicker Collection of Outstation Instruments
15. Issue of Cheque Books
16. Periodical Review and Monitoring
17. Issue of Duplicate Demand Draft
18. Nomination facility
19. Monitoring system of implementation of various instructions on customer service
20. Customer Service - Redressal of Grievances
ATM Transactions & Customer service
1. The message regarding non-availability of cash in ATMs should be displayed before the Transaction is initiated by the
customer.
2. The ATM ID may be displayed in the ATM premises to enable a customer to quote the same while making a
complaint/suggestion.
3. Banks should make available the forms for lodging ATM complaints within the ATM premises and also display the name and
phone number of the officials with whom the complaint can be lodged.
4. Banks should provide sufficient toll-free phone numbers for lodging complaints/reporting and blocking lost cards.
5. Banks may proactively register the mobile numbers/e-mail IDs of their customers for sending alerts.
6. To prevent fraudulent withdrawal at ATMs, PIN entry should be must for each and every transaction, including balance
enquiry transactions. Time limits should be prescribed for completion of transactions at ATMs. Time out sessions should be
enabled for all screens/stages of ATM transaction.
Latest Changes in area of Customer Service
1. Banks should not levy penal charges for non-maintenance of minimum balances in any inoperative account.
2. Minor accounts: A savings/fixed/recurring-bank deposit account can be opened by a minor of any age through his/her natural or legally
appointed guardian. Minors above the age of 10 years may be allowed to open and operate savings bank accounts independently. Banks may,
fix limits in terms of age and amount up to which minors may be allowed to operate the deposit accounts independently. On attaining majority,
the erstwhile minor should confirm the balance in his/her account and if the account is operated by the natural guardian/legal guardian, fresh
operating instructions and specimen signature of erstwhile minor should be obtained and kept on record for all operational purposes. Banks
are free to offer additional banking facilities like internet banking, mobile banking, ATM/ debit card, cheque book facility etc., but minor
accounts should not be allowed to be overdrawn and that these always remain in credit. Banks should leverage the technology available
with them and the telecom service providers to ensure that SMS alerts charges are levied on all customers on actual usage basis.
BANKING CODES AND STANDARDS BOARD OF INDIA

1. Banking Codes and Standards Board of India (BCSBI) has been set up on the recommendations of Tarapore Committee on
Customer Service
2. The Banking Codes and Standards Board of India functions as an independent and autonomous body.
3. Membership of BCSBI is voluntary and open to scheduled banks. Initially the membership of BCSBI was open to scheduled
commercial banks and has now been extended to include Regional Rural Banks and select Urban Co-operative Banks.
4. Objectives of the BCSBI: (a) To plan, evolve, prepare, develop, promote and publish comprehensive Codes and Standards for banks,
for providing for fair treatment to their customers; (b) To function as an independent and autonomous body to monitor, and to
ensure that the Codes and Standards adopted by banks are adhered to, while delivering services to their customers.
5. Types of Codes: BCSBI has in collaboration with the Indian Banks' Association (IB A), evolved two codes (a) Code of Bank's
Commitment to Customers and the Code of Bank's Commitment to Micro and Small Enterprises.
6. Basic theme of Codes: Codes set minimum standards of banking practices for member banks to follow when they are dealing
with individual customers and micro and small enterprises. These Codes are subject to periodical review and revision.
7. Objective of Codes: Promoting good banking practices, setting minimum standards, increasing transparency, achieving higher operating
standards and promoting a cordial banker-customer relationship.
8. Nature of Codes: (a) The Codes lay emphasis on transparency and full information to the customer before a product or service
is sold to him; (b) The Codes are not only commitments of banks to their
customers but also in a sense a Charter of Rights for the common person; (c) By setting the minimum standards of customer
service, the Codes make the customer aware of what he can expect from banks.
9. Methods for Monitoring of Codes by BCSBI: (a)Obtaining an Annual Statement of Compliance (ASC) from member banks; (b) Visiting
branches to find out the status of ground-level implementation of Codes; (c) Studying complaints received from customers and
orders/awards issued by Banking Ombudsmen/ Appellate Authority to find out whether there is any system-wide deficiency; (d)
Organizing an annual-Conference with Principal Code Compliance Officers of the Member banks to discuss implementation issues.
10. Other activities by BCSBI: (a) undertakes campaigns and initiatives to spread awareness of the Codes amongst customers and banks; (b)
provides faculty support to training establishments of banks; (c) participates in on-location workshops held by/for member banks to
increase coverage; (d) associates with customer awareness programmes conducted by Banking Ombudsmen; (e) provides credit
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counselling services in Mumbai; (f) publishes quarterly newsletter entitled' Customer Matters', containing matters of interest to
customers
11 Complaint Redressal by BCSBI: BCSBI is not a forum for redressal of individual grievances. BCSBI examines each complaint to identify any
systemic issue that may exist and takes up the matter with the respective bank to ensure that systems and procedures are suitably
amended so that such complaints do not recur.
3. OPERATIONAL ASPECTS OF ACCOUNTING ENTRIES

In every business, the ultimate objective of recording the financial transactions is to prepare the balance sheet and the P& L account so
that all the stakeholders get a fair picture of results of the operations of the enterprise during the accounting period as also the financial
position at the end of the accounting period. Any financial transaction is recorded in the books of the enterprise by way of an accounting
entry and is always in terms of number of monetary units, e.g. Rs. 50,000 , Rs. 3,000 etc. The accounting entry could be a debit entry or a
credit entry
The transactions in a Bank result in a large number of accounting entries and these are recorded in a systematic manner. The
entries pertaining to the transactions are first entered in ledger accounts and then posted in journal which is called Day
Book. The total of the Day Book is entered in the control account concerned of the General Ledger which is the basis of
preparing P&L a/c and the Balance Sheet of the bank. In the present banking scenario, most of the bank's accounting is done
on Core Banking Solution' wherein all accounts are maintained on huge servers with posting being effected instantly and
automatically. The branch staff has only to enter the accounting entry, originated at the branch level, to the accounts
concerned and rest of the operations till the preparation of the financial statements are automatically performed by the
system . Even in a fully computerised branch, some work is presently carried out manually, e.g., preparation of vouchers,
preparation of letters of credit and guarantees, preparation of some returns and statements, etc. In partly computerised
branches, generally the back-office work (i.e. the internal processing of transactions of the branch) is carried out on
computers whereas the customers transactions (i.e. the front-office work) are processed
Features of Accounting System in Banks:
Mostly, transactions in banks can be classified into Cash and Non cash. Cash transactions involve receipts and payments of
cash such as cash deposited by a customer into his account, Cash withdrawal by a customer etc. Thus these transactions affect
cash account of the bank directly. Whereas Non cash transactions are also called 'Transfer Transactions'. These transactions
may involve transfer of funds between the customers of the bank thus debiting and crediting customers account
simultaneously. If a bank pays interest on Saving accounts of the customers, the 'Interest Account' of the branch will be
debited and saving accounts of many customers (Personal accounts) will be credited.
Types of Transactions
Transactions in a bank are of two types, cash and non-cash. In the case of the latter, also called 'transfer transactions', one or
both of the accounts concerned may be of the customers or the internal accounts of the bank. For example, if 'A' deposits a
cheque drawn in his favour by 'Er, who is also a customer of the branch, the accounts of the two customers will be affected.
On the other hand, if 'A' deposits draft drawn on the branch, the 'Draft, account, an internal account of the bank, will be
debited. Likewise, on payment of interest on deposit accounts, the 'Interest Account' at the branch will be debited and many
personal accounts credited.
VOUCHERS: Both debit and credit operations on all accounts, either by customers or by the bank itself, are made by means
of vouchers. There are two kinds of vouchers, one, which evidences only debit or credit to an account, and the other, which
contains both debit and credit to different accounts. For the sake of convenience, the latter kind of vouchers may be called
'composite vouchers'.
Vouchers are loose leaves of journals or cash books on which transactions are recorded as they occur and entries in the personal
ledger are made directly from vouchers.
The various types of vouchers are:
Debit Voucher: When bank pays a cheque, it becomes a debit voucher for the bank. Sometimes a banker needs to debit a
customer's account for carrying out Standing Instructions etc. Credit voucher: A credit voucher is a type of form to convey that
the account mentioned on the voucher has been credited on a particular date with a particular amount with the initials of the
person who has prepared the voucher and the person who has authorized (passed) the voucher.
Cash Vouchers: When cash is involved in payment or receipt of money, the voucher in use will be termed as a cash voucher.
Likewise, when a voucher is used for non-cash (transfer) transactions, it will be called a transfer voucher. Cash or transfer
vouchers could be debit and/or credit vouchers too
ACCOUNTING SYSTEMS OF DIFFERENT BANKS
It is difficult to identify a single accounting system that describes all the features of systems in operation in different banks as the
accounting systems of different banks vary in terms of hardware configuration,software capabilities, levels of hardware and software
security, and nature of transactions processed. The accounting system in a bank is designed keeping in view the nature and volume
of operations and information needs of the stakeholders. Every big bank has customized banking software as per its own
requirement and as such, the accounting systems differ amongst different banks.
4. OPERATIONAL ASPECTS OF HANDLING CASH/CLEARING
INTRODUCTION
Some of the important operations conducted at a bank branch involve cash, collection of local and outstation instruments and
remittances on behalf of the customers. Cash transactions still occupy an important place in our financial system and every branch
has to deal with custody as well as inter office movement of cash, involving the aspects of security, misappropriation and frauds.
Customers also lodge various instruments like cheques, drafts, pay orders, trade bills, dividend and interest warrants, NSCs, postal
orders, term deposit receipts, tax refund orders, etc. These may be payable locally or at outside centres. The instruments payable
locally are collected through the clearing house system, while the instruments payable outside are sent by the bank for collection.
The inter-bank transactions among the local banks are settled by the clearing house. Post offices may also be members of the
clearing house. There may be separate clearing houses for MICR (Magnetic Ink Character Recognition) and non-MICR instruments.
The clearing house is managed by RBI, State Bank of India or any other bank nominated by RBI. If a bank has many branches within
the area of a clearing house, it nominates one branch to act as the nodal branch of that bank. This nodal branch handles the
instruments to be presented by other branches also. The accounts of all member banks are maintained by the clearing house.
Electronic Clearing Service (ECS) is also in vogue in addition to regular clearing involving ECS credit or ECS debit. In the case of ECS credit,
there is a single receiver of funds from a large number of customers, while in the case of ECS debit, a single account is debited against
which a number of accounts with member banks are credited. This is useful in case of dividend/interest or payment of salaries etc.
Speed Clearing has also been initiated by RBI for improving the efficiency in the process of collection of outstation cheques. Speed
Clearing utilises the Core Banking Solutions (CBS) implemented in banks and obviates the need of such cheques to physically move to the
outstation centres. RBI has extended the scope of Speed Clearing to cover all transaction codes, other than those relating to government
cheques.
Remittances involve transfer of funds from one place to another. The common modes of remittance of funds are drafts, RTGS, NEFT
etc. Drafts are issued by one branch of the bank and are payable by another branch of the bank. In case there is no branch of the
bank at that place, the draft is issued at the branch of another bank with which the issuing bank has entered into necessary
arrangement. National electronic funds transfer (NEFT), like RTGS, is another mode of remittance which facilitates almost
instantaneous transfer of funds between two centres.
LO CAL CLEARING :
In Loth! Cheque Clearing in major centres, cheques are processed either by using Cheque Truncation Systems(CTS) through movement
of images or through mechanised sorters, using Magnetic Ink Character Recognition (MICR) technology. CTS are in place in New Delhi,
Chennai and Mumbai. In addition, Express Cheque Clearing Systems (ECCS) application package is used in small clearing houses.
Local Clearing ,handles only those cheques that are drawn on branches within the jurisdiction of the local Clearing House. Generally, the
jurisdiction is determined taking into account the logistics available to physically move to and from the Clearing House. It may however
be noted, under grid-based CTS clearing, all cheques drawn on bank branches falling in the grid jurisdiction are treated and cleared as
local cheques (The grid clearing allows banks to present/ receive cheques to / from multiple cities to a single clearing house through
their service branches in the grid location).
The RBI as the settlement bank manages the clearing house. All, the banks maintain accounts with the settlement bank to facilitate settlement
of claims on each other. The final clearing settlement is done by debiting or crediting the net amount payable. This is known as the net
settlement. With introduction of RTGS, the settlement is on real time basis.
OUP ARD CLEARIN G:
Cheques deposited by the customers sent for clearing to the respective banks is called outward clearing. Outward clearing means the cheque
sent for collection. It represents the cheque of other banks which the account holders deposit in their accounts. It increases the deposits of the
banks.
INWARD CLEARING:
Cheques received by the branch from various banks for debiting their customers accounts of the branch is called inward clearing. It represents
the cheques drawn by the bank/branch customers on their account in favour of other parties.
Thus, when we receive inward clearing, we have to debit customer account and when we receive outward clearing the bank has to send it
to relevant bank for payment.
The operational tasks done by banks for inward clearing are:
Validation of the customer account with the Core Banking Systems.(CBS)
Searching the physical instruments or return in
Archival of all the physical instruments.
PROCEDURE IN CLEARING:
All the outward clearing cheques are entered in the system as sets. A clearing schedule or patti of 200 instruments per batch is prepared as
per RBI guidelines.
On the MICR band of the cheque (MAGNETIC INK CHARACTER RECOGNITION), the amount of the cheque is again entered through a
machine called encoder machine and the process is called encoding. This is done at branch level or at service branch level.
All the cheques from all the branches of a particular bank are sent to the service branch and then sent to RBI on the same day. At RBI, the
cheques are sorted bank wise and branch wise through sorter machines.
In case of Core banking, there is no need for generation of branch wise reports and can be directly uploaded from service branch to the
respective branches. The Service branch of the banks will collect the physical cheques and forward it to the respective branches. These
cheques are the Inward clearing cheques of the particular branch. ,Respective accounts will be debited and the total credit will be given to
head office/ local branch account. Some cheques may be returned for valid reasons; the total amount of the return cheques will be
debited to some parking office a/c like suspense clearing cheque returned and will be sent back to the respective banks through outward
clearing option. These returned cheques are called inward returns.
There are various types of clearing. Type of clearing is defined by the time taken to affect the actual clearing credit to the customers account.
This time taken is called latency of clearing. Entries passed during clearing:
In case of outward clearing on the 2nd day of lodgment of the cheques, the following entries are passed at branch level:-Head Office
Account / (Service branch Account/Net clearing a/c) Dr.
To Respective customer account Dr. In case of Inward Clearing, the following entries are passed at branch level:-
Respective Customer a/c Dr.
To Office a/c for returned cheques
To Service Branch a/c/Head office a/c Net clearing a/c)
This office account debit will be adjusted on the next day when the returns are sent in outward clearing.
ELECTRONIC CLEARING SYSTEM (ECS):

ECS is a electronic mode of payment / receipt for transactions that are repetitive and periodic in nature. ECS is used by institutions for
making bulk payment of amounts towards distribution of dividend, interest, salary, pension, etc; or for bulk collection of amounts towards
telephone / electricity / water dues, cess / tax collections, loan installment etc.
ECS is a mode of electronic funds transfer from one bank account to another bank account using the mechanism of clearing house. ECS
facilitates bulk transfers of money from one account to many accounts or vice-versa.
ECS has two variants:
a) Electronic Clearing Services Credit (ECS Credit)
b) Electronic Clearing Services Debit (ECS Debit)
ECS Credit:
ECS credit can be initiated by any institution called ECS user that has to make either bulk payments or repetitive payments to a large number of
beneficiaries.
ECS Debit:
ECS Debit is a scheme under which an account holder with a bank can authorize an ECS user to recover an amount at a prescribed
frequency by raising a debit in his account. The ECS user has to collect an authorization that is called ECS mandate for raising such
debits. These mandates have to be endorsed by the bank branch maintaining the account.
NATIONAL ELECTRONIC FUNDS TRANSFER (NEFT):
National Electronic Funds Transfer system is an electronic funds transfer system introduced by RBI to facilitate banks to transfer funds
electronically from one customer a/c of a participant bank branch to another customer a/c of any other participant bank branch. Persons without
an account also can initiate a NEFT transfer but Beneficiary must have an account.
NEFT uses the Public Key Infrastructure (PKI) technology to ensure end-to-end security and rides on the Indian Financial Network (INFINET) to
connect the bank branches for electronic transfer of funds.
DEAL TI ME GROSS SETTLEMENT (RTGS):
The RTGS system is primarily meant for large value transactions. It is a funds transfer mechanism where transfer of money takes place
from one bank to another on a "real time" and on "gross" basis. The transactions are settled as soon as they are processed. RBI
operationalised the new RTGS system on October 19, 2013. It is regulated as per RTGS System Regulations, 2013.
The RTGS System is operated by the RBI and managed by a Standing Committee consisting of members from RBI, Bank and other
stakeholders. The tenure of members from distinct bank group, other than the Bank shall be for 1 year and shall be substituted by another
member of that distinct group each year. The tenure of the representatives of the Bank shall be, as may be decided by the Bank.
Thus, RTGS provides:

Quick collection and disbursal of funds
Under normal circumstances the beneficiary branches are expected to receive the funds in real time as soon as funds are transferred by
the remitting bank.
The beneficiary bank has to credit the beneficiary's account
within two hours of receiving the funds transfer message.
8 Cost effective compared to traditional methods of cheque /
demand drafts collections.
Eliminates Settlement Risk and reduces Systemic Risk
considerably.
The Institute for Development and Research in Banking
Technology or any other institute as decided by the Bank will be the Certifying Authority (CA).
SPEED CLEARING:
Speed Clearing refers to collection of outstation cheques (a cheque drawn on non-local bank branch) through the local clearing. It
facilitates collection of cheques drawn on outstation core-banking-enabled branches of banks, if they have a networked branch locally.
The collection of outstation cheques, earlier required movement of cheques from the Presentation centre (city where the cheque is
presented) to Drawee centre (city where the cheque is payable) which increases the realisation time for cheques. Speed Clearing aims
to reduce the time taken for realisation of outstation cheques. Banks have networked their branches by implementing Core Banking
Solutions (CBS). In CBS environment, cheques can be paid at any location obviating the need for their physical movement to the Drawee
branch. Cheques drawn on outstation CBS branches of a Drawee bank can be processed in the Local Clearing under the Speed
Clearing arrangement if the Drawee bank has a branch presence at the local centre. Outstation cheque collection through collection
basis takes around one to three weeks time depending on the drawee centre. Under Speed Clearing, it would be realised on T+1 or 2
basis, say, within 48 hours. Further Savings Bank customers need not incur any service charge for collection of outstation cheques
(value up to .1 lakh) in Speed Clearing which they may have to incur if such cheque is collected under collection basis.
CASH REPLEE:LSEIMENT AT ATM'S:
Each bank has its cash replenishment policy describing the security measures that must be ensured at the time of replenishing cash in the
ATM's. This policy stipulates the professional monitoring and management of cash replenishment at ATM's, thus promising a low risk, higher
reliability. The replenishment process should include carrying the cash from that armored vehicle to your ATM in a secure container.
In cases, when ATM replenishment services are provided by service vendors, the Bin filling exercise is normally done in the presence of atleast
two persons who should supervise each other to ensure that correct denominations are inserted in the correct bins. Moreover, the identification
of their employees should be verified with a list of employees along with samples of theirssignatures or by comparing their signatures on an ID
card to a signature on the list with the bank.
Cash shortages should be thoroughly investigated with full reference to the server report compared with the ATM's log available on the site of
ATM.
IMPLEMENTATIOn OF CHEQUE TRUNCATION SYSTEM:

C HEQUE T RU NC AT ION SYST EM ( CT S)
CTS is a mode of clearing of cheques wherein physical movement of the cheque is stopped at the point of presentment of Cheque and
the Image of Cheque alongwith captured data contained in the MICR band of the cheque is transmitted to the drawee bank / branch
through the clearing house.
Reserve Bank of India (RBI) implemented Cheque Truncation System as a pilot project in the National Capital Region (NCR), Delhi w.e.f.
February 1, 2008 and in Chennai w.e.f. September 24, 2011. After migration of the entire cheque volume from MICR system to CTS the
traditional MICR-based cheque processing has been discontinued in these two locations.
CTS PROCESS FLOW:
o The presenting bank branch/service branch captures the data (on the MICR band) and the images of a cheque using the Capture
System (comprising of a CTS Scanner, core banking or other application). The captured images and data have to meet the
specifications and standards prescribed by RBI.
o For participation in clearing, each bank has been provided with an interface / gateway called the Clearing House Interface (CHI) that
enables them to connect and transmit/receive data and images in a secure and safe manner to / from the Clearing House (CH).
The images and data captured by Capture system of the bank is sent to clearing house via the interface CHI. The Clearing House
process the data, arrive at the settlement and routes the images & requisite data to the drawee banks. This is called the presentation
clearing.
e The drawee banks through their CHIs receive the images and data from the Clearing House for payment processing. The CHIs also
generates the return file for unpaid instruments, if any. The return file / data sent by the drawee banks are processed by the Clearing
House in the return clearing session in the same way as presentation clearing and return data is provided to the presenting banks for
processing. The clearing cycle is treated as complete once the presentation clearing and the associated return clearing sessions are
successfully processed.
To ensure security, safety and non-repudiation of data / images, end-to-end Public Key Infrastructure (PKI) has been implemented in
CTS. As part of the requirement, the collecting bank(presenting bank) sends the data and captured images duly signed and encrypted to
the central processing location(Clearing House) for onward transmission to the paying bank (destination or drawee bank).
Through, the entire essence of CTS technology lies in the use of images of cheques (instead of the physical cheques) for payment
processing, there are some instruments which requires to be sent to the clearing house in physical form. This process is called Paper-to
Follow (P2F). There are three categories of instruments which need to be presented in physical form.
a) Government Cheques
b) IQA failed cheques
c) Drawee bank demands to present the instrument with document.
Benefits:
a) With the introduction of CTS, collection time of cheques has been reduced.
b) No need to encode the amount field in the cheques as such manpower/time/other resources on encoding saved.
c) c) Enhanced time window for customers to deposit the cheques upto the last moment of submission of outward clearing by the branch.
d) No operational risk of instruments being lost / tempered in transit (except paper to follow cases of Image Quality Audit (IQA) failure and
Government Cheques, which are being presented physically).
e) No risk of any manipulation of data and images during trans t Data and images being transmitted digitally signed.
f) Rec onc iliatio n made eas y-resultant reduc ed m anpower r equirement f or rec onc iliatio n.
GRID BASED CTS CLEARING:
Under this approach the entire cheque volume in the country cleared across numerous locations will be consolidated into three grids namely
Southern Grid (Chennai), Western Grid (Mumbai), Northern Grid (Delhi). Each grids will provide processing and clearing services to all
the centres under its jurisdiction, which could involves an entire state or a group of contiguous states as well.
CTS 2010 STANDARD CHEQUES:
Growing use of multi-city and payable-at par cheques, increasing popularity of Speed Clearing, etc were a few aspects that led to
prescription of certain minimum security features in cheques printed, issued and handled by banks and customers uniformly across the
banking industry. For this, RBI vide it's circular dated 22.02.2010 has incorporated some security features in cheque forms collectively known
as "CTS 2010 Standards".
As there is still a large volume of non CTS 2010 format cheques being presented in image based clearing, RBI has decided to put in place
the following arrangements for clearing of residual non CTS 2010 standard cheques:
As per RBI mandate there will be different clearing sessions for CTS 2010 compliant and Non CTS 2010 compliant cheques from
1st January, 2014.
Non-CTS 2010 instruments, if deposited, there will be a delay in receiving credit against the same. Customer will be
receiving credits only after the return session corresponding to each presentation session. Since the clearing sessions for non-CTS are in
morning 10:00 AM to 12:00 Noon, cheques received till previous Day end will be presented in the session.
In order to facilitate clearing of residual non-CTS 2010 cheques, including PDC and EMI cheques, a special clearing
session has been introduced in three CTS centres (Mumbai,
Chennai & New Delhi), with effect from 1st January, 2014. If
Non-CTS 2010 instruments are presented in incorrect session
then the drawee bank can return all such instruments. The special clearing session shall operate as per the following schedule. Details of
Sessions in CTS:
Different sessions will be run for CTS 2010 and Non-CTS 2010 instruments. Sessions for Non-CTS 2010 instruments will be run at
the following frequency. From 1st Jan to 30th Apr, 2014 : Thrice a Week on Monday, Wednesday - & Friday From 1st May to 31st
Oct, 2014:Twice a Week on Monday - & Friday From 1st Nov, 2014 onwards: Once a Week on every Monday.
Upon the commencement of special session for non-CTS 2010 standard instruments, drawee banks will return the non CTS 2110
instruments, if any presented in the regular CTS clearing, under the reason code '37-Present in proper zone.' Such returned instruments
will have to be re-presented by the collecting bank in the immediate next special clearing session for non CTS 2010 instruments in
accordance with the instructions.
RBI GUIDELINES ON COLLECTION OF

INSTRUMENTS
LOCAL CHEQUES
Local cheques are payable within the jurisdiction of the clearing house and will be presented through the clearing system prevailing at the
centre. Credit arising out of local cheques shall be given to the customer's account at the next day to the date of presentation in the
clearing. Ideally, banks shall permit usage of the shadow credit afforded to the customer accounts immediately after closure of the relative
return clearing on the next working day or maximum within an hour of commencement of business on the third working day from the day of
presentation in clearing, subject to usual safeguards. If there is any delay in credit, beyond the period specified above, customer is entitled
to receive compensation at the rate specified in the Cheque Collection Policy (CCP) of the concerned bank. In case, no rate is specified in
the CCP for delay in realisation of local cheques, compensation at savings bank interest rate has to be paid for the corresponding period of
delay.
OUTSTATION CHEQUES
Maximum timeframe for collection of cheques drawn on state capitals/major cities / other locations are 7/10/14 days respectively. If there is
any delay in collection beyond this period, customer is entitled to receive compensation at the rate specified in the Cheque Collection Policy
(CCP) of the concerned bank. In case the rate is not specified in the CCP, interest rate on Fixed Deposits for the corresponding maturity to
be paid. Banks' cheque collection policy also indicates the limit up to which outstation cheques are given immediate/instant credit.
If cheques / instruments are lost in transit / in clearing process:
If cheques are lost in transit or in the clearing process or at the paying bank's branch, the bank should immediately bring the same to
presenting customer (beneficiary)'s notice so that the customer can inform the drawer to record stop payment and can also take care that
other cheques issued anticipating the credit arising out of the lost cheque are not dishonoured due to noncredit of the amount of the lost
cheques / instruments.
The onus of such loss of instrument lies with the collecting banker.
The customer is entitled to be reimbursed by banks for related expenses for obtaining duplicate instruments and also interest for reasonable
delays in obtaining the same.
COLLECTION CHARGES:
Local Cheque collection charges are decided by the concerned bank from time to time and communicated to customer through their Cheque
Collection Policy as part of the Code of Bank's Commitment to Customers. Banks cannot charge more than the following for outstation
cheques:
Up to and including Rs.5000 Rs.25 per instrument + service tax; Above Rs.5000 and Up to and including Rs.10,000 not exceeding Rs.50
per instrument+ service tax; Above Rs.10,000 and up to and including Rs.1,00,000 not exceeding Rs.100 per instrument + service
tax;'Rs.1,00,001 and above left to the banks to decide. No additional charges such as courier charges, out of pocket expenses, etc., should
be levied.
No bank can refuse'to accept outstation cheques deposited for collection or refuse to offer its products to customers.
CHEQUE COLLECTION POLICY:
Like in most countries, banks in India also are required to .;velop their own individual policy / procedures relating to
Collection of cheques. The customer is entitled to receive due disclosures from the bank on the bank's obli ations and the customers' rights.
Broadly, the policies formulated by banks should cover the following areas:
e Immediate credit for local/outstation cheques, Time frame for collection of local/ outstation instruments and compensation
payable for delayed collection.
The cheque collection policies of various banks are made
available on the website of respective bank.
Banks are obliged to disclose their liability to customers by
way of compensation / interest payments due to delays for non-compliance with the standards set by the banks themselves. The
customer has to be compensated by way of compensation / interest payment even if no formal claim is lodged to the effect.
Banks are required to provide both the cheque drop box facility and the acknowledgement facility at their collection counters. No bank
branch can refuse to give an acknowledgement to the customer if the latter asks for the same while tendering cheque for collection at
the bank branch's counters.
Customers Grievances:
If any customer has a complaint against a bank due to nonpayment or inordinate delay in the payment or collection of cheques, complaint
can be lodged with the bank concerned. If the bank fails to respond within 30 days, a complaint with the Banking Ombudsman may be
lodged. (Please note that complaints pending in any other judicial forum will not be entertained by the Banking Ombudsman). No fee is
levied by the office of the Banking Ombudsman for resolving the customer's complaint. A unique complaint identification number will be
given for tracking purpose. Complaints have to be addressed to the Banking Ombudsman within whose jurisdiction the branch or office of
the bank complained against is located. Complaints can be lodged simply by writing on a plain paper or online at
www.bankingombudsman.rbi.org.in or by sending an email to the concerned Banking Ombudsman. Complaint forms are available at all
bank branches also.
Complaint can also be lodged by authorised representative (other than a lawyer) or by a consumer association/forum acting on
customer's behalf. If the complainant is not satisfied with the decision of the Banking Ombudsman, an appeal can be made to the
appellate authority in the Reserve Bank of India (Deputy Governor of Reserve Bank of India in charge of Customer Service
Department).
5. OPERATIONAL ASPECTS OF DEPOSIT ACCOUNTS

Acceptance of deposits from the public is one of the basic functions of the banking business. Deposits form a major portion of
the resources available to the bank to carry out its other basic function, i.e. lending. The deposit raising function of the bank
takes into account not only the amount to be raised but also the average cost of the deposits because it has a major impact on
the profitability of the bank. Basic features of the deposit accounts are similar for various banks but there are certain
distinguishing features also particularly in respect of areas where the regulation has left certain aspects to the discretion of the
individual banks. For example, RBI has now deregulated the interest rate on Savings accounts and some banks have adopted
different policies in this respect.
INTRODUCTION:
a) The account should normally not be opened without a meeting between the bank official and the customer.
b) The banks should invariably insist upon prospective depositors to furnish introduction (from either any of the existing
account holders or a respectable member of the local community known to the bank or the bank's staff) for opening not only
current and cheque operated savings bank accounts but also all deposit accounts including call, short-term and fixed deposits.
c) The person giving introduction should be of some standing and have an account with the bank for at least six months to ensure
that the accounts are not opened on the introduction of new account holders or persons having small and marginal balances.
d) Branch Managers/staff members should be discouraged from giving the introduction.
B) PHOTOGRAPHS OF ACCOUNT HOLDERS:
a) The banks should obtain photographs of the depositors/account holders who are authorised to operate the account, at the time
of opening of all new accounts.
b) In case of other deposits viz. Fixed/Recurring, Cumulative etc. photographs of all depositors in whose names the deposit
receipt stands may be obtained, except in the case of deposits in the name of minor, where guardians' photographs could be
obtained.
c) The banks should also obtain photographs of 'Pardanashin" Women.
d) The banks should also obtain photographs of NRE, NRO FCNR account holders.
e) For operations in the accounts, banks should not ordinarily insist on the presence of account holder unless the
circumstances so warrant.
C) ADDRESS OF ACCOUNT HOLDERS:
ItisnotproperforbanksevenunwittinglytoallowthemselvesbeutilisedbyunscrupulouspersonsforthepurposeofTax evasion.Therefore,banksshouldobtainfull&
completeaddressofdepositorsandrecordthese inthebooks andthe accountopeningformssothatthe partiescouldbetraced withoutdifficulty,incaseofneed.
TYPESOFDEPOSITACCOUNT ::Ordinarily the bank accounts are classified into three categories - 1.SAVING BANK ACCOUNT , 2. CURRENT
ACCOUNT & 3. FIXED DEPOSIT OR TERM DEPOSIT ACCOUNT
Procedural aspects of Opening the accounts
For opening various types of accounts, viz., Savings, Current and Fixed Deposits banks may use a single account opening form. At the time
of opening the account, following documents are taken (a) Photograph; (b) Proof of
identity and address as per KYC norms; (c) Copy of Pan card or form no 60/61; (d) specific documents depending upon the constitution of
the customer like copy of the partnership deed, copies of the memorandum and articles of association, certificate of incorporation,
resolution passed by the board for opening the account/making the deposit. For opening accounts of individuals, introduction is not
required.
Accounts are opened by the bank at its discretion and upon satisfaction of the authorised official of the bank as to the bonafides of
the prospective customer.
Introduction of Customer accounts: As per RBI guidelines, introduction is not required for opening the accounts as proof of identity
and photograph are sufficient for this purpose.
Photographs: The banks should. obtain photographs of the depositors/account holders who are authorised to operate the accounts.
The customers' photograph should be recent and the cost of photographs to be-affixed on the account opening forms may be borne by
the customers. Only one set of photographs need to be obtained and separate photographs should not be obtained for each category of
deposit. In the case of joint accounts, separate set of photographs of all joint depositors/partners should be obtained. In the case of
institutional customers,
photographs of all the officials authorized to. open and operate the account should be obtained. In the case of Savings bank accounts
opened by minors of age 10 years and above, photographs of the account holder has to be obtained. In the case of minor's account,
operated by the Guardian, photograph of the Guardian is also to be obtained. In the case of Hindu Undivided Family (HUF) accounts,
photograph of the "Karta" has to be obtained.
Where mandate/power of attorney has been granted, photo of mandate/POA holder should be obtained. Photographs of
'Pardanashin' women should also be obtained for opening the account. in case of accounts of illiterate persons and blind persons,
passport size photograph of the depositor must be affixed on the pass book and the account opening form duly authenticated by the
authorized officer. If any visible change in the resemblance of the photograph and the customer is noticed, a recent photograph should be
obtained from the customer.
Nomination Facilities in Customers' Accounts
1. _In 1983, Section 45ZA to 45ZF were added to the Banking Regulation Act, 1949 providing for extension of nomination
facilities in banks. However, the facility of nomination was started in banks w.e.f. 29.03.1985.
2. Nomination facilities are available in deposit accounts (Sec 45 ZA & 45ZB), in respect of articles deposited for safe custody with
the bank (Sec 45ZC & 45ZD) and in locker accounts (45ZE & 45ZF)
3. Sections 45ZA, 45 ZC, 45ZE relate to nomination, change in nomination and cancellation of nomination. Sections 45ZB, 45
ZD, 45ZF state that bank will be discharged of liability by making payment/delivery to nominee.
4. Where facility is available: Nomination facility is available in all types of deposit accounts like _______ GB, CA, FD, RD,
foreign currency accounts of individuals and accounts of NRI like NRE, FCNR(B) and NRO.
5. Who can nominate: Account should be in individual capacity or joint account of individuals or a sole proprietorship firm.
6. Who can not nominate: The facility of nomination is not available in partnership accounts, HUF, deposit accounts of
clubs/societies/limited companies/trusts. A minor can not appoint a nominee. On his behalf, nomination facility can be
exercised by the person legally competent to act on behalf of the minor.
7. Who can be nominee: Only an individual can be appointed nominee. He or She can be minor, very old person or even an
insolvent person. If nominee is a minor, the depositor has to appoint a major person to receive deposit amount / articles in the
Compiled by Sanjay Kumar Trivedy, Chief Manager, Canara Bank, Shrigonda,Ahmed Nagar, Maharashtra 100 |
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safe custody / locker etc. on behalf of the minor nominee in the event of death of the depositor.
8. Number of nominees:ln the case of deposit accounts there can be only one nominee irrespective of the fact whether deposit
account is in single name or joint names and also irrespective of operating instructions in the joint accounts.
9. In the case of articles deposited for safe custody only one nominee is permitted if account is in the name of a single person. In
case articles are deposited by more than one person, nomination facility is not available.
10.In the case of locker accounts in single names or in joint names where under contract of hire, operation is allowed to any one or
more of locker holder(s)/survivor(s), nominee can be only one. However, in locker accounts in joint names where operations
are 'jointly', by 2 or more of such hirers, more than one nominee can be appointed. (Though nomination rules allow more than
one nominee in jointly operated locker accounts, as per IBA maximum number of nominees in such cases should be two).
11.Nomination once exercised can be changed, cancelled or modified by the depositor(s) at any time and any number of times. In
case of more than one depositors, all such acts require their joint consent. Survivor of a joint account has the right to cancel an
existing nomination, exercise fresh nomination where nomination was earlier not exercised or change nomination.
12.When does the right of nominee start?:Right of a nominee starts only after death of all depositors/locker holders/safe custody
article lodger. The only exception is the nominee(s) in case of jointly operated lockers. In that case, right of nominee(s) starts
immediately after the death of any of the hirers.
13.ln the case of illiterate account holder nomination is required to be witnessed by two persons.
14.Status of nominee:The status of nominee is just like trustee of legal heirs. He does not become absolute owner of the amount or items lying
in safe custody or in safe deposit vault. Nominee can not get his name added or get his name substituted or renew FDR. He can not raise
any loan against FDR. However, Nominee is entitled to premature payment of deposit and no penalty is levied in effecting premature
payment to nominee.
15.Legal Heir versus nominee: When both nominee and legal heirs approach the bank for getting payment after the death of
depositor or locker holder, bank will make payment to the nominee unless there is a court order to make payment to legal heirs.
Bank gets a valid discharge by payment to nominee.
16.Formalities for making payment to nominee: In case of death of depositor, nominee has to submit following documents (a) Copy of death
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certificate (b) claim form (c) Identification which can be done by 1 class Magistrate or Gazetted officer or by a bank officer or any two
persons known to bank. While delivering contents of locker or safe custody, if any sealed packet is found, the same should be delivered
without opening the same.
17.1n case of term deposits, there is no need of fresh nomination in the case of renewal of FDR.
18.While making nomination, the thumb impression of the accountholder should be attested by two witnesses. However, signatures of the
accountholders in forms DA1, DA2 and DA3 need not be attested by witnesses.
19.1n the case of accounts in the name of single persons, nomination must be obtained. If the depositor does not want to nominate
any body, a written letter should be obtained from him in this regard. In case the person opening the account declines to give
such a letter, the bank should record the fact on the account opening form open the account.
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20. Banks should acknowledge the receipt of the duly completed form of nomination, cancellation and / or variation of the
nomination. Such acknowledgement should be given to all the customers irrespective of whether the same is demanded by the
customers.
21.Banks should incorporate the legend "Nomination Registered' on every pass book or deposit receipt so as to enable the relatives
to know that the nomination facility was availed of by the deceased depositor.
22.ln addition to the legend "Nomination Registered", banks should also indicate the name of the Nominee in the Pass Books /
Statement of Accounts f FDRs, in case the customer is agreeable to the same.
Other Operational Guidelines

Posting of Cheques for payment: Points to be considered
1. The cheque is from the drawer's current Cheque Book.
2. Date of the cheque: The cheque should not be post dated or stale cheque (i.e. 3 months old).
3. Amount written in words and figures should agree.
4. The cheque has been properly signed by the account holder/authorised person.
5. In the case of business/companies/firms their rubber stamp should be affixed and authorised officials should sign.
6. The balance in the account should be sufficient or within the sanctioned overdraft or CC limits.
7. All alterations, if any, on the cheque, should be duly authenticated by the drawer.
8. The payment of the cheque should not have been stopped.
9. itthe cheques bear the crossing, it must be presented through a banker;
10. If the crossing is "A/c Payee only", then the proceeds of the cheque has to be credited to the payee A/c
only.
Stop Payment: Banks cannot honour the cheque after getting the clear stop payment instructions from the customer.It should be verified
whether the cheque for which stop payment is issued is already passed or not. If the cheque is unpaid as of the time of receipt of the stop
payment instructions, all relevant particulars must be entered into the system. The drawer of the cheque can give instructions for revoking the
stop payment and ask the bank to honour the cheque when presented.
Standing instructions: The customer can instruct the bank to carry out certain functions at fixed periodicity like transferring amount
from SB A/c to RD A/c; transferring interest on Term Deposit to SB A/c or any other A/c; transferring amount from SB A/c to certain
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loan account etc; payment of Insurance Premium etc.
Current Account:
For whom: Current account is meant for Individuals/Institutions having large number/volume of transactions, mainly for meeting their
day-to-day business and operational requirements for parking their operational fund balances. Who can open?: Accounts can be
opened by Individuals, Sole Proprietary Concerns, Partnership Firms, Private/Public Sector Companies, Clubs, Associations,
Trusts/Executors/Administrators, Govt/Local Bodies, Cooperative Societies, Religious/Educational/Charitable Institutions,
Registered/Unregistered Societies, etc. Who cannot open current account?: Minors(accounts of minors to be operated by the natural
guardian may be open e), Purdanashin women, Illiterate persons, Blind persons.
Interest: Nil
Restriction on maximum balance/ number and amount of transactions/withdrawal in a day/month: No limit.
Withdrawal from account: only through cheques. However for standing instructions, account can be debited without cheques.
Overdrafts: can be allowed.
Current accounts of Partnership Firms: Account opening form as prescribed for "Partnership account" should be taken which should be
signed by all the partners. Besides AOF, following documents should be taken (a) Specimen signature cards signed by all the partners; (b)
Partnership letter signed by all the partners in their personal capacity and not under the seal of the firm; (c) Original Partnership Deed (for
verification & return) with a certified copy; (d) Certificate of Registration, in case of a registered partnership firm; (e) Instructions regarding
person(s) authorised to operate the account with specimen signatures of the authorised persons with their designation or capacity in which
they will operate the account. Any partner has powers to countermand (stop) payment of a cheque drawn by another partner.
Current account of a Hindu Undivided Family (HUF): (a) Submit application forms as per bank's format; (b) The current account opening
form and the Joint Hindu Family letter have to be signed by all the adult members of the joint family; (c) if co parceners (members) are
minor, then the Karta should sign the account Opening Form on behalf of the minors apart from signing in the capacity as Karta; (d) As
Karta alone has the capacity to enter into contracts for a HUF, the name of the Karta who is authorised to operate the HUF account
should be noted.
Current account of Joint Stock Companies: Besides, getting the account opening application form as per bank's format, following
documents should also be collected (a) Certificate of Incorporation, (b) Copy of Memorandum and Articles of Association; (c) Certified
copy of Board Resolution authorising the opening and operation of bank account signed by the Chairman of the meeting of the Board of
Directors (d) A mandate regarding operations authority. Earlier Certificate of Commencement of Business was also
required for Public Limited Companies but there is no such requirement as per Companies Act 2013.
Current account of Clubs. Associations: (a) In the case of unregistered bodies like Clubs/Association/Committee, a resolution passed in the
Management Committee/ Executive Committee as per their bye-laws regarding opening a bank account and persons authorised to operate
such bank account should be obtained alongwith designation of such persons; (b) In all cases of registered/unregistered bodies like
Clubs/Association etc. copy of their bye-laws/ Rules should be obtained to facilitate checking that the persons authorised to operate the
account are as per their rules/bye-laws provisions.
Accounts of Trusts: (a) Copy of Trust Deed be obtained and compared with the original; (b) A Trust Letter and resolution signed by
all the trustees; (c) The account opening form should be signed by all the trustees and the account must be opened in the name of
the trust.
Executors/Administrators: 'Original will' and probate of the will, if any/Letter of administration should be asked for verification and certified
copy be retained in bank's files. Account will be opened in the name of individuals but after the name of the individual, "Executor,"
"Administrator" must be added in the account.
Government Departments: Copy of Government Order (G.O.) or Notification authorising the officers to open a bank account
should be obtained.
Temporary Overdraft (TOD): Temporary overdrafts (TOD) can be given to good and trustworthy customers against their written
request within powers of the concerned official. Granting of TOD is at the sole discretion and risk and responsibility of sanctioning
Officer/Manager.
Savings Bank Account
Who can open SB accounts: Saving account can be opened in the name of individuals operating singly or.jointly with other
individuals; Associations, clubs or similar other non-trading institutions; Minor above 10 years can open SB account operated
independently; can also be opened in the names of institutions which are specifically approved by the RBI for maintaining savings
bank accounts with banks. These accounts can not be used for business or trading.
Organisations for which Saving Bank accounts can not be opened: Saving Bank accounts are opened for savings and not for any business.
Therefore, such accounts can not be opened in the name of business concern. Further, as per RBI directives, Government Departments or
Bodies who for performance of their functions depend on Budgetary Allocations cannot open Savings Bank Accounts. Thus, RBI has
specifically asked banks not to open SB accounts in the name of (a) Govt. Departments (b) Municipal Corporations or Committees, (c)
Panchayat Samitees, (d) State Housing Boards, (e) State Electricity Boards (f) Water and Sewerage Boards, (g) State Text Book Publishing
Corporations or Societies, (h) Metropolitan Development Authorities, (i) State/District Level Cooperative Housing Societies (j) any bank
including Land Development Bank .
Organisations for which Saving Bank accounts can be opened: The above prohibition is not applicable for the following
organizations/agencies and therefore banks can open SB account in their names (i) Companies licensed under section 25 of Companies
Act, 1956 which are permitted not to add to their names the word 'limited' (i.e. Non profit making companies). For example, Chamber of
Commerce, Indian Bank Association, Lions Clus etc. (ii) Societies registered under Societies Registration Act, 1860 or any other
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corresponding law in force in any State/UT. (iii) Primary Cooperative Credit Society being financed by the bank (PACS) (iv) Institutions other
than those mentioned above and whose entire income is exempt from payment of income tax under Income Tax Act, 1961. (v)
Government departments (Central as well as State Government) /bodies/agencies in respect of grants/ subsidies released for
implementation of various programmes/schemes sponsored by the Central Government as well as State Government on production of an
authorization to the bank from the respective Government departments certifying that the concerned Government department or body
has been permitted to open savings bank account. Banks should keep on their record a copy of the authorization issued by the respective
State Government departments. For example (a) Khadi and Village Industries Boards. (b) Agriculture Produce Market Committees (c) Distt
Rural Development Agency (DRDA) (d) Integrated Tribal Development Agency (ITDA) (e) Draught Prone Area Development Programme
(DPAP) (f) Member of Parliament Local Area Development Authority (MPLADS) (g) Small Farmers Development Agency (h) Marginal
Farmers and Agricultural Laborer's Agencies (i)
Nagar panchayats and palikas, Muncipal Bodies for credit of subsidy amount. (j) District Development Agency (DDA); (vi)
Development of Women and Children in Rural Areas(DWCRA); (vii) Self-help Groups (SHGs), registered or unregistered, which are
engaged in promoting savings habit among their members; (viii) Farmers' Clubs-Vikas Volunteer Vahini(VVV); (ix) Clubs, Associations,
Society, Educational Institutions (x) Any other institution permitted by RBI provided it is a non trading institution.
Documents required for opening a SB account in the case of Associations/Clubs etc: (a)Certified copy of Rules/Bye-laws/Memorandum and
Articles of Association of the Institution; (b) Original certificate (to be verified and returned) of incorporation/ registration issued by
appropriate authority along with a certified copy; (c) Certified copy of the General Body/Board/Committee resolution for opening of a bank
account; (d) names and designation of persons authorised to operate the account; (e) Specimen Signatures of authorised persons duly
attested by the Chief Executive of the Institution or the Chairman of the meeting wherein the relevant resolution was passed.
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Interest rate on Saving accounts was deregulated by RBI with effect from 25 October 2011. Banks are free to determine their savings bank
deposit interest rate, subject to the following two conditions: (a) Each bank will have to offer a uniform interest rate on savings bank
deposits up to Rs.1 lakh, irrespective of the amount in the account within this limit. (b) For savings bank deposits over Rs.1 lakh, a bank may
provide differential rates of interest, if it so chooses, subject to the condition that banks will not discriminate in the matter of
interest paid on such deposits, between one deposit and another of similar amount, accepted on the same date, at any of its offices. With
effect from 1.4.2010, interest rate on saving bank is payable on daily product basis. It can be credited at any interval. The interest should be
calculated and provided for even in case of inoperative S.B. accounts. 1% additional rate of interest over the standard rate is allowed on
deposits held individually or jointly with dependents in the case of employees of the bank/retired employees/widows of
employees/widows of retired employees etc. and on deposits of an Association or a Fund, all the members of which are the members of
the bank staff.
Basic Saving Bank Deposit account: 'Basic Savings Bank Deposit Account' with following minimum common facilities should be offered
to all their customers: (i) The 'Basic Savings Bank Deposit Account' should be considered a normal banking service available to all; (ii)
This account shall not have the requirement of any minimum balance; (iii) The services available in the account will include deposit and
withdrawal of cash at bank branch as well as ATMs; receipt/credit of money through electronic payment channels or by means of
deposit/collection of cheques drawn by Central/State Government agencies and departments; (iv). There will be no limit on the number
of deposits that can be made in a month, account holders will be allowed a maximum of four withdrawals in a month, including ATM
withdrawals; and (v). Facility of ATM card or ATM-cum-Debit Card will be provided without any charges. Further, no charge will be
levied for non-operation/activation of in-operative 'Basic Savings Bank Deposit Account'. The 'Basic Savings Bank Deposit Account'
would be subject to Know Your Customer (KYC) guidelines. If such account is opened on the basis of simplified KYC norms, the account
would additionally be treated as a 'Small Account'. Holders of 'Basic Savings Bank Deposit Account' will not be eligible for opening any
other savings bank deposit account in that bank. If a customer has any other existing savings bank deposit account in that bank, he/she
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will be required to close it within 30 days from the date of opening a 'Basic Savings Bank Deposit Account'. The existing basic banking
'no-frills' accounts should be converted to 'Basic Savings Bank Deposit Account'.
Levy of penal charges on non-maintenance of minimum balances in savings bank accounts: Banks should inform customers regarding the
requirement of minimum balance in savings bank account and levy of penal charges for non-maintenance of the same at the time of
opening the account in a transparent manner. Banks are not permitted to levy penal charges for non-maintenance of minimum balances in
any inoperative account. Further, no charge should be levied for non-operation/activation of Basic Savings Bank Deposit Accounts
(BSBDAs). While levying charges for non-maintenance of minimum balance in savings bank account, banks shall adhere to the following
guidelines from April 1, 2015: (i) In the event of a default in maintenance of minimum balance/average minimum balance as agreed to
between the bank and customer, the bank should notify the customer clearly by SMS/ email/ letter etc. that in the event of the minimum
balance not being restored in the account within a month from the date of notice, penal charges will be applicable; (ii) In case the minimum
balance is not restored within a reasonable period, which shall not be less than one month from the date of notice of shortfall, penal
charges may be recovered under intimation to
the account holder; (iii) The penal charges should be directly proportionate to the extent of shortfall observed. In other words, the charges
should be a fixed percentage levied on the amount of difference between the actual balance maintained and the minimum balance as
agreed upon at the time of opening of account; (iv) Penal charges should be reasonable and not out of line with the average cost of
providing the services; (v) The balance in the savings account should not turn into negative balance solely on account of levy of charges for
non-maintenance of minimum balance. Further, as per direction from Bombay High Court, accounts of all student beneficiaries under the
various Central/State Government Scholarship Schemes should be free from restrictions of 'minimum balance' and 'total credit limit'.
Thus, there would be no limit on total credits in such accounts.
Transfer of accounts: At the written request of the customer his Savings bank account can be transferred from one branch to another
branch of the bank free of any charges. The account holder must surrender all unused cheque leaves to the old branch. However, with the
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introduction of CBS and multi-city cheques, the same cheque books (multi-city) can be used.The account opening form and specimen
signature card must be transferred to the branch where the account is being transferred by retaining a Photostat copy in the branch.
Conversion of accounts: Conversion of individual account into joint account can be done by taking fresh account opening forms duly signed
by all the proposed joint account holders along with a letter of request for such conversion into joint account from the existing single. account
holder and operating instructions i.e. EorS, For S etc. Staff accounts: Number of savings bank accounts in the name of each staff member of
the bank in his individual name or in joint names with family member(s) should be restricted. The savings bank accounts of staff members
must be prominently marked/tagged as "Staff account". All cheques drawn by the staff members on their accounts when presented in
clearing, should be personally scrutinized by the officer particularly with reference to the balance available in the account. Third party
cheques/DDs should not be permitted to be collected in staff account. If the operation in the account are disproportionate to known source
of income of staff, the account should be watched. Closing of account: Savings bank account may be closed at the request of the account
holder in writing. In case of Joint accounts, all account holders will have to sign the request letter for closure of the account. The account
holder must surrender all the unused cheque leaves. After closing the account the pass book, may be returned after making the entries up to
date and marking "account closed" after the last entry.
Other Rules:
1. Savings bank accounts can be operated either with cheque book facility or without cheque book facility.
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2. Generally, there is a limit on the number of withdrawals in Savings bank account and these accounts are not meant for business
or trading activities etc.
3. Except in case of Basic Saving Bank Deposit accounts, generally banks prescribe maintenance of minimum balance in the
account failing which bank may charge for not maintaining minimum balance but only after alerting the customer.
4. Withdrawal from Savings bank account is allowed either by cheques or bank's withdrawal forms. The withdrawal forms cannot
be issued in favour of third parties and should be used only for withdrawing cash by the account holder. Withdrawal form
must be accompanied by the pass book to enable the assistant to properly identify/recognize the bearer/presenter.
5. Pass Books should be issued at the time of opening the account which should be presented to bank at frequent
intervals to keep it updated. Banks should invariably offer pass book facility to all its savings banks account holders (individuals)
and in case banks offer the facility of sending statement of account and the customer chooses to get statement of account,
banks must issue monthly statement of account. The cost of providing pass book or statement should not be charged to
customer.
Inoperative account
1. Banks should make an annual review of accounts in which there are no operations (i.e. no credit or debit other than crediting of periodic
interest or debiting of service charges) for more than one year. The banks may approach the customers and inform them in writing
that there has been no operation in their accounts and ascertain the reasons for the same. In case the non- operation in the account is
due to shifting of the customers from the locality, they may be asked to provide the details of the new bank accounts to which the
balance in the existing account could be transferred. if the letters are returned undelivered, they may immediately be put on enquiry
to find out the whereabouts of customers or their legal heirs in case they are deceased. In case the whereabouts of the customers are
not traceable, banks should contact the account holder telephonically or through email or persons who had introduced the account
holder, the employer/or any other person whose details are available with them.
2. A savings as well as current account should be treated as inoperative / dormant if there are no transactions in the account for over a
period of two years. fn case any reply is given by the account holder giving the reasons for not operating the account, banks should
continue classifying the same as an operative account for one more year within which period the account holder may be requested to
operate the account.
3. For the purpose of classifying an account as 'inoperative' both the type of transactions i.e. debit as well as credit transactions induced
at the instance of customers as well as third party should be considered. However, the service charges levied by the bank or interest
credited by the bank should not be considered.
4. Where the customer has given a mandate for crediting the interest on Fixed Deposit account or dividend on shares to the Savings Bank
account, crediting the interest to the Savings Bank accounts as per the mandate of the customer, should be treated as a customer
induced transaction. Such accounts
should be treated as operative account as long as the interest on Fixed Deposit account or dividend on shares is credited to the
Savings Bank account.
5. Operation in inoperative accounts may be allowed after due diligence as per risk category of the customer. Due diligence
would mean ensuring genuineness of the transaction, verification of the signature and identity etc. There should not be any
charge for activation of inoperative account.
6. There should not be any charge for activation of inoperative account.
7. Interest on savings bank accounts should be credited on regular basis whether the account is operative or not. If a Fixed
Deposit Receipt matures and proceeds are unpaid, the amount left unclaimed with the bank will attract savings bank rate of
interest.
8. When account should not be classified as inoperative: (a) Banks should allot a different "product code" in their CBS to accounts opened
by banks for beneficiaries under the various Central / State Government Schemes including scholarship schemes for students so that
the stipulation of inoperative /dormant account due to non-operation does not apply; (b) Where operations in the account have been
stopped under Garnishee order or any Court Order; (c) Where the account is under lien or charge for advances allowed to the same
customer in another account; .(d) Where the account is showing debit balance.
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9. Display list of Inoperative accounts: Banks should display the list of unclaimed deposits/inoperative accounts which are
inactive/inoperative for ten years or more on their respective websites. The list so displayed on the websites must contain only the
names of the account holder(s) and his/her address in respect of unclaimed deposits/inoperative accounts. However, the account
number, its type and the name of the branch shall not be disclosed on the bank's website.
10.Depositor Education and Awareness Fund Scheme, 2014: As per section 26A of B R Act, RBI is empowered to establish The Depositor
Education and Awareness Fund. The amount to the credit of any account in India with any bank which has not been operated upon for a
period of ten years or any deposit or any amount remaining unclaimed for more than ten years shall be credited to the Fund. The Fund
shall be utilized for promotion of depositors' interest. RBI has prepared Depositor Education and Awareness Fund Scheme, 2014. As per
the scheme, banks shall transfer to the Fund the amounts becoming due in each calendar month, (i.e., proceeds of the inoperative
accounts and balances remaining unclaimed for ten years or more), and the interest accrued on interest bearing accounts till the date of
transfer, on the last working day of the subsequent month. The rate of interest payable by banks to the depositors/ claimants on the
unclaimed interest bearing deposit amount transferred to the Fund shall be 4% simple interest per annum. The depositor would,
however, be entitled to claim from the bank her deposit or any other unclaimed amount or operate her account after the expiry of ten
years, even after such amount has been
transferred to the Fund. The bank would be liable to pay the amount to the depositor/claimant and claim refund of such amount from the
Fund. Where refund has been claimed from the Fund, banks shall preserve records/documents in respect of such accounts and
transactions, for a period of at least five years from the date of refund from the Fund.
Fixed Deposits
1. Minimum period as per RBI is 7 days. Maximum period as per IBA is 10 years. However, term deposits in the name of minors or
as per court orders can be opened for more than 10 years. Fixed Deposits may be accepted for Days, Months, Years or their
combination, as per request of customer.
2. Interest rate on term deposits is deregulated and is decided by Asset Liability Management Committee of the bank. Bank can not
discriminate among customers regarding payment of interest except for single deposits of Rs 15 lac and above but the difference should
be minimal. The interest is normally paid at quarterly rests for credit of the customer's Savings/Current account as per standing
instructions or allowed to be withdrawn in cash by the customer or paid to him by way of NEFT/pay order/DD or by reinvesting the
same. However, now RBI has allowed banks to decide periodicity of interest and banks can pay interest at monthly rests also.
3. If due date of term deposit is on a holiday, banks will make payment on next working day or thereafter and will pay the interest for the
holiday to depositor at contracted rate irrespective of when the payment is taken.
4. In case of renewal of overdue term deposits, bank may decide the rate of interest payable for the overdue period. In case of
payment of overdue fixed deposit, the amount left unclaimed with the bank will attract savings bank rate of interest.
5. Depositor can request for addition or deletion of names in the deposit but at least one of the original depositors must remain
6. As per Section 269 T of Income Tax Act, if the principal plus interest of term deposit is Rs 20,000 or above, the payment should be made
through credit to account or issuing account payee cheque or DD. It should not be paid in cash. In case, bank pays such term
deposit in cash, penalty will be equal to amount paid. Similarly, payment of interest of Rs 10,000 and above should not be
made in cash.
7. 'Bulk Deposits mean deposits of Rs 1 crore and above. Bank can refuse premature payment of Bulk deposits. In case of premature
payment of FDR, penalty will be decided by the bank. However, penalty can not be charged in case of premature payment in case of
death of depositor. Previously, banks were not allowed to charge penalty in case of premature 'renewal of term deposits. RBI has
advised in April 2010, that banks can frame their own guidelines in this regard.
8. in case of death of depositor, interest for overdue period will be paid at saving rate if depositor died after maturity date. If
depositor dies before maturity of FDR, interest for overdue period will be paid at FD rate as on date of maturity for the period
overdue amount remained with the bank.
9. The account holders are permitted to make premature encashment of such deposits. In such cases, the principal amount is paid along
with interest as applicable for the period for which the deposit was actually with the bank, less some penalty on the applicable rate of
interest, as per bank's policy. Loans against the Fixed Deposit may be given to the customers. The rules relating to margin and interest
rate are decided by the bank.
Recurring Deposits
1. In RD, fixed amounts are deposited by the depositor every month for a pre-determined period. Interest is generally cumulated at
quarterly rests based on month-end balances in the account and pre-determined amount is fixed as payable at the end of the period
of deposit. RD is not opened under FCNR(B) Scheme.
2. The rules relating to premature payment or foreclosure and grant of loan are similar to that under Fixed Deposit
Other types of deposits
Cash certificates: Cash certificates are issued at discounted value.
Certificate of Deposit: The certificates of deposit are short-term negotiable money market instruments. Issuance of CDs attracts stamp duty.
CDs are issued at a discount on face value. Minimum maturity 7 days and maximum maturity one year. Minimum amount of a CD should be
Rs 1 lakh and in the multiples of Rs 1 lakh thereafter.
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CUSTOMERS & THEIR ACCOUNTS
Banker Customer Relationship and Accounts of Customers Banker Customer Relationship.Bank is one which conducts business of
banking. Banking has been defined in Section 5 of Banking Regulation Act. Customer is not defined in any Act. However, it is defined
in KYC norms. As per various court decisions, any person for whom bank agrees to open an account is called as customer of the bank.
Various types of relationships
Type of Transaction Bank Customer
Deposit in the bank (CR balance in account) Debtor Creditor
Loan from. Bank (Debit balance in account) Creditor Debtor
Safe Deposit-Locker Lessor (Licensor) Lessee (Licensee)
Safe custody Bailee Bailor
Issue of draft (after issue of draft) Debtor Creditor
Payee of draft Trustee Beneficiary
Collection of cheque & Standing Instruction Agent Principal
Goods left negligently by customer Trustee Beneficiary
Purchase of cheque from customer Holder for value Endorser
Purchase/sale of securities on behalf of customer Agent Principal
Money deposited. No instructions for its disposal. Trustee Beneficiary
Pledge pawner (Pledgee) Pawner (Pledger)
Mortgage Mortgagee Mortgagor
Hypothecation Hypothecatee Hypothecator
Assignment Assignee Assignor
ACCOUNTS OF CUSTOMERS
Accounts of Minors :A minor is a person who has not attained the age of 18 years. A person will become major at the age of 18
whether guardian is natural or appointed by a court of law. There could be three types of guardians natural, testamentary and
legal guardian. The guardian appointed by will is called Testamentary Guardian and the one appointed by court is called legal
guardian. As per section 11 of the Indian Contract Act, 1872 a minor is not competent to enter into a contract. A minor cannot ratify
an agreement after attaining majority. A minor cannot appoint an agent. However, a minor can be appointed as an agent and he can
make principal liable by his actions. A minor cant delegate authority in his self operated account. Banks do not grant overdraft / loan
to a minor, even if security is provided because a contract with minor being void, the bank will not be able to recover the loan. Even
when loan has been raised on a term deposit in the name of a major person, his request for addition of the name of the minor
cannot be entertained. However, if loan is given for necessity, it can be recovered. If a minor misrepresents age for raising a loan
bank cannot recover loan from him. Loan given to a minor is guaranteed then bank cannot recover loan from guarantor. According to
Section 26 of NI Act, a minor can draw or endorse or negotiate a cheque or a bill but he cannot be held liable on such cheque or bill.
However, other parties will be liable in their respective capacities. A minor cantappoint nominee. However, minor can be appointed
nominee. As minor does not incur any personal liability, he cannot be declared insolvent.
Minor as a partner: A minor cannot be partner in a partnership concern. As per Indian Partnership Act, 1932 a minor may be
admitted to benefits of partnership with the consent of all partners. However, the liability of the minor partner will be limited to
his share in the business of the firm. On attaining majority, a minor has to give public notice within six months of attaining
majority or when it comes to his knowledge after becoming major whichever is lesser, whether he wants to continue as a
partner. If he chooses to become a partner, he will be held liable as a partner from the date he has been admitted to the benefit
of the partnership firm and his profit sharing ratio will continue as it was existing before becoming major.
In case of Hindus, father is the natural guardian of a Hindu minor boy or an unmarried girl and after him, the mother. In case of
a married Hindu minor girl, her husband is the natural guardian. If the husband is minor or minor girl becomes widow, her father
in law and after him the mother in law will be the guardians. When guardian of a Hindu minor ceases to be a Hindu he/she
ceases to be natural guardian. Testamentary guardian will come into picture only on the death of father as well as mother.
In case of Muslims, father is the natural guardian. A Muslim father can appoint a testamentary guardian and even mother of a
Muslim child can be testamentary guardian. If the father dies without leaving behind a will, father's father i.e. paternal
grandfather is the guardian. On the death of paternal grandfather, the person appointed by the will of the paternal grandfather
will be guardian.
Accounts of a minor: A minor can have account under guardianship as well as self operated account.
In the case of accounts under guardianship, the account will be operated by the guardian during minority of the child and once
the minor becomes major the debit in the account will be allowed only with the consent of minor who has become major. If
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guardian dies during minority, next guardian will operate the account. In case the minor dies, the balance in the account will be
paid to the legal heirs of the minor.
Minor's Account with Mother as Guardian: RBI has allowed mother to open and operate all types of deposit accounts even
though the father is alive. A minor can open self-operated deposit account provided he has completed the age of 10 years and is
literate. He cannot appoint nominee in this account. On his behalf nomination will be done by a person legally competent to act
on his behalf. Joint account is also allowed in the name of two minors provided both are of 10 years of age, are literate, belong
to the same family and operation is jointly. Minor's account can be a joint account with the guardian also. In jointly operated
accounts with minor, till attainment of majority by minor, guardian will sign for himself as well as on behalf of minor When
minor becomes major, account will be operated jointly by guardian and minor who has become major.
A bearer cheque presented for cash payment by a minor may be paid as a minor can give a valid discharge in the capacity of the
payee. Minor can obtain premature payment of FOR as he can give valid discharge but cannot raise loan against security of FDR.
Joint accounts
Joint accounts can be opened with various types of operating instructions like Either or Survivor, Joint Operation or Former or
Survivor or Either or Joint or Survivor. The position in such cases as under:
Either or Survivor (E or S): It means anyone can operate the account till both are alive. After the death of either of them, the
bank can pay the balance to the survivor without any formality.
To be operated jointly: Account will be operated by both jointly till both are alive and, if one of the two expires, the bank would
pay the final balance to the survivor, along with all the legal heirs of the deceased.
Jointly or by Survivors: Account can be operated by both / all the person jointly during their lifetime and, in the event of death of
any one, the balance is payable to the surviving persons jointly.
Former or Survivor: Till the first named person is alive, the second named person has no right to withdraw/operate the account.
After the death of the first named person, the payment will be made to second named person.
In case of "either" or "either or survivor" or "joint" operation any one of the account holders can stop payment of the cheque.
The revocation in case of either or either or survivor can be done by either but in case of joint operation, revocation has to be
done by all jointly. In case of Former or Survivor accounts, stop payment of cheque can be done by Former and revocation of
stop payment can also be done by Former.
In case of "either of survivor" alteration on the cheque can be confirmed by any of the account holders.
Any authority to a third party has to be with the consent of all joint account holders.
Joint accounts are joint property. Therefore, unless there is clear mandate in the account opening form that anyone can
undertake the following functions, these should be done by all joint account holders jointly under signatures of all (a) opening
the account (b) closure of account (c) making or altering nomination (d) raising loan against term deposit (e) premature payment
of term deposit (1) addition or deletion of names.
In case of joint accounts with either or survivor instruction, if any of the account holders becomes insane, the balance will be
paid jointly to the account holders other than who has become insane and guardian of the insane minor appointed by court.
In all types of joint accounts, Garnishee order issued in joint names will be applicable on joint accounts but Garnishee order
issued in the name of one of the account holders will not be applicable on joint account.
Partnership Firms
As per section 4 of the Indian Partnership Act, 1932 partnership is the relation between persons who have agreed to share the
profits of a business carried on by all or any of them acting for all.
Minimum partners: A partnership firm should have minimum 2 partners.
Maximum partners: As per Companies Act 2013, an association of more than 100 persons which is not registered as Company or
Society will be an illegal association. Therefore, maximum number of partners can be 100. (As per Companies. Act 1956,
maximum number of partners could be 20 for any business other than banking and 10 for banking business).
In case of Limited Liability Partnerships, there is no limit on maximum number of partners.
Who can become a partner? Only a person competent to contract can become partner. Minor, insolvent, insane cannot become
partners A company and a firm can become partner in another firm.
Who cantbecome a partner?: HUF cantbecome partner as per judgement of the Supreme
Court because HUF is neither a legal person nor a natural person and cant be liable for action of others.
Partnership Deed: Partnership can be oral or in writing. Therefore, banks do not insist on partnership deed while opening
accounts of a partnership concern.
Registration of Partnership: A partnership firm is registered with registrar of firms. Though, it is not necessary that the firm be
registered yet registration is, preferred because an unregistered firm cantsue others in its own name for recovery of its dues
while others can sue it in its name. Therefore, while granting loans banks prefer that the firm should be registered one.
Implied authority of partner: As per section 19 of the Partnership Act, 1932, a partner of a firm has implied authority to act on
behalf of the firm for the normal business of the firm and bind the firm. Alt actions of the partner in the ordinary course of
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business are actions of all partners. However, in the absence of any usage or custom of the trade to the contrary, a partner's
implied authority does not cover '(a) admission of any liability in a suit against the firm (b) withdrawal of any suit filed on behalf
of the firm (c) acquire/transfer any immovable property on behalf of the firm (d) submitting a dispute relating to the business of
the firm to arbitration (e) opening a bank account on behalf of the firm in his own name
(f) compromising on behalf of a firm (g) entering into partnership on behalf of the firm. But if all partners agree for these
issuesand authorize anyone in this regard, these jobs can be undertaken by the said partner.
Liability of partner: As per section 25 of the Indian Partnership Act, 1932 every partner is liable, jointly with all other partners
and also severally, for all acts of the firm while he is a partner. Thus, liability of a partner is unlimited. In case of Limited Liability
Partnership, the liability of partner is limited up to the amount agreed to be contributed by him.
Account of Partnership firm: For opening account of a partnership firm, all partners are required to sign Account opening form
except minor who is admitted for benefits of firm.
In Partnership accounts operation authority is given by all partners. Any change in the operational authority is also with the
consent of all partners including those who were earlier not authorized to operate. Every partner including a sleeping partner
has authority to stop payment of a cheque issued by another partner of the firm. The revocation of stop payment of cheque will
be as per operational authority.
As per section 18, a partner is the agent of the firm for the purpose of business-of the firm. Being an agent, he can't delegate his
authority to an outsider without the written consent of all other partners.
Death, insolvency, insanity of partner: On the death, insolvency or insanity of a partner, the partnership is dissolved and
operations are stopped. The cheques signed by the deceased, insane or insolvent partner will not be paid. If the account is in
credit, operations are allowed for winding up of the firm. In such case operations are allowed on the basis of a fresh mandate. It
the account is in debit, operations in the account should be stopped to retain liability of the deceased /insolvent partner or
his/her estate and to avoid operations of the Clayton's rule.
Limited Liability Partnership :Limited Liability Partnership is governed by Limited Liability Partnership Act 2008.
It is registered with Registrar of Companies. 3. Minimum number of partners is 2 but there is no limit on number of partners. An
individual or a 15-Ody coporate can be a member of an LLP. Liability of partner is limited to the extent of his contribution in the firm.
A partner shall not be personally liable.
COMPANY ACT & ACCOUNTS

Indian Companies Act, 1956: A company is a juristic person created by law, having a perpetual succession and common seal distinct
from its members. In India, companies are governed by Companies Act, 1956. All the companies are required to be registered under
Companies Act, 1956. Section 11 of the Companies Act provides that an Association or Partnership consisting of more than 10 in the
case of Banking Business and more than 20 in the case of other business shall be registered under the companies act. If not
registered, the said association or partnership will be illegal. The business and the objects of a company and the rules and
regulations governing its management are known by two important documents called Memorandum of Association and Article of
Association. Company is juristic person created by law, having a perpetual succession and common seal distinct from its members.
Company is owned jointly by a group of persons. It has a legal existence separate from that of owners. Properties of company
are owned by company and not jointly by owners who are called shareholders. Unlike partners, shareholders are not personally
liable for the debts of the company. They cannot participate in day to day management of company. It is managed by its directors.
Amendments made in the Indian Companies Act, 2013: The amendments to the Companies Act 1956 in 2013 Act has introduced
several new concepts and has also tried to streamline many of the requirements by introducing new definitions.
After getting approval of both the houses of Parliament, the long-awaited Companies Bill 2013 obtained the assent of the President
of India on 29 August 2013 and became Companies Act, 2013 (2013 Act). The changes in the 2013 Act have far-reaching implications
that are set to significantly change the manner in which corporates operate in India.
Highlights of Companies Act 2013:
1. Immediate Changes in letterhead, bills or other official communications, as if full name, address of its registered office,
Corporate Identity Number (21 digit number allotted by Government), Telephone number, fax number, email ID,
website address if any.
2. One Person Company (OPC): It's a Private Company having only one Member and at least One Director. No compulsion to
hold AGM. Conversion of existing private Companies with paid-up capital up to Rs 50 Lacs and turnover up to Rs 2
Crores into OPC is permitted.
3. Woman Director: Every Listed Company /Public Company with paid up capital of Rs 100 Crores or more / Public Company
with turnover of Rs 300 Crores or more shall have at least one Woman Director.
4. Resident Director: Every Company must have a director who stayed in India for a total period of 182 days or more in
previous calendar year.
5. Accounting Year: Every company shall follow uniform accounting year i.e. 1 st April -31st March.
6. Loans to director The Company CANNOT advance any kind of loan / guarantee / security to any director, Director of
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holding company, his partner, his relative, Firm in which he or his relative is partner, private limited in which he is
director or member or any bodies corporate whose 25% or more of total voting power or board of Directors is
controlled by him.
7. Articles of Association- In the next General Meeting, it is desirable to adopt Table F as standard set of Articles of
Association of the Company with relevant changes to suite the requirements of the company. Further, every copy of
Memorandum and Articles issued to members should contain a copy of all resolutions / agreements that are
required to be filed with the Registrar.
8. Disqualification of director- All existing directors must have Directors Identification Number (DIN) allotted by central
government. Directors who already have DIN need not take any action. Directors not having DIN should initiate the
process of getting DIN allotted to him and inform companies. The Company, in turn, has to inform registrar.
9. Financial year- Under the new Act, all companies have to follow a uniform Financial Year i.e. from 1st April to 31st March.
Those companies which follow a different financial year have to align their accounting year to 1st April to 31st
March within 2 years. It is desirable to do the same as early as possible since most of the compliances are on
financial year basis under the new Companies Act.
10. Appointment of Statutory Auditors- Every Listed Company can appoint an individual auditor for 5 years and a firm of
auditors for 10 years. This period of 5 / 10 years commences from the date of their appointment. Therefore, those
companies have reappointed their statutory auditors for more than 5 / 10 years; have to appoint another auditor in
Annual General Meeting for year 2014.
Accounts of Limited Companies
A limited company is an artificial person with perpetual succession incorporated under the Companies Act.
Number of members: As per Companies Act 2013, in the case of a private limited company, minimum number of members
should be 2 and maximum number of members excluding employees can be 200. For public limited company minimum number
of shareholders should be 7 and there is no ceiling on maximum number
Number of Directors: Minimum Directors in a public limited company should be three, in a private limited company 2 and in One
Person Company one. Maximum directors in all types of companies can be 15. However, company may appoint more than 15
directors by passing a special resolution. An individual cannot be director of more than 20 companies at one time out of which
public co should not be more than 10.
Shareholders are owners of the company, directors are agents of the company and debenture holders are creditors of the
company.
Documents for opening_ account: For opening account of a limited company bank should obtain the following: Memorandum of
Association: It contains name of the Company, its authorised capital, registered office and liability of shareholders, objects of the
company etc. Anything done by the directors beyond the objects stated in the memorandum of association is called ultravires
the company and can't be ratified even in a general body meeting. Directors can borrow only for the objects mentioned in the
MOA. if any loan is given for objects other than those mentioned in Memorandum of Association, company will not be liable for
such loans.
Articles of Association: lays down the internal working of the company like rights and powers of the directors, rules of
conducting meetings, borrowing power of directors etc.
Certificate of incorporation : It is equivalent to birth registration certificate of the company. This is the most important
document. A company does not exist without it. Certificate of commencement of business: used to be issued by Registrar of
companies. Earlier it was required by public limited companies only. Now it is not required by either public limited company or
private limited company. Resolution of Board of Directors which is passed by the Board of Directors authorizing opening and
operation of the account by named officials of the company. A copy of the resolution should be attested by its Company
Secretary and / or Chairman of the meeting at which resolution was passed.
While opening account of a limited company, no introduction is required as Certificate of incorporation is sufficient for that
purpose. However, KYC norms are required to be applied on all persons authorized to operate the account of company.
As per doctrine of 'Constructive Notice' anybody dealing with company is assumed to have knowledge of Memorandum and
Articles of Association.
Operational Authority: The operational authority is decided by Board Resolution. Any change in operational authority is also as
per Board Resolution. Stop payment of a cheque and revocation of stop payment will be as per operational authority. The
directors can not delegate their authority to any other person.
In case a director dies, the cheques signed by him presented for payment can be paid if these are otherwise in order and are
dated prior to his death.
Common Seal of the Company is to be affixed on documents as per Articles of Association or Board Resolution.
Borrowing powers of Directors: The borrowing powers of company arise from Memorandum of Association. The Borrowing
powers of directors are given in the Articles of Association. If it is not mentioned in Articles of Association, it is equal to paid up
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capital and reserves of the company. The Board of Directors of a public limited company or a private limited company which is a
subsidiary of public limited company can't borrow in excess of its paid-up capital and free reserves. If the directors want to
borrow more than the paid up capital and reserves of the company, consent of the shareholders is required in the General Body
meeting.
Winding up of company: Winding up can be (a) voluntary (b) Compulsory by court (c) through court supervision.
Registration of Charge
When to be registered: Under section 77 of the Companies Act, 1956, a charge other than created by way of pledge or lien, by a
company is required to be registered with Registrar of Companies (ROC).
Modification: Whenever, there is a change in terms and conditions of the loan, then the particulars of Modification of charge
should be filed with the ROC.
Satisfaction: When loan is repaid, particulars of satisfaction of charge should be filed with ROC , within 30 days of the
satisfaction of charge.
ROC with whom particulars to be filed: The particulars of the charge should be filed with the Registrar of companies in whose
jurisdiction the Registered Office of the Company is
located.
Forms: For filing particulars of fresh charge, Form No. CHG 1 is required. Form used for modification of the charge is same as
that for fresh registration. For satisfaction of charge, Form No. CHG 4 is to be submitted.
Period for filing particulars: Particulars of charge are required to be filed within 30 days of creation of charge.
Extension of Period of Registration: ROC can grant extension of 270 days in filing particulars of charge. The company will be
required to pay additional fees not exceeding 10 times the specified fees. Beyond this period permission is required from
Company Law Board.
Duty to file particulars of charge: It is the primary duty of the company to get the charge / modification of charge / satisfaction
of the charge registered with ROC. However, if the company does not get the charge registered, bank in its own interest can file
particulars of charge.
Consequence of non filing the particulars: In case the particulars of charge are not filed, the bank becomes the unsecured
creditor against the official liquidator.
Priority of charge: The priority of the charge is reckoned from the date of creation of charge (i.e. date of documents) and not
from the date of registration if the charge is registered within the stipulated period.
Accounts of Hindu Undivided Family (HUF) :HUF is neither a legal person nor a natural person, It is not created by agreement.
1t is not incorporated under any Act. It is froma-eornmon ancestor and membership is by birth or adoption. The eldest coparcener
including daughter is the Karta and continues to be Karta even when he/she lives outside India.Operational authority to operate the
account is with Karta. Karta can appoint any other coparcener or third party to conduct business of HUF and/or operate the account.
Co parcener cannot stop payment of the cheque unless he is authorized to operate the account. In case of death, insanity or
insolvency of Karta, next senior most member of family becomes Karta. The liability of Karta is unlimited while that of co-parceners is
limited up to their share in the firm.
Account of Trusts : Types of Trusts: Trusts can be of two types - private trusts where beneficiaries are certain specified individuals
or groups and public trusts where beneficiary is public at large. The document creating a trust is called 'trust deed'. Public Trusts are
registered with the Charity Commissioner. Operational Authority: The operation and other aspects of the bank account are to be
conducted as per the Trust Deed. Unless otherwise provided for in the trust deed, all trustees have to operate the account jointly.
Trustees can't delegate their powers to an outsider even by mutual consent. Loan to a trust: Unless specifically provided for in the
trust deed, no trustee can raise loan against the security of the assets of the trust. Loan should be for the objects as mentioned in
the Trust Deed. On the death of a trustee, the trust property is passed on to the next trustee while in the event of death of sole
trustee or last surviving trustee, the court can appoint a trustee. Death or insolvency of a trustee does not affect the trust property-
and the bank can pay cheques issued by the deceased trustee prior to his death. Stop payment of a cheque and revocation of stop
payment as per operational authority.
Account of Executors and Administrators :An executor is a person named by the deceased in his will to mange his estate whereas an
administrator is appointed by the court of law for the same purpose where the deceased dies without leaving behind a will.
Executors and administrators are treated as one person. On opening a bank account, therefore, executors/administrators can
authorize any one or more of them to operate the account. On the death of an executor or administrator, the surviving executor(s)
or administrator(s) can continue to operate the account unless otherwise provided for in the will or letter of administration. While
opening the account of an executor, bank should obtain letter of probate, which is an official confirmation of the will of the deceased
by a court of law. For opening account in the name of administrator(s), letter of administration is required which is issued by the
court of law.
Societies and Clubs : Societies and Clubs are non-profit making organizations. These can be registered under Societies Registration
Act 1860 with Registrar of Societies. Societies can also be registered with Registrar of Companies under section 25 of Companies Act
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which pertains to nonprofit making companies. Documents to be obtained while opening the account: (i) Copy of Registration
Certificate (ii) Copy of Bye laws which contain rules and regulations (iii) Copy of resolution passed by the Managing Committee which
should include authority to open the account and operational authority.
Cheques presented after death of Secretary or Office Bearer: Any cheque signed by the Secretary of Club or Society or any other
office bearer who is authorized to operate the account and presented after his death can be paid provided if is otherwise in order
and dated prior to his death.
ACCOUNTS FOR GOVERNMENT AND PUBLIC BODIES
The central government transactions are governed by the Central Government Compilation of Treasury Rules and Account Codes.
The state government transactions are governed by the State Financial Handbook of the state. The main function of banks in
conducting government business consists of paying, receiving, collecting and remitting money on behalf of the government
departments. Banks, while opening the accounts of government and public bodies, should also obtain a copy of the letter of
authority issued by the competent authority for opening the account.
Receipts : The receipt is through challans made in duplicate or triplicate as required, showing distinctly the nature of payment and
the head of account to which the amount is to be credited. The challan must be passed by the treasury/sub-treasury before
presenting for payment. Passed challans are valid for ten days after which they will have to be revalidated. Copies of chailans
returned to the depositor as receipts should be signed in full. In case a challan is lost, no duplicate is issued, but only a certificate
is to be issued.
Payments : The government departments are authorised to issue cheques within the drawing limit permitted to them. Self-
drawings in cash are allowed for salary and expenses. Special Cheque books are used by the government departments. They are
supplied by the department and are paid for by the banks. No overdraft is to be allowed in these accounts. The creditto these
accounts is received through budget allocations by the respective ministries. Refund orders are issued by the central excise and
customs department in favour of payees. Refund orders are also issued by the income tax department with a related advices.
While paying, the banks should have cheques as well as advice at the time of payment. Advice is also received by the payee along
with the cheques. Such refund orders are quasi-negotiable and do no attract any stamped discharge.
Opening of Personal Deposit Account by Government Departments
There are certain government departments like forest, local funds etc., as authorised by the A.G. office where cheques are drawn
by the authorised official in these departments and presented at the bank directly for payment without the intervention of the
treasury. Such accounts are opened as current accounts. Details like authority for opening account, cheque books issued, person
authorised to draw cheques, drawing limits etc., are noted. The cheques issued are valid only for three months. The validity of
three months ends at the end of the calendar month. Government officials are also authorised to open accounts in their personal
names for disbursement etc. Such accounts are opened and closed by the official after the purpose is served.
6. OPERATIONAL ASPECTS OF LOAN ACCOUNTS

Lending is an important function of commercial banks. The banking business consists primarily of garnering funds through
acceptance of deposits for the purpose of onward lending. Advances, generally, constitute the biggest item on the assets side of
the bank's balance sheet and are, generally, the biggest source of its income. Advances granted by commercial banks take various
forms such as cash credit, overdrafts, purchase or discounting of bills, term loans, etc. Apart from granting traditional facilities,
banks also provide non-fund based facilities.
Lending function of banks takes into account: (I) Amount of loans to be given and recovered (2) Rate of interest at which
loan is to be given
Loan products are similar in different bank. Features can be different including different interest rates.
Loan segments according to:
Size : Retail loans and corporate loans.
Purpose : Working capital and Term Loans
Type : Fund based and non-fund based
Time : Short term loans and Long term loans
Retail loans are for individual customers such as for vehicle, for house etc.
Corporate loans are for business purpose.
Working capital loans include cash credit, overdraft etc. against current assets. These are renewed once in a year and repaid
out of sale of current assets.
Term loans are given for creation of business assets to be used over a long period. These are paid in instalments (EMI)
Mier a moratorium period, out of profits generated by the business.
Types of borrowers
The borrowers and law governing them include:
Individuals (Indian Contract Act)
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Partnerships (Indian Partnership Act)
Companies (Companies Act 2013)
Hindu Undivided families (Hindu customary law)
Trust and societies (Indian Trust Act or Societies Registration Act)
in additions, banks have to comply with requirement of Transfer of Property Act, Limitation Act, Registration Act,
SARFAESI Act, RDDB Act etc.
.
Fund Based Loans
Cash Credit : A loan to finance stocks and receivables. It is adjusted out of sale of current assets.
Bills : Purchase or discounting of bills of exchange. It is self liquidating with realization of the bill.
Demand loans : These are for specific purposes and repayable on demand. Repayment can be instalment or in lump sum.
Term loans A loan to finance fixed assets. It is repayable in instalments, out of profits.
.
Non-Fund Based Loans
Letter of credit : These are issued in favour of sellers, to facilitate purchase of current assets or fixed assets by borrowers.
Bank guarantees : These are issued in favour of suppliers, to facilitate the borrowers to avail services from service providers.
Deferred Payment guarantees : These are issued to facilitate purchase of capital assets on long term credit basis.
Types of Securilies
Primary security : A security created with the proceeds of the loan (house constructed with loan proceeds).
Collateral Security : Additional security to secure the loan but not created with the proceeds of the loan (house taken as
security to secure cash credit)
t
Guarantor: Personal securities where the r parties promise to pay the loan, if borrower defaults.
Securities and Charges
Immovable properties : Mortgage Movable assets
:
Pledge, if possession with bank. Document of title to goods (RR, GR, BL etc.), can also be accepted under pledge.
Lien, if possession with bank. Lien can be general lien under which the available securities can be used for repayment any
loan. Lien can be negative lien where the borrowers undertake not to sell the assets without permission from the bank.
Hypothecation, if possession with borrower.
Actionable claims like NSCs, LIP, book debts : Assignment
Marketable securities in paper or demat form like shares : Lien
R i ght of s et- off or Ri gh t o f A pp rop ri a ti on ca n b e u s ed i n d epo si t a ccou n ts , f o r recov ery o f i rregul ar
l o an s o f th e b orro w er, in th e s a m e na m e a nd s a m e cap a ci ty . Cha r g es
o Floating charge : Charge on securities that keep on changing their form (example stocks in possession of the borrower in
case of cash credit limit)
Pari-passu charge : Charge that is shared by different banks in the ratio
of their loans (example : consortium loans)
Margin on security and LTV
While providing loans, the banks expect the borrowers to contribute some money of their own for financing an
asset, which is called margin.
Margin differs from security to security and loan to loan. Securities with high fluctuation in their value, requires higher
margin.
o In case of Home loans the concept of Loan to Value ratio is used. LTV rules of RBI stipulate:
LTV max 90% for loans up to Rs.20 lac (means borrower's margin 10%), 80% for loan above 20
lac to 75 lac and 75% for loan above Rs.75 lac.
Priority Sector Loans

A part of total lending, banks are required to lend to activities, classified as priority sector as under. RBI has fixed targets for this
purpose:
Overall : 40% of ANBC or CEOBE (whichever high) Sub-targets:
Agriculture : 18% of ANBC or CEOBE
Weaker section : 10% of ANBC or CEOBE
Housing loans : up to Rs.25 lac for construction and up to Rs.5 lac for repair according to location.
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Education loans : Up to Rs.10 lac for India and up to Rs.20 lac for outside India.
Micro and Small Enterprise : 60% of MSE loans to Micro Enterprises and 40% to small enterprises.
Loans to KVI Sector to be classified as loans to Micro enterprises.
Export loans are also part of priority sector.
Smal l lo ans u p to Rs .50000 to di fferent catego ries includi ng overd raft up to Rs.5000
under Jan Dhan Yojna, are classified as priority sector loans. Refinance
In order to facilitate lending by banks, funds are made available at cheap rate in the form of Refinance (against specific
lending) by:
1. NABARD for agriculture loans
2. SIDBI for loans to MSEs
3. EXIM Bank for export loans
In case of refinance, the credit risk continues with the financing bank.
Credit Exposure Rules
As part of Credit Risk Management, banks are expected to follow credit exposure norms fixed by RBI.
Accordingly, the exposure of a bank in a single party can be up to 15% of capital fund (20% in case of infrastructure)' and
case of a borrowing group up to 40%. (50% for infrastructure).
In addition, the banks can also fix exposure limits for lending to specific industries.
Rate of Interest
RBI launched Base Rate System w.e.f 1.7.2010 by replacing the BPLR system, with a view to bring transparency in fixing
interest rate and again 01.04.2016 MCLR replaces base rate.
Accordingly, banks are to fix ROI w.r.t. base rate and it should not be below Base Rate (except in staff loans, DRI loans and
loans against deposit).
Base rate is to be reviewed on a quarterly basis.
Banks can offer floating interest rates. But, internal bench mark cannot be used.
Penal Rate of Interest
Penal interest can be levied for loans above Rs.25000 for default in repayment, non-submission of financial
statements etc. by following Board approved transparent policy.
Restrictions on advances : Banks cannot give loans:
Against their own shares (Sec 20 B R Act)
To their own directors (Sec 20 B R Act)
On security of deposits or other banks due to possibility of frauds
Against certificate ordeposit
Against pure gold
Fair Practice Code
Banks are to follow Fair Practice Code of Lenders' Liability, which spells obligations of banks towards their borrower
customers. Issue cover:
Loan application form and disposal period
Loan appraisal standard
Loan disbursement
Post disbursement supervision, particularly for loans up to Rs.2 lac.
Time limit of 21 days to issue no objection, for transfer of loan account to other banks.
Loan sanction process : Banks follow the following sequence:
Receipt of loan application
Assessment of viability and creditworthiness
Sanction with terms and conditions
Disbursement anti documentation
Monitoring and supervision by way inspection and review
Renewal of sanction, annually
In-tporiont aspects 10 assess viability & Creditworthiness
Promoters' experience, competence
Commercial, technical and financial feasibility
Comparison of performance with similar other units Conduct of accounts with other banks, if shifting
Sources of margin for loans
Financial performance on the basis of ratio analysis
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Credit report from CIC
Dialogue with suppliers and customers of the borrower
Securities and collateral securities offered.
Objective of Monitoring /Inspection
o Borrower has not availed loan from other sources or against unpaid for stocks
Borrower has acquired and not disposed off the assets created with the loan
Progress of project under implementation
Physical stocks tally with the stocks declared in stock statement
Borrower engaged in the activity, for which loan granted
Assessment of Loans
Large size projects : Assessment of viability requires special skills. Normally outside, expert assistance is required.
Retail loans : Standards are fixed by banks in terms of eligibility, repayment, margin, rate of interest:It is more a back-office
function.
Working capital : Banks use projected balance sheet and operating statements or cash flow statement to asses the working
capital limit. Many banks still follow the Credit Monitoring Format (CMA Form Ito Form VI) of Tandon Committee.
Operating Instructions on loans
Credit Officers should be familiar with the following:
Loan policy approved by Board
Loan products for different requirements
Eligibility criteria, Margin and security criteria
Moratorium and repayment criteria
Appraisal and documentation standards including for creation & registration of charges on securities
Monitoring and follow up
Restructuring and recovery
Operational aspects : Gold Loans
Banks can grant loans against Gold ornaments / jewellery but not against Bullion or Primary Gold.
Loan against specially minted gold coins with weight up to 50 gm can be allowed.
Valuation of ornaments should be on the basis of Assessor' certificate regarding content and purity. (labour charges to be
excluded)
o Valuation should be based on average value of closing price of 22 carat gold for preceding 30 days as quoted by Indian
Bullion and Jewellers Association.
Appraisal should ideally be within bank premises. But if these are sent to appraiser, transit insurance should be obtained.
o Preference should be for Hallmarked jewellery.
LTV ratio should be max 75%.
Loan : Agriculture & non-agriculture purpose.
Proper details of borrower and gold should be kept by the bank. Gold relating to each borrower should be kept separate in
cloth bags, in fire proof safe in joint custody.
Insurance should also be done.
Repayment of loan for non-agriculture purpose should be within 12 months.
On repayment of loan, gold should be delivered to borrower against proper receipt.
Return to 3rd party should be on the basis of proper authority and indemnity from the borrower.
In case of non-payment, gold can be auctioned after giving proper notice to the borrower.
Periodical inspection of packets containing gold should be done.
Operational aspects : Education Loans
Eligible courses : School education, graduation, post-graduation, professional and vocational education.
Student having got admission in a course in India or abroad is eligible.
Expenses include fee, purchase of books, equipment, uniform, caution deposit, travel expenses etc.
Amount : Need based loan. But, to classify in priority sector, amount is max Rs.10 lac for India and Rs.20 lac abroad.
Margin : up to Rs.4 lac = Nil. Above Rs.4 lac 5% for education in India and 15% for abroad.
Scholarship is part of margin. Margin can be contributed, year to year.
Security : Parents co-borrowers in all cases. Up to Rs.4 lac, no other security. Above Rs.4 lac up to Rs.7.50 lac, r i party
guarantee and above Rs.7.50 lac, collateral can be obtained.
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Loan can be considered by branch nearest to place of domicile.
Moratorium one year + period of studies or 6 months of job, whichever is earlier. Period for completion of studies can be
extended by 2 years.
Repayment : Loan up to Rs.7.50 lac within 10 years and above Rs.7.50 lac, within 15 years.
If interest is serviced during moratorium period, interest concession can be considered.
No processing fee to be charged.
Loan application disposal : 15 days to one month.
Operational aspects : Home Loans
Individuals or groups of individuals are eligible.
Loan can be allowed to purchase / construct: a house or for repair of the house. Loan can be granted for purchase of plot provided
undertaking is given to start construction within a pre-specified period,
Loan can be granted for 2"' house.
Loan in unauthorised colonies cannot be given.
Loan to value ratio of max 90% for loan up to Rs.20 lac, 80% for above Rs.20 lac up to Rs.75 lac and 75% for above Rs.75 lac. Cost
of stamp duty, registration etc. can be added for loan up to Rs.20 lac.
Rate of interest can be fixed or floating at choice of the borrower. Interest is charged monthly.
.Security : Mortgage of the house.
Proper insurance of the house, is required.
Disbursement in case of construction, should be in stages.
Repayment : it by way of EMI, which changes with change in interest rate.
Prepayment penalties not recoverable for floating rate loans.
Operational aspects : Vehicle Loans
Loan can be allowed for two-wheelers and cars.
Loan to value ratio : Generally 80% to 85%.
Rate of interest : Bank specific. It can be fixed or floating rate.
Calculation of interest : Daily reducing balance, with monthly rests.
Repayment : 84 months
Security : Hypothecation of the vehicle.
Insurance : Comprehensive insurance for market value.
General Operational Instructions Loan against Goods :
Goods should easily marketable, with price stability and price easily ascertainable.
Borrower should normally deal with these goods.
Type of loan : Pledge if possession with bank and Hypothecation, if possession with borrower. (presently banks offer
Hypothecation).
Goods should be paid for.
Goods should not be old or slow moving.
Goods should be insured for full value to avoid application of average clause.
Margin should be 25% to 30%.
Valuation of goods: Cost price or market price, whichever is lower.
Finished goods can he valued at sale price less margin of profit.
If bank is not satisfied with valuation, assistance of independent valuer can be taken.
Bank name should be displayed, where the goods are kept.
In case of Hypothecation, borrower should submit stock statement, periodically as per terms of sanction.
DP allowed on the basis of stock statement older than 3 months, is considered as NIL, due to which account can become
SMAO (out of order).
Stocks are required to the inspected physically and value-wise, on periodical basis.
Stocks value need to be compared with the value shown in the balance sheet of the borrower.
Loan against warehouse receipts:
Loans can be granted against warehouse receipts issued by Central or State Govt. warehouses.
Banks can also approve private agency warehouses also for lending.
Advance should be against recent 'negotiable' receipts.
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Inspection of goods covered by the receipt, is desirable, before giving the loan.
Goods should be insured for full value. Selective Credit
Control:
SCC refers to restrictions on loans against sensitive commodities such as wheat, rice, paddy, oils, oil seeds, sugar, cotton
etc.
The restriction can in terms of amount of loan, margin and rate of interest.
At present, banks have full freedom to consider such loans except levy sugar and buffer stock of sugar.
7.OPERATIONAL ASPECTS OF CBS ENVIRONMENT

Based on the level of computerisation, banks may be categorised as non-computerised banks, partially computerised banks or fully
computerised banks. The requirement of information systems of one bank may be different than that by the other banks. Core
Banking Solutions (CBS) means the platform where communication technology and information technology are merged to suit core
banking needs. Core banking functions differ depending on the specific type of the bank. Under CBS, the software is installed at
different branches of bank and then interconnected by means of communication lines like telephones, satellite, internet etc.
Examples of core banking softwares include Infosys' Finacle, Nucleus FinnOne and Oracle's Flexcube application.
MEANING OF CBS:
CBS stands for Core Banking Solutions. A core banking system is the software used to support a bank's most common
transactions It is the process which is completed in a centralized environment under which the information relating to
customer's account is stored in the central server of the bank and is available to all the networked branches instead of branch
server. The word Core in Core Banking Solutions stands for Centralized Online real Time Environment. Thus CBS is a step
towards enhancing customer convenience through anywhere and anytime Banking.
Core Banking Solutions (CBS) essentially helps in integration of the range of services that can be offered by all the bank's branches
from centralized data centers. It also helps the banks, apart from providing better customer service, in generating MIS reports for
the top management and in submission of various reports to the regulators and the Government.
The core banking services rely heavily on computer and network technology to allow a bank to centralise its record keeping and
allow access from any location. It has been the development of banking software has allowed core banking solutions to be
developed.
FUNCTIONS PERFORMED BY CBS: Making and servicing loans,Opening new accounts,Processing cash deposits and withdrawals.
Processing payments and cheques,Calculating interest,Customer relationship management (CRM) activities,Managing customer
accounts,Establishing criteria for minimum balances, interest rates, number of withdrawals allowed and so on,Establishing interest
rates,Maintaining records for all the bank's transactions
NEED FOR CBS:
Improve operational efficiency - reduce cost of operations: Core Banking provides various alternative delivery service channels,
which reduce cost and time taken for the transactions. Moreover, the centralised process of core banking also improves efficiency by
avoiding duplication of work.
Improves customer service: Core Banking has improved customer services by providing services through alternate channels on 24
x 7 basis ATM, Internet, Phone, SMS and Mobile Banking. It has enabled customers to operate their accounts and avail banking
services from any branch on CBS network, regardless of where they maintain their account.
Comply with Anti Money Laundering (AML) / Know Your Customer (KYC) requirements:
It is easy to comply with antimoney laundering norms through core banking. Moreover, compliance with KYC norms is required to
open accounts, issue debit/credit cards to the customers. I
ntegrate with electronic payment systems:
Integration with electronic payment systems will allow banks to participate in an inter-operable electronic payment network run by
the National Payments Corporation of India. This will help in quick and safe transfer of funds through National Electronic Fund
Transfer (NEFT) and Real Time Gross Settlement (RTGS).
Benefits of Implementation of CBS: Anytime and Anywhere banking,Standardised, simple and automated processes,Increase in
quality of the service provided to the customers, Timely and accurate information for management decision making. Strong audit
and internal controls, Paving way for new value added services thereby generating additional revenue for the banks, Availability of
more time for branch staff to focus on sales and marketing.
END OF DAY (EOD) AND BEGIN OF DAY (ROD) OPERATIONS:
EOD-Branch Level:
After the banking operations are over, all the branches log out.. And the branch has to do an EOD operation. Though the EOD is
done at the central data centre for the bank as a whole, the branch has to perform EOD checks to trace out any pending
transactions to be authorized. After this process, the branch is closed for that date and no further transactions are accepted for
that date. After this process, the users will get access to certain limited modules only.
BOD-Branch Level:
After the day end is run, Day begin operations are carried out. The branches will be able to access Core banking application
only after the day begin operations are run by CPPD. After the BOD, the users will be given access to the module to carry out
transactions.
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Day start up operations of a computer system should be properly documented and signed in the register maintained. Further,
these should be carried out either by Branch manager or System Administrator after the commencement of banking hours.
EOD-Central Data Central Level:
The time for EOD operations at Central Data Centre (CDC) is fixed around 10 PM so that all branches complete the day's
transactions before 10 PM daily. Once the EOD transactions are started, the branches are cut off from the host to ensure that
branches do not carry any transactions.
All the data for entire banks is stored at CDC and all updating and back up is made at CDC only. After completion of EOD, the
Begin of Day is done is initiated at the CDC level. The EOD/BOD process is undertaken for all the branches in a consolidated
way. Branches should ensure that Day end activities are properly documented and carried out by the Branch Manager or
System Administrator.
The functions completed at day end are :
Recording in Log Books and back up register.
Taking Backup of Day end.
Filing of reports and generating mandatory reports
Calculating products for Current Account (debit Balances)
Shutting down of complete computer system
Ensuring the safe custody and proper documentation of data backups.
Ensuring that Server room is properly locked and keys are with authorised person.
OPERATIONAL ASPECTS RELATING TO PASSWORD CONTROL:
Following safety measures should be adopted by operational staff to establish integrity of the Password:
It is the foremost duty of Branch Manager, System Administrator, users and the authorized persons to maintain secrecy of the
password.
Password Register should be maintained for recording updations in the passwords.
The important passwords for sensitive jobs like taking backups, entering operating systems, creating/editing master records
should be known only to Branch Manager or System Administrator and should not be shared with other staff members.
The operating system password should be protected in a sealed cover and opened in the presence of at least two persons. On
being opened, it should be changed at once.
Role and responsibility of Bank under CBS: For safe and proper implementation of CBS, Banks should ensure that:
They have proper IT infrastructure, data processing and data interface systems including data integrity and security.
They have well defined process of generating information related to various disclosures in the financial statements and the
involvement of IT systems.
Regular periodicity of generation of MIS reports: Proper mechanism of resolving IT related issues as well as resolving customer
complaints related to mistakes in transactions. RBI has issued guidelines to banks to ensure that proper checks, controls & processes
are put in place to prevent misuse of technology.
Therefore Implementation of CBS in banks has numerous benefits both for the banks and for their customers. New products have
been introduced by using the technology. But this has also thrown up new challenges in terms of prevention of cyber frauds and
misuse of system by unscrupulous persons. RBI has issued extensive guidelines to the banks to ensure that proper checks, controls
and processes are put in place to prevent/minimise misuse of computerisation. Accordingly, each bank has issued operational
guidelines for its staff.
8. BACK OFFICE FUNCTIONS/HANDLING UNRECONCILED ENTRIES IN BANKS

Back office consists of administration and support personnel in a financial services company. Although the operations of a back office
are rarely in the limelight, they are a major contributor to the banking business. With the introduction of computerisation in the
banks, the roles of front office and back office are changing and many of the activities, which were previously performed by the front
office, are now performed by the back office, resulting in cost savings and economies of scale as also freeing the time for the front
office staff to focus on sales and servicing functions. Also, computerisation has eliminated the need of back office being a part of the
branch. Back offices may be located somewhere other than the bank branch or bank office. Many are in areas and countries with
cheaper rents and lower labor costs. One of the important functions of the back office is to reconcile the accounting entries specially
the inter office entries.
A back office is a part of most corporations where tasks dedicated to running the company itself take place. Back office
consists of administration and support personnel in financial services company. In banking, the back office includes a
heavyweight IT processing system that handles position keeping, clearance, and settlement.
FUNCTIONS PERFORMED BY THE BACKOFFICE: Bank office staffs do not liaise with customers to generate revenues and profits
for the bank. Instead, the division is a support function operations professionals support people in the front office. The
operations division is at the core of processing every transaction at the bank. It links risk management and control processes to
help protect the bank's assets and reputation. Operations staff work closely with the other divisions trading, sales,
technology, market risk, credit, compliance, tax and legal as well as external clients to help facilitate business and provide
guidance & direction, especially with new products.
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Every banking arm has back-office support teams. Back-office functions are so broad that operations staff typically specialise in
only one of these areas. Typical functions include settlement of securities and derivatives including FX and commodities,
reconciliations, issuance of new securities through Initial Public Offerings (IPOs), and processing of asset servicing. At its centre is
the core function of clearing and settling trades. The back office monitors the post-market processing of transactions:
confirmation, payment, settlement and accounting.
The back office functions related to the normal banking activities can be grouped as under:
Book Keeping and Accounting: It covers transaction processing, maintenance of general Ledger & other books of a/c,
balancing of branch a/cs, reconciliation of entries and subsystems, preparation of financial statements.
Deposits: Calculation of posting of interest, service charges, reminders for renewals of term deposits, nature of operation of
account-single / jointly etc.
Loans: Processing end to end loan originations or any aspect of loan servicing, loan modification, default management and
collections, calculation of EMI's, calculation and posting of interest, penal interest, processing fee, commission and prepayment
charges, process implementation for credit products, operational Limits, risk management etc.
Regulatory Compliance: Identifying KYC gaps, customer grievance redressal system etc.
e-banking: Handling transactions through internet, mobile banking or ATM's, card based payments etc.
Other functions: clearing, collection, remittances etc.
RECONCILIATION FUNCTIONS IN BANKS
The basic reconciliation function in a bank can be divided into groups such as reconciliation of accounts for payments involving
intermediaries, correspondent banks, with RBI and other banks and institutions. It further includes reconciliation of inter branch
and intra branch entries and sub systems.
RBI guidelines regarding Inter Office entries
RBI has instructed the banks to reconcile the entries outstanding in their inter branch accounts within a period of six months.
Banks have been advised by RBI to segregate the credit entries outstanding for more than five years in inter-branch accounts
and transfer them to a separate Blocked Account which should be shown in the balance sheet under the head 'Other liabilities
and provisions-Others'(Schedule 5). Accordingly, banks are required to arrive at the categbry-wise position of unreconciled
entries outstanding in the inter-branch accounts for more than six months as on March 31, and make provision equivalent to
100 percent of the aggregate net debit under all categories. While doing so, the banks are required to ensure that:
a) The credit balance in the Blocked Account created is also taken into a/c.
b) The net debit in one category is not set-off against net credit in another category.
Considering the large volume of transactions relating to demand drafts, RBI had advised the bank to segregate inter-branch
transactions relating to demand drafts from other inter-branch transactions. RBI has also directed the banks to introduce the
system of segregating DD transactions, with reconciliation at weekly intervals and close monitoring of large amounts.
RBI has advised banks to restrict originating debits to head office account to cash / funds transfer, purchase of securities / capital
assets, withdrawals from Provident Fund, advances to inspection.
The reconciliation work of Inter Office accounts is normally centralised at a designated office of the bank (the reconciliation
department). In the new CBS environment, most of the banks have centralised this reconciliation work at the IT department at
the Head Office. One of the important functions of the back office in a bank is the reconciliation of inter office entries. In view of a large
number of transactions being routed through this account and the account being susceptible to frauds, the RBI has issued various
instructions to the banks including provisioning requirements for unreconciled entries. The reconciliation of inter office account entries is
centralised and the branches submit daily statements of the account to the centralised reconciliation department. Computerisation has
helped a lot in reconciliation of entries but staff involvement is still vital in the whole process. All banks treat the reconciliation process as
being important and have put in place systems and procedures for the same.
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7. MEMORY BASED RECALLED QUESTIONS: 2013-17
PRACTICE SET -1 (2016-17)
1) Freight paid on a Machine for bringing it to factory is an:
a) Capital expenditure b) Revenue expenditure c) Deferred expenditure d) none of the above
2) The holding period for which interest rate risk disappears is known as:
a) Yield of Maturity b) Duration of bond c) Intrinsic value d) N.P.V
3) When the exchange of currencies takes place on the next working day, it is known as____ rate:
a) SPOT b) TOM c) Forward rate d) Premium rate
4) Under the Straight line method of charging depreciation, the rate and amount ______:
a) Increases every year b) Decreases every year c) Is constant every year d) None of the above
5) Which of the following are Deferred Revenue expenditure:
a) Heavy advertising expenditure for launching a new product
b) Expenditure for the issue or raising loan or capital
c) Expenditure for the formation or registration of a company d) All of the above
6) Bill of exchange is _____ instrument: a) Unconditional b) Negotiable c) Conditional d) Prepaid
7) Company purchased assets of Rs.1,80,000 payable in fully paid share of Rs.100 each issued at discount of 10%. What will be
number of shares: a) 1000 shares b) 2000 shares c) 3000 shares d) 500 shares
8) Left side of asset account is for: a) Recording decrease b) Recording increase c) Recording depreciation d) Recording sale
9) Which of the following have a credit balance? a) A/c payable b) A/c receivable c) Current a/c d) Discount a/c
10) Bill receivable endorsed is debited to: a) Debtor a/c b) Creditor a/c c) Bill payable a/c d) Bill receivable a/c
11) Value of asset can become zero in method: a) Straight line b) Written down c) Sinking fund d) Insurance policy
12) The amount realised from sale of obsolete asset is:
a) Scrap value b) Residual value c) Both a & b d) Neither a nor b
13) Scrap value of asset is deducted from original cost while calculating depreciation under:
a) Straight Line Method b) Reducing Balance Method c) Sinking Fund Method. d) Written Down value
14) If there is no liability then: a) Asset > Capital b) Asset < Capital c) Asset = Capital d) None
15) Purchase a/c is credited for: a) Goods withdrawn b) Goods lost c) Good purchased d) Both a & b
16) What is true about the Duration of a Bond?
a) Duration is expressed in terms of years.
b) Duration of a coupon-paying bond is always less than its maturity. C) In Zero-coupon bonds where periodical interests are
not paid out, duration will be equal to its maturity d) All of the above
17) Credit side of cash book (Triple column) consists of: a) Discount column b) Bank column c) Cash columnd) All above
18) Preference shareholder have a right of: a) Dividend b) Interest c) Claim d) Commission
19) Debentures are _______ :
a) Normal types of bonds issued by Corporates
b) It is unsecured debt, backed only by the name and goodwill of the Company.
c) In the event of the liquidation of the corporation, holders of debentures are repaid before stockholders, but after other
secured creditors. d) All of the above
20) If the Coupon rate & the Discount rate (Market based) or the expected rates of return are same:
a) The bond will be trading at par
b) Bond will trade at a discount
c) Bond will trade at a premium d) Coupon rate & discount rate have no connection with each other
21) Bill of exchange cannot be_:a) Retained till maturity b) Discounted with bank c) Endorsed to anybody d) None of these
22) Clerical error includes: a) Error of omission b) Principal error c) Error of commission d) Both a & c
23) Revenue expenditure are: a) Day to day expenditure b) Monthly c) Yearly expenditure d) Half yearly
24) If BRS is prepared with balance of cash book, it will show _____ per pass book.
a) Balance b) Overdraft c) Both a&b d) Either a or b
25) If a bill made on 25th May matures after 4 months, then maturity date will be:
a) 26th Sept. b) 25th Sept. c) 28th Sept. d) 1st Sept.
26) Double entry system is based on:
a) Somebody loss = to some body gain
b) Every debit equal to every credit c) What comes in is = to what goes out d) All of the above
27) Capital at end is Rs.21,500, drawings are Rs.4,000 and profits given to partner is equal to Rs 6,000 then opening capital is
equal to: a) 14,000 b) 19,500 c) 20,000 d) 14,500
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28) Balance sheet contains only Personal & Real accounts: a) True b) False c) None of above d) a and b
29) Goods lost by fire should be credited to: a) Purchase a/c b) Goods lost by fire a/c c) Sales a/c d) No entry
30) Internal Rate of Return (IRR) method is also known as:
a) Net present value method
b) Time adjusted rate of return method
c) Payback period method d) Rate of return method
31) If NPV<0, the project is: a) Acceptedb) Rejected c) Partly accepted d) Partly rejected
32) Debit Note is given in respect of : a) Sales Return b) Purchase Return c) Sales d) Purchases
33) Trade discount is:
a) Deducted from cash sales
b) Deducted from credit sales
c) Deducted from credit sales or purchase d) Shown in trading a/c
34) Share Premium is a: a) Capital Receipt b) Revenue Receipt c) Revenue Income d) Investor Receipt
35) Cost of Goods sold is equal to:
a)Opening stock + Purchase + Direct expenses Closing stock b)Closing stock Purchase + Opening stock
c) Closing stock Opening stock + Purchases. d)None of the above
36) Total of Sales book shows: a) Total sales made b) Total credit sales made c) Total cash sales made d) None of these
37) If Purchases are made for Rs.2,000 and both cash discount and trade discount is equal to 10%, then Net purchases will be:
a) Rs.1,620 b) Rs.1,700 c) Rs.1,500 d) Rs.1,440
38) Company received Rs.5 per share on application & allotment except on 1,000 shares. The Call in arrears are equal to:
a) Rs.5,000 b) Rs.10,000 c) Rs.4,500 d) Rs. 4,000
39) Following figures are extracted from the Balance sheet of Y Ltd. as on 31st December:
Stock 25,000, Debtors 10,000, Cash at Bank is 5000, Creditors 8,000, Bills payable 2,000, Provisions for taxes 5,000,Bank
overdraft is 5,000. Calculate the current Ratio: a) 2:1 b) 2:4 c) 3:2 d) 5:1
40) Liquid assets includes: a) Only Cash b) Cash, Debtors c) Closing Stock d) Cash, Bank, Debtors
41) If the total assets of the business are Rs.1,30,000 and capital is Rs. 80,000. Calculate creditors.
a) 50,000 b) 2,10,000 c) 65,000 d) 1,60,000
42) Personal accounts are related to :
a) Assets and Liabilities b) Expenses, losses and incomes c) Debtors, creditors etc d) All of these.
43) Discount on issue of shares is shown under: a) Assets b) Investment c) Fictitious Assets d) Liability
44) Loss on issue of Debentures is shown in:
a) Current asset b) Reserve & surplus account Capital d) Miscellaneous expenditure
45) From the following information taking a period of 365 days compute creditors turnover ratio and Average payment
period Total purchases 3,00,000, Cash purchases 30,000, Purchase return 51,000, Creditors at the end 1,05,000, Bills
payable at the end 60,000:
a) 1.327 times, 275 days b) 11.342 times, 300 days c) 12.327 times, 324 days d) 1.44 times, 435 days
46) Which one of the following is true?
a) Prepaid account is a Nominal Account b) Depreciation Account is a Nominal Account c) Both (a) and (b) above d)
None 47) Ram paid rent of Rs.70 but credited to rent a/c as Rs.170. In rectifying the entry, rent a/c will be:
a) Debited with 240 b) Debited with 100 c) Credited with 100 d) Credited with 240
48) Calculate stock turnover ratio from the following information: Opening stock 58,000 Purchases 4,84,000 Sales 6, 40,000
Gross profit ratio 25% on sales: a) 6 Times b) 8 Times c) 10 Times d) 7 Times
49) Out of the following, Password Management policy includes:
a) Password Usage b) Password Construction c) Password protection d) All of these
50) Purchase: Rs.80,000, Office expenses: Rs.15,000, Direct expenses: Rs.10,000, Sales: Rs.1,50,000: Office furniture: Rs.
24,000, Find Net Profit. a) Rs. 60,000 b) Rs.45,000 c) Rs. 21,000 d) Rs.29,000
51) Present value is always at ______ when compared with Future Value. a) Par b) Discount c) Premium d) Any of these
52) Journal is a book of: a) Prime record b) Final book c) Analysis book d) Ledger A/c
53) Rams a/c is debited with Rs.500 instead of debit of Mohan a/c. It is a:
a) Commission Error b) Principal error c) Compensating error d) No error
54) Computers are basically classified as:
a) Analogue computers and Digital computers
b) Major and Minor computers c) Bit and Byte computers d) None of these
55) Withdrawal of cash by owner for personal use is credited to:
a) Cash Account b) Drawings Account c) Capital Account d) Properitor Account
56) If there is Public holiday on due date of bill .Than when will be the bill payable:
a) On business day b) Preceeding business day c) More than the grace days d) None of these
57) Accounting concepts are:
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a) Methods of presenting financial accounts
b) Broad assumptions c) Bases selected to prepare a specific set of accounts d) None of these
58) Which is an Intangible Asset?- a) Patents b) Building c) Preliminary Expense d) Goodwill e) Both a and d
59) _______ capital is the amount with which company is formed: a) Subscribed b) Authorized c) Called up d) Paid up
60) A company in which liability of members is fixed to certain amount is known as :
a) Company limited by Guarantee b) Issue of shares at a Premium c) Issue of shares at a Discount d) Forfeiture of shares
61) Capital comes under which schedule of Balance sheet: a) 2 b) 1 c) 3 d) 5
6 2 ) Reserves & Surplus come under which schedule of Balance Sheet:
a) Schedule 2 b) Schedule 3 c) Schedule 4 d) Schedule 5
6 3 ) The credit balance of bank (overdraft) is: a) Asset b) Liability c) Revenue d) Expense
6 4 ) If cost price of the machine is 80,000. Rate of Depreciation is 10%. Find the depreciated value after 4 years by reducing
value method: a) 80,000X.9X.9 b) 80,000X.81X.81 c) 80,000X.9X.9X.9 d) 80,000X.88X.9
6 5 ) If the cost of the car is 3,00,000. Depreciation is 10% on W.D.V. Find Book Value of car after 5 years:
a) 21600 b) 218700 c) 22500 d) 30,000
6 6 ) If the cost of equipment is Rs.50,000, Salvage value is Rs.10,000 and its useful life is 6 years. Compute depreciation
amount in the 4th year by SYD Method: a) 5700 b) 5714.28 c) 6500 d) 6200
6 7 ) What is the discounting factor for 3 year if rate is 10%: a) .75 b) .46 c) .909 d) .41
68) Time value of money is relevant in:
a) Accounting rate of return method b) Pay back period method c) c) Internal rate of return method d) All of the
above
69) Total of Rs.1400 is forfeited and only Rs.1000 was reissued on forfeiture share a/c. So _______:
a) 400 is transferred to capital reserve
b) 400 is transferred to general reserve c) 400 is transferred to share premium d) 400 is transferred to shown in asset side
70) What will be the cross currency rate for Euro/GBP if following are the rates: US$ / Euro 0.7798 ; US$ / GBP 0.6577
a) 0.8434 b) 1.1856 c) 0.1528 d) 0.1221
71) If Sales are of Rs. 2,00,000 and Gross profit is @ 25%, then gross profit will be:
a) Rs.80,000 b) Rs.50,000 c) Rs.40,000 d) Rs.82,000
72) Rebate is a expense for drawer, so it is a ______: a) Nominal a/c b) Real a/c c) Personal a/c d) None
73) When payment is required at the beginning of each period, it is :
a) Ordinary annuity b) Future Value c) Annuity due d) Present value
74) Company purchased assets of Rs.1,80,000 payable in fully paid share of Rs.100 each issued at discount of 10%. What will
be no of shares? a) 1000 shares b) 2000 shares c) 3000 shares d) 500 shares
75) Unfavaourable Bank Balance means:
a) Credit Balance in the Cash Book b) Credit Balance in the Pass Book
c) Debit Balance in the Cash Book d) Favourable Balance in the Cash Book
76) If NPV<0, the project is: a) Accepted b) Rejected c) Partly accepted d) partly rejected
77) Rs.15,000 received from Nalini is credited in the account of Meetu. It is an error of :
a) Principle b) Omission c) Commission d) Compensatory
78) Duality principle is also known as:
a) Historical cost principle b) Dual Aspect principle c) Revenue Recognition principle d) Matching principle
79) Expenditure incurred on shifting the stock to a new site is:
a) Capital expenditure b) Revenue expenditure c) Deferred revenue expenditure d) Deferred capital expenditure
80) Entry of Rs.1,000 wrongly posted to wages a/c instead of building a/c:
a) Error of principle b) Error of omission c) Error of commission d) All above
81) Sales book was overcast by Rs. 2,000. If the total of credit side of trial balance is showing Rs. 92,000, what should be
the actual balance? -- a) 90,000 b) 92,000 c) 94,000 d) 88,000
82) Stock in trade doesnt include:
a) Goods in process of manufacture b) Raw materials c) Items held as fixed assets d) Finished goods
83) A reduction in the amount of assets or increases in the amount of liabilities will means ______ in the amount of capital:
a) Increased b) Reduction c) Constant d) None of these
84) EOD operations starts around ___ at the Central data centre: a) 11PM b) 10pm c) 10AM d) 2AM
85) Describe the nature of purchase a/c: a) Real a/c b) Personal a/c c) Artificial personal a/c d) Nominal a/c
86) What is the time frame stipulated by RBI for updation of KYC data in respect of high/medium/low risk customers?
a) 2/5/7 b) 2/5/10 c) 2/8/10 d) 5/8/10
87) Cheque issued but not presented is ______ in Bank Reconciliation statement, when started with overdraft as per cash
book: a) Added b) Subtracted c) Multiply d) Divide
88) Profit before Interest and Tax /Capital employed X100 is the formulae for:
a) Return on Investment b) Gross profit ratio c) Return on equity d) Net profit ratio
89) A person deals in purchase and sale of machinery. He sold one machinery for Rs. 25,000/- and it has been credited to
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sales a/c. What should be the correct entry?
a) Dr. sales credit machinery b) Dr. cash credit machinery c) Dr. sales credit machinery d) None of above
90) The full form of GLIF is________ :
a) General ledger Interface folio b) General ledger Interface file c) Group ledger inter facts d) Group ledger inter faces
91) If Net profit is Rs.50,100 and a sales manager is to provide commission of 5% after charging such commission, what
would be his amount of commission? a) 2386 b) 2505 c) Rs. 2610 d) None of these
92) Bill is made payable to: a) Drawer b) Endorsee c) Payee d) All the above
93) Rs.550 is posted to Depreciation Account as depreciation on furniture but was not posted to furniture account. If the total
of Debit side of Trial balance is Rs.1,31,000, what it should be after rectification:
a) 1,31,000 b) 1,29,900 c) 1,31,550 d) 1,30,450
94) A endorsed a bill drawn on B for Rs. 4,000 in favour of C. On the due date the bill is honoured by B. Which account will
be debited by B in his books? a) Bills Payable Account b) C\'s Account c) A's Account d) Bills Receivable
95) Profit & Loss a/c shows position of firm: a) On particular day b) Of Accounting period c) Gross profits d) Only a/cs
96) When the entry for sale of goods worth Rs.2500 is recorded Rs.250 in the books of a firm, what kind of error it is?
a Compensating error, b Error of principle, c Error of commission, d Error of omission
97) 2 Mr. X applied for 500 shares of a company and was allotted 300
shares. The application money was Rs.3 per share but face valui. of Rs.10. To allot the shares, the share application account
wouic be debited for a 1500, b 5000, c 3000, d 900
98) 3 As per the dual concept of accounting, the transactions arcrecorded on the basis of:
a. double entry system, b cash system, c mercantile system, d single entry system
99) What is recorded in journal proper?
a all transactions, b transactions that are not recorded elsewhere, c transactions through a bank account
d transactions where error has taken place
100) The opening balance of a liability account will always show:
a a debit balance, b a credit balance, c either a debit or a credit balance, d overdraft balance
101) A firm failed to charge depreciationrectification of this error would result in:
a increase in loss, b increase in profit, c reduction in profit, d a and c
102) The dissolution expenses have been paid by a partner of a firm.These would be transferred to:
a) bank account, b) cash account, c) capital account of the partner, d) any of the above
103) Which of the following will be treated as a correct accountingequation:
a) Assets = capital + liabilities, b) Assets = liabilities, c) Liabilities = Capital + assets, d) Assets = equity liabilities
104) Income received in advance is written on the liability side of thebalance sheet:
a) true, b) false, c) incomplete statement, d) none of the above
105) When ever a company forfeits the share, the amount already received is transferred to which of the following accounts:
a) Paid up capital, b) Surplus of profit and loss, c) General reserve, d) Capital reserve
106.A company issues 6000 shares of Rs.10 each and Rs.6 only have been called and received so far. What is the amount
of paid up capital? a) Rs.30000 b) Rs.36000 c) Rs.60000 d) Rs.72000
107.The rule 'debit what comes is' is applicable in case of which of the following: a. payment of salary to an employee, b)
sale of goods on credit to another firm, c) purchase of vehicle for use in the business, d) none of the above
108. In the terminology of books being maintained by a business firm, the term principal books refers to:
cash book, b) journals, c) ledgers, d) all the above,
109.When discount is allowed to a debtor on prompt payment or otherwise, in the cash book it is recorded
on: a) credit side of discount column, b) debit side of discount column, c) debit side of bank column, d)
credit side of bank column
110. What is the amount of net profit when merchandise costs Rs.21650, expenses of doing business Rs.480 and sales
Rs.24900? a) Rs.2770, b) R s . 3 2 5 0 , c) Rs.4030, d) Rs.2670
111. From the trial balance, the wages are transferred to which of the following accounts:
a Profit and loss account, b trading account, c wages to profit and loss account,
d salaries to trading & manufacturing account
112. A firm had made payment of wages of Rs.3000 to one of its staff members which have been debited to his personal
account. This is an : a error of omission, b error of commission, c error of principle, d compensating error
113. In the above problem, the rectification of the error can be done by passing the following journal entry:
a debit wages and credit cash account, b debit cash and credit personal account of the staff member, c
debit wages and credit personal account of the staff member d debit personal account and credit cash
114. A firm purchased machinery worth Rs.1.80 lac and it incurred Rs.20000 on its installation and freight. Its scrap value
at the end of 5th year is expected at Rs.10000. What will be the amount of depreciation on SLM basis for the 5 th year? a
Rs.40000, b Rs.35000, c Rs.38000, d Rs.36000
115. A company had forfeited 1000 shares with face value of Rs.10 each on which it had received Rs.4 as application
money. The shares have been re-issued at a premium of Rs. 1. What is the total amount that would be credited to capital
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reserve including premium? a Rs.1000, b Rs.4000, c Rs.5000, d Rs.10000
116. When capital is debited in double entry system it is done by way of: a credit to capital account,
b debit to capital account, c credit to drawings account, d debit to capital and drawings account
117. A company comes out with a public issue and decides to receive the proceeds as application money, allotment, 1st call and
2nd call. What will be the minimum time gap for calling the amount of 15tand 2nd call ?
a No time gap is mandatory, b time gap of 6 months, c time gap of 3 months, d time gap of 1 month
118 Which of the following is the most appropriate formula for workingout the amount of cost of sales:
a opening stocks purchase direct expenses + closing stock
b opening stocks + purchase direct expenses closing stock
c opening stocks + purchase + direct expenses closing stock
d opening stocks + purchase + direct expenses + closing stock
119. A company issues 6000 shares of Rs.10 each and Rs.6 only have been called and received so far. What is the amount of
subscribed capital? - a Rs.60000, b Rs.36000, c Rs.96000, d Rs.16000
120 Minor repairs are carried to building during the last one year. Theexpenses would be debited to:
a cash account, b creditors' account, c repair account, d building account
ANSWERS
Q A Q A Q A Q A Q A Q A Q A
1 A 2 B 3 B 4 C 5 D 6 B 7 B
8 B 9 A 10 B 11 A 12 C 13 A 14 C
15 D 16 D 17 D 18 A 19 D 20 A 21 D
22 D 23 A 24 D 25 C 26 D 27 B 28 A
29 A 30 B 31 B 32 B 33 C 34 A 35 A
36 B 37 A 38 A 39 A 40 D 41 A 42 C
43 C 44 D 45 A 46 B 47 A 48 B 49 D
50 B 51 B 52 A 53 A 54 A 55 A 56 B
57 B 58 E 59 B 60 A 61 B 62 A 63 B
64 B 65 B 66 B 67 A 68 C 69 A 70 A
71 B 72 A 73 C 74 B 75 A 76 B 77 C
78 B 79 B 80 A 81 A 82 C 83 B 84 B
85 A 86 C 87 B 88 A 89 D 90 B 91 A
92 D 93 D 94 A 95 B 96 C 97 D 98 A
99 A 100 B 101 C 102 C 103 A 104 A 105 D
106 B 107 C 108 C 109 B 110 A 111 B 112 C
113 C 114 C 115 C 116 B 117 D 118 C 119 A
120 C
PRACTICE SET -2 ( 2015-16)

1) Which of the following equation is true:
a) Assets=Capital +Liabilities b) Assets- Capital=Liabilities c) Assets-Liabilities=Capital d) All of the above
2) The purpose of accommodation bill is:
a) To facilitate trade transaction
b) To finance actual purchase or sale of goods
c) To provide financial help to the parties without consideration d) none of these
3) Entry in the books of Drawer, when bill is sent to the Bank for collection:
a) Bank for Bill Collection A/c Dr To Bills Receivable b) Bills Receivable A/c Dr To
Bank
b) Bank A/c Dr To Bills Payable d) Cash A/c Dr To Bills Receivable
4) Bond Price and YTM are
a) Inversely related to each other b) Directly proportional to each other c) Absolutely the same d) Not related to each other
5) Credit purchases are calculated by preparing:
a) Debtors account b) Creditors account c) Bills Receivable account d) Bills payable account
6) If Current ratio is 2:1, Quick ratio is 1:1 and the current assets 120,000. Compute Liquid assets and the Current Liabilities:
a) 60,00 b) 60,000, c) 67,000, 60,000 d) 80,000, 54,000
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7)Calculate Stock Turnover ratio from the following information: Opening stock 58,000 Purchases 4,84,000 Sales 6,40,000
Gross profit ratio 25% on Sales: a) 6 Times b) 8 Times c) 10 Times d) 7 Times
8)In Diminishing Value Method, depreciation is calculated:
a) Original cost b) Diminished Value c) Cost Price d) Opening Value
9)If the total assets of the business are Rs. 1,30,000 and Capital is Rs. 80,000, calculate creditors:
a) 50,000 b) 2,10,000 c) 65,000 d) 1,60,000
10) Personal accounts are related to :
a) Assets and Liabilities b) Expenses, losses and incomes c) Debtors, creditors etc d) All of these.
11) If Purchases are made for Rs.2,000 and both cash discount and trade discount is equal to 10%, then Net purchases will
be: a) Rs. 1,620 b) Rs. 1,700 c) Rs. 1,500 d) Rs. 1,440
12) If Current ratio is 2:1, Quick ratio is 1:1 and the current assets 120,000. Compute Liquid assets and the current liabilities:
a) 60,00 b) 60,000, c) 67,000, 60,000 d) 80,000, 54,00
13) Purchase: Rs. 80,000, Office expenses: Rs.15,000, Direct expenses: Rs.10,000, Sales: Rs.1,50,000: Office furniture: Rs.
24,000, Find Net Profit: a) Rs. 60,000 b) Rs. 45,000 c) Rs. 21,000 d) Rs. 29,000
14) Capital Budgeting Technique helps in :
a) Investment decision making b) Cash flow decision making c) Profit decision making d) Management decision making
15) In the Balance sheet of a firm, the debt equity ratio is 2:1. The amount of long term sources is Rs.12 lac. What is the
amount of Tangible Net Worth of the firm? - a) Rs.12 lac b) Rs. 6 lac c) Rs. 4 lac d) Rs. 2 lac
16) An expense of installation charges of machinery is:
a) Credited is machinery account b) Debited to machinery a/c c) Credited to cash account d) Debited to cash a/c
17)If cost price of the machine is 80,000, Rate of Depreciation is 10%. find the depreciated value after 4 years by reducing
value method: a) 80,000X.9X.9 b) 80,000X.81X.81 c) 80,000X.9X.9X.9 d) 80,000X.88X.9
18) If the cost of equipment is Rs.50,000, Salvage value is Rs.10,000 and its useful life is 6 years, compute depreciation amount
in the 4th year by SYD Method: a) 5700 b) 5714.28 c) 6500 d) 6200
19) If BRS is prepared with balance as per Passbook on 31 Dec., then out of Rs. 20,500 paid by X by cheques on 31 Dec., a
cheque of Rs.7,500 was collected on 7th Jan., the effect will be: a) Rs 13,000 will be deducted from balance
b)Only Rs. 7,500 be deducted from balance c) Rs. 20,500 is added is the balance d) None of these
20) Find out the EMI, if the loan is 500,000 repayable in 10 years with interest @7% per annum:
a) 5800 b) 5600 c) 5805 d) 5467
21) Which of the following are Deferred Revenue expenditure:
a) Heavy advertising expenditure for launching a new product b) Expenditure for the issue or raising loan or capital c)
Expenditure for the formation or registration of a company d) All of the above
22) Bank overdraft is a: a) Personal Account b) Real Account c) Nominal Account d) All the above
23) If a bill made on 25th May matures after 4 months, then maturity date will be:
a) 26th Sept. b) 25th Sept. c) 28th Sept. d) 1st Sept.
24) Accounting concepts are:
a) Methods of presenting financial accounts
b) Broad assumptions c) Bases selected to prepare a specific set of accounts d)None of these
25) Reduction in expenses causes:
a) Increase in proprietor equity b) Increase in Asset c) Decrease in properitor equity d) Increase in losses.
26) Duration and Interest rate elasticity of bond are: a) Directly related b) Inversely related c) Not related d) None
27) 100 equity shares of Rs.100 each of a company were forfeited for nonpayment of the final call of Rs.30 per share. These
shares were re-issued at Rs.90 per share fully paid. Calculate the amount to be transferred to capital reserve account. a)
Rs.5000 b) Rs.6,000 c) Rs.7,000 d) Rs.8,000
28) Which of the following is used for redeeming Preference shares?
a) General Reserve b) Dividend Equalization fund c) Profit & loss a/c d) All of the above
29) If drawings exceed capital introduced in business, capital a/c may have:
a) Debit balance b) Credit balancec) Either of above d) None
30) As a general rule for independent investment project, invest in the project where IRR is:
a) IRR = Cost of Capital b) IRR > Cost of Capital c) IRR < Cost of Capital d) IRR method is decisive
31) What is the discounting factor for 3 year if rate is 10%? - a) .75b) .46 c) .909 d) .41
32) What is true about the Duration of a Bond? - a) Duration is expressed in terms of years. b)Duration of a coupon-paying
bond is always less than its maturity. c)In Zero-coupon bonds where periodical interests are not paid out, duration will be equal
to its maturity d)All of the above
33) Which of the following have a Credit balance?- a) A/c payable b) A/c receivable c) Current a/c d) Discount a/c
34) Bill Receivable endorsed are debited to: a) Debtor a/c b) Creditor a/c c) Bill payable a/c d) Bill receivable a/c
35) Clerical error includes: a) Error of omission b) Principal error c) Error of commission d) Both a & c
36) Revenue expenditure are: a) Day to day expenditure b) Monthly c) Yearly expenditure d) Half yearly
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37) Drawings do not include:
a) Payment of Rent for proprietor residence.
b) Goods taken by proprietor c) Amount withdrawn from bank d) Amount withdrawn from bank for domestic use.
38) Profit & loss a/c is a : a) Nominal a/c b) Real a/c c) Personal a/c d) Both a & b
39) Bill of exchange cannot be ______:
a) Retained till maturity b) Discounted with bank c) Endorsed to anybody d) None of these
40) Value of asset can become zero in _____ method: a) Straight line b) Written down c) Sinking fund d) Insurance
policy
41) Depreciation is calculated on _____ of asset. a) Cost price b) Market price c) Book value d) Invoice price
42) Interest suspense a/c is shown in: a) Trading a/c b) Balance sheet c) Profit & loan a/c d) Venture a/c
43) What is Tangible Net Worth of a Firm? -
a) Capital only b) Bank OD c) Capital + Reserves & Surplus - Intangibles d) Debtors
44) In a Banks Balance Sheet bad debts and provisions for doubtful debts are shown under:
a) Loans & Advances b) Provisions c) Reserves d) Contingent Liabilities
45) ______ is an example of contingent liability. - a) Bank Guarantee b) Deposits c) Loans & Advances d) Provisions
46) Bonus shares are issued to_______:
a) Existing shareholders.b) New shareholders c) Holders of partly paid-up shares d) None of the above
47) The balance of Petty cash a/c is shown as: a) Expense b) Asset c) Loss d) Revenue
48) If BRS is prepared with balance of cash book, it will show _____ per pass book.
a) Balance b) Overdraft c) Both a & b d) Either a or b
49) Goodwill means ______ :
a) Value of reputation of the firm b) Good wishes of the partners c) Good wishes of the customers d) Type of will made with
good intentions
50) If a Bill made on 25th May matures after 4 months, then maturity date will be:
a) 26th Sept. b) 25th Sept. c) 28th Sept.d) 1st Sept.
51) Double entry system is based on: a) Somebody loss is equal to some body gain b) Every debit equal to every credit c) What
comes in is equal to what goes out d) All of the above
52) Goods lost by fire should be credited to: a) Purchase a/c b) Goods lost by fire a/c c) Sales a/c d) No entry
53) Goods returned by X for Rs.600/- was passed through Sales book is an error:
a) Compensating b) Commission c) Principal d) None of the above
54) Money received in advance from shareholder before it is actually called is:
a) Debited to call in advance a/c b) Debited in call in paid in arrear a/c c) Credited in call in paid in arrear a/c d) None of these
55) Book keeping records: a) Monetary aspect b) Non-monetary aspect c) Both a & b d) Only b
56) Purchase a/c is credited for: a) Goods withdrawn b) Goods lost c) Good purchased d) Both a & b
57) Preference shareholder have a right of: a) Dividend b) Interest c) Claim d) Commission
58) Which of following is not an asset? -a) Fixed Asset b) Current Asset c) Capital d) Discount on share
59) Which of following has debit balance? a) Purchase a/cb) Sales a/c c) Capital a/c d) Loan a/c
60) Current Assets include: a) Goodwill b) Land & Building c) Cash d) Profit & Loss
61) Journal is a book of: a) Prime record b) Final book c) Analysis book d) Ledger A/c
62) Rams a/c is debited with Rs.500 instead of debit of Mohan a/c. It is a:
a) Commission Error b) Principal error c) Compensating error d) No error
63) The Balance sheet of Bank is prepared under:
a) Section 26 b) Section 29 (3rd schedule) c) Section 29 d) Under Section 20 (vi)
64) If there is Public holiday on due date of bill, then when will the bill be payable:
a) On business day b) Preceding business day c) More than the grace days d) None of these
65) General Manager commission of 10% of net profits of Rs.2,200 after charging such commission is Rs. ______:
a) 200 b) 190 c) 250 d) 220
66) Which is an Intangible Asset? a) Patents b) Building c) Preliminary Expense d) Goodwill e) Both a and d
67) If the cost of the car is 3,00,000, Depreciation is 10% on W.D.V. Find the depreciated value after 3 years by reducing value
method? a) 21600 b) 218700 c) 22500 d) 30,000
68) For a project, the difference between the sum of the presents value of cash flows of the project and cash outlays for
financing the project is its: a) Future value b) Net present value c) Internal rate of return d) Cash outflow
69) Goods Sold to A against a cheque issued by A for the amount. The journal entry is:
a) As Account Dr., Sales account Cr. b) Bank Account Dr. Sales account Cr c) Bank A/c Dr. Purchase Account Cr. d) Purchase
A/c Dr. As account Cr.
70) What is the discounting factor for 3 year if rate is 10%: a) .75 b) .46 c) .909 d) .41
71) If the cost of equipment is Rs.50,000, Salvage value is Rs.10,000 and its useful life is 6 years. Compute depreciation amount
in the 4th year by SYD Method: a) 5700 b) 5714.28 c) 6500 d) 6200
72) Sales book shows only: a) Cash sales b) Credit sales c) Total sales d) Cash payments
73) Profit on redemption of Debenture is:
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a) Capital profit b) Transferred to capital reserve c) Transferred to P& L a/c d) Both a and b
74) Discount on issue of Debenture is: a) Capital Loss b) Capital gain c) Revenue loss d) Revenue gain
75) Share Premium, if not mentioned, is included in:
a) Application money b) Allotment money c) 1st call money d) Share capital
76) Find out the EMI, if the loan is 500,000 repayable in 10 years with interest @7% per annum:
a) 5800 b) 5600 c) 5805 d) 5467
77) A loss arising due to pilferage, theft, fire etc, is a: a) Normal loss b) Abnormal loss c) Data Inadequate d) None
78) The drawee of a bill is ___ : a) Creditor b) Debtor c) Endorsee d) Owner
79) Cash sales = Rs. 35,000, Credit Sales = Rs.40,000, Cost of Good Sold = Rs. 52,000 and Expenses on Sales = Rs.6,700. Find
value of Net Profit. a) Rs. 15,500 b) Rs. 16,000 c) Rs. 15,000 d) Rs. 16,300
80) Trade discount is given on ________: a) Purchasing of goods in bulk b) Purchasing of goods in small quantity c) On selling
the goods d) On returning the goods sold
81) An entry of Rs.320 has been debited in books as Rs.250. It is an error of:
a) Commission b) Omission c) Principled) Compensating
82) Which of the following instrument is noted on dishonour? - a) Cheque b) Promissory Note c) B/E d) Hundi
83) Which amongst the following can not be a source for issue of bonus shares? - a)Share premium
b) Revaluation reserve created by revaluation of fixed assets c) Capital reserve d) Capital redemption reserve
84) An Annuity is an ordinary annuity if payments are required to be made________: a) At the beginning of each period
b) Made at the middle of each period c) Made at the end of each period d) At ordinary instalments.
85) Payment of wages to Ram Lal debited to his personal a/c is:
a) Compensating error b) Principal error c) Commission error d) None of these
86 A company purchased equipment of Rs.8.80 lac against allotment of shares with face value of Rs.100 each at a premium of
10%. What would be no. of shares, issued to the vendor?
a 8800, b 8000, c 7200, d 800
87 As per accounting equation what would be the amount of liabilitiesof a firm, if its assets are Rs. 3 lac and capital is Rs.1
lac:
a Rs. 3 lac = 1 + 2 lac, b Rs. 2 lac = 3 1 lac, c Rs.1 lac = 3-2 lac, d none of the
above
88 A firm makes purchase in cash for Rs.4000. Cash and trade discount are available @ 10% simultaneously. What is the net
amount payable?
a Rs. 3600, b R s . 3 4 8 0 , c Rs.3320, d Rs.3240
89 A firm has to pay Rs.2500 to its creditor Mr. Mahesh. While making payment, it debits the account of Mr. Satish another
creditor. This is:
a an error of principal, b an error of commission, c compensating error as well as error of commission
d error of omission and compensating error
90 The overdraft balance in the cash book is Rs.45060 but from bank pass book it is found that a cheque of Rs.600 has been
debited twice, a cheque of Rs.6045 deposited with the bank has been dishonoured and Rs.60 have been debited by the bank as
returning charge and bank credited Rs.8 to the account on account of postal charges refunded. What is the balance as per pass
book?
a Rs.51757 Cr, b Rs.57157, c Rs.51757 Dr, d Rs.57717
91 Interest suspense is classified as :
a nominal account, b personal account, c real account, d none of the above
92 At times, the errors are detected after preparation of the trialbalance. The rectification of such errors is done by : a
debiting the ledger account, b debiting the profit and loss account, c debiting the balance sheet
d way of suspense account
93 A company came out with a public issue of 2 lac shares of Rs.10 each payable as application money @ Rs.3 and allotment
money @ Rs.3. Final call amount has also been called which has not been received on 4000 shares. If the company decides to
forfeit the partly paid shares, what is to the total amount of capital, that would be forfeited:
a Rs.16000, b Rs.24000, c Rs.40000, d Rs.60000
94 Cash book of a firm is showing a balance of Rs.5100. Bank statement of account shows that bank has credited Rs.50 and a
customer of the firm directly deposited with the bank Rs.610. What is the balance as per pass book.
a Rs.5710, b Rs. 5150, c Rs.5760, d Rs.5660
95 The purchase account has been undercast by a firm by Rs.12000. What will be the journal entry for rectification?
a debit purchase account and credit creditor, bdebit purchase account and credit suspense
c debit creditor's account and credit purchase, d debit purchase and credit cash account
96 The amount of total assets of a firm is Rs.5 lac and the liabilitiesare Rs.2.60 lac. What will be the correct accounting
equation, when the gap between the two is filled in:
a 5.00 = 2.40 + 2.60 lac, b 2.40 = 5.00 2.60 lac, c 2.40 = 2.60 5.00 lac, d none of the
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above
97 In the written down value method, the amount of depreciation iscalculated on which of the following:
a original value of the asset, b depreciated value of the asset, c scrap value of the asset
d any of the above, whichever lower
98 A firm paid an amount of Rs.2000 to a transport company which include payment on account of freight of machine Rs.1000
and Rs.1000 as freight on raw material. Which account would be debited for freight on raw material:
a raw material account, b purchase account, c freight account, d cash account
99 In the above problem, the freight on machine would be debited towhich account?
a cash account, b freight account, c purchase account, d machine account
100 Rebate on bills of exchange, in the books of the drawer would be treated as:
a nominal account, breal account, c personal account, d No where
101 The pass book of a firm shows overdraft of Rs.5100. The firm hadissued a cheque of Rs.2400 which has not been
presented for payment so far. What is the balance as per cash book?
a Rs.5100 Dr, b Rs.2700 Cr, c Rs.7500 Cr, d Rs.7500 Dr
102 A firm has received a cheque of Rs.3000 in its favour and uses this cheque for making payment by endorsing in favour of
the seller. What treatment will be given to this in the cash book?
a It need not be entered in the cash book, b It will be entered on debit side, c It will be entered on
credit side, d It will be posted both on debit and credit side
103 A firm earns profits of Rs.12000. Its partners had drawn Rs.8000during the year. What was the capital at the beginning,
if it is Rs.43000 at the close of the financial year?
a 39000, b 38000, c 36000, d 34000
104 A firm has made provision @ 5% of its book debts of Rs.40000 at the beginning of the year. During the year, a sum of
Rs.2000 is written off out of the provisions held. To maintain 5% provisions at the end of the year, what would be the amount of
fresh provision? a Rs.1900, b Rs.2000, c Rs.1800, d Rs.1700
105 Which of the following statement is correct ?
a Personal accounts are reflected in trading account, b Real accounts are recorded as liability in the balance sheet,
c Nominal accounts are reflected as asset in the balance sheet
d Personal and real accounts appear in the balance sheet
106 Goods worth Rs.2 lac relating to a firm have been damaged in fire.Which account would be credited?
a. Claim receivable, b Profit and loss account, c Pu r c h a s e ac c o u n t , d No entry is required
107 Preliminary expenses incurred by a firm is an example of :
a revenue expenditure, b deferred revenue expenditure, c capital expenditure, d fictitious assets
108 Expenses incurred by a firm in manufacturing of goods are to beclassified as:
a revenue expenditure, b deferred revenue expenditure, c Capital expenditure, d fictitious assets
109 A consignment account is in the nature of:
a Personal account, b Nominal account, c Real account, d Intangible asset
110 A firm makes advance payment of tax on behalf of one of its partners. This amount would be debited to:
a cash account, b capital account of the partners, c drawing account of the partner
d none of the above
111 In the consignment account, the unsold stock is valued at:
a original cost, b original cost direct expenses incurred by consigner/consignee, c direct expenses
incurred by the consignee, d Original cost + indirect expenses
112 Goods sent on consignment is in the nature of:
a real account, b personal account, c nominal account, d none of the above
113 The credit balance of Rs.2000 in the bank column of the cash book was carried forward as its debit balance. If the overdraft
as per pass book is the starting point:
a Rs.2000 would be deducted, b Rs.2000 would be added, c Rs.4000 would be added
d Rs.4000 would be deducted
114 A favourable balance as per cash book means:
a debit balance in the bank column of cash book, b credit balance in the bank column of cash book
c debit balance in the pass book, d any of the above
115 If the trade discount appears in the trial balance, in the finalaccounts it is shown as:
a deduction from sales in trading account, b addition to amount of sales in trading account, c
deduction from amount of purchases, d none of the above
116 A firm's profit is 25% of the cost price. How much it would be of sales:
a 25%, b 20%, c 15%, d 10%
117 Which of the following kinds of companies can issue a deferred share:
a. public companies, b. private companies, c independent private companies, d govt. companies
118 When a company makes allotment of shares to the share applicants, which of the following accounts is to be credited? a.
share capital account, b share allotment account, c share application account, d any of the above
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119 When preference shares are redeemed out of profits otherwise available for dividend, equal amount must be transferred to:
a. capital redemption reserve, b sinking fund, c capital reserve, d none of the above
120 What kind of sales out of the following are recorded in the sale book?
a credit sales of goods, b cash sales of goods, c credit and cash sales, d credit or cash sales of any thing
ANSWER
Q A Q A Q A Q A Q A Q A
1 D 2 C 3 A 4 A 5 B 6 A
7 B 8 B 9 A 10 C 11 A 12 A
13 B 14 A 15 B 16 B 17 B 18 B
19 B 20 C 21 D 22 A 23 C 24 B
25 A 26 A 27 B 28 D 29 A 30 B
31 A 32 D 33 A 34 B 35 D 36 A
37 C 38 A 39 D 40 A 41 C 42 B
43 C 44 B 45 A 46 A 47 B 48 D
49 A 50 C 51 D 52 A 53 B 54 A
55 A 56 D 57 A 58 C 59 A 60 C
61 A 62 A 63 B 64 B 65 A 66 E
67 B 68 B 69 B 70 A 71 B 72 B
73 D 74 A 75 B 76 C 77 B 78 B
79 D 80 A 81 A 82 C 83 B 84 C
85 B 86 B 87 A 88 D 89 C 90 A
91 B 92 D 93 C 94 C 95 B 96 A
97 B 98 C 99 D 100 A 101 C 102 D
103 A 104 A 105 D 106 C 107 B 108 A
109 B 110 C 111 B 112 A 113 D 114 A
115 A 116 B 117 C 118 A 119 A 120 D
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MODEL TEST PAPERS : TEST YOURSELF
01. When simple rate of interest is calculated, the interest rate %age is expressed as:
a. Rate/100, b Rate x 100, c 100 / Rate, d 1+ rate/100
02 Identify a personal account out of the following: a. commission paid account, b machinery account,
c income accrued but not received account, d cash account
03 In the case of loan obtained from the bank, the amount repayable is represented by thevalue and the amount taken
represents the value: a present, future, b future, present, c present, present, d future, future
04 Which of the following is not true:a principal = amount minus simple interest, b amount = principal plus simple
interest, c amount = principal + (principal x interest rate% x time), d none the above
05 A principal amount of Rs.40000 becomes Rs.44400 at simple interest rate of 2.75% p.a. in a period of:
a 2 years, b 3 years, c 4 years, d 5 years
06 Amount = Principal (1+0" is the formula for calculation of:
a simple interest, b floating interest, c compound interest, d annuity
07 In which of the following, normally, the closing stock is not included:
a trial balance, b profit and loss account, c balance sheet, ,d none of the above
08 In the context of Rule of 72, which of the following is correct:
a if amount of principal is divided by 72, it gives the rate of interest and period, to double the principal
b if 72 is divided by the principal, it gives the rate of interest andperiod to half the principal
c if 72 is divided by the rate of interest, it will provide the period todouble the principal
d if 72 is divided by the period, it will provide the rate of interest, tohalf the principal
09 Where regular payments are required to be made or received for a fixed period of time in the beginning of each
period interval, this is called:
a perpetuity, b ordinary annuity, c annuity due, d sinking fund
10 Mr.Satish has decided to invest Rs.7500 every year for the next 3years at prevailing rate of 10% p.a. Calculate the present
value of the amount he is to receive at the end of the period:
a 18650, b 16850, c 19560, d 17550
11 Which of the following statement is correct:
a present value of annuity due is lower than the present value ofordinary annuity.
b present value of annuity due is higher than the present value of
ordinary annuity.
c present value of annuity due is equal to the present value of
ordinary annuity.
d present value of annuity due can be higher or lower than the
present value of ordinary annuity depending upon the circumstances.
12 The payment side of the cash book is overcast by Rs.500 and starting point is overdraft as per passbook.
a the amount would be subtracted, b the amount would be added, c the amount will neither be added nor
subtracted, d the amount will be either added or subtracted.
13 Which of the following statements is correct in the context ofinterest rate:
a compound interest is cheaper than the simple interest, b less frequent is the period of compounding, higher is the
amount ofinterest, c frequent the period of compounding, higher is the amount ofinterest, d the effective rate is
always less than the given annual compoundrate.
14 When a bond matures, its maturity value is known as:- a maturity value, b redemption value, c
face value, d coupon value
15 The coupon rate is (which of the following is correct)a rate of return on a debenture, b fixed rate of interest on a
bond, c yield to maturity on a bond, d current yield of the bond
16 Which of the following best matches the description of a zerocoupon bond:
a it is issued at par in which interest is included and not paid in cash, b it carries a fixed rate of interest
c it is issued at a discount to face value, without any interestpayment, d any of the above
17 On which of the following instruments only interest is paid and theinstrument has no maturity period:
a annuity, b perpetual bond, c negotiable bond, d zero coupon bond
18 A bond issued for Rs.10000 for 5 years carries a coupon of 15%. With current market interest of 10%, what is the value of
the bond:a 11974, b 13068, c 11896, d 10470
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19 When a firm is not been able to locate the difference in the totals oftrial balance and wants to prepare the final accounts:
a it will ignore the difference, b the difference will be placed in the suspense account, c the difference will be placed in
any account having substantialbalance, d the difference will be adjusted to the capital account
20 Interest rate elasticity is calculated as under:
a %age change in maturity value of bond in period t / % change inthe yield to maturity for a bond I
b %age change in price of bond in period t / % change in the yield to maturity for a bond I
c %age change in price of bond in period t / % change in the maturity value for a bond I
d total age change in price of bond in period t I % change in the yield to maturity for a bond
21 Ramesh has the option of investing Rs.60000 at 10% p.a. with
annual compounding for 3 years. it will fetch him maturity value of Rs.96000. What will be the gain or loss of
Ramesh in terms of the present value.
a Rs.19600 loss, b Rs.22070 loss, c Rs.16090 profit, d Rs.16140 profit
22 Which of the following is a correct statement:
a conversion of future value into present value, at a given discountrate, is called compounding
b conversion of present value into present value, at a given discount rate, is called discounting
c conversion of future value into present value, at a given discount rate, is called hedging
d conversion of present value into future value, at a given discount rate, is called compounding
23 A difference (deficit of surplus) between the total amount of
present value of future cash flows and initial investment in the project is called:
a internal rate of return, b net present value, c pay back, d return on the project
24 An investment of Rs.140000 is made in a project that generates a profit of Rs.60000 each in the 1st year 2nd year 3rd
year and 4th year. What is internal rate of return (IRR) of the project:
a 2Z98%, b 23.22%, c 24.65%, d 25.68%
25 On the basis of Internal Rate of Return, under what situation aproject should be taken up for investment:
a when IRR = market interest rate, b when IRR < capital cost, c when IRR > capital cost, d
when IRR = capital cost
26 In which of the following methods of depreciation, the amount ofdepreciation remains same throughout the life of the
asset: amachine hour method, b written down value method, c straight line method,
d diminishing balances method
27 An equipment costing Rs.1 lac with a useful life of 5 years was purchased. Its salvage value is estimated at Rs.10000. What
is the amount of depredation for the 2nd year and 5th year at double declining balance method.
a 24000, 2960, b 25000, 3000, c 26000, 3140, d 28000, 3360
28 The depreciation under sum of year's digit (SYD) is calculated withthe help of which of the following:
a (written down value salvage value) x (remaining useful life / sum of year's digit )
b (original cost salvage value) x (sum of year's digit / remaining useful life)
c (written down value salvage value) x (sum of year's digit / remaining useful life)
d (original cost salvage value) x (remaining useful life / sum of year's digit )
29 An equipment has original cost of Rs.100000 with a salvage value of Rs.25000 and useful life of 5 year. Calculate
depreciation for the 2nd year by using sum of year's digit (SYD) method.
a 20000, b 22000, c 25000, d 26600
30 Which of the following statement is correct in the context of book keeping and accounting:
a accounting deals with recording of transactions of business and book keeping deals with the interpretation,
b book keeping deals with recording of transactions of business and accounting deals with the interpretation,
c book keeping and accounting deals both with recording of transactions of business and their interpretation,
d book keeping deals with recording of transactions of business and accounting deals with the audit of those transactions.
31 Which of the following accounting concept is observed at reportingstage and not at the recording stage:
a money measurement concept, b cost concept, c consistency concept, d dual aspect concept
32 The valuation of assets is done at their cost price or market price,as per which of the following accounting standards:
a. money measurement concept, b going concern concept, c cost concept, d dual aspect concept
33 Prepaid expenses and outstanding expenses are taken intoaccount by a firm on the basis of which of the following
concept:
a money measurement concept, b accrual basis of accounting, c cost concept, d dual aspect concept
34 Accounting standards are prescribed by:a Govt. of the country, b Central Bank of the country, c
Professional accounting bodies of the country, d Tax departments of the country
35 Which two accounts in the following financial transactions do notmatch:a rent paid to landlord rent & cash,
b goods given as a free sample sales & advertisement, c goods lost in transit abnormal loss & trading, d
purchase of computer from XYZ on credit computer & XYZ.
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36 Out of the following accounts, which one is a personal account:a expenses made for advertisement, b
interest received from X, c commission payable to Y d rent paid to the landlord
37 Which among the following is a book of prime entry (a) journal (b)cash book (e) subsidiary books
a a and b only, b b and c only, c a and c only, d a to c all
38 Which of the following is a rule for debit and credit in case of a realaccount:
a debit the giver and credit the receiver, b debit what comes in and credit what goes out,
c debit all expenses and credit all incomes, d debit all assets and credit all liabilities
39 A firm has purchased a patent right from a reputed company. This will be treated as:
a real account, b personal account, c personal account in representative category d nominal account
40 Which of the following is not a method of preparation of trialbalances:

a totals method, b balances method, c totals and balances method, d none of the above
41 A double column cash book records which of the following: a cash and discount transactions, b cash and credit
transactions, c cash and income transactions d cash and petty cash transactions
42 When amount is paid to the petty cashier, this is called:a cash advance, b imprest amount, c
petty cash amount, d any of the above
43 The periodical totals, monthly or weekly, of the purchase book is: a. posted to the credit of credit book,
b. posted to the debit of credit book, c posted to the debit of purchase book, d posted to the debit of sales book
44 Which of the following does not match:
a sales return book records return of goods to the customers, bsales return book records return of goods by the
customers, c purchase return book records return of the goods to the supplier, d none of the above
45 When the credit side of the cash book is undercast, it has thesame effect as over casting of : a credit side of pass-
book, b debit side of cash book, c debit side of pass-book, d there is no relationship between the two
46 The bank reconciliation statement is prepared to reconcile thefollowing:
a difference in the pass book and cash book, b difference between the opening and closing balance of cash book,
c difference between the opening and closing balance of pass book, d difference in the cash and bank column of the cash
book.
47 Which of the following does not match:
a when subscription is made by the bank, there is a debit entry in thepass book debiting the firm's account
b when cash is deposited in the bank, there is a debit entry in the cash book debiting the bank
c when a customer directly deposits the amount, bank is credited in the cash book. none of the above
48 Bank charges of Rs.100 have been recorded twice in the cashbook. if the pass-book showing debit balance is taken as
starting point:
a Rs.100 will be deducted, b Rs.100 will be added, c Rs.200 will be added, d Rs.200 will be deducted
49 Which of the following statement does not match in the context oftrial balances:
a trial balances take care of arithmetic accuracy
b in the trial balance, the balances of liabilities are recorded on the debit side
c in the trial balance, the balances of expenses are recorded on the debit side
d in the trial balance, the balance of capital account are recorded in the credit side.
50 Debit and credit totals of each ledger account are shown in the trial
balance instead of the outstanding balance, against the name of each account. It is called:
a trial balance, b net trial balance, c gross trial balance, d any of the above
51 Expenses incurred on wages paid to a labourer of the factory, havebeen debited to wages account, while his services
have been used for construction of factory building. This is:
a. Compensating error, b error of commission, c error of omission, d error of principle
52 Firm ABC purchased a new machinery and expenses incurred on its transportation have been debited to the cartage account.
This will affect: a trading & manufacturing account and balance sheet, b profit and loss account and
balance sheet c only profit and loss account, d only balance sheet
53 Firm XYZ purchased goods worth Rs.20000 from P & Company and these have been routed through sales book as Rs.10000.
Therectification of this will be through the following journal entry:
a debit purchases Rs.20000 and credit sales Rs.20000, b debit sales Rs.20000 and credit purchases Rs.20000
c debit sales Rs.10000 and credit P & Company, d debit sales Rs.10000 and debit purchase Rs.20000 and credit P &
Company Rs.30000
54 A firm had written off Rs.3000 as a bad debt of Z and the amount recovered from him later on has been credited to his
account. Rectification of this error will result into: a decrease in the debtors, b decrease in the profit, c
decrease in the capital, d increase in profit leading to increase in capital
55 Find out, which expenditure is wrongly classified:
a purchase of goods revenue expenditure, b purchase of machinery capital expenditure,
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c payment of technical fee for selection of machinery for a project -revenue expenditure, d none of the above
56 A firm incurred substantial marketing expenses to expand theirmarket reach. This will be classified as:
a revenue expenditure, b deferred revenue expenditure, c capital expenditure, d any of the above
57 When trade discount is received by a firm, it is shown as:
a income in the trading account, b a deduction from the sales in the trading account, c a deduction from purchases
in the trading account, d an addition to the purchases in the trading account
58 There was fire in the stock godown of Firm-B and stock worth Rs.2 iac is damaged. The insurance company makes payment of Rs.1.50 lac as
a full and final payment of the claim. The balance of amount of Rs.0.50 lac:
a will be debited to net loss in the profit and foss account, b will be debited to abnormal loss account and credited to trading account,
c will be credited to abnormal loss account and debited to trading account,
d will be debited to gross loss in the trading account.
59 Which of the following error may result in disagreement of trial balance:
a error of omission, b error of commission, c compensating error, d error of principle
60 What type of accounts, do appear in the balance sheet, out of the following:
a real and nominal, b real and personal, c personal and nominal, d real, personal, nominal
61 Which liabilities are not included in the totals of a balance sheet but their mention is made in the balance sheet: a Intangible liabilities,
b Fictitious liabilities, c current liabilities, d contingent liabilities
62 A firm has a liability on account of disputed claim made by another firm. This will be shown as :
a.Intangible liabilities, b Fictitious liabilities, c current liabilities, d contingent liabilities
63 The net profit is transferred to balance sheet in a firm by way of the following journal entry:
a debit trading and manufacturing account and credit capital account, b debit trading account and credit capital
account, c debit profit & loss account and credit capital account, d any of the above
64 The entries passed for closing all income and expenses accounts at the end of a trading period are called:
a closing entries, b appropriation entries, c adjustment entries, d opening entries
65 The historical cost in the context of inventory valuation includes (a)cost of purchase (b) cost of conversion (c) other costs
incurred for bringing the inventory.
a a and b only, b b and c only, c a and c only, d a to c all
66 Gross profit + opening stocks + purchases + directed expenses closing stocks
a Cost of sales, b Cost of production, e Sales, d Any of the above
67 Which of the following in not an operating Expenses
a Advertisement Expenses, b Depreciation expenses, c General Manger salary, d Loss on sale of
motor car
68 Debit balance in a personal account means amount _and credit balance means amount
a receivable, payable, b payable, receivable, c receivable, receivable, d payable, payable
69 The insurance of plant machinery is renewed by the firm on Feb 01, 2008 for one year. The firm closes its books as on Mar
31. The cost of premium beyond Mar 31, 2008, would be debited to:
a insurance expenses, b outstanding insurance, c prepaid expenses, d there is no need for any adjustment
70 On a sale of Rs.2 lac, the firm was to pay discount to the buyer(M/s Kala Niketan & Co) @ 2% but it was not paid. The
auditors have suggested to the firm to make provision. What journal entry will have to be passed:
a debit prepaid expenses and credit discount account, b debit discount and credit Kale Niketan & Co
c debit discount and credit outstanding discount, d debit outstanding discount and credit Kala Niketan & Co
71 M/s XYZ has the outstanding debtors of Rs.50000. It has baddebts of Rs.2000 and provision for bad debts at Rs.3000.
Due to problems in the industry, the firm decides to make provision @ 7.5%. The additional provisions will be:
a 750, b 2750, c 3750, d 5750
72 The manager of a firm is entitled to 10% commission on profits
before charging such commission. He earns a commission of Rs.20000 on the profit. The profit before charging this
commission is: a 2 0 0 0 0 0 , b 218000, c 220000, d 222000
73 The proprietor of a firm has taken goods for personal use, the sale
price of which is Rs.4000. These goods were purchased for an amount that provides 25% profit on sale. What journal
entry would be passed. : a debit drawing account and credit sales account for Rs.4000, b debit drawing account
and credit purchase account for Rs.4000, c debit purchase account and credit drawing account for Rs.1000,
d debit drawing account and credit purchase account for Rs.3000
74 2nd hand machine was purchased by the firm ABC for Rs.70000 and an expenditure of Rs.30000 incurred on overhauling.
Depreciation is charged at 15% on the original cost each year. The machine was found unsuitable at the end of 3 rd
year and was sold for Rs.40000. : a the firm made a profit of Rs.1500, b the firm made a profit of
Rs.15000, c the firm incurred a loss of Rs.1500, d the firm incurred a loss of Rs.15000
75 A bill of exchange accepted by the drawee was discounted by the drawer with the bank and was dishonoured later
only. The journal entry for noting charges will be as under:
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a debit noting charges credit the bank, b debit bank and credit noting charges, c debit noting charges and credit
the drawee, d debit drawee and credit the bank
76 The stocks that are lying unsold with the consignee under a consignment sale are value at: a cost price of the stock,
b sale price of the stock, c cost price + recurring and non-recurring expenses incurred by the consignee,
d cost price + non-recurring expenses incurred by the consignee and the consignor
77 The goods were sent to the consignee and were lost in transit. The consignor did not get the goods insured for transit
risk. The abnormal loss will be met debiting to:
a profit and loss account, b trading account, c stock account, d loss to consignment account
78 Stock of Rs. 4000 is destroyed by fire. It was fully covered byinsurance. Accounting entry is:
a Dr. Stock A/c 4000, Cr. Trading A/c 4000, bDr. P & L A/c 4000, Cr. Trading A/c 4000
c Dr. Insurance Claim 4000 Cr. Trading A/c 4000, d Dr. Trading A/c 4000, Cr. Insurance Claim A/c 4000
79 in the trial balance, there is an item reading interest rebate. It willbe transferred to which of the following:
a trading & manufacturing account, b profit and loss account,
c profit and loss appropriation account, d balance sheet
80 A business has assets of Rs. 44312 and owner's equity is Rs. 13120. What is the amount of other liabilities?
a 31192, b 57522, c 44312, d None of these
81 Goods have been supplied by R. Sharma and Son's for Rs. 85Z01-but while posting, the amount has been put on the
credit side of S. Sharma & Sons. The credit side of the trial balance total is Rs. 43570. Assuming no other error, what should be
the total of credit side of the trial balances? a 41870, b 4 4 4 2 0 , c 4 3 5 7 0 , d 42720
82 In a business, the net assets as on Jan. 1st are Rs. 6000 and onJanuary 31st are Rs. 7500. If withdrawls by owner
during January are Rs. 1000, the net income during January is:
a 2500, b 1500, c 500, d None of these
83 X gets a car on hire purchase basis costing Rs.250000. The down payment is Rs.50000. The balance is to be paid in 24
monthly instalments at 10% rate of interest. The EMI would be:
a Rs.11500, b Rs.11000, c Rs.10000, d Rs.9500
84 A company comes out with a public issue of 10000 shares of Rs.10 each on which application money @ Rs.5 is received.
But allotment money on 500 shares @ Rs.5 is not received. If the share capital is forfeited, what is amount of share capital
to be forfeited?a R s . 5 0 0 , b Rs.1000, c Rs.5000, d Rs.2500
85 Tangible Net worth is:- a Owners equity -Intangible Assets, b Owners Equity Long term liabilities,
c Owners Equity - Tangible Assets, d None of these
86 An entry representing bad debt of Rs.10000 appears outside the trial balance. How these are to be adjusted?
a debit bad debt and credit profit and loss account, bdebit debtors' account and credit profit & loss account
c debit bad debt account and credit debtors' account, d debit cash account and credit debtors' account
87 Posting of wrong amount in the ledger : a Causes the ledger to be out of balance, b Does not cause trial
balance to be out of balance c Causes the trial balance to be at out of balance, d none of these
88 A firm receives commission in advance. Where will this transaction be classified:
a. real account (tangible), b personal account (liability), c - personal account (asset), d real account (intangible)
89 Which of the following is not a balance sheet equation:
a. Asset = Liabilities + capital, b Capital = Assets + liabilities, c Liabilities = assets capital, d Assets = equities
90 A firm has capital of Rs.4 lac and liabilities of Rs.1 lac. Its lossesare Rs.0.50. The assets are equal to:
a 5.00 lac, b 4.50 lac, c 1.50 lac, d 0.50 lac
91 Which of the following is an error of principle:
a on purchase of goods in cash, seller's account credited, b purchase of furniture debited to purchase account,
c wrong amount posted while the journal entry was correct, d none of these.
92 Interest paid on capital of the partners by a firm would becategorized as:
a. expenditure for the business, b loss for the business, c expenses for the business, d gain for the business
93 Closing Stock appearing in the trial balance indicates that:
a. Opening Stock appear outside the trial balance, b Opening Stock has been adjusted into the Stock figure
c. Purchases have been included in the Closing Stock, d Closing Stock will appear only in the trading account
94 The Income Tax deducted from Interest paid on debentures isshown on the
a Asset side of the Balance sheet, b Liability side of the Balance sheet, c Credit side of the P &C A/c
d Debit side of the P& C A/c
95 If preference Shares are redeemed at premium, such premium may be provided out of the
a. Share premium A/c, b Proceeds of fresh issue of shares, c Share forfeited No d Any of the above
96 The amount listed for Cash in the trial balance represents
a The cash at the beginning of the period, bCash receipts during the period, c The balance of cash on
the date of trial balance, d Cash receipts minus disbursement during the period
97 Sales direct expenses opening stocks purchases + closing stocks =
a. net profit, b) gross profit, c) cost of sales, d) any of the above
98. A company raised funds from public through a public issue at premium. The amount premium can be used for (a) issue of
Page
fully paid bonus shares (b) paying premium on redemption of preference shares (c) buy back of shares (d) writing off
preliminary expenses.- a a, b and c only, b b, c and d only, c a, c and d only, d a to d all
99 When shares are allotted to employees and directors to reward them for a consideration other than cash, these are called:
a. equity shares, b employees' stock option, c sweat equity, d management quota shares
100 Which of the following is not correct in the context of bank balance sheet:
a the amount of bad debts and provision for bad debts is charged under the heading 'provision and contingencies, b
the amount of bad debts and provision for bad debts is charged in the profit and loss account,
c in the balance sheet the amount of advances is shown after deducting the bad debts and provisions from bad debts,
d none of the above
101 The excess of credit side of an account over the debit side of thesame account shows:
a) credit balance, b) debit balance, c) overdraft balance, d) any of the above
102 A balance sheet is defined as:
Statement, prepared with a view to measure the exact financial position of a business on a certain fixed date,
Statement for the particular year, c Any of the above, d None of the above
103 Purchase of machinery by a firm for cash would result in:a increase in the assets, b increase in the liabilities,
c decrease in the assets, d there will be no change in the total amount of assets
104 What is the basic reason for committing error of principle?
a Incorrect posting, b Lack of knowledge about capital and revenue items, c Incorrect
balancing of ledgers, d Incomplete records
105 What is the time period during which the shares can be issued at adiscount after permission of Central Govt.:
a 2 months, b 3 months, c 4 months, d 6 months
106 Claims against a firm raised by its creditor but not acknowledged by the firm would be classified as:
a intangible asset, b current liability, c contingent liability, d no where
107 Which of the following account will always have a debit balance:
a real accounts, b personal accounts, c nominal accounts, d all the above
108 A company purchased a machinery for Rs.2.30 lac. The vendor was paid advance of Rs.20000 and the balance was paid to
him as allotment of share of Rs.10 at a premium of Rs. 0.50. What is the no. of shares allotted?
a 20000, b 18000, c 10000, d 5000
109 Accrued income is:a an asset, b a liability, c income, d none of the above
110 A firm paid rent amounting to Rs.2000 but it credited the rent account. Now the entry would be rectified:
a debit the rent account by Rs.2000, b debit the cash account by Rs.2000, c debit the rent
account by Rs.4000, debit the cash account and credit the rent account by Rs.4000
111. A firm purchased machinery worth Rs.30000 on April 01, 2000, Rs.20000 on Oct 01, 2000 and Rs.10000 on July 01, 2001. On Jan
01, 2002 it sold 1/3rd of the machinery purchased on April 01, 2000 for Rs.3000. The annual closing period of the firm is December.
What will be the amount of depreciation during the first year, on SLM basis, if expected useful life is 10 years? a) 2250, b) 2400,
c) 2650, d) 2750
112.In the above problem, what is the profit or loss on sale of themachinery?
a) Profit Rs.5250, b) Loss Rs.5750, c) Profit Rs.5750, d) Loss Rs. 5250
113 In the same problem, what is the written down value as onDecember 31, 2002?
a) Rs.37000, b) Rs.37500, c) Rs.38000, d) Rs/38500
114 What is the amount of gross profit when net purchases are Rs.50000, net sales Rs.80000 and sales returns Rs.10000? a)
Rs.31000, b) Rs.20000, c) Rs.30000, d) Rs.29000
115,A company decides not to draw Articles of Association of its own. Which of the following would apply to the company? A)
Table A of Companies Act, b) Table B of Companies Act, c) Table E of Companies Act,
d) Nothing would be applicable.
116 The pass book of a firm shows overdraft of Rs.10000. It isobserved that the firm had issued a cheque of "s.20000
which has not been presented, bank has charged interest on overdraft for Rs.1500, cheque of Rs.20000 deposited with the bank
but not credited and insurance of Rs.100 has been debited by the bank.What is the balance as per cash book? aRs.8400 cr, b
Rs.8500 cr, c Rs.8400 dr, d Rs.8200 cr
117.The cash book of a firm is undercast by Rs.700. What would be the change in the pass book?
a credit balance would be increased by Rs.700, b Credit balance would be reduced by Rs.700
c balance would be increased by Rs.700, d there would be no effect
118. A firm has debited wages of Rs.5000 paid labour on account of installation of machinery to wages account. The debit side
of trial balance should show total of Rs.184504. What it will be showing presently:
a Rs.189504, b Rs.179504, c Rs.184504, d none of the above
119. A firm debited the wages of Rs.2000 to the salary account. The gross profit of the firm is Rs.102000. What should be the
correct amount of gross profit? a Rs.104000, b Rs.102000, c Rs.100000, d Rs.98000
120. A firm debited the wages of Rs.10000 paid on account of construction of building to the wages account. Its net profit is
Rs.52000 presently. What it should be:
a Rs.42000, b Rs.52000, c Rs.62000, d Rs.72000
Page
ANSWER
1 A 2 C 3 B 4 D 5 C 6 C 7 A 8 C 9 C 10 A
11 B 12 B 13 C 14 B 15 B 16 C 17 B 18 C 19 B 20 B
21 D 22 D 23 B 24 D 25 C 26 C 27 A 28 D 29 A 30 B
31 C 32 B 33 B 34 C 35 B 36 C 37 A 38 B 39 A 40 D
41 A 42 B 43 C 44 A 45 C 46 A 47 C 48 B 49 B 50 C
51 D 52 B 53 D 54 D 55 C 56 B 57 C 58 B 59 B 60 B
61 D 62 D 63 C 64 A 65 D 66 C 67 D 68 A 69 C 70 C
71 A 72 C 73 D 74 D 75 D 76 D 77 A 78 C 79 D 80 A
81 C 82 A 83 C 84 C 85 A 86 C 87 C 88 B 89 B 90 B
91 B 92 C 93 B 94 B 95 D 96 C 97 B 98 D 99 C 100 D
101 A 102 A 103 D 104 B 105 A 106 C 107 A 108 A 109 A 110 C
111 D 112 D 113 D 114 C 115 A 116 A 117 A 118 A 119 A 120 C
*** BEST OF LUCK ****
( Please send Memory based questions on sktrivedycan@gmail.com; sktrivedyiibf@gmail.com )
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TEACH YOURSELF - JAIIB

SMALL & QUICK BOOK FOR JAIIB-2

ACCOUNTING AND FINANCE FOR BANKERS

Sanjay Kumar Trivedy

Date: 15.11.2017 Sanjay Kumar Trivedy

3 MODULE : A (BUSINESS MATHEMATICS & FINANCE ) 09-30

4. MODULE : B ( PRINCIPLE OF BOOK KEEPING & ACCOUNTANCY ) 31-65

5 MODULE : C ( FINAL ACCOUNTS ) 66-88

6 MODULE : D ( BANKING OPERATION ) 89-118

7 MEMORY BASED RECALLED QUESTIONS 119-128

8 TEST YOUR SELF : MODEL PRACTICE TEST PAPERS 129-135

( Please send Memory based questions on sktrivedycan@gmail.com; sktrivedyiibf@gmail.com )

STUDY MATERIAL / COURSEWARE :

TypeofQuestionsBasicallyfour types of MultipleChoiceQuestions askedinExamof WhichType A:ConceptbasedStraightQuestions(70-71

QUESTIONS MODELS : TYPES OF QUESTIONS

JAIIB EXAMINATION Nov. -2017

MODULE C FINAL ACCOUNTS

MODULE D BANKING OPERATIONS

FV = 10000 * [(1 +0.05)"-11 * (1+0.05) = 10000 * 5.53 * 1.05 = Rs.58019

Example -2 (with annual compounding for 2 separate loans) --

_Payment Amount Quarterly Interest Principal payment Balance arincipal

Yield to maturity (YTM)

Interest rate risk

DISCOUNTED CASH FLOW TECHNIQUES

Year Cash flow Present value of Re.1 at 11% cash flow

DISCOUNTED CASH FLOW METHODS

0 5000 (-)5000 -5000 (-) 5000

Net present value 4927 - 5000 = (-) 73 5020-5000 = 20

Lower Difference Net present value of the cash flow at

Situation Competitive Product (40% No competition (60% chances)

Decision making : Based on the above, decision can be taken as under:

Item Original cash Cash flow value at which

4. DEPRECIATION AND DEPRECIATION ACCOUNTING

3'3 year depreciation = 4/21 x 63000 = 12000

5. FOREIGN EXCHANGE ARITHMETIC

Direct Rates Indirect Rates

Date of Contract Delivery Date / settlement date Rate to be used

LATEST CHANGES IN INDIAN ACCOUNTING STANDARD

IFRS status in India

AREA GAAP IFRS

Underlying The "going concern" assumption is not well- developed in

2. BASIC ACCOUNTING PROCEDURES

COMPARATIVE POSITION OF NOMINAL AND PERSONAL ACCOUNTS

Salary receipt Salary received Salary received in advance OR salary

RULES FOR 'DEBIT' AND 'CREDIT'

COMPARATIVE POSITION OF NOMINAL AND PERSONAL ACCOUNTS

Transaction Nominal account Personal representative account

Salary receipt Salary received Salary receivedinadvanceORsalary outstandingforreceipt

CommissionorDiscountpayment Commission/discountpaid Cornmis.siontdiscount payable OR commission

MEANING OF DEBIT AND CREDIT BALANCE IN ACCOUNTS

3. MAINTENANCE OF CASH/SUBSIDIARY, BOOKS & LEDGER

This process has been shown in the following exercise.

To sales 12000 By balance 37000

Total 15000 Total 15000

Total 10000 Total 10000

Total 25000 Total 25000

Cash Book with Discount Column or Double Column Cash book

RELATIONSHIP BETWEEN JOURNAL AND LEDGER

MASTER RECONCILIATION TABLE

What will be balance as per pass book?

5.TRIAL BALANCE, RECTIFICATION OF ERRORS & ADJUSTMENT ENTRIES

Nature of account Disposal

b Rent paid to landlord debited to landlord's personal account

* BEST OF LUCK **