Jaiib Crash PDF

JAIIB MADE SIMPLE
ACCOUNTING AND FINANCE FOR BANKERS

( JAIIB PAPER -2)
Version 1.0
(A Very useful book for Day to Day Banking and all

Knowledge Based Examinations)
COMPILED BY
Mr. SANJAY KUMAR TRIVEDY ( Sr. Manager & College-in-charge )
& Team RSTC, Mumbai
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REGIONAL STAFF TRAINING COLLEGE : MUMBAI
Maker Tower E , 13th Floor , 85, G D Somani Marg, Cuffe Parade , Mumbai 400005
Phone :22184871 22185980 Fax: email: rstccomcity@canarabank.com
Preface
Dear Friends,
Banking/Financial sector in our country is witnessing a sea change and banker’s business has
become more complex & difficult in this driven era of knowledge & technology. There are
mass retirements happening due to super annuation & many new recruits are joining the Bank.
More than 40% staff strength is newly recruited in last three to four years. An official
working in the Banking sector has to keep pace with Updated knowledge, skills & attitude, as
the same is required everywhere. There is need to issue a comprehensive book covering all
the aspects so that new recruits get updated very fast without referring many voluminous
books.
This book titled “ JAIIB MADE SIMPLE ” has many unique features to its credit & consists
of all topics/syllabus required for JAIIB examination with clear concept & simple language
with latest changes during 2015-16 ( upto June/July 2015 as per IIBF/ JAIIB exams.
requirement ) also included. This Book is divided into four Modules namely A,B,C & D &
Practice Teat Papers / Teat Yourself based on latest IIBF syllabus for JAIIB examination.
The Book also covers the full syllabus (latest) of JAIIB examination and also recalled
questions (one line approach & MCQ (based on IIBF examination Pattern ) will be helpful to
all aspirants who are taking up JAIIB examination
During preparation of this book, I have received tremendous support from Team RSTC,
Mumbai, many friends & colleagues especially my wife Mrs Renu, who is also a banker, my
son Master Ritwiz Aryan & our clerk Mr Sanjeev V Karamchandani. Special thanks to Sri B P
Desai Sir (Our Ex. AGM & now Faculty on Contract at RSTC,Mumbai ) for vetting &
compilation of this book.
As any work will have scope for some improvement, I shall be grateful if any feedback is
provided for improvement in contents of the book.
I wish you all the best for the written test & hope the study material will help in achieving the
goal.
Place: Mumbai SANJAY KUMAR TRIVEDY

Date: 16.11.2015 Senior Manager & College-in-Charge
RSTC, MUMBAI
Compiled by Sanjay Kumar Trivedy & Team RSTC, Mumbai 1|Page

CONTENTS
TOPIC PAGE NO.
1. ABOUT JAIIB EXAMINATION …………………….……03-05
2. MODULE : A ( B. MATHEMATICS & FINANCE)….…06-23
3. MODULE : (BOOK KEEING & ACCOUNTANCY ) .... 24-54
4. MODULE : C ( FINAL ACCOUNTS ) ............................. 55-79
5. MODULE : D ( BANKING OPERATIONS ) ........ 80-122
6. PRACTICE TEST PAPERS .......................................123-156

ABOUT JAIIB EXAMINATION
JAIIB & CAIIB EXAMINATION – Nov/Dec 2015
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.
MEDIUM OF EXAMINATION : Either in Hindi or English
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.
Reference: IIBF Monthly Magazine : VISION , June 2015, Page no. 7.
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
A. MULTIPLE CHOICE ( Each Questions 0.5 Marks )– QUESTIONS & ANSWERS ( 70-74QUES )
B. MULTIPLE CHOICE – ( Each Questions 01 Marks )– PROBLEMS & SOLUTIONS (18-20QUES)

C. MULTIPLE CHOICE – ( Each Questions 02 Marks )– APPLIED THEORY – QUES. & ANS.
(10 -14 QUES)
D. MULTIPLE CHOICE – ( Each Questions 02 Marks )– CASE STUDIES & CASE LETS (PROBLEMS &
SOLUTIONS ) ( 12-15QUES )
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
Type of Questions – Basically four types of Multiple Choice Questions asked in Exam of
Which Type – A : Concept based Straight Questions ( 70-71 QUES - 0.5 MARKS EACH ) ;
Type – B : Problems & Solutions (20-25 QUES - 1.0 MARKS EACH); Type – C : Applied
theory based Questions (10-15 QUES - 2.0 MARKS EACH) ; Type – D : Case Study & Case-
lets based Questions ( 10-15 QUES - 2.0 MARKS EACH )
DURATION OF EXAMINATION : The duration of the examination will be of 2 hours.

Important dates for JAIIB are First paper : Principles & Practices of Banking - 15.11.2015
Second paper : Accounting & Finance for Bankers – 22.11.2015
Third paper : Legal & Regulatory Aspects of Banking – 29.11.2015
PERIODICITY AND EXAMINATION CENTRES ; The examination will be conducted normally twice a
year in May / June and November / December on Sundays.
Pass : Minimum marks for pass in every subject - 50 out of 100 marks.
Candidate securing at least 45 marks in each subject with an aggregate of 50% marks in all
subjects of JAIIB examination in a single attempt will also be declared as having passed JAIIB
Examination.
Candidates will be allowed to retain credits for the subject/s they have passed in one attempt till the expiry
of the time limit for passing the examination as mentioned bellow:
TIME LIMIT FOR PASSING THE EXAMINATION
Candidates will be required to pass JAIIB examination within a time limit of 2 years (i.e. 4 consecutive
attempts). Initially a candidate will have to pay examination fee for a block of one year i.e. for two attempts.
In case a candidate is not able to pass JAIIB examination within 1st block of 2 attempts, he / she can appear
for a further period of 1 year (2nd block) i.e. 2 attempts on payment of requisite fee. Candidates who have
exhausted the first block of 2 attempts, should necessarily submit the examination application form for the
next attempt, without any gap. If they do not submit the examination form immediately after exhausting
the first block, the examination conducted will be counted as attempts of the second block for the purpose
of time limit for passing.
Candidates not able to pass JAIIB examination within the stipulated time period of two years are required to
re-enroll themselves afresh by submitting fresh Examination Application Form. Such candidates will not be
granted credit/s for subject/s passed, if any, earlier.
Attempts will be counted from the date of application irrespective of whether a candidate appears at
any examination or otherwise.
“CLASS OF PASS” CRITERIA

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 subjects as per the
passing criteria and secure prescribed marks for awarding class. Candidate re-enrolling for the examination
after exhausting all permissible attempts as per the time limit rule will not be considered for awarding class.
First Class : 60% or more marks in aggregate and pass in all the subjects in the FIRST PHYSICAL
ATTEMPT.
First Class with Distinction : 70% or more marks in aggregate and 60 or more marks in each subject
in the FIRST PHYSICAL ATTEMPT.
Candidate who have been granted exemption in the subject/s will be given "Pass Class" only.
JAIIB EXAMINATION – Nov/Dec 2015
(Last date for applying for examination : 28/08/2015)
ONLINE MODE
Examination DATE TIME SUBJECTS
ONLINE - Will be given in the admit

15/11/2015 Sunday Principles & Practices of Banking
Letter
22/11/2015 Sunday Accounting & Finance for Bankers
Letter
29/11/2015 Sunday Legal & Regulatory Aspects of Banking
Letter
Last Date for receipt of Change of Centre Requests at the respective Zonal Offices for the JAIIB Examination scheduled for
Nov 2015 : 10th October 2015
Revised Examination Fees inclusive SERVICE TAX @14% with effect from 1st June, 2015
(Examination Eligible for Members Only)
Sr. No. Name of the Exam Attempts Fee (Rs)
1 JAIIB First Block of 2 attempts 2736
Second Block of 2 attempts 2736

Module: A
BUSINESS MATHEMATICS AND FINANCE
Syllabus
Calculation of Interest and Annuities :Calculation of Simple Interest & Compound
Interest; Calculation of Equated Monthly Instalments; Fixed and Floating Interest Rates;
Calculation of Annuities; Interest Calculation using Products/Balances; Amortisation of a
Debt; Sinking Funds
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
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.
Depreciation and its Accounting :Depreciation, its types and methods; Comparing
Depreciation Methods
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.

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.
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 8% interest rate. The annual interest would be Rs.2400
i.e. (30000 x 1 x 8)1100. 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.
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.
FIXED AND FLOATING INTEREST RATES : There are two different modes of interest. They are
Fixed Rates & 2. Floating Rates also called as variable rates.
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.
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.
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.
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.
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
Present Value (PV) for Ordinary Annuity= C X [{1- (1+i)n}/i]
Present Value (PV) for Annuity Due = C X [{1- (1+i)n}/i] x (1+i)
For payment made at the end of 4th 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:
For amount received at the end of 11 year = 10000 (1 + r)1 = 10000 (1 + 0.05)1
= 9524
For amount received at the end of 2"d year = 10000 (1 + r)2 = 10000 (1 + 0.05)2 =
9070 For amount received at the end of 3'11 year = 10000 (1 + r)3 = 10000 (1
0.05)3 = 8638
For amount received at the end of 4th year = 10000 (1 + r)4 = 10000 (1 + .05)4
= 8227
For amount received at the end of 5111 year = 10000 (1 + r)5 = 10000 (1 + 0.05)5 =
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:
For payment made in the beginning of 15' year = 10000 (1 +r )4 = 10000 (1 + 0.05)4 = 12763
For payment made in the beginning of 2nd year = 10000 (1 + r)4 = 10000 (1 + 0.05)3= 12155
For payment made in the beginning of 3rd year = 10000 (1 + r)3 = 10000 (1 + 0.05)2= 11576
For payment made in the beginning of 4th year = 10000 (1 + r)2 = 10000 (1 + 0.05)1= 11025
For payment made in the beginning of 5111year = 10000 (1 + r)1 = 10000 (1 + 0.05)1= 10500
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
Compiled by Sanjay Kumar Trivedy & Team RSTC, Mumbai 10 | P a g e
For amount received at the end of 4`h year = 10000 (1 + r)1 = 10000 (1 + 0.05)1= 9524
For amount received at the end of 3 rd year = 10000 (1 + r) 2 = 10000 (1 + 0.05) 2 = 9070
For amount received at the end of 2 nd year = 10000 (1 + r) 3 = 10000 (1 + 0.05) 3 = 8638
For amount received at the end of 1 51 year = 10000 (1 + r) 4 = 10000 (1 + 0.05) 4 = 8227
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
PV =10000 * [(1-(1+0.05)51* (1+0.05) =10000 * 4.33 * 1.05 = 100000 * 4.5459 = Rs.45459

0.05
AMORTISATION OF DEBTS : 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 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)
{(1+r)"-1} ( r= rate per period)
SINKING FUND : 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)" -1 (F=Future value of an annuity)

F = A ----------- ,(A= Annuity)
( rate of interest)
Test your self
1. A student purchases a computer by obtaining loan on simple interest. The computer costs
Rs 15000 and the interest rate on the loan is 12 per cent. If, the loan is to be paid back in
weekly instalments over two years, calculate the following
a) The amount of interest paid over the two years , b)The total amount to be paid back
c)The weekly payable amount
2. Ramesh has one saving account with interest rate of 3.3% and one money market account
with interest rate of 5.1% in a bank. If he deposits Rs 1200 to the savings account and Rs 1800
to the money market account, how much money will he have after 6 years?
3. Your friend borrows Rs 1000 from you for purchase of a sofa. The loan will be repaid in a year.

She wants to pay the principal in 12 equal monthly instalments and interest as applicable on
monthly basis. How much amount will be payable at the end of the first month and second month
if interest rate is 8% p.a. (or 0.667% per month)
4. What will be the EMI for a loan of Rs 100,000 at an interest rate of 12% p.a. to be repaid in
12 months
5. You have deposited Rs 100,000 in the bank. You want that it should be deposited for such a
period that it is doubled. For how long you will have to deposit if interest rate is 9% assuming that
there is no TDS
6 A person deposits Rs 1000 at the end of each year for 5 years. If the interest rate is 5% per
annum, how much amount will he have at the end of 5 years? (Ordinary Annuity)
7.A person receives Rs 1000 at the end of each year for 5 years. If interest rate is 5% per annum,
what will be the present value of total amount received by him? (Ordinary Annuity)
8. In question no 6 if the amount is deposited at the beginning of each year, what amount will he
have at the end of 5 years
9. In question no 7, if the amount is received at the beginning of each year, what will be present
value of total amount received by him (Annuity due)
10. The population of an industrial town is increasing by 5 per cent every year. If the present
population is 1 million, estimate the population five years hence. Also estimate the population
three years ago.
11. Rama publishers buy a machine for Rs 20,000. The rate of depreciation is 10%. Find the
depreciated value of machinery after 3 years. Also find the amount of depreciation. What is the
average rate of depreciation?
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, that 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 make payment of interest or principal,
the company may be forced to in to bankruptcy as per the prevailing provisions of the law including
liquidation.
YIELD TO MATURITY : 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.
Test your self

1. A Bond whose par value is Rs 1000 bears a coupon rate of 12 per cent and has a maturity
period of 3 years. The required rate of return on the bond is 10 per cent. What is the value of this
bond if (PVIFA 10% 3 years is 2.487 and PVIF 10% 3 years is 0.751)
2. If a bond of face value Rs 1000 carrying a coupon interest rate of 8% is quoted in the market at
Rs 800, then what is the Current yield on the bond?
3.There is a bond with par value of Rs 1000. The market value of the bond is Rs 850. The
bond carries a coupon rate of 8% and has maturity period of nine years. What would be the
rate of return that an investor earns if he purchases the bond and holds until maturity?
4.There is a bond with a face value of Rs 1000, coupon rate is 10 per cent and period
of maturity is ten years. If the current market rate 10 per cent is changed to 11 per
cent, the price of the bond changes to In the above question, what is the interest rate
elasticity?
5.The face value of the bond is Rs 100,000. The coupon rate is 8%. The YTM is 6%. The time to
maturity is 5 years. Interest payments are made annually. What will be the Duration of the Bond?
What is Modified Duration? Calculate the percentage change in price of the bond if the YTM falls
by 100 basis points or 1% from 6% to 5%.
6.There are two bonds with the following features:

Bond A Bond B
Face Value Rs 100 Rs 100
Coupon Rate 14% 14%
Current Market Price Rs 100 Rs 100
Term to maturity 4 years 7 years
Coupon payment Annually Annually
(a) Compute the YTM of Bond A and B
(b) If the interest rate falls by 1% what would be the new market price of bonds
(c) What is the percentage change in the price of two bonds
(d) If interest rates increased by 1% what will be the current price of Bond A?
CAPITAL BUDGETING
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)
1 1000 0.901 2
9(1599)
2 1000 0.812 8( 787)
3 1000 0.731 7( 56)
4 1000 0.659 6603
The payback of 3.1 years in the above project = 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 Cash inflow NPV
(DCF) 10%
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 rate of return (IRR)
IRR is the rate of discount at which the net present value is ZERO. In the following example it is
34.62%. At this discount rate the discounted value of the net cash flow from a project is equal to
the amount which has been invested to obtain that net cash flow (in the following case, the
investment is 1500. At 30% discount, the NPV of cash inflow is 1633 and at 35% it is — 11, but at
34.62%, it will be 1500, making the net value as Zero).
Illustration:
The exact IRR would be 34.62% which can be worked out as under, at which the net present
value of the cash Inflow would be Zero which is (-) 11 at 35% and 133 at 30% discount rate.
(Lower discount rate + difference between two discount rates) X Net present value of the cash
flow at lower discount rate / absolute difference between the NPV of cash flow stream at two
discount rates.
= 30 + 5 (133/144) i.e. = 30 + 5 (.924) = 34.62%
Year Cash flow DCF-30% Discounted DCF-35% Discounted
0 Cash flow cash flow
(-)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
5 3250 1633 1489
Net position 1633-1500 = 133 1489-1500=(-)11This is initial investment. Hence an outflow.
Test your self

1.What is the discounting factor for 1 year % at 10rate? What is the discounting factor for 2 year
and 3 year at 10% rate?
2. Company A is considering a new piece of equipment. It will cost Rs 6000 and will produce a
cash flow of Rs 1000 every year for the next 12 years (The first cash flow will be exactly one year
from today). What is the NPV if appropriate discount rate is 10%?
DEPRECIATION
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
Though there are a number of methods for charging depreciation, but two methods are very common.
These are straight line method (SLM) also called fixed instalment method and written down value (WDV
— which is recognised by Income Tax department) also called diminishing balance method. Other
methods include annuity method, depreciation fund method, insurance policy method, depletion method
and machine hour rate method.
Depreciation = (Original cost— scrap value) / estimated life
(Scrap value is the sale price of the asset after it is estimated useful value )
Name of the method How charged
Fixed instalment or SLM Details given below
WDV Details given below
Annuity method Calculated from annuity table and is different according to rate of
interest and according to the period over which asset is to be written off
Depreciation fund Kept as fund and usedwhen asset is to be replaced. It is invested

in
securities and rate of interest is provided in sinking fund table.

Insurance policy It is similar to depreciation fund method but investment is made in
insurance company to which premium is paid. After fixed period the
maturity amount is received. Premium is equal to annual
depreciation
Depletion method Suitable for mines, queries etc as after extraction of the entire
quantity, the mine loses value. It is calculated as per tonne by
dividing the cost of mine by total quantity of mineral available.
Machine hour rate Life of machine is fixed in hours of work and depreciation is
calculated by dividing cost of machine by total no. of hours of which
machine is expected to be used.
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).
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 life. In the above example, the rate of
depreciation of 25% will be applied on Rs.180000 during the first year, while during the 2114 year it will be
on Rs.135000 (180000-45000), when the amount of depreciation would be Rs.33750 (25% of
Rs.135000).
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
depreciation 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 depreciation method during the 15' two years is
SLM and subsequently changed to WDV, the following adjustment would be needed.
Amount of depreciation for 15' two years would be Rs.40000 x 2 = Rs.80000 and written down value of
the asset Rs.120000 (2 lac — 80000). The amount of depreciation for the 3rd year would be Rs.30000
(25% of WDV of Rs.120000). This will result in increase in profit by Rs.10000 in the 3k1 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.
Journal entries :
Depreciation Dr , To fixed asset account Cr.
Illustrations:
1. Machinery worth Rs.82000 is purchased and the firm spent Rs.8000 on its installation. Its
effective commercial life is estimated as 10 years and scrap value Rs.10000. What will be written down
value at the end of 3rd year, under straight line method?.
Answer The amount of annual depreciation would be Rs.8000 (82000+8000-10000, 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?
Answer — For 151 year the amount of depreciation would be Rs.8000, for 2nd year Rs.7200 (80000-8000
x 10%) and for 3rd 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
4 A company purchased machinery worth Rs.4.00 lac on July 1st, 1999 and depreciation was provided
at 10% p.a. on SLM basis with yearly closing of Dec 315t. The company changed the method of
depreciation wef Jan 01, 2001 from SLM to WDV with change in depreciation rate to 15%. On July
01, 2002 the machinery was sold for Rs.2.40 lac. What is the amount of loss or profit to the
company ?
Solution -
Original value = Rs.4.00 lac
Depreciation up to 31.12.1999 = 20000(for1/2year)
Depreciation for the year ended Dec 00 = 40000
Depreciation for y.e. Dec 2001 @ 15% wdv =51000 (for Rs.340000)
Depreciation for 6 m ended June 30, 02 = 21680 (for Rs.289000)
Sale price realised = 240000
Total of all items above = 372680
Loss on sale = 27320
Total = 400000
5. A firm purchased certain machinery on January 01, 2003 for Rs.1 lac. It added more machinery on
July 01, 2003 for Rs.50000. 1/2 of the machinery purchased on January 01, 2003 was sold for
Rs.25000 on Dec 31, 2004. The rate of depreciation is to be assumed 20% and the annual closing
of accounts as on Dec 31. Find the value of machinery as on Dec 31, 2004.
Solution :
WDV of 1st machine as on Dec 31, 2004 would be Rs.30000 as under:
Original value = 1,00,000 2 years' depreciation @ 20% = 40000
Hence, WDV = 60,000
Sale of IA of machinery : Rs.25000
Loss on sale of machinery= 30000-25000 = 5000
Hence WDV = 600000-30000= 30000
WDV of 2nd machinery : Original value = 50,000 — depreciation of
1-1/2 year i.e. Rs.5000 + 10000 = 15000.
WDV = 50000 —15000 = 35000
Total WDV : 30000 + 35000 = 65000
FOREIGN EXCHANGE ARITHMETIC

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'.
CROSS RATES OR CHAIN RULE : When rate between two currencies is not directly available, it has
to be calculated through a 3rd 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 Rate to be used

Oct 12, 2008 date Oct 12, 2008 Cash/ Ready Rate
Oct 12, 2008 Oct 13, 2008 Tom Rate
Oct 12, 2008 Oct 14, 2008 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
Forward rate 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:
Spot Euro 1 = US $ 1.2010 — 0.0028 = 1.1982
In this case, the one month forward Euro can be sold at the following rate:
Spot Euro 1 = US $ 1.2000 — 0.0030 = 1.1970
Premium or discount on forward transactions

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 the spot 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.
Forward Premium 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 $ 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.
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
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
10 If the exchange of currencies (delivery) is to be completed on the 2rid 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

MODULE B
PRINCIPLES OF BOOK-KEEPING & ACCOUNTANCY
Syllabus
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.
Basic Accountancy Procedures : Concepts of Accountancy; Going Concern Entity;

Double Entry System; Principle of Conservatism; Revenue Recognition and Realisation;
Accrual and Cash Basis. Maintenance of Cash/Subsidiary Books and Ledger Record
Keeping Basics; Account Categories; Debit and Credit Concepts; Accounting and
ColumnarAccounting Mechanics; Journals; Ledgers; subsidiary books; etc.
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.
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.
Capital and Revenue Expenditure : Expenditure; Distinction between Capital and

Revenue Expenditure; Deferred Revenue Expenditure; Receipts; General Illustrations.
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.

DEFINITION, SCOPE AND ACCOUNTING STANDARDS
Accounting: An art of recording, classifying and summarising in a significant manner and in terms
of money, transactions and events, that are, in part at least, of a financial character and
interpreting the results thereof.
Financial Statement: A set of documents that shows the results of business operations during a
period, how the results were achieved and the position of assets and liabilities on a given date. It
normally means 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 relative schedules forming part of financial statement.
BOOK-KEEPING : 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, (b) 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 : 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) management
accounting.
Basic objective of accounting : To maintain records of business,To make calculation of profit or loss
To depict the financial position, To make the financial information available to the management and other interested
groups of users of the information.
VARIOUS KINDS OF ACCOUNTING

Financial Accounting : This accounting system is concerned with the financial state of affairs of a
business. The 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 accurate 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.
BASIC ACCOUNTING CONCEPTS

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.
Materiality concept : 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.
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. ASH 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.
No. Title of the accounting 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 1-4-1995
AS 5 (Revised) sheet dateor loss for the period, prior period items and 1-4-1996
Net profit
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 1-4-1995
AS 12 exchange rates
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 1-4-1995
statements 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 teased 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 1-4-2002
consolidated financial statements
AS 24 Discontinuing operations 1-4-2004/ 1-4-2005
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
Provisions, contingent liabilities and contingent
AS 29 In the process of being finalised
assets
INTERNATIONAL ACCOUNTING STANDARDS

At international level, the International Accounting Standards Board (earlier International Accounting
Standards Committee — IASC, 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.
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 and so 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
Expenditure beyond one year.
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 It is allowed when a buyer purchases goods above a certain quantity or certain
discount) 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
discount) invoice.
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 The expenditure which is incurred on purchase of goods or availing of services for
Expenditure 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.
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., and 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 persodal 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. Their
detailed study follows :
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) Interest outstanding account.
(d) Interest prepaid account.
(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 Use of cash for purchase of an assets e.g. purchase of machinery for cash
assets and decrease in which increases the balance in machinery account and reduces the balance
another asset in cash account. With this only the asset side of the balance sheet
undergoes change.
Decrease in asset and Withdrawal of cash by the promoter of the firm which reduces the
decrease in capital balance of cash and also reduces the capital. This changes the
composition of both sides of the balance sheet
Decrease in asset and Payment of dues payable to creditors of the firm which reduces the cash
decrease in liability balance on the one hand and the balance in the creditor's account on the
other hand (both sides effected)
Increase in asset and Purchase of an asset on credit say stocks of goods, which will increase the
increase in liability stocks and also the amount of creditors (both sides effected).
Increase in asset and Introduction of additional capital by the promoters of the business which
increase in capital increase balance in the 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 ORinterest/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 ORsalary
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
receipt received commission/discount 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 application for 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 Effect on balance when Effect on balance when account
account is debited is 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
MEANING OF DEBIT AND CREDIT BALANCE IN ACCOUNTS

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

BOOKS OF ACCOUNTING : JOURNALS & LEDGERS
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.
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 Cash account Capital account or any
with cash other
Purchase of assets or goods out Asset account or liability account
Cash account
of cash purchase
accountaccount
Purchase of assets or goods on Asset or Seller'saccount or
credit purchase Creditor's
account
Sale of assets or goods for cash Cash account 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 Expenses account (respective Cash account for cash payment. In
are due within the head) case of on credit, account of the
accounting supplier of the service
period
For any type of income due within Cash account for cash entry or Income Account (respective head)
the accounting period account of the buyer of services
for on-credit entry
For outstanding expenses Expenses account Outstanding expenses a/c

(respective
For pre-paid expenses head) expenses account
Pre-paid Expenses account
(respective
head) account (respective head)
For outstanding or accrued income Account of the person from whom Income
such income is to be received
For income received in advance Income account (respective head Income received in
of account) advance
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 Creditor's account Bank account
to creditors
Payment received by Bank account Debtor's account
way of 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:
1Purchased 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 Har ish Dr. 10000
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 25000
machinery
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
accoun c/d
t
Dr. Machinery account Cr

ate I Particulars I Folio I Amount [Date Particulars I Folio I Amount
To cash 25000 balance 25000
By
accoun
c/d
t
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 Bank account 42500
Goods account 410000 Machinery 285000 Creditors: 10000
Bank /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:
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.
Important points to be remembered:
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.
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.
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 It generally contains the balance in
of cash, bank, opening stock, fixed capital, creditors, all kinds
assets, discount allowed, debtors, income accounts, discounts received,
bills receivables, all kinds of bills payable, bank
expenses paid, drawings, purchase, sales overdrafts, purchase returns,
returns, bad debts, depreciation etc. sales, 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 only the balance in the account is placed
 Totals & Balance method : Where both these are placed simultaneously
 Totals excluding closed a/cs : Where total is placed for running accounts.
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
-While balancing the account of Mr. Ramesh the balancing was done for an
amount of Rs.8500 instead of Rs.9500
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.
How the errors affect Trial Balance

Error at the time of The ledger account would reflect wrong balance due to which the trial
posting to ledger balance will not tally
Error in carry - Due to wrong carry forward, the balance in the ledger account would
forward be different from what it should be. Hence trial balalice will not tally
Error inbalancing If a ledger is not balanced correctly, it will show a different balance due
the account to which trial balance will not tally
Error in casting trial If debit or credit balance from a ledger account is not taken correctly to
balance the trial balance both sides will not agree
Error inpreparing When there is any mistake in preparing creditors' or debtors'
schedules schedules, the total will be 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.
Different kinds of errors and method to rectify those 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)
BANK RECONCILIATION
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/ Cash Cash book Pass book Cr Pass book
Nature of book Cr (means (means Dr (means
transaction Debit overdraft) current a/c) overdraft)
Cheques, cash or other instrument (means
(-) CA) (+) (+) (-)
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
Illustration on reconciliation
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:
a cheques amounting to Rs.6300 which were issued to creditors and entered in the cash book before 31st
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
*This amount to non-presentation of cheque issued once but recorded twice, as the cheque will never
presented 2nd time once it is paid..
6 The balance in the cash book of a firm is Rs.4200 credit and on receipt of the bank statement, the
following items are not matching. What will be the balance as per pass book?
a cheque deposited and dishonoured Rs.1452
b an amount of Rs.212 relating to some other account has been credited in firm's account by the bank
c bank returned a cheque through mistake which the firm had issued for Rs.2042 for discharging its
liability towards a creditor.
Solution — This case falls in Category- II above, where the overdraft balance as per cash book has
been given. It can be placed in the following manner:
Balance given as per cash book: Rs.4200 Cr
A Cheque deposited, not credited + 1452 Rs. 5652 Cr
B Cheque issued, not presented - 2042 Rs. 3610 Cr
C Amount credited by bank - 212 Rs. 3398 Cr
Balance as per pass book Rs.3398 Dr
CAPITAL EXPENDITURE AND REVENUE 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.
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 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, Respective expenses a/c (profit Expenses outstanding (balance
wages, depreciation etc) and loss account) sheet)
Prepaid expenses Prepaid expenses (balance sheet) Respective expenses a/c (profit
(such as insurance, commission etc) and loss account)
Income accrued/due not received (Any kind Accrued income (balance sheet) Respective income account (profit
of income) and loss account)
income received in advance (any kind of Respective income a/c (profit and Income received in advance
income) loss account) (balance sheet)
Provision against doubtful debts Expenses provisions — doubtful Provision for doubtful debts
debts (profit and loss accounts) (balance sheet)
More provisions for doubtful debts (for the Expenses provisions — doubtful Provision for doubtful debts
additional amount only) debts (profit and loss accounts) (balance sheet)
Writing-off of bad debts Expenses : write-off bad debts Respective party's account
(when no provision is already available) (profit and loss account) (balance sheet)
Write-off of bad debts Provision for doubtful Respective party's account
(when provision is already held) debts (balance sheet) (balance sheet)
Write-off of bad debts Provision for doubtful debts Respective party's account
(when adequate provision is not held) (balance sheet) Expenses write- (balance sheet)
off of bad debts for shortfall
amount ( P & L Account)
Excess provision on doubtful debts Provision for doubtful Expenses provisions-

debts (balance sheet) doubtful debts (profit and loss
account)
Interest on capital not paid Expenses: Interest on capital Capital account /balance sheet)
(Profit and loss account)
Interest on drawings Capital or drawings account Income-interest on drawings (profit

(balance sheet) and loss account)

HOW VARIOUS ADJUSTMENTS AFFECT DIFFERENT ACCOUNTS
Transaction Trading account Profitiloss account Balance Sheet
Closing Credit Side Asset Side
Depreciation Debit side Reduction from Fixed

Asset
Expenses outstanding Addition to related exp. Addition to related To be shown as liability
a/c debit side exp. a/c debit side
Prepaid expenses Reduction from related Reductionfrom 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 Reductionfrom 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 Reduction from amount of
account to P&L a/c debtors
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.
SUMMARY OF ADJUSTMENTS WITH JOURNAL ENTRIES

Nature of 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 By net 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
BILLS OF EXCHANGE
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 declared to be public holiday by the Central Government) it falls due on

immediate next preceding business day. Since 26th Jan, 15th August and 2nd 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 month is taken into account. For example, a bill dated 31stDec payable two
months after date will fall due on 31st Feb without grace period. But since February has only 28 days,
28th February will be considered and after 3 days of grace, 3td 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.
In the books of the 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
E When bill is endorsed to 36d 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
In the books of the drawee
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
In the books of 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 with its bank at a discount rate of 5% and endorses the 2114 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:
Due date Amount No. of days from Product
starting from due date
Oct 08 5000 0 0
Nov 11 3000 34 102000
Nov 12 2250 44 99000
Dec 10 6000 63 378000
Dec 18 4000 71 284000
Total 20250 863000
No. of days = 863000 / 20250 = 43 days appx. Hence the average due date would be Oct 08 + 43 days
= Nov 20th.

MODULE C
FINAL ACCOUNTS
Syllabus
Balance Sheet Equation : Balance Sheet Equation; Computation of Balance Sheet
Equation.
Preparation of Final Accounts : Preparation of Trading A/C; Profit and Loss A/C; Profit &
Loss Appropriation Account; Balance Sheets
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.
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. 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 forAssets; Legal
Requirements for Liabilities; Legal Requirements for Profit & Loss A/c; Preparation of Final
Accounts
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 Softwares available in the Market; Computerization — Scope
and Experiences in Banking; The Core Banking Components; Information Security;
Internet and World Wide Web — Influences on Banking.

BALANCE SHEET
1. 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.
2. Balance Sheet /Financial Statements : 3 stage process - Classification of assets and liabilities ( as per
RBI guidelines ),Calculation of financial ratios Interpretation of ratios.
3. Audited Balance sheet : For credit limit ( FB + NFB ) upto Rs. 20 lacs no ABS, only unaudited BS but over
Rs.20 lacs ABS is must but for Agril. Related loans no ABS upto Rs. 100 lacs & only above Rs. 100 lacs
ABS in Agril. Credit ( FB + NFB ) is required. For company & other statutory body ABS always required
irrespective of Quantum of limit and similar in the case in business enterprises where turn over is Rs. 100
lacs or more- ABS. Gross receipt of Profession exceeds Rs.25 lacs- ABS required. As per IT rules Form
3CB & Form 3CD also required where ever it is applicable. In case of sticky accounts S-3, a special audit
report is required. Penal Interest of 2% on the outstanding liability shall be collected if ABS is not
submitted before 31st oct. every year ( within 07 month from closing year ) or within a fortnight from the
date of Audit of financial accounts of business unit which ever is earlier.
Terms used inFinancial statement analysis
1 Net Sales Gross Sales minus returns, discounts, excise duty.
2 Raw Materials consumed Opening Stock of raw materials plus purchases of raw materials less
Dosing stock of raw material .
3 Cost of Production Raw materials consumed, stores and spares consumed, power and
fuel, direct labour, repairs and maintenance, other manufacturing
expenses and depredation plus opening stock of stock in process
minus dosing stock of stock in process.
4 Cost of Sales Cost of production (3) plus opening stock of finished goods minus
dosing stock of finished goods.
5 Gross Profit Net Sales - Cost of Sales (Item 1 minus Item 1)
Gross Profit (5) minus interest, selling general and administrative
6 Operating Profit
expenses.
7 Net Profit before tax Operating profit plus other incomes minus other expenses
8 Net Profit after tax Profit before taxation minus provision for taxes.
9 Retained Profit Net profit minus dividend paid / dedared
10 Cash Profit Profit before charging Depreciation (Net Profit + Depredation)
11 Cash-Loss Loss before charging Depredation (Net Loss — Depredation)
_12 Assets Things owned by a business Not converted into cash in normal course
13 Fixed Assets of business, These are acquired to use them in the production of other
. goods and services.
14 Current Assets Assets which are meant to be converted into cash or consumed in
normal course of business say within 1 year. These are also called as
gross working capital.
15 Intangible Assets . Expenditure on invisible assets, likely to yield benefit to the company
in future e.g. goodwill, patent, trade marks, designs.
16 Fictitious Assets Which have notional value only e.g. losses, preliminary expenses.
17 Miscellaneous Assets or Which can't be classified as current, fixed or intangible e.g. inter
Non current assets Corporate investment
18 Tangible Assets Total asset side of balance sheet minus intangible assets.

19 Quick Assets Assets which can be converted to cash quickly. Cash, bank balances,
marketable investments, bills receivables and sundry debtors
considered goal. (Current Assets minus-Inventories & Prepaid
Expenses)
20 Liabilities Things owed by the business.
21 Owners Equity Paid up share capital, reserves and surplus, preference shares with
(Net Worth) more than 12 years maturity.
22 Long term liabilities or Debt Outsiders funds, payable in more than 12 months. Term loan
(exduding instalment payable within 12 months) plus debentures
maturing within more than one year, preference shares redeemable
within 12years, deposits payable beyond one year.
23 Current Liabilities Liabilities which are payable in less than one year e.g. sundry
creditors, unsecured loans, advances from customers, interest
accrued but not due, dividends payable, statutory liabilities,
provisions, Bank borrowings for working capital etc
24 Total Outside Liabilities Total of the liability side of balance sheet minus net worth
25 Tangible Net Worth Total tangible assets minus total outside liabilities. Owner's funds
minus Intangible & Fictitious assets ; Paid up capital plus reserves
minus intangible assets
26 Gross Working Capital Total of Current Assets
27 Net Working Capital Current assets minus total current liabilities. Long Term Sources
minus long term uses
28 Working Capital gap Current Assets minus current liabilities other than Bank Borrowings.
29 Long term sources Paid up capital, reserves and surplus (excluding specific reserves) i.e.
Net Worth and long term liabilities.
30 Short Term Sources Current Liabilities
31 Long Term Uses Fixed Assets, Miscellaneous or Non. current assets, Intangible and
Fictitious Assets (assets other than current assets)
32 Short Term Uses Current Assets
33 Contingent Liabilities Likely liability which may or may not arise on the happening or non
happening of an event
(i) As per RBI guidelines, installments of term loans due within 12 months are not to be treated as
current liability for calculation of Net Working Capital and Working Capital Gap. (ii) Overdue
instalments and Interest on term loan is treated as current liability. (iii) Sundry Debtors/ Book
debts older than 6 months are treated as Non current assets. (iv) Loans from friends and
relations are normally treated as Long term liability but if these are secured by Demand
Promissory Note i.e. payable on demand then the same should be treated as Current
Liability. (v)Reserves except which are in the nature of provisions like Depreciation Reserve
are part of net worth.
Format of Balance sheet

Liabilities Previous Year Current Year
Capital
Add/deduct net profit/loss –
Interest on capital -Drawings
Reserves
-Capital reserves -Other
reserves
Sinking funds
Loans and borrowings:
Loans from financial institutions
Loans and borrowings from banks
Fixed deposits
Others
Current liabilities:
Sundry creditors for goods supplied
Sundry creditors (others)
Advances/progress payments from
customers/deposits from dealers or selling
agents
-Interest and other charges accrued but not
due for payment
-Bills payable
Statutory liabilities
Other current liabilities
Provisions:
-Taxation (less advance tax ax paid)
-Provident fund
-Contingencies
-Others
Assets
Fixed assets:
-Goodwill
-Land
Building
Leaseholds
-Railway sidings
-Plant and Machinery -Furniture
and fittings
Development of property
-Patents, trademarks and designs -
Livestock
-Vehicles (cost less depreciation)
Advances and deposits on capital a/c
Investments:
-Shares and debentures or bonds -
Immovable properties
Capital of partnership firms
Others Loans
Current asset s :
Stocks of raw material, stock in process, finished goods
Suppliers and sundries
-Receivables
-Instalments of deferred receivables
due within one year
-Debts considered bad or doubtful
-Amount due from proprietors, partners
associate concerns
-Bills of exchange
Advances
-Suppliers of raw material/stores/
spares/consumables
-Advance payment of taxes (in excess of
tax payable)
-Pre-paid expenses
-Others
Cash and banks balances:
-Fixed deposits
-Current/saving account
-Cash on hand
Misc. expenditures to the extent not written off
Accumulated losses
Liabilities Assets
Net worth/Equity Funds brought in by the Fixed Assets :Assets which are purchased for long
promoters as their investment in business or term and not meant to be sold but used for
generated by and retained in business production.
Share capital/partner's capital/ Paid up Land & Building,Plant & Machinery
equity share capital,/owners funds Vehicles,Furniture & Fixture
Reserves & Surplus e.g. General Reserve, Office equipment,Capital Work in Progress These
CapitalReserve, Revaluation Reserve and are represented as under:
Other Reserves),Retained Earnings Original value (Gross Bock) Less depreciation
Undistributed Profits,Preference share Net Block or book value or written down
capital (not redeemable within 12 years) Value Method
Long term liabilities: Non Current Assets:

Liabilities which are not due for payment Assets which cannot be classified as current or
within 12 months from the date of the fixed or intangible assets Book Debts or Sundry
Balance Sheet) Debtors more than 6 months old/ Disputed Debts,
Term loans from financial institutions; Investment of long term nature in shares,
Term loan from banks; Debentures/Bonds; govt. securities, associates or sister firms or
Deferred payment liability;Preference companies. Long term security deposits. Unquoted
Shares redeemable within 12 years; investments; Investments in subsidiaries or sister
Fixed Deposits maturing after one year; concerns; Loans & Advances to directors, officers;
Provision for gratuity; Unsecured Loans 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 Current Assets : Cash in hand, Bank balance
which are due for payment within 12 including fixed ,deposits with banks. Stocks/inventory
months from the date of the balance sheet (such as raw material, stock in process, finished
and are to be repaid out of proceeds of goods, consumable stores and spares),Book
current assets,Short term borrowings from debts/Sundry debtors/Bills Receivable/ Accounts
banks (C/C, 0/D or B/P, B/D limits) for receivable/ debtors, Government and other trustee
working capital.,Sundry/trade securities
creditors/creditors/ Account payable,Bills (other than for long term purposes e.g. sinking
Payable / trade acceptances funds, gratuity funds etc.),Readily
Fixed Deposits from public payable within Marketable/quoted govt. or other securities
one year,Short duration loans or deposits meant for sale,Interest accrued and
Provision for taxation, Proposed Dividends, receivables,Advance payment of taxes,
Provision for bonus, unclaimed dividend. pre-paid expenses,Advance payments for
Deposits from dealers, selling agents etc. merchandise; 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.
BALANCE SHEET EQUATIONS
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
The following case-let 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 Total = Liabilities Capital
Old balance 37000 1000 6000 0 44000 = 4000 40000
Transaction 0 0 -5000 8000 3000 .-- 0 3000*
New balance 37000 1000 1000 8000 47000 = 4000 43000
"Goods have been sold on profit of Rs.3000 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)
Equation of Trading Account
The purpose of preparing the Trading Account is to calculate the Gross Profit or Gross Loss of a concern during a
particular period. The following equations are useful for determination of Gross Profit or Gross/ Loss :
Gross Profit = Sales - Cost of Sales
Sales = Cost of Sales + Gross Profit (or)
Sales = Stock in the beginning + 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.
RATIO ANALYSIS
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
The ratios can be classified as (a) Traditional ratios (b) Functional ratios:
1. Traditional classification — It is based on the source of information from financial statements. It can be
(a) Profit and loss account ratios (where information is taken from P & L account
(b) Balance sheet ratios (where the source of information is balance sheet and
(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) Profitability ratios

(b) Activity ratios or turnover ratios
(c) Solvency or leverage ratios or financial ratios. These can be short term solvency ratios like current ratio or long term
solvency ratios like debt equity ratio.
Types of ratios
As a banker, one would normally depend upon four types of ratios namely:
a: Liquidityratios,
b: Leverage or solvencyratios,
c: Profitabilityratios,
d: Activityratios.
LIQUIDITY RATIOS
The ratio which indicate the liquidity of the firm are current ratio, acid test ratio or quick ratio and net working capital.
1. Current Ratio
The current ratio is the relationship between the current assets and current liabilities. The ratio helps in knowing about the
liquidity position of a firm during the course of a year. It can be worked out as under:
Current assets / Current liabilities
2. Acid Test or Quick Ratio or Liquidity ratio

The quick ratio is the ratio between quick current assets and current liabilities. The ratio measures the capacity of the
organisation to pay off current liabilities of the urgent nature immediately.
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 be worked out as under:
Quick assets I Current liabilities

If the cash and bank balances are Rs.2 lac, receivables Rs.5 lac, quickly realisable securities Rs.1 lac and current
liabilities Rs.10 lac, the quick ratio would be 0.8:1.
LEVERAGE OR SOLVENCY RATIOS
The long term solvency can be judged by solvency ratios, most importance of which, is debt-equity ratio
and debt service coverage ratio (DSCR).
1. Debt Equity ratio

The ratio is important one since it shows the dependence of the unit on outside long term finance. A debt-equity ratio
of 2:1 is considered desirable by the banks and Reserve Bank. It can be worked out as under:
Long term outside liabilities/Tangible net worth

(Where long term outside liabilities are liabilities of long term nature and tangible net worth is total of capital and
reserves and surplus reduced by intangible assets.
Interpretation — Higher the ratio, more the pressure on 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.800 lac, the debt equity ratio would be 1.6:1. Similarly when the Debt equity ratio for a firm declines
say from 1.6 : 1 to 1.2:1, it is considered better.
2. Fixed Assets Ratio : 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)
3. Debtor service coverage ratio (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 intangible assets
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 following ratios could be worked out:
a: Inventory turnover:
Sales / Average stocks (average of opening and closing stocks) (it
can also be calculated as cost of sales / average stock)
b: Debtor turnover :
Sales / average debtors (average of opening and closing receivables) (it
can also be calculated as credit sales / average debtors).
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.
PROFITABILITY RATIOS
Profitability indicates the efficiency of the organisation in generation of income and surplus out of the
operations of main business.
1. Return on investment or Return on capital employed or Overall Profitability Ratio)

This is the basic profitability ratio and can let us know, as to how much the organisation is earning on its capital
employed. The ratio can be worked out as under:
Profit before tax and interest / Investment (or capital employed) x 100
Where, the 'return' is net profit before interest & tax and `investment or capital employed' means tangible net worth of
the share holders' funds and outside term 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 x 100).
2. Return on equity
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.3 lac 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. Operating Profit ratio
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. Earning Per Share (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 Short term lenders (Banks) Shareholders
Fixed charges cover = Quick ratio ---
Earning per share =
Income before interest Quick assets / current liabilities
Profit available for equity holders /
and tax /
no. of equity shares
Interest charges
Debt service coverage ratio = Current ratio = Dividend Yield ratio =
Cash profit for debt service / Current assets / current liabilities Dividend per share / market
annual interest and principal price per share
WHAT THE CHANGE IN RATIOS MEAN

If a firm realises book debts in cash — No change in current assets, quick ratio, current ratio or net
working capital.
If a firm realises old assets or non current assets in cash or sell fixed assets in cash: current assets,
quick ratio, current ratio or net working capital will all 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 %age in
receivables in total current assets.

PRACTICE TEST
Classify the following assets and liabilities for Balance Sheet of M/s Gopala & Govinda Company for
the year as on 31.3.2012.
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
OWNERS FUNDS FIXED ASSETS
Capital 2000 Land and Building 1500
Reserves 1000 Plant and Machinery 2500
B TOTAL(Net Worth) 3000 Vehicles 1000
LONGTERMLIABILITIES SUB TOTAL(Fixed Assets) 5000
Unsecured Loans 800 NON CURRENT ASSETS (NCA)
Term Loan 2000 Investment in Firms 300
Debentures 1200 Security Deposit 200
SUB TOTAL(Term Liabilities) 4000 SUB TOTAL (Total Non Current 500
Assets)
CURRENTLIABILITIES INTANGIBLE ASSETS
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 CURRENT ASSETS
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 (1000÷700)
400+300 = 700
Stock Turnover Sales ÷ Stocks 10000 ÷ 2000 5 times
Ratio
Drs T/o Ratio Sales ÷ Sy Debtors 10000÷1600 6.3 times
Debtors Velocity (Sy Drs÷Sales) x 12 (1600÷10000) 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%
FINAL ACCOUNTS
Final accounts, which include trading & manufacturing account, profit & loss account and balance sheet, are
prepared to know the financial position of a business organisation. These accounts include the closing balances in
various personal, real and nominal accounts and are prepared with the help of trial balance. While the personal and
real accounts are recorded as assets and liabilities in the balance sheet, the nominal accounts are included in the
trading & manufacturing and profit & loss account.
A trading & manufacturing and profit and loss account is divided generally in two parts :
a A trading and manufacturing account(for trading concerns only trading account),
b A profit and loss account,
Trading and manufacturing account
It is an account which shows the result of the buying, manufacturing and selling of goods. It summarises all the
transactions occurred during a trading/manufacturing period which have direct relationship to the goods dealt in
by the business. The various items (also referred to as Direct Cost) in a trading & manufacturing account could
be:
1: Opening stocks (of raw material, stock in process, finished goods & consumables)
2: Purchases less returns:
3: Duties and clearing charges
4: Wages (manufacturing)
5: Freight and carriage
6: Power and fuel
7: Factory rent
8: Misc. manufacturing expenses
9: Repairs to factory land and building
10: Maintenance charges of factory land and building
11: Gross profit transferred to Profit/Loss account
12: Sales less returns
13: Closing Stocks (raw material, stock in process & finished goods, stores and spares and consumables)
14: Gross loss transferred to profit/foss account
Profit and loss account

It takes into account those revenue and expenditure items which are related to management of the business
(excluding the items included in trading and manufacturing account — also referred to as Indirect Cost). These
expenses are directly related to conduct of the business other than manufacturing or trading aspects. The
items which are taken into account in a profit and loss account (and which would increase/ reduce the quantum
of net profit or increase/reduce the level of losses) are as under:
1: Gross profit brought forwards
2: Selling and distribution expenses
3: Packing charges
4: Carriage outwards
5: Publicity
6: Commission paid to sales-men
7: Provision for bad debts
8: Administrative expenses (such as salaries, rent and taxes, lighting & insurance, printing &
stationery, telephone charges, postage and telegram, legal expenses, directors' fees, auditors' fees
and other general expenses)
9: Financial expenses (such as Discounts allowed, interest on term loans, working capital and other
borrowings such deposits and unsecured loans and preliminary expenses written off)
10: Repairs and maintenance
11: Depreciation
12: Gross profit brought over
13: Discounts earned
14: Income from investments
15: Commission received
16: Interest received
17: Rent received
18: Income from any other sources
19: Net loss transferred to profit/loss appropriation account
Closing entries in respect of trading accounts:
1 For opening stock : debit trading account and credit stock account
2 For purchase returns : debit returns outward and credit purchase account
3 For sale returns : debit sales account and credit returns inward account
4 For purchases account : debit trading account and credit purchases account for net amount after
returns.
5 For expenses : debit trading account and credit the concerned expenses account such as wages,
custom duty, freight
6 For sales : debit sales account with net amount and credit trading account
Closing entries in respect of profit and loss accounts:
1 For expenses : debit profit and loss account and credit the concerned expenses account such as
salaries, insurance, depreciation etc.
2 For items of incomes : debit respective income accounts and credit profit and loss account
3 Transfer of profit to capital : debit profit and loss account and credit capital account
4 Transfer of loss to capital : debit capital account and credit profit and loss account.
Traditional & Manufacturing Account for the period ended :
To Opening stocks: By Sales
:Raw material less returns
:Stock in process by Closing Stocks:
:Finished goods :Raw material
" Purchase : :Finished goods
less returns by Gross loss transferred
to profit/loss account (in case of loss)
" Wages (manufacturing)
Freight and carriage
Gas, water etc.
" Power, fuel
" Factory rent
" Misc. manufacturing
expenses
" Repairs to factory
land and building
Maintenance charges of factory land and
building
" Gross profit transferred to ( Profit/Loss
account )
Total Total
Profit and Loss account for the period ended ………….

To Gross profit brought
forward (in case of loss)
" Selling and distri-bution expenses
" Packing charges
" Carriage outwards " Publicity
" Commission paid to sales-men
" Provision for bad debts
" Administrative expenses:
:Salaries
:Rent and taxes
:Lighting & insurance
:Printing & stationery
:Telephone charges
:Postage and telegram
:Legal expenses
:Directors' fees
:Auditors' fees
:Other general expenses
" Financial expenses:
:Discounts allowed
:Interest on loans
:Preliminary expenses
written off

" Repairs and maintenance
" Depreciation
" Net profit transferred to appropriation a/c
Total Total
ACCOUNTS OF COMPANIES
A joint stock company is formed by way of incorporation under the provisions of Companies Act 1956. Such
companies are artificial legal persons, having their own legal entity separate from members. It could be private
company or a public company or a govt. company. While a private company has minimum of 2 members and
maximum 50, a public or govt. company should have minimum 7 members without any upper ceiling. in case of
public company the minimum capital should be Rs.5 lac with minimum holding of shares of 25%, from members
of the public. The important documents which a company must have are Memorandum of Association,
Memorandum of Association, Certificate of Incorporation and Certificate of Commencement of business.
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 forsubscription. It can be
maximum up 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.40 lac (subscribed capital cannot be more than the issued capital)
Paid up capital = Rs.20 lac
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 cumulative or non-cumulative,
redeemable or non-redeemable, convertible or non-convertible and participating or non-participating.
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.
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 : 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 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.
4. 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.
5. 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 sharei 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
7 No. of shares for which 151 /final call money not received when called * - 1000
8 The company subsequently forfeits partly paid shares on which allotment money and 1st 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 @ Rs.2 per share — not received on 1000 shares)
On refund of ineligible application
Share application account. Dr.3000
To Bank account. Dr.3000
(being the full amount received and returned)
On refund of un-allotted application
Share application account. Dr.27000
To Bank account. Dr.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 Rs.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 @ Rs.5)
On transfer of amount in arrears on a/c of allotment of 1 5t 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 @ Rs.9 per share)
Share forfeited account. Dr.1000
(for 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
Date Particulars Dr Cr Balance
By share application 30000 30000
By share allotment 20000 50000
By share 1*call 50000 100000
To forfeited account 100.00 90000
By Bank — share application 10000 100000
Bank Account
To share application 60000 60000
To share allotment 18000 48000
To share 1* call 45000 93000
To share capital 9000 102000
Capital reserve account
By share forfeited a/c 2000 2000
Balance Sheet
Liabilities Amount Assets Amount
Share capital 100000 Bank 102000
Capital reserve 2000
Total 102000 102000

FINAL ACCOUNTS OF BANKING COMPANIES
Definition and Functions of a Bank
Definition of Banking : (Section 5-b of Banking Regulation Act 1949) Banking 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, order or otherwise.
As per Section 7, no firm, individual or group of individuals and no company other than a banking
company shall use, as part of its name or, in connection with its business, any of the words "bank",
"banker" or "banking" and no company shall carry on the business of banking in India unless it uses as
part of its name, at least one of such words.
Banks in India fall in 3 categories that include:
1. Banks being body corporates constituted under special Acts of the Parliament such as SBI
2. Banks being companies registered under Companies Act 1956 or a foreign company such as Axis
Bank Limited
3. Banks registered as Cooperative Societies under Central or State Act.
Functions of a Commercial Bank
Section 6 of the Banking Regulation Act, 1949 specifies the forms of business in which a banking
company may engage. These are:
(a) Receiving of money on deposit and providing facilities to constituents for payments by cheque.
(b) Dealing in securities on its own account and on account of customers.
(c) Lending of money by - (i) making loans and advances, (ii) purchasing or discounting of bills.
(d) Transferring money from place to place by - (i) the issue of demand drafts, telegraphic transfers, traveller's
cheques, etc., (ii) collection of bills.
(e) Issuing letters of credit.
(f) Safe custody of securities and valuables.
(g) Issuing guarantees.
(h) Acting as executors and trustees sometimes through subsidiary companies formed for that purpose.
(i) Buying, selling and dealing in foreign exchange.
(j) Acting as managers for issue of capital by companies and performing functions incidental thereto.
A banking company cannot directly or indirectly deal in the buying or selling of goods. However, it may buy,
sell or barter in connection with the bills of exchange received for collection or negotiation or can undertake the
administration of estates as executors, trustees or otherwise.
Requirement of Banking Companies as to Accounts and Audit

Date of final accounts of banking companies : As per Govt. notification, the accounts of banking companies
shall be closed as on March 31 every year (till 1989, these were closed as on December 31). Requirement of
preparation of final accounts: Section 29 of Banking Regulation Act 1949 stipulates that every banking
company shall prepare financial statements comprising Profit & Loss Account and Balance Sheet as at the close
of March 31 every year on the format prescribed for this purpose. RBI has prescribed Form A for balance sheet
and Form B for Profit and loss account as per 3rd Schedule. With effect from the year ended March 31, 2002
onwards, the balance sheet has to be prepared on the revised form, as given in this chapter.
Statutory Audit of final accounts: Under Section 30 of the Act, these accounts must be got audited by a person
qualified under any law for the time being in force, to be an Auditor of a company. Banking companies have to seek
permission of RBI for appointing, re-appointing or removing any auditor.
Submission of audited final accounts to RBI: U/s 31 a banking company is required to submit the balance
sheet and auditors' report within 3 months from the end of the period to which they refer. RBI may extend
this period, on an application from the bank concerned, by 3 months.
Publication of final accounts: Banking companies are also required to publish the final accounts and
auditors' report within 6 months from end of the period to which they relate, under Rule 15 of Banking
Regulations (Companies) Rules 1949.
Types of books maintained by banks: For their day to day operation and control purpose banks
maintain various kinds of books. These books include cash books, ledgers, registers etc.
Significant Features of Accounting Systems of Banks

The book-keeping system of a banking company is different from that of a trading or manufacturing enterprise. A
bank maintains a large number of accounts of various types for its customers. As a safeguard against any payment
being made in the account of a customer in excess of the amount standing to his credit or a cheque of a customer
being dishonoured due to a mistake in the balance in his account, it is necessary that customers' accounts should be
kept up-to-date and checked regularly.
A bank has to enter into the ledgers. every transactions as soon as it takes place.
The main characteristics of a bank's system of book-keeping are as follows:
(a) Voucher posting — Vouchers are loose leaves for recording entries in to journals or cash books, on which
transactions are recorded as they occur. Entries in the personal ledger are made directly from vouchers, in banks,
instead of being posted from the books of prime entry i.e. journal or cash book.
(b) Voucher summary sheets - The vouchers entered into different personal ledgers each day are summarised
on summary sheets, totals of which are posted to the control accounts in the general ledger.
(c) Daily trial balance - The general ledger trial balance is extracted and agreed every-day.
(d) Continuous checks - All entries in the detailed personal ledgers and summary sheets are checked by
persons other than those who have made the entries. A considerable force of such check is employed, with the
general result that most clerical mistakes are detected before another day begins.
(e) Control Accounts - A trial balance of the detailed personal ledgers is prepared periodically, usually
every two weeks, agreed with general ledger control accounts.
(f) Double voucher system - Two vouchers are prepared for every transaction not involving cash - one
debit voucher and another credit voucher.
Principal Books of Accounts
Banks maintain different type of books, which fall in the following categories:
a) The General ledger contains accounts of all personal ledgers, the profit and loss account and different asset
accounts. The accounts in the general ledger are arranged in such an order that a balance sheet can be readily
prepared there from.
There are certain additional accounts known as contra accounts which are a feature of bank accounting. These are
kept with a view to keep control over transactions which have no direct effect on the bank's position e.g., letters of
credit opened, bills received or sent for collection, guarantees given, etc.
b) Profit and loss ledger So.rne banks keep one account for profit and loss in the General Ledger and maintain
separate books for the detailed accounts. These are columnar books having separate columns for each revenue
or expense head. Other banks maintain separate books for debits and credits. These books are posted from
vouchers. The total of debits and credits posted are entered into the Profit and Loss Account in the General
Ledger. In some banks, the revenue accounts are also maintained in the General Ledger itself, while in some
others, broad revenue heads are kept in the General Ledger and their details are kept in subsidiary ledgers.
For management purposes the account heads in the Profit and Loss ledgers are more detailed than those shown in
the published Profit and Loss Account of the bank. For example, there will be separate accounts for basic salary,
dearness allowance and various other allowances, whicl) are grouped together in the final accounts. Similarly,
various accounts concerning general charges, interest paid, interest received, etc., are maintained separately in the
Profit and Loss ledgers.
Subsidiary Books
(a) Personal Ledgers
(b) Bill Registers
Other Subsidiary Registers
There are different registers for various types of transactions. Their number, volume and details will differ
according to the individual needs of each bank. For example, there will be registers for :-
(a) Demand Drafts, Telegraphic Transfers and Mail Transfers issued (drawn) on Branches and Agencies.
(b) Demand drafts, Telegraphic Transfers and Mail Transfers received from Branches and Agencies.
(c) Letters of Credit.
(d) Letters of Guarantee.
Departmental Journals
Each department of the Bank maintains a journal to note the transfer entries passed by it. Other
Memorandum Books
a) Cash Department
b) Teller Payment System
Clearing transactions
Outward Clearing:
d) Inward Clearing
e) Loans & Overdraft Departments
f) Deposits Department
g) Establishment department
h) General
The Banking Regulations Act, 1949 prescribes Schedules 1 to 16 only. Any other schedule prepared by a
Banking company besides what is specified in the Third schedule of the Banking Regulations Act, 1949, is
only for better understanding of their financial statements.
Accordingly, banks in addition to the above 16 schedules, may prepare :
(i) Schedule 17 for Notes on Accounts and
(ii) Schedule 18 for Disclosure of Accounting Policies.
Summary of disclosures (RBI Master Circular Jul 01, 2014)
There are 3 groups of disclosures, namely
(1) General disclosures,

(2) Disclosures related to Accounting Standards and
(3) Additional disclosures.
In addition there are Basel Committee disclosures.
Accounting Treatment of Specific Items

1. Discounting, Collection & Acceptance of Bills
1Rebate 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.
Collection of Bills:
As an alternative, the bank can collect a bill for a customer. The particulars will be recorded in a separate book
called Bills for Collection Register. Bills sent for collection have to be shown by way of Note as per Third Schedule.
Two Accounts have to be opened. They are mirror images of each other. They are:
(i) Bills for Collection (Asset)
(ii) Bills for Collection (Liability)
Acceptance and Endorsement:
Such Acceptance (Liabilities) which are outstanding at the close of the year and the corresponding asset (security)
is disclosed as Contingent liability. As a safeguard against the customer not being able to meet the demand of the
bank in this respect, usually the bank requires the customer to deposit a security equivalent to the amount of the bill
accepted on his behalf.
If the bill, at the end of its term, has to be retired by the bank and the amount cannot be collected from
the customer on demand, the bank reimburses itself by disposing of the security deposited by the
customer. Drafts and telegraphic Remittances:
When a bank issues a bank draft on another bank or on its branch, it credits the account of the bank or that of the
branch with amount of the draft. The corresponding debit is raised in the account of the customer. His account is
also debited with the remittances. A similar procedure is adopted in case of telegraphic transfer made on account of
customers.
Letters of Credit and Travellers' Cheques:
These are issued as a facility to travellers within the country or abroad. In either case, the person desiring such
instruments of credit, to be issued in his favour or some other party is made to deposit the full value of the letter of
credit or travellers' cheques issued in his favour.
The amount deposited by the customer is placed to the credit of Letters of Credit Account or Travellers' Cheques
Account, as the case may be. When the bills of Exchanges drawn against the Letters of credit are received for
payment, the amount is debited to the Letter of Credit Account. Similarly, the travellers' cheques, when presented
are debited to the Travellers'
FINAL ACCOUNTS OF BANKING COMPANIES

Preparation of Financial Statements and Accounting Date (Section 29)
1. 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.
2. The format of the balance sheet and the profit and loss account in which the accounts of bank
should be presented is given in the third schedule of the Banking Regulation Act. Form A is for
proforma balance sheet and form B for proforma profit and loss account. The accounts of the
banking companies shall be closed on 31st March every year.
Signatures: As per Section 29 of the B R Act, 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 provisions of section 29 are also
applicable to nationalised banks, State Bank of India, its subsidiaries, and regional rural banks.
Audit: As per Section 30 of the B R Act, accounts must be audited by a person, duly qualified under
any law, to be an auditor of companies. However, every banking company is, required to obtain the
prior approval-of the Reserve Bank of India before appointing, reappointing or removing any auditor.
Submission of Accounts (Sees 31 and 32)

As per Section 31 of the B R Act, three copies of the balance sheet and profit and loss account
together with auditors' report must be submitted to RBI within three months from the end of the
period to which they refer. It can be extended by RBI up to a further period of three months.
As per Section 32 of the B R Act, a banking company (but not other types of banks) to furnish three
copies of its annual accounts and auditor's report to the Registrar of Companies at the same time
when it furnishes these documents to the RBI.
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.
Accounting System in Banks
1. Banks, follow the mercantile system of accounting as followed by other firms.
2. However, in the case of banks, ledger containing accounts of customers must be kept up to date
and every transaction must be entered into the ledgers as soon as it takes place.
3. In the case of banks, lesser emphasis is placed on books of prime entry such as cash books or journals.
4. Banks follow the accounting procedure of voucher posting'.
Bankers' Books:
1. As per Bankers' Books Evidence Act, 'Bankers' Books' include ledgers, day book, cash books,
account books and all other books used in the ordinary business of a bank.
2. Cash Book: All cash receipts and payments are recorded in the receiving cashier's cash book and
paying cashier's cash book respectively. After this, on the basis of pay in slips received by
the receiving cashier and cheques and withdrawals by the paying cashier, transactions are
entered first in the accounts of customers and after that Day Books are written. This is called the
'Slip System' of posting.
3. Ledger Book: General Ledger contains the total accounts of each ledger. Besides GL, other
ledgers are -
1.Current Accounts Ledger; 2.FD Accounts Ledger; 3. RD Accounts Ledger; 4. Saving Bank
Ledger; 5.
Loan Ledger; 6. Investment Ledger 7. Bills discounted and purchased Ledger
4. Other Books: 1. Clearing Register; 2. Securities Register; 3. Draft Register; 4. Bills for collection
Register; 5. Safe deposit vault Register; 6. Dishonoured cheques Register; 7.Letter of credit
Register;
8. Bank Guarantee Register; 9. Standing Instructions Register.
Principal Books of Account
General Ledger:
1. contains the control accounts of all personal ledgers, the profit and loss account and asset and
liability accounts.
2. Contra accounts are also kept to keep control over transactions which have no direct effect on the
assets and liabilities of the bank e.g. letters of credit opened, bills received or sent for collection,
guarantees given, etc. Profit and Loss Ledger
1. Generally, banks maintain a profit and loss account in the general ledger and separate books for
each revenue or expense head/sub-head.
2. These books are prepared from vouchers. The totals of debits and credits each day are posted to
the profit and loss account in the general ledger from voucher summary sheets. Generally, broad
revenue heads are kept in the general ledger and their details are kept in subsidiary ledgers.
3. The account heads in the profit and loss ledgers of a branch are more detailed than those shown
in the published profit and loss accounts of banks.
Subsidiary Books
Personal Ledgers: In respect of control accounts relating to accounts of customers, subsidiary
ledgers are maintained for various types of deposit accounts containing accounts of individual
customers and various types of loan and related accounts (cash credit, term loans, demand loans,
bills purchased and discounted, letters of credit, bank guarantees issued etc.). Generally, separate
ledger is not maintained for overdraft accounts which are part of current account.
Bills Registers
Details of different,types of bills are kept in separate registers like bills purchased, inward bills for
collection, outward bills for collection register etc.. Entries are entered serially on a daily basis in
separate registers. For bills purchased or discounted, party-wise details are also kept separately to
ensure that the sanctioned limits of parties are not exceeded.
In respect of bills for collection, contra vouchers reflecting both sides of the transaction are prepared at the
time of the original entry, and this entry is reversed on realisation.
Other Registers/Records: These registers/records do not form part of the books of account but support
the entries/balances in the various accounts. For example - (a) Drafts issued; (b)Drafts paid; (c) Issue and
payment of Bankers cheques/Pay orders/Traveller's cheques/Gift cheques; (d) Letters of credit; (e) Letters
of guarantee.
Financial Statements of Banks
A banking company is required to prepare financial statements in accordance with Schedule Ill of the
Companies Act, 2013.
Banking Regulation Act has prescribed Form A, the format of a balance sheet and form B, the format
of a profit and loss account.
Capital and Liabilities side
Capital
Reserves and Surplus
Deposits
Borrowings
Other Liabilities and Provisions (including Bills Payable, Inter Office (or Branch) Adjustments (Net),
Interest
Accrued, Others (Including Provisions)
Total
Assets side
Cash and Balance with RBI
Balances with Banks and Money at Call and Short Notice
Investments
Advances
Fixed Assets
Other Assets
Total
Contingent Liabilities
(I) Claims against the bank not acknowledged as debts
(II) Liability for partly paid investments Outside India
(III) Liability on account of outstanding forward exchange
contracts
(IV) Guarantees given on behalf of constituents: (i) In India; (ii)
(V) Acceptances, endorsements and other obligations
(VI) Other items for which the bank is contingently liable Total:
Preparation of Profit and Loss account

Form 'B' Third Schedule Form of Profit and Loss Account Profit and Loss Account
I. Income:
Interest
Earned Other
Income
II. Expenditure:
Interest Expended
Operating
Expenses
Provisions and Contingencies
Total
III. Profit/Loss:
Net ProfiV(Loss) of the Year
Total
IV Appropriations:
Transfer to Statutory Reserves
Transfer to other Reserves
Transfer to Government Proposed Dividend
Balance Carried over to Balance Sheet
Total

ACCOUNTING IN A COMPUTERISED ENVIRONMENT
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:
 Capturing of business transactions as accounting entries
 Use of accounting entries for final accounts preparation
 Preparation of final accounts as per Accounting Standards prescribed by the ICAI
 Generation of analytical information.
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 requirement for computerized accounting:
 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 receivable management
 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;
 maximising profitability of 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 remittance services
 Anywhere banking and ATMs
 Tele-Banking
 Home banking
 Cash management
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 Computerised accounting 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 between Manual accounting and Computerised accounting
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 No such data duplications is

the books of original made. In order to produce ledger
entry are further accounts the stored transaction
classified by posting data is processed to appear as
them into ledger classified so that same is
3. Summarising accounts. This results in presented in the form of report.
transaction data duplicity The generation of ledger
Transactions are accounts is not necessary
summarised to produce condition for trial balance.
4. Adjustin trial balance by
g ascertaining the balances There is nothing like making
Entries of various accounts. adjusting entries for errors
Adjusting entries are and rectifications.
5. Financial
made to adhere to the The preparation of
principle of matching. financial statements
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

MODULE D
BANKING OPERATIONS
Syllabus
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.

BANKING OPERATIONS
The Banking Regulation Act 1949 (Section 5-c) defines a banker as a person, undertaking business of
banking. Banking means (Section 6) accepting deposits from public, for the purpose of lending,
repayable on demand or otherwise, withdrawable by cheque, draft, order or otherwise.
Definition of Bank & Banking: Bank is one which conducts business of banking. Banking has been
defined in Section 5 of Banking Regulation Act.
CUSTOMER : There is no legal definition of a bank customer. When customer tenders an account
opening form to open the a/c and banker accepts it, a contractual relationship is established. KYC
definition of customer: As per RBI, for KYC policy purpose, a 'Customer may be defined as
a person or entity that maintains an account with the bank and/or has a business relationship with the
bank;
FUNCTIONS OF A BANK:
Main functions: As per section 5 of the Banking Regulation Act, Banking 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. The Act further says that 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.
Incidental business: As per Section 6 of the Banking Regulation Act, 1949, banks can engage in certain
classes of business which are incidental to the business of banking like Lockers, Safe custody, Collection of
cheques etc. Prohibitions: As per Section 8 of B R Act, a bank is prohibited from buying, selling or dealing in
goods except in connection with the realisation of a security held by it or for collection or negotiating bills of
exchange.
Main function of a bank are: (a) Accepting Deposits of money from public; (b) Granting loans and
advances Deposits
1. Deposit accounts is the core activity of the bank. Deposits are major resource of the bank.
2. Banks accept demand deposits which are withdrawable on demand, Saving Deposits,
Term deposits and open current accounts.
Loans and advances:
1. Banks grant advance through Overdraft, Cash credit, Demand Loan, Term Loans, Purchase or
Discounting of Bills.
2. Loans are given mainly to corporates, businessmen and small borrowers.
3. Loans are given against securities created from out of bank funds, personal security or goods,
movable or immovable in nature.
4. Type of advances: Advances on the personal security of the debtor, or and for which no tangible or
collateral security is taken; Advances which are covered by tangible or collateral security; Loans against
the security of Fixed Deposit receipts; Housing Loan; Educational Loan; Loans against
Shares/Securities/debentures; Loans against National Savings Certificates, KVPs, etc; Consumer
Loans; securitization of Loans; venture capital advances, gold loans, etc.
Other functions of banks:
1. Dealing in securities, on its own account or on behalf of its customers. .
2. Opening letters of credit/issuing guarantees.
3. Dealing in foreign -exchange.
4. Remittances: through demand drafts, RIGS, NEFT, etc.
5. Collection of cheques, drafts, pay orders, travellers cheques, dividend and interest warrants, tax refund
orders,
6. Collection of trade bills
7. Receipt of Foreign Contribution on behalf of the registered persons/Organization
8. Cash Management Product
9. Automated Teller Machines (ATMs)
10. Depository Participant (DP) Services
11. Handling Government Business
12. Acting as trustees and executors.
13. Merchant banking, i.e. acting as managers to a public issue, etc.
14. Safe-keeping Services
15. Lockers
16. Credit Cards/Debit Cards
17. Securitisation of future lease rentals
18. Derivatives
19. Prepaid Payment Instruments
Para Banking services performed by banks
1. Equippament Leasing, Hire Purchase and Factoring Services through subsidiary companies
2. Investment in Venture Capital Funds (V CFs)
3. Mutual fund business: sponsoring mutual funds and marketing the mutual fund units.
4. Money Market Mutual Funds (MMMFs) which come under the purview of SEBI regulations but RBI
approval required before approaching SEBI for registration.
5. Portfolio Management Services: Though banks can not undertake Portfolio Management Services on their
own, bank-sponsored NBFCs can offer PMS to their clients subject to following conditions - (a) Funds
accepted for portfolio management from their clients, should not be entrusted to another bank for
management; (b) 'PMS' should be in the nature of investment consultancy/management, for a fee, at the
customer's risk without guaranteeing, a pre-determined return.
6. Primary Dealership Business.
7. Retailing of Government Securities
8. Underwriting of Corporate Shares and Debentures
9. Underwriting of bonds of Public Sector Undertakings
10. Sponsors to Infrastructure Debt Funds (IDFs)
11. Insurance business: Through risk participation or Bancassurance or Insurance broking
12. Pension Funds Management through subsidiaries (not departmentally) with prior approval of RBI
and as per eligibility criteria prescribed by Pension Fund Regulatory and Development Authority
(PFRDA).
FRONT OFFICE AND BACK OFFICE IN A BANK
Front office:
1. Refers to bank's departments that come in contact with clients.
2. Front office include the marketing, sales, and customer relations operations of the bank.
3. The front office staff directly produces the revenue.
4. Generally, the branches of banks perform the function of the front office by receiving deposits and
making loans and advances - as well as providing other banking services.
5. _Due to computerization in banks, many of the front office functions like fund withdrawal/transfer,
accepting cheque book request, balance inquiry, statement of account have been converted into back
office functions by using ATM/Internet banking/Mobile banking. Use of technology, to replace front office
activities, results in cost savings and economies of scale.
Back Office:
1. Back office staff, perform administrative and other support functions for the front office.
2. Although the operations of a back office are not prominent, they are a major contributor to the
banking business.
3. Back offices may be located other than the bank branch with cheaper rent and lower labour costs.
4. Back office functions can be outsourced to consultants and contractors, including ones in other countries.
5. The Head office and the' Regional/Zonal offices do not conduct any banking business and are
generally responsible for administrative and policy decisions. But, accounting for treasury functions
(viz., investments, funds management, bill re-discounting) is usually carried out at the head office.
Specialised activities like merchant banking are carried on by separate divisions which operate at
the head office and/or at large designated branches.
6. Specialised branches: Banks have set up branches exclusively for a specified segment of their clients like
Personal Banking branches (catering to the needs of individual customers), Commercial or Industrial
Finance branches (catering to the needs of industries in the small, medium and/or large sectors), Recovery
branches (focusing on reduction of non- performing assets of the bank).
OUTSOURCING OF SERVICES BY BANKS

"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.
Advantages of Outsourcing :Reduction in costs as well as use of expertise not available internally.
Scope of RBI guidelines on outsourcing:
(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
(f) Evaluating the capability of the service provider
(g) Outsourcing agreement
(h) Confidentiality and security

(i) Responsibility of DSA/DMA/Recovery Agents (j) Monitoring of outsourced activities
(k) Redressal of grievances related to outsourced services
(l) Reporting of transactions to Financial Intelligence Unit
(m) Off-shore outsourcing of financial services
Activities which cannot be outsourced: 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 investment portfolio. Operational Risk Associated with Outsourcing of Activities
1. Requirement to process high volumes of transactions within a short time through the large-scale use of IT.
2. 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.
3. 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.
4. Intra-day payment risk.
5. 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.
6. The need to adhere to differing requirements, thereby, leading to risk that operating procedures may
not comply with regulations in all the jurisdictions.
OPERATING INSTRUCTIONS IN BANKS: Banks should establish formal operating procedures, well-
defined limits for individual discretion and rigorous systems of internal control as banks are exposed to
exceptional risks like
1. Custody of large volumes of cash and other monetary items, like negotiable instruments requiring
physical security in the storage and the transfer of these instruments-with a scope for frauds.
2. Large number of transactions involving large amounts requiring complex accounting and internal
control systems. Though manual operations replaced by technology driven processes, but checks
required to avoid frauds.
3. Transactions are initiated, recorded and managed at different locations.
4. Geographically dispersed wide network of branches and departments, involving foreign offices also
requiring greater decentralisation of authority and control functions with difficulties in maintaining
uniform operating practices and accounting systems.
5. 'Off-balance sheet' items, may not involve accounting entries and may be difficult to detect.
6. Completion of transactions directly by the customers, over the Internet, mobile banking or through
Automated Teller Machines (ATMs).
7. As the banks are linked to national and international settleMent systems, they could pose a
systemic risk.
BANKING OPERATIONS MANUAL
Objective: To provide a ready guide to the front office functionaries in - in day-to-day banking
operations. Used for standardizing the procedures. Provides up-to-date instructions on Banking
operations.
Basis of Manual: Extant banking law practices. It needs frequent updating to cover RBI guidelines and
for implementation of Core Banking Solutions.
Coverage:
1. Each bank has its own Banking Operations Manual. While the basic structure of the manual ofeach
bank is similar, as it is based on the same legal framework and RBI guidelines, the differences are
because of specialized products and policies/practices based on the peculiar conditions of each
bank. For example, activities like opening of accounts, compliance with KYC norms, handling cash,
clearing, loans and advances, remittances, etc are undertaken by every bank
2. Mainly covers the aspects which are currently relevant to the Bank.
3. Not a document to provide any full- fledged legal framework of banking operations and not a
rigorous substitute for extant circular instructions.
4. Contains important aspects of Banking operations for reference of the functionaries at the delivery
point of the customer services in the Bank.
5. The customer relationship policy of the Bank and also the customer service norms of the Bank.
Preparation of vouchers
There are 2 types of transactions in a bank, cash and non-cash. The non-cash transactions also called 'transfer
transactions'. In various transactions, one or both of the accounts concerned may be of the customers or the
internal accounts of the bank. For example, if 2' deposit a cheque drawn in his favour by 'Y' who is also a customer
of the branch, the accounts of the two customers will be affected. On the other hand, if 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 : The debit as well as the credit operations in different accounts, either by customers or by
the bank itself, are made by means of vouchers.
There are two kinds of vouchers (1) which evidence only debit or credit to an account, and (2) which contains both
debit and credit to different accounts. The 2nd category of vouchers may be called 'composite vouchers'.
Types of debit vouchers :
The debit vouchers are created out of the following transactions:
1. Cheques issued by the customers.
2. Cheques/pay orders issued by the bank.
3. Withdrawal forms received from the savings bank account holders.
4. Drafts issued by other branches, of the bank payable at the branch.
5. Draft issued by other banks on the branch, in terms of an approved arrangement between the two banks.
6. Dividend/interest warrants issued by the bank's customers and payable by the branch in terms of an
approved arrangement.
7. Traveller's cheques issued by any branch of the bank which are presented to the branch for payment.
8. Drafts/pay orders issued by the branch itself which are cancelled at the request of the customer and
amount is refunded to him.
9. Instruments like traveller's cheques/gift cheques, etc., of other banks which are paid by the branch in
terms of an approved arrangement.
10. Letters of authority signed by the customers, containing standing instructions
11. Debit vouchers prepared by the branch on its printed stationary which are authorised by designated official of the
bank and may also carry authority from the customers in some cases if the debit is to his account at the branch.
12. In respect of realization of collection instrument sent to other branches of the bank, a debit advice (which may
be known by different names in different banks) prepared by the other branch may itself as a debit voucher.
13. In case of remittance of funds by one branch to the other by means of telegraphic transfer or a mail
transfer. The bank may treat the advice of transfer itself as debit voucher or may prepare a separate debit
voucher.
Credit vouchers: The credit vouchers are created out due to the following transactions:
1. Pay-in-slips filled up the customers (depositors as well as borrowers) for deposit of amounts in their accounts.
Generally, the pay-in-slips are in a standard format adopted by the bank but there may be cases of a special kind of
pay-in-slips in respect of some customers pursuant to a formal agreement between the bank and the customer.
2. Applications for issue of demand drafts, mail transfers, telegraphic transfers, banker's cheques pay orders, gift
cheques, traveller's cheques and other similar instruments. Some of these applications may be made on behalf of
the branch itself for the payments it has to make.
3. Challans for deposits into the accounts of Central/State Government, e.g. on account of direct/indirect taxes or
under schemes like public provident fund, etc.
4. Credit vouchers prepared by the branch on its printed stationary which are authorised by an official of the bank.
Normally, these vouchers are signed on behalf of the branch only but there may be some instances where the
customer concerned also signs on the voucher as evidence that the transaction actually pertains to him. Examples
are: deposit of locker charges (credit to an income account of the bank), deposit of money with the bank for purchase
of non-judicial stamps required for execution of documents in favour of the bank, etc.
5. On payment of collection instruments form other branches of the bank, a credit advice (which may be known
by different names in different banks) or a copy of the collection schedule received from the other branch may itself
be treated as a credit voucher.
6. In case of debits or credits of similar nature to a large number of accounts in the same ledger or group of ledgers
(e.g. debit on account of periodic interest, inspection charges etc. or credit on account of periodic payment of interest
to depositors), it is a common practice among banks to prepare a consolidated voucher on their stationary and
enclose thereto a list containing details of accounts to be debited/credited and the amount of debit/credit.
7. Examples of composite vouchers : in addition to debit vouchers and credit vouchers, there is a category of
'composite vouchers' also. These vouchers record the particulars of both debit and credit accounts. Most of the
transactions covered by composite vouchers pertain to the internal accounts of the bank, i.e. non-customer
accounts.
8. Examples : bills received for collection, letters of credit issued by the branch, guarantees issued by
the branch, etc.
9. Such vouchers may also be prepared to rectify an error while debiting or crediting an account. For example, in
case the current account is debited in general ledger instead of cash credit account by mistake, the composite
voucher will show debit to cash credit account with a corresponding credit to current account.
10. Multi-level authentication (checking): All entries in the personal ledgers and the summary sheets
are checked by persons other than those who have made the entries. Most clerical errors are thus
detected immediately.
11. Balancing of books : A trial balance of the personal [edgers is prepared periodically, usually every
two weeks, and agreed with general ledger control accounts. In banking parlance, this exercise is
referred to as 'balancing of books'.

KYC GUIDELINES
 Money laundering: activities by which the proceeds of illegal acts are converted into proceeds from
legal acts. These guidelines have been issued by RBI under Section 35A of the Banking Regulation
Act, 1949.
 Objective of KYC guidelines: -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 which in turn help them
manage their risks prudently_
 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.
 Components of KYC Policy: Banks should frame their KYC policies incorporating the following four
key elements: Customer Acceptance Policy; Customer Identification Procedures; Monitoring of
Transactions; and Risk management.
Customer acceptance policy: Norms to be fulfilled for acceptance of a customer establishing a banking
relationship, carrying out a financial transaction or when the bank has a doubt about the authenticity/veracity or
the adequacy of the previously obtained customer identification data. The bank must be satisfied about the
proper identity, standing and residential address of the prospective customer.
Customer identification procedure: To be followed while opening the account of the prospective customer.
Customer is required to furnish proper proof of identity through photo identity card and address proof.
Documents required from various types of customers are given below. The original documents are to be
verified, copies taken and duly authenticated by the officer of the Bank stating 'verified with the original'.
Type of customer Documents
Accounts of individual For proof of identity, only the documents mentioned below would be accepted for opening
accounts of individuals. They are: the passport, the driving license, the Permanent
Account Number (PAN) Card, the Voter's Identity Card issued by Election Commission of
India, job card issued by NREGA duly signed by an officer of the State Government, the
letter issued by the Unique Identification Authority of India containing details of name,
address and Aadhaar number. It is
Accounts of a) Certificate of incorporation; b) Memorandum and Articles of Association; c) A
Companies: Name, resolution from the Board of Directors and power of attorney granted to its managers,
Principal place of officers or employees to transact
Business; Mailing on its behalf; and d) An officially validdocument in respect of managers, officers or employees
address; Phone no holding an attorney to transact on its behalf; (e) Copy of PAN Allotment letter; (f) Copy
Accounts of of
a)the telephonecertificate;
Registration bill. b) Partnership deed; and c) An officially valid document in
Partnership respect of the person holding an attorney to transact on its behalf; (iv) Any officially
valid document identifying the partners and the persons holding the Power of Attorney
and their addresses; (v) Telephone bill in the name of firm/partners
Trusts a) Registration certificate; b) Trust deed; and c) An officially valid document in
respect of the person holding a pbwer of attorney to transact on its behalf.
Proprietorship at least two of the following documents (i) Proof of the name, address and activity of
concern the concern; (ii) Registration certificate (in the case of a registered concern); (iii)
Certificate/licence issued by the Municipal authorities under Shop & Establishment
Act, (iv) Sales and income tax returns; (v)
CST/VAT certificate; (vi) Certificate/registrationdocument
Tax/Professional Tax authorities; (vii) Licence issued by the Registering authority like
Certificate of Practice issued by Institute of Chartered Accountants of India, Institute of
Cost Accountants of India, Institute of Company Secretaries of India, Indian Medical
Council, Food and Drug Control Authorities, registration/licensing document issued in
the name of the proprietary concern by the Central Government or State Government
Authority/ Department, etc or IEC (Importer Exporter Code) issued to the proprietary
concern by the office of DGFT; (viii) The complete Income Tax return (not just the
acknowledgement) in the name of the sole proprietor where the firm's income is
reflected, duly authenticated/ acknowledged by the Income.Tax Authorities; (ix) Utility
bills such as electricity, water, and landline telephone bills in the name of the proprietary
Summary of RBI Guidelines on various aspects of Customer Acceptance
Policy Banks' Board should clearly lay down policy relating to KYC taking into account the
following:
1. No account is opened in anonymous or fictitious/ benami name(s);
2. KYC norms should be applicable on all accounts except Small accounts and on all persons
authorized to operate the account.
3. Documentation requirements and other information to be collected for different categories of
customers depending on perceived risk and as per requirements of Prevention of Money laundering
Act, 2002 and guidelines issued by RBI.
4. Not to open an account or close an existing account where the bank is unable to verify the identity and /or
obtain documents required as per the risk categorisation due to non cooperation of the customer or non
reliability of the data/information furnished to the bank.
5. Documents for proof of identity and address of the customer: (i) Passport (ii) PAN card (iii) Voter Identity
card (iv) Driving Licence (v) MANREGA Job Card (vi) Aadhar card issued by the Unique Identification
Authority of India. Banks would not have the discretion to accept any other document for this purpose.
Banks may maintain records of the identity of clients, and records in respect of transactions with its client in
hard or soft format.
6. Time for completing KYC Norms: Where a customer categorised as low risk expresses inability to
complete the documentation requirements on account of any reason that the bank considers to be
genuine, and where it is essential not to interrupt the normal conduct of business, the bank may complete
the verification of identity within a period of six months from the date of establishment of the relationship.
7. Non-compliance of KYC requirements: Banks should impose 'partial freezing' on such KYC non-compliant in a
phased manner. The option of 'partial freezing' to be exercised after giving due notice of three months initially to the
customers followed by a reminder for further period of three months. Thereafter, banks may impose 'partial freezing'
by allowing all credits and disallowing all debits with the freedom to close the accounts. 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. Further, it would always be open to the bank to close the account of such
customers.
8. PAN No: Quoting of PAN number is not as per KYC norms. But as per Income Tax Rules, Quoting
of PAN number is mandatory while opening an account or making a time deposit exceeding Rs.
50,000 and any person who has not been allotted a PAN number shall make a declaration in Form
No. 60/61.
Simplified KYC Measures by RBI

1. Simplified Measures for KYC: 'Simplified measures' may be applied to verify the identity of the tow
risk' customers and in such cases it would be sufficient to obtain either (1) identity card with
applicant's Photograph issued by Central/State Government Departments, Statutory/Regulatory
Authorities, Public Sector Undertakings, Scheduled Commercial Banks, and Public Financial
Institutions; or (ii) letter issued by a gazetted officer, with a duly attested photograph of the person
above for the purpose of proof of identity and proof of address.
2. KYC once done by one branch of the bank should be valid for transfer of the account within the bank.
Banks may transfer existing accounts at the transferor branch to the transferee branch without insisting on
fresh proof of address and on the basis_ of a self-declaration from the account holder about his/her current
address.
3. Introduction not Mandatory-for opening accounts: Sinc.ie introduction is not necessary for openirig of
accounts under PML Act and Rules or Reserve Bank's extant KYC instructions, banks should not
insist oraffroduction for opening bank accounts of customers.
4. If the address on the document submitted for identity proof by the prospective customer is same as that
declared by him/her in the account opening form, the document may be accepted as a valid proof of both
identity and address. Customers may submit only one documentary proof of address (either current or
permanent) while opening a bank account or while undergoing periodic updation. in case the address
mentioned as per 'proof of address' undergoes a change, fresh proof of address may be submitted to the
branch within a period of six months. In case the proof of address furnished by the customer is not the local
address or address where the customer is currently residing, the bank may take a declaration of the local
address on which all correspondence will be made by the bank with the customer. No proof is required to be
submitted for such address for correspondence/local address. Verification of address by the bank through
'positive confirmation' has been dispensed with. In the event of change in this address due to relocation or
any other reason, customers may intimate the new address for correspondence to the bank within two
weeks of such a change.
5. Opening another account in the same bank: If an existing KYC compliant customer of a bank desires to open
another account in the same bank, there should be no need for submission of fresh proof of identity and/or proof of
address.
6. Small account: "Small account" means a savings account in a banking company where- (i) the aggregate
of all credits in a financial year does not exceed rupees one lakh, (ii) the aggregate of all withdrawals and
transfers in a month does not exceed rupees ten thousand, and; (iii) the balance at any point of time does
not exceed rupees fifty thousand. An individual who desires to open a small account in a banking company
may be allowed to open such an account on production of a self-attested photograph and affixation of
signature or thumb print, as the case may: be, on the form for opening the account provided: (i) The
designated officer of the banking company, while opening the small account, certifies under his signature
that the person opening the account has affixed his signature or thumb print, as the case may be, in his
presence. "Designated Officer" means any officer or a class of officers authorized by a banking company,

either by name or by designation, for the purpose of opening small accounts". (ii) a small account shall be
opened only at Core Banking Solution linked banking company branches or in a branch where it is possible
to manually monitor and ensure that foreign remittances are not credited to a small account and that the
stipulated limits on monthly and annual aggregate of transactions and balance in such accounts are not
breached, before a transaction is allowed to take place; (iii) a small account shall remain operational initially
for a period of twelve months, and thereafter for a further period of twelve months if the holder of such an
account provides evidence before the banking company of having applied for any of the officially valid
documents within twelve months of the opening of the said account, with the entire relaxation provisions to
be reviewed in respect of the said account after twenty four months. (iv) a small account shall be monitored
and when there is suspicion of money laundering or financing of terrorism or other high risk scenarios, the
identity of client shall be established through the production of officially valid documents. (v) foreign
remittance shall not be allowed to be credited into a small account unless the identity of the client is fully
established through the production of officially valid documents.
7. Accounts of Self Help Groups: KYC verification of all the members of SHG need not be done while
opening the savings bank account of the SHG and KYC verification of all the office bearers would suffice.
At the time of credit linking of SHGs, no separate KYC verification of the members or office bearers is
necessary.
8. Foreign students have been allowed a time of one month for furnishing the proof of local address.
Periodical updation of KYC Data

Updation of Customer Identification Data: Full KYC exercise will be required to be done at least every two years
for high risk individuals and entities, at least every eight years for medium risk individuals and entities and at least
every ten years for low risk individuals. Fresh photographs will be required to be obtained from minor customer on
becoming major. Fresh proofs of identity and address will not be required from those customers who are
categorised as 'low risk'. In case of change of address of such 'low risk' customers, they could merely forward a
certified copy of the document (proof of address) by mail/post, etc. Banks may not insist on physical presence of
such low risk customer at the time of periodic updation.
Risk Classification & Management
1. Customers should be ategorized into low, medium and high risk (banks may choose any suitable
nomenclature viz. level I, level lI and level Ill ); customers requiring very high level of monitoring, e.g.
Politically Exposed Persons may, if considered necessary, be ategorized even higher.
2. Examples of low risk customers could be salaried employees whose salary structures are well defined,
people belonging to lower economic strata of the society whose accounts show small balances and low
turnover, Government Departments and Government owned companies, regulators and statutory bodies
etc.
3. Examples of High risk customers include (a) nonresident customers; (b) 'high net worth individuals; (c)
trusts, charities, NGOs and organizations receiving donations; (d) companies having close family
shareholding or beneficial ownership; (e) firms with 'sleeping partners'; (f) politically exposed persons
(PEPs) of foreign origin, customers who are close relatives of PEPs and accounts of which a PEP is the
ultimate beneficial owner; (g) non-face to face customers and (h) those with dubious reputation as per
public information available etc; (i) bullion dealers (including sub-dealers) & jewelers. However, only
NPOs/NGOs promoted by United Nations or its agencies may be classified as low risk customer.
4. Bank should review the risk profile of the customer at least once in six months.
5. Concurrent/ Internal Auditors should specifically check and verify the application of KYC procedures
at the branches and comment on the lapses observed in this regard.
Money Mules
Third parties, called "Money mules" can be used to launder the proceeds of fraud schemes (e.g., phishing and
identity theft) by criminals who gain illegal access to deposit accounts. In a money mule transaction, an
individual with a bank account is recruited to receive cheque deposits or wire transfers and then transfer these
funds to accounts held on behalf of another person. Money mules may be recruited by a variety of methods,
including spam e-mails, advertisements on genuine recruitment web sites, social networking sites, instant
messaging and advertisements in newspapers. Periodical updation of customer identification data can reduce
risk of Money Mules.
Monitoring of Transactions
Maintenance of records of transactions
Banks should introduce a system of maintaining proper record of following transactions:
1. all cash transactions of the value of more than Rupees Ten Lakh or its equivalent in foreign currency;
2. Banks should maintain proper record of all series of cash transactions integrally connected to each
other which have been valued below rupees ten lakhs or its equivalent in foreign currency where
such series of transactions have taken place within a month and the.
3. all series of cash transactions integrally connected to each other which have been individually valued below

Rupees Ten Lakh or its equivalent in foreign currency where such series of transactions have taken place
within a month and monthly aggregate exceeds rupees ten lakhs or its equivalent in foreign currency.
4. all transactions involving receipts by non-profit organisations of value more than rupees ten lakh or
its equivalent in foreign currency
5. all cash transactions where forged or counterfeit currency notes or bank notes have been used as genuine
and where any forgery of a valuable security or a document has taken place facilitating the transaction and
6. All suspicious transactions whether or not made in cash and by way of as mentioned in the Rules.
Integrally connected cash transactions
Debit transactions are treated as integrally connected cash transactions if total cash debits during the
calendar month exceeds Rs. 10 lakhs. Similarly Credit transactions are treated as integrally connected
cash transactions if total cash credits during the calendar month exceeds Rs. 10 lakhs. However, the
bank should not report a transaction which is less than Rs.50,000/-.
Monitoring of High risk accounts
1. Banks should set key indicators for. risk sensitive (e.g.,high turnover accounts or complex or unusual
transactions accounts) accounts, taking note of the background of the customer, such as the country
of origin, sources of funds, the type of transactions involved and other risk factors.
2. Banks should put in place a system of periodical review of risk categorisation of accounts and the
need for applying enhanced due diligence measures.
3. Banks should subject 'high risk accounts' to intensified transaction monitoring. High risk associated
with such accounts should be taken into account by banks to identify suspicious transactions for filing
Suspicious Transaction Reports (STRs) to FIU-IND.
4. Banks should closely monitor the transactions in accounts where a large number of cheque books are
sought by the company, there are multiple small deposits (generally in cash) across the country in one bank
account and where a large number of cheques are issued bearing similar amounts/dates. In case of
unusual operations in accounts, the matter should be immediately reported to Reserve Bank and other
appropriate authorities such as Financial Intelligence Unit India (FIU-Ind) under Department of Revenue,
Ministry of Finance.
Maintenance and Preservation of record
Banks should maintain for at least five years from the date of transaction between the bank and the client, all
necessary records of transactions, both domestic or international, which will permit reconstruction of
individual transactions (including the amounts and types of currency involved if any) so as to provide, if
necessary, evidence for prosecution of person's involved in criminal activity. Banks should ensure that
records pertaining to the identification of the customer and his address (e.g. copies of documents like
passports, identity cards, driving licenses, PAN card, etc.) obtained while opening the account and during
the course of business relationship, are properly preserved for at least five years after the business
relationship is ended.
Reporting to Financial Intelligence Unit – India :In terms of the PMLA Rules, banks are required to report
information relating to cash and suspicious transactions and all transactions involving receipts by non-
profit organisations of value more than rupees ten lakh or its equivalent in foreign currency to the
Director, Financial Intelligence Unit-India (FIU-IND).
Cash Transaction Report ( CTR )
1. The Cash Transaction Report (CTR) for each month should be submitted to FIU-IND by 15th of the
succeeding month. It should include transactions where cash receipt or payment is more than Rs 10 lakh
and integrally connected cash transactions where-cash debit or cash credit during the month exceeds Rs
10 lakh.
2. All Cash transactions where forged or counterfeit currency notes or bank notes has been used as
genuine should be reported by the 15th day of the succeeding month.
3. While filing CTR, details of individual transactions below Rupees Fifty thousand need not be furnished.
4. CTR should contain only the transactions carried out by the bank on behalf of their
clients/customers excluding transactions between the internal accounts of the bank.
Suspicious Transaction Reports (STR)
1. While determining suspicious transactions, banks should be guided by definition of suspicious
transaction contained in PMLA Rules.
2. Banks should make STRs if they have reasonable ground to believe that the transaction involve
proceeds of crime generally irrespective of the amount of transaction and/or the threshold limit.
3. The Suspicious Transaction Report (STR) should be furnished within 7 days of arriving at a conclusion that
any transaction, whether cash or non-cash, or a series of transactions integrally connected are of suspicious
nature.
4. Banks should not put any restrictions on operations in the accounts where an STR has been made.
Banks and their employees should keep the fact of furnishing of STR strictly confidential, as required
under PML Rules. It should be ensured that there is no tipping off to the customer at any level.
Cross border wire transfers: All cross border wire transfers of the value of more than rupees five
Iakhs or its equivalent in foreign currency where either the origin or destination of fund is in India to be
reported to FIU-IND. Non-Profit Organisation
The report of all transactions involving receipts by non- profit organizations of value more than rupees
ten lakh or its equivalent in foreign currency should be submitted every month to the Director, FIU-IND
by 15th of the succeeding month in the prescribed format.
Other Guidelines of RBI on KYC
1. Principal Officer Banks should appoint a senior management officer to be designated as Principal
Officer who should have timely access to customer identification data, CDD information, transaction
records and other relevant information. The Principal Officer should be able to act independently
and report directly to the senior management or Board of Directors. (September 11, 2009) .
2. KYC/AML guidelines issued by Reserve Bank of India shall also apply to their branches and majority
owned subsidiaries located outside India, especially, in countries which do not or insufficiently apply the
FATF Recommendations, to the extent local laws permit. In case there is a variance in KYC/AML
standards prescribed by the Reserve Bank and the host country regulators, branches/overseas
subsidiaries of banks are required to adopt the more stringent regulation of the two.
3. Reliance on third party due diligence: For the purpose of identifying and verifying the identity of
customers at the time of opening account, banks may rely on a third party subject to the conditions that-
(a) the bank immediately obtains necessary information of such client due diligence carried out by the
third party; (b) the third party is not based in a country or jurisdiction assessed as high risk; and (e) the
bank is ultimately responsible for client due diligence and undertaking enhanced due diligence
measures, as applicable.
Seeking additional information under KYC
1. Only the mandatory information required for KYC purpose should be obtained at the time of opening
the account/during periodic updation. The information sought from the customer should be relevant
to the perceived risk, and in conformity with RBI guidelines.
2. Personal information/details like-number of dependents, the names of sons and daughters, lifestyle,
number of foreign visits undertaken during the last three years, details of family members/relatives settled
abroad, assets and liabilities, name and date, of birth of spouse, wedding date, investments, etc, if
required should be sought ; separately with his/her consent and after opening the account.
3. The customer should be advised about the information required under KYC and additional information
sought by the bank that is optional. All details collected from the customer is to be treated as confidential
and not to be divulged for cross selling or any other like purposes.
Aadhar Card for KYC Purposes
1. The fetter issued by the Unique Identification Authority of India (UIDAI) containing details of name,
address and Aadhaar number may be accepted as an 'Officially Valid Document'. Further, while
opening accounts based on Aadhaar, if the address provided by the account holder is the same as that
on Aadhaar letter, it may be accepted as a proof of both identity and address.
2. Banks may accept e-Aadhaar, downloaded from UIDAI website, as an officially valid document. If the
prospective customer knows only his/her Aadhaar number, the bank may print the prospective customer's
eAadhaar letter in the bank directly from the UIDAI portal; or adopt e-KYC procedure as prescribed by RBI
or confirm identity and address of the resident through simple authentication service of UIDAI.
3. e-KYC service is accepted as a valid process for KYC verification under Prevention of Money Laundering
(Maintenance of Records) Rules, 2005. Information containing demographic details and photographs made
available from UIDAI as a result of e-KYC process ("which is in an electronic form and accessible ") may be
treated as an 'Officially Valid Document' under PML Rules. The individual user has to authorize the =Ai, by
explicit consent, to release her or his identity/address through biometric authentication to the bank
branches/business correspondents (BCs). The UIDAI then transfers the data of the individual comprising
name, age, gender, and photograph of the individual, electronically to the bank/BCs, which may be
accepted as valid process for KYC verification.
4. RBI has advised the banks to have proper infrastructure in place to enable biometric authentication for e-
KYC.
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.
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 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.
OPERATIONAL ASPECTS OF ACCOUNTING ENTRIES
Introduction
1. In every business, the ultimate objective of recording the financial transactions is to prepare the
balance sheet and the P& L account to know results of the operations of the enterprise during the
accounting period and the financial position at the end of the accounting period.
2. 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 like Rs 2000. The accounting entry could be a debit entry or a
credit entry.
3. In accounting, the double entry system is used which implies that every credit/debit accounting entry
should have one or more corresponding debit/credit entry.
4. Normally in accounting entries are first recorded in Journal and then posted in Ledger but in banks
these are first entered in the ledger accounts concerned and then in the journal.
5.Features of manual operations: First, the entries are entered in the physical ledgers and then all the entries
in a particular ledger head are entered in the journal (day book). Finally, the total is entered in the control
account concerned of the General Ledger which is used in preparing the balance sheet and the P&L
account. Any accounting entry in manual operations can only be made based on a physical voucher
which is authenticated by the authorised officer of the branch.
6. Features of Computerised operations: The accounting entry in the system is made by the staff
concerned and authenticated by the official concerned. Remaining operations like day book and GL
are taken care of by the system.
Peculiar Features of Accounting System in Banks
1. More focus on Ledger compared to Journal: In business enterprises other than banks, books of prime entry
i.e. Journals are kept up-to-date while ledgers, including the general ledger and subsidiary ledgers for
debtors, creditors, etc. are written afterwards. But in case of banks, more emphasis is laid on ledger accounts
and relatively lesser emphasis is placed on books of prime entry such as cash books or journals.
Every transaction is entered in ledgers as soon as it takes place because in the case of banks, the need for
the ledger accounts of customers, being accurate and up-to-date is much stronger.
2. Voucher Posting: Banks follow the accounting procedure of 'voucher posting'. In this system, the vouchers
are straightaway posted to the individual accounts in the subsidiary ledgers. Then, at the end of the day, the
debit and credit vouchers relating to a particular type of transaction (e.g. savings bank accounts, current
accounts, demand loans, cash credit accounts, etc.) are entered on separate voucher summary sheets. Total
of various items of summary sheet is posted to the respective control account in the general ledger. The
general ledger trial balance is prepared every day.
Types of Transactions:
1. Transactions in a bank are of two types, cash and non-cash.
2. Non cash transactions, are also called 'transfer transactions'.
3. In transfer transactions, one or both of the accounts concerned may be of the customers or the
internal accounts of the bank.
Vouchers:
1. Both debit- and credit operations on all accounts, either by customers or by the bank itself, are made
by means of vouchers.
2_ Types of vouchers: (a) which evidences only debit or credit to an account; (b) composite voucher -
which contains both debit and credit to different accounts.
Debit vouchers
1. Cheques issued by the customers;
2. Cheques/pay orders issued by the bank;
3. Withdrawal forms received from the savings Bank account holders;
4. Drafts issued by other branches of the bank payable at the branch;
5. Drafts issued by other banks on the branch, as per approved arrangement between the two banks;
6. Dividend/interest warrants issued by the bank's customers and payable by the branch;
7. Travellers'_cheques issued by any branch of the bank which are presented to the branch for payment;
8. Drafts/pay orders issued by the branch itself which are cancelled at the request of the customer;
9. Instruments like traveller's cheques/gift cheques, etc., of other banks which are paid by the branch.
10. Letters of authority signed by the customers, containing standing instructions.
11. Debit vouchers prepared printed stationery of the bank which may also carry debit authority from the
customers in some cases if the debit is to his account at the branch.
12. in respect of realisation of cheques/bills sent to other branches of the bank, advice prepared by the
other branch may itself act as a debit voucher.
13. Term deposit receipts presented for payment, renewal or premature
closure.
Credit Vouchers
1. Pay-in-slips filled by the customers for deposit of amounts in their accounts.
2. Applications for issue of term deposits, demand drafts, RTGS/NEFT, banker's cheques, pay orders,
gift cheques, traveller's cheques and other similar instruments.
3. Challans for deposits into the accounts of Central/State Government, e.g. on account of direct/ indirect
taxes
4. Credit vouchers on printed stationery of the bank which are authorised by an official of the bank. Normally,
these vouchers are signed on behalf of the branch only in some cases, the customer concerned also signs
on the voucher as evidence that the transaction actually pertains to him.
5. On payment of collection instruments from other branches of the bank, a credit advice from the other
branch may itself be treated as a credit voucher.
Consolidated Voucher: When debits or credits of similar nature are done to a large number of accounts
in the same ledger or group of ledgers (e.g. debit or credit on account of periodic interest) generally, a
consolidated voucher is prepared on bank's stationery and a list containing details of accounts
debited/credited and the amount of debit/credit is attached to voucher.
Composite Voucher: These vouchers record the particulars of both debit and credit accounts and generally
pertain to the internal accounts of the bank, i.e. non- customer accounts. Examples are: bills received for
collection, letters of credit issued by the branch, guarantees issued by the branch, etc. Such vouchers may
also be prepared to rectify an error while debiting or crediting an account.
Checking of Vouchers and Balancing: All entries in the personal ledgers and the summary sheets are
checked by persons other than those who have made the entries. Thus, clerical errors are detected
immediately. A trial balance of the personal ledgers is prepared periodically, usually every two weeks, and
agreed with general ledger control accounts which is called 'balancing of books'.
Accounting System of Different Banks

I. Accounting systems of different banks vary in terms of hardware configuration, software capabilities,
levels of hardware and software security, and nature of transactions processed.
2. The accounting system in a bank is designed keeping in view the nature and volume of operations
and information needs of various interested parties.
3_ Every big bank has customized banking-software as per its own requirement and as such, the
accounting systems differ amongst different banks.
OPERATIONAL ASPECTS OF HANDLING CASH/CLEARING

Important operations conducted at a bank branch: cash, collection of local and outstation instruments
and remittances on behalf of the customers.
Cash transactions: Branch has to deal with custody as well as inter office movement of cash, involving
the aspects of security, misappropriation and-frauds.
Instruments submitted by Customers for collection: cheques, drafts, pay orders, trade bills, dividend and
interest warrants, NSCs, postal orders, term deposit receipts, tax refund orders, etc.
Type of instruments: Instruments payable The instruments payable locally are collected through the
clearing house. The instruments payable outside are sent by the bank for collection.
Settlement of inter-bank transactions among the local banks: Done through 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 accounts of all member banks are maintained by the
clearing house. Management of Clearing House: done by RBI, State Bank of India or any other bank nominated
by RBI.
Nodal Branch: 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. Nodal branch handles the instruments to be presented by other
branches also. Electronic Clearing Service (ECS): It is in addition to regular clearing. ECS is of two
types- ECS credit or ECS debit.
ECS Credit: is used by an institution for affording credit to a large number of beneficiaries (for instance,
employees, investors etc.) having accounts with bank branches at various locations within the jurisdiction of a
ECS Centre by raising a single debit to the bank account of the user institution. ECS Credit enables payment of
amounts towards distribution of dividend, interest, salary, pension, etc., of the user institution.
ECS Debit: is used by an institution for raising debits to a large number of accounts (for instance, consumers
of utility services, borrowers, investors in mutual funds etc.) maintained with bank branches at various
locations within the jurisdiction of a ECS Centre for single credit to the bank account of the user institution.
ECS Debit is useful for payment of telephone / electricity / water bills, cess / tax collections, loan installment
repayments, periodic investments in mutual funds, insurance premium etc., that are periodic or repetitive in
nature and payable to the user institution by large number of customers etc.
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 net-worked branch locally. Speed Clearing covers 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. RTGS and
NEFT are other modes of remittance which facilitates almost instantaneous transfer of funds between
two centres.
Cheque Truncation System (CTS)
1. What is Truncation: Process of stopping the flow of the physical cheque issued by a drawer to the drawee
branch. The physical instrument will be truncated at some point en-route to the drawee branch and an
electronic image of the cheque would be sent to the drawee branch along with the relevant information like
the MICR fields, date of presentation, presenting banks etc. Thus with the implementation of cheque
truncation, the need to move the physical instruments across branches would not be required, except in
exceptional circumstances. The banks have the freedom to decide the point of truncation.
2. Benefits of Cheque Truncation: Cheque Truncation speeds up collection of cheques and therefore
enhances customer service, reduces the scope for clearing related frauds, minimizes cost of
collection of cheques, reduces reconciliation problems, eliminates logistics problems etc.
3. Precautions to be taken by the bank customers to avoid frauds: Bank customers should use image
friendly cheques. They should preferably use dark coloured ink while drawing the instruments.
4. Grid System: The CTS is operated on grid basis. Under grid-based CTS clearing, all cheques drawn on
bank branches falling in the grid jurisdiction are treated and cleared as local cheques on T+l basis. As such,
under CTS, inward clearing is generally processed in a centralised manner by banks at the CTS location.
5. Presentation of physical instrument: In case any drawee bank desires to verify the government cheque in
physical form before passing it for payment, the image would be returned unpaid under the reason "present
with documents". The presenting bank shall ensure that the instrument is presented again in the next
applicable clearing session without any reference to the Account holder.
6. Presentation of Non CTS 2010 cheques: Separate clearing session has been introduced in the three CTS
centers (Mumbai, Chennai and New Delhi) for clearing of such residual non-CTS 2010 instruments
(including PDC and EMI cheques). With effect from November 1, 2014, this separate clearing session will
be held once a week (every Monday). If the identified day falls on a holiday under the N I Act, presentation
session on such occasions will be conducted on the previous working day. If non CTS 2010 cheques are
presented in the regular CTS clearing, drawee banks will return the same 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.
7. Preservation of physical instrument: The presenting banks are required to preserve the physical cheques in
their custody securely for a period of 10 years as required under CTS. In case some specific cheques are
required for the purpose of any investigation, enquiry, etc., they may be preserved beyond 10 years. The
images of all cheques paid should be preserved by the drawee banks likewise for a period of 10 years.
8. Cheque Truncation of Government Cheques: Banks are required to forward the government cheques in
physical form, after payment to the Government Departments. There were plans to adopt truncation of Govt
cheques also. But revised guidelines which were to be effective fromJanuary 1, 2015 have been kept on
hold and_RBI has decided to postpone the implementation of discontinuation of P2F vide circular dated 1
Jan 2015.
Collection of Instruments— RBI Guidelines
1. Formulating Cheque Collection Policies: Efficiencies in collection of proceeds and providing funds to
customers in time are best achieved through a spirit of competition among the banks rather than through
issuance of guidelines by RBI. Therefore, RBI withdrew guidelines regarding immediate credit of local
/outstation cheques, time frame for collection of local/outstation instruments and interest payment for
delayed collection leaving it to the individual banks to formulate policies in this regard. However, The
National Consumer Disputes Redressal Commission had passed an order in 2006 on 'timeframe for
collection of outstation cheques'. Accordingly RBI has advised as under:
1. Contents of Policy: Banks shall reframe their Cheque Collection Policies (CCPs) covering local and
outstation cheque collection as per the timeframe prescribed by the Commission. It should also cover (a)
Immediate Credit for Local / Outstation cheques; (b) Interest payment for delayed collection; (d)
compensation payable for the delay in the collection of local cheques as well.
2. Collection of local cheques: Credit and debit shall be given on the same day or at the most the next day of
their presentation in clearing. Ideally, in respect of local clearing, banks shall permit usage of the shadow
credit afforded to the customer accounts immediately after closure of relative return clearing and in any
case withdrawal shall be allowed on the same day or maximum within an hour of commencement of
business on the next working day.
3. Timeframe for collection of outstation cheques: Cheques drawn on State Capitals / major cities / other
locations to be collected within 7/10/14 days respectively. The timeframe for collection specified by the
Commission shall be treated as outer limit and credit shall be afforded if the process gets completed
earlier.
4. Interest for delay in collection: If there is any delay in collection beyond 7110114 days, interest at the
rate specified in the CCP of the bank, shall be paid. In case the rate is not specified in the CCP,
interest should be paid as applicable on Fixed Deposits for the corresponding maturity.
5. Banks shall not decline to accept outstation cheques deposited by its customers for collection.
6. Banks shall give wide publicity to the CCP by prominently displaying in bold and visible letters on the
notice board at their branches.
7. A copy of the complete CCP shall be made available by the branch manager, if the customers require so.
2. Broad Principles of Policy:
1. The policy should be comprehensive and transparent policy covering all the above aspects, taking
into account their technological capabilities, systems and processes adopted for clearing
arrangements and other internal arrangements for collection through correspondents.
2. Banks should work out a scheme for reduction in collection period.
3. Interests of the small depositors should be fully protected.
4. Liability of the banks should be clearly laid down by way of interest payments due to delays.
5. Compensation by way of interest payment, where necessary, should be made without any claim from
the customer.
3. Cheques/mstruments lost in transit/in clearing process/at paying banks branch
In respect of cheques lost in transit or in the clearing process or at the paying bank's branch, the bank should
immediately bring the same to the notice of the account holder so that account holder can inform the drawer to
record stop payment and can also take care that other cheques issued by him are not dishonoured due to non-
credit of the amount of the lost cheques/instruments. The onus of such loss lies with the collecting banker and
not the account holder. The banks should reimburse the account holder related expenses for obtaining
duplicate instruments and also interest for reasonable delays occurred in obtaining the same. If the
cheque/instrument has been lost at the paying bank's branch, the collecting banker should have a right to
recover the amount reimbursed to the customer for the loss of the cheque/instrument from the paying banker.
4. Bills for collection: Bills for collection including bills discounted required to be collected through another bank
at the realising centre should be forwarded directly by the forwarding office to the realising office. The lodger's
bank should pay interest to the lodger for the delayed period in respect of collection of bills at the rate of 2%
p.a. above the rate of interest payable on balances of Savings Bank accounts. The delayed period should be
reckoned after making allowance for normal transit period based upon a time frame of 2 days each for (i)
Dispatch of bills (ii) Presentation of bills of drawees (iii) Remittance of proceeds to the lodger's bank (iv)
Crediting the' proceeds to drawer's account. To the extent the delay is.attributing to the drawee's bank, the
lodger's bank may recover interest for such delay from that bank.
Collection of Account Payee Cheque - Prohibition on Crediting Proceeds to Third Party Account
1. As per RBI guidelines, Banks should not collect account payee cheques for any person other than the
payee constituent. This has been done keeping in view the intent of the N I Act, to protect the banks
from liabilities arising out of unauthorized collections, and in the interest of the integrity and soundness of
the payment systems. These instructions shall also extend to drafts, pay orders and bankers' cheque.
2. Account payee cheques deposited with the sub-member for credit to their customers' account can be
collected by the member bank (referred to as the sponsor member) of the Clearing House. However, there
should be clear undertaking that the proceeds of the account payee cheque will be credited to the payee's
account only.

3. To mitigate the difficulties faced by the members of co-operative credit societies in collection of
account payee cheques, collecting banks may consider collecting account payee cheques drawn for
an amount not exceeding Rs 50,000/- to the account of their customers who are co-operative credit
societies, if the payees of such cheques are the constituents of such co-operative credit societies.
6. Payment of Cheques/Drafts/Pay Orders/Banker's Cheques: With effect from April 1, 2012, banks
should not make payment of cheques/drafts/pay orders/banker's cheques if they are presented beyond
the period of three months from the date of such instrument.
CASH OPERATIONS
1. Cash and its custody:
1. The Cash and Small Coin Balances must be kept in the Strong Room in the joint custody of the
Head Cashier/Cashier and an authorised Supervising Official.
2. No member of staff other than the Cashier/Teller should receive money over the counter from depositors.
Notices to this effect should be prominently displayed in English and also the regional language in two
places, one near the cash department and the other near-the-entrance.
3. Strong Room/Safe: The Strong Room or Safe must be under the double lock of the Cashier and the
Supervising Official in charge of cash. Both officials must be present when the Strong Room/Safe is
opened. All receptacles in the Strong Room used for storing Cash and Small Coin balances must also be
under the double lock of the Cashier and the Supervising Official, except receptacle used for the
Cashier's hand balance.
3.Cash Balance of the Bank:

1. The bulk of the Cash Balance should always be in the Strong Room/Safe under joint custody
2. Only cash sufficient for the day's requirements will be withdrawn in the morning from joint custody.
3. Cashier's Hand Balance left with the Head Cashier/Cashier during the day for the day's transactions
will be kept as low as conveniently possible.
4. The amounts of all notes and coins withdrawn from, or deposited in, the joint custody portion of the
bank's Cash Balance (i.e. excluding the Head Cashier's/Cashier's hand balance) will be entered
immediately in the Reserve Cash Register under the initials of the joint custodians.
5. The Reserve Cash Register must always remain in the Strong Room.
6. The amount will be recorded in the Cash Balance Book, which will be checked and signed by the
Head Cashier/Cashier and the Supervising Official.
7. The Manager will also sign the Cash Balance Book after tallying the combined total of the 'Joint
Custody' balance and the Head Cashier's/Cashier's Hand Balance with the Closing Balance of his
Cash Scroll.
4. Checking of Cash Balance:
1. Before taking notes and coin into the 'Joint Custody' balance, the Supervising Official will check their
correctness.
2. Supervising Official will personally count all notes of denominations above Rs 10/- and will verify a
portion of all other notes on the 'clip system'.
3. Clip System: A few notes in each packet of notes are clipped together at the top. The remainder is counted
by an employee other than the one responsible for its correctness in the presence of the Supervising
Official who verifies the total by counting the clipped notes.
4. Notes of the same denomination are banded together into packets of one hundred pieces each.
5. Every ten packets (books) are further tied up into a bundle of one thousand pieces.
6. All bags of coins will be weighed in the presence of supervisor and a few number of bags emptied to
verify that the contents are genuine coins.
7. R should be verified at the close of the working day that the 'Joint Custody Balance' gorresponds
exactly with the entries in the Cash Balance Book.
8. The entire Head Cashier's/Cashier's hand balance of loose notes and loose packets in Hand
Balance should be checked.
9. The notes and coins held in the Head Cashier's/Cashier's Hand Balance are kept in the Cash Box and
locked.
10. Before the safe is closed, the Supervisor and Head Cashier should check the bundles kept in the
vault and verify the same with the Reserve Cash Register.
11. At least once a week on different days, the officer holding charge of cash will check the whole of the
bank Cash Balance by test check of different denominations and Register evidence of such check in
the Cash Balance Book.
5. Shortage or Excess in cash:

1. Any excess in the Cash Balance must be credited to Sundry Creditors Account on the same day itself.
2. Any shortage in the Cash Balance should be recovered the same day from the employee concerned
of the Cash Department.
3. If recovery is not possible on the same day, the amount of shortage should be debited to the Suspense
Account taking the signatures of the members responsible for the shortage on the reverse of the voucher
4. The incident will be reported to Controlling Office
5. The suspense account will be adjusted on recovery from the concerned members.
Head Cashier/Cashier is responsible for any shortage either in Hand or Vault Balance . In case of any
shortage in any book (packet) of notes, the Cashiers who have signed the Denomination Slips will
be responsible for the shortage.
6. Remittance of Cash:
1. Physical cash remittances to branches outside the town should be undertaken only if transfers
cannot be effected through the State Bank of India or any other Bank with which the Bank has an
Account.
2. Guard: Cash remittances should always be entrusted to an authorised employee who should be
accompanied by a reliable and experienced member of the subordinate staff and the armed guard.
3. Night journeys and unusual halts at junctions should be avoided.
4. Locking box to van: The remittance box should always be conveyed in the van provided by the
Bank. The box should be securely chained and locked to a staple or other fixed object in the van by
which the remittance is carried.
5. Cash Remittance Register: A Register should be maintained to record all cash remittances to and
from local branches and other branches.
7. Insurance:
1. All cash remittances in transit are covered under the Blanket Insurance Policy obtained by the Bank.
The maximum limit laid down for any one carriage should not be exce eded.
2. Cash in safe and on the counter should be kept within insured lim it.
8. Custody of Keys:
1. Key Register: should be maintained in which particulars of all important keys, including those of the
Head Cashier/Cashier, must be entered. The Register should indicate existence of originals and
duplicates and their location. .
2. Main keys of the branch should always be in the possession of the officials to whose charge they have
been entrusted except when these will be taken over by another Bank official due to leave of the incharge
etc.
3. The officials holding custody of the safe/strong room should not move freely to places other than the
place of work or their residence while in personal possession of the keys.
4. Subordinate employees or other unauthorized persons should not be allowed to handle the keys of
the Strong Room and safes for any purpose whatsoever.
5. If any important key shows signs of serious wear, the duplicate can be issued for the time being. The key-
which has worn out to be sent to controlling office in sealed packet and arrangements made for
replacement of lock. No important key pertaining to cash counters, safes, lockers, strong rooms, almirahs,
main entrance may be made and no repairs to such locks be got carried out without the prior permission of
Controlling Office. All repairs, if permitted, must be carried out under the personal supervision of the
Manager and the Head Cashier/Cashier if he has joint control over the Strong Room door or safe under
repair.
9. Duplicate Keys
1. The officials holding the keys of the Strong Room/safe room and safes/cupboards containing cash,
gold ornaments under pledge to the Bank and other securities, should pack their duplicate keys
individually in a strong cloth lined envelope which will be sealed by them with seals. Before they are
packed the keys must be greased and labeled (the label indicating the lock to which thp key relates
and the designation of the qfficial who holds the original).
2. The sealed packets must be placed in a strong wooden or tin box locked or otherwise secured and
wrapped in water-proof cloth.
3. It must then be sealed in the presence of the officials concerned and the sealed box will be labeled with
the name of the branch with the marking that "This packet contains duplicate keys of Branch of
the ...... Bank and is deliverable against the joint signature of the Manager and Cashier of the branch ".
4. It should be signed by the Manager/Cashier or the Supervising Official whose keys are deposited therein.
5. The relative safe deposit receipt will be entered in the Branch documents Register and kept in the personal
custody of the Manager in a safe or cabinet as the same will be required for issue of duplicate keys.
6. Duplicate keys must be withdrawn from safe deposit and the keys rotated once every year.
Cash replenishment at ATMs
1. All the staff involved in cash transfers should be screened thoroughly and their photos and prints taken.
2. In case of a contract with service vendor, the Bin filling exercise is normally done in the presence of at least
two persons who should supervise each other to ensure that correct denominations are inserted in the
correct bins.
3. The User report should be obtained and filed for future reference. This should record the time and date
of opening the ATM machine to replenish it. The cash balance after replenishment should also be
printed.
4. Cash shortages should be thoroughly investigated with full reference to the server report compared
with the ATM's log available on site of ATM.
CLEARING OPERATIONS
1. General: The "Service Branch" or a centralized clearing house functions as a Clearing Centre for all
the instruments such as Drafts, Cheques etc. received from its customers and those_ of its
branches.These instruments will have to be presented for collection through the "Clearing House".
2. Clearing House: The Clearing House functions during the stipulated hours. The realization of cheque
may take 2/3 days depending on type of clearing - MICR inward Clearing, High Value Clearing
(outward), . Returns Clearing (outward); ECS
3. Operations in the MICR Clearing at Branch: The payee's name on the instrument and on the pay-in-slip
should be verified which should be same except when cheque is endorsed by the payee in some other
person's favour. The amount on the instrument and that on the pay-in-slip should be same. The cheque
should be drawn on a local branch. Cheque should be affixed with clearing/crossing stamp. Cheque should
be sent for collection in the immediate next clearing.The information should be completely filled in, including
the Bank and Branch Code while sending cheques for clearing.
4. Operations in the MICR Clearing at Service Branch: The instruments received from Branches are encoded
in the machine after taking the information of that branch from the CBS and uploading into the MICR encoding
batch. After consolidation of all the instruments and bundling bank-wise, the instruments are taken to the
clearing house for presentation to various banks.
Inward Clearing Cheques: The Head Office (clearing section) i.e. the service branch will arrange to collect the
inward clearing instruments from the Clearing House and send to respective Branch through courier. The
number of cheques received at service branch will be verified as per the claim slip received from Clearing
House. The number of instruments and the total value against the respective branches will be recorded in the
inward clearing Register and the respective Branch will be debited for the total value of the presentation on
the Branch. The claim slip will be sent to the Branch along with the relative instruments. The branch will verify
the inward clearing instruments with the Claim Slip received from the clearing section, Head Office, and
difference if any will be notified to the Head Office clearing section. The branches will send the unpaid Return
Cheques through the branch courier to reach the Head office (clearing branch) before stipulated time.
OPERATIONAL ASPECTS OF DEPOSIT ACCOUNTS
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 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.
Interest rate on Saving accounts was deregulated by RBI with effect from 25th 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 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 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.
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.
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.
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 likeGB, 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 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 certificate (b) claim form (c) Identification which can be done by 15i 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.
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 loan account etc; payment of Insurance Premium
etc.
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 Vault 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
Currency Chest on behalf of RBI Agent RBI is principal
Money deposited. No instructions for its disposal Trustee Beneficiary
Banker's Obligations - Duty to maintain secrecy:
 A bank has duty to maintain secrecy of customer's account as per implied Contract.
 The duty to maintain secrecy continues even after closure of account.
 Balance in the account of an employee should not be disclosed to employer. Similarly balance in the
account of wife not to be disclosed to husband and vice versa.
 If bank discloses customer's affair (e.g. in case of insufficient balance in the account advising the
presenter of cheque to deposit deficit amount), bank will be liable to customer for resultant loss.
Exceptions to rule of secrecy: When information sought by Court for evidence or by In-charge of a
Police Station, or by revenue authorities like Income Tax Authority, or RBI as per general practice
(without any liability) or as per consent of customer (based only on records).
The banks deal with different types of customers that include Individuals, partnership firms, companies, cooperative
societies etc. In addition to complying with requirement of KYC of RBI, at the time of opening and in the conduct of
accounts of these persons, the banks have to comply, the relevant law applicable to each of them. A brief of these
requirements, for different customers, is given as under:
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.
 Guardians: There can be three types of guardians.
 Natural guardians like father, mother.
 Testamentary Guardian: A Guardian appointed by Will (Vasiyat). Natural guardian may appoint
somebody to act as guardian after his or her death through will. But such guardian will come into
picture only on the death of natural guardian (in case of Hindus on the death of father as well as
mother). Legal guardians: A Guardian appointed by Court. If neither natural or testamentary
guardian then appointed by court.
Minor Guardian
Hindu son, unmarried daughter Father and after father's death mother
Hindu Married daughter Husband. If husband is minor or has died, father in law and after his
Mohammdan minor death of fathers will. If no will, father's
Father After death of father, executor
Christian or Parsi Father After death mother.
 When guardian of a Hindu minor ceases to be a Hindu or he becomes a hermit or sanyasi he
ceases to be natural guardian.
 As per section 11 of the Indian Contract Act, 1872 a minor is not competent to enter into a contract
and the contract entered into by him is void ab-initio.
 Loan to minor. Banks do not grant overdraft / loan to a minor, even if security is provided because
a contract with minor is void, and the
bank will not be able to recover the loan.
 Loan against FD: No loan if account self operated. If under guardianship, loan can be granted to

guardian for benefit of minor.
 Premature payment of FD: If account self operated, it is allowed as minor can give valid discharge.
 Addition of name: Even when loan has been raised on a term deposit in the name of a major person,
the request for addition of the name of the minor cannot be entertained till loan is adjusted.
 Ratification of agreement by minor: A minor cannot ratify an agreement after attaining majority.
 Loan for education: A contract for the supply of necessities of life like food, clothes, education to a
minor is a valid contract.
 Loan to minor against Guarantee: Cannot be recovered even from guarantor.
 Minor as Agent 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 cannot delegate authority in his self operated
account.
 Issue of cheques etc: According to Section 26 of NI Act, a minor can draw or endorse or negotiate a
cheque or a bill. He can make everybody liable except himself.
 Appointment of Nominee: A minor cannot appoint nominee. However, minor can be a- ppointed
nominee.
 Minor as a partner: A minor cannot be full fledged partner in a partnership concern as he can not
enter into a valid contract and partnership is created by agreement.
 A minor may be admitted to benefits of partnership with the consent of all partners. However, the liability
of the partner will be limited to his share in the business of the firm and he will not liable personally for
the acts 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 which ever is later, whether he wants to continue as a
partner. if he remains silent, it amounts to his implied consent. 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.
 As minor is not partner, he cannot give stop payment instructions on a cheque issued by partnership.
 Accounts of a minor: A minor can have account under guardianship as well as self operated
account.
 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 even though the cheques might have been issued prior to
his attaining majority. in case of death of minor; next guardian to operate the account.
 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 and no consent of father is required for such accounts.
 Self operated account of minor: 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 belong to the same family and
operation is jointly. In case of death of minor, payment to legal heirs of minor.
 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.
Accounts of Visually Challenged (Blind) Persons
1 A visually challenged person is competent to the contract like any other person.
2 Signature or thumb impression of the blind person should be attested by an independent witness to the
effect that all terms and conditions were properly explained to the blind person in his presence.
3 Cash deposit and withdrawal by blind person should be handled by the officer of the bank.
4 RBI has advised banks to ensure that 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. are
invariably offered to the visually challenged without any discrimination.
Accounts of Illiterate Persons
 An illiterate person is competent to contract like any other person.
 Cheque book is not issued to illiterate depositor for cash payments.
 Cheque book can be issued for making statutory payments, post dated cheques for repayment of
instalments of loan. In such cases, the cheques will be crossed account payee and thumb impression
of the illiterate depositor will be verified on such cheques at the time of issue of cheque book by
competent authority of the bank.
Joint accounts

 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: in such accounts, 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 cheque can be stopped by former and revocation of stop payment can
also be done by former only.
 In case of either of survivor alteration on the cheque can be confirmed by any of the account
holders. In - case of former or survivor it can be confirmed only by former and in case of joint
operation by both.
 If in a joint account any one becomes insane (Pagel), operation in the account will be suspended
and balance will be payable to the other account holders alongwith guardian of insane appointed
by court.
 Any authority to a third party has to be with the consent of all joint account holders_
 Premature payment of FDR: in all cases it will be consent of all account holders unless mandate
has already been taken that any one take premature payment
 Loan against FDR: In all cases it will be consent of all account holders unless mandate has already
been taken that any one take raise loan singly.
 Joint accounts are joint property. Therefore, unless there is clear mandate in the account opening
form that any one 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
JOINT ACCOUNTS
Transaction Either or survivor Former or survivor Joint operations
Stop payment Any one Former Any one
Request for loan All jointly All jointly All jointly
Premature payment of All jointly All jointly All jointly
FDR
Payment on death SB/CA Survivor Survivor Survivor with legal heirs
Death - FDR Premature Survivor with legal heirs Survivor with legal heirs Survivor with legal heirs
Closure of account All jointly All jointly All have to sign
Nomination All to sign All to sign All to sign
Payment in case of Survivor till any of them Survivor, till any of them Survivor & legal heirs till a
Attachment order Each liable proportion- Each liable proportion- Each of them liable
Garnishee order Order in joint names only-\ Order in joint names Order in joint names
Partnership Firms
1. 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.
2. Minimum & Maximum Partners: A partnership firm should have minimum 2 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).
3. In case of Limited Liability Partnerships, there is no limit on maximum number of partners.
4. 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.
5. Who can not become a partner?: HUF can not become partner as per judgement of the Supreme
Court because HUF is neither a legal person nor a natural person and can not be liable for action of others.

6. Partnership Deed: Partnership can be oral or in writing. Therefore, banks do not insist on
partnership deed while opening accounts of a partnership eencern.
7. 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 can
not sue 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.
8. 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. All actions of
the partner in the ordinary course of 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 issues—and authorize any one in this
regard, these jobs can be undertaken by the said partner.
10.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.
11.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.
12.00erational Authority: 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._
13.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.
14.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 :
1. Limited Liability Partnership is governed by Limited Liability Partnership Act 2008.
2. 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 body
coporate can be a member of an LLP.
4. Liability of partner is limited to the extent of his contribution in the firm. A partner shall not be
personally liable.
Accounts of Limited Companies
1. A limited company is an artificial person with perpetual succession incorporated under the
Companies Act.
2. 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
3. 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 can not
be director of more than 20 companies at one time out of which public co should not be more than 10.
4. Shareholders are owners of the company, directors are agents of the company and debenture
holders are creditors of the company.
5. Documents for opening_ account: For opening account of a limited company bank should obtain the
following:
(a) 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 ultra-vices 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.
(b) 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.
(c) 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.
(d) 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.
(e) Resolution of Board of Directors which is passed by the Board of Directors authorising 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.
(f) 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.
6. As per doctrine of 'Constructive Notice' anybody dealing with company is assumed to have
knowledge of Memorandum and Articles of Association.
7. 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.
8. 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.
9. Common Seal of the Company is to be affixed on documents as per Articles of Association or Board
Resolution.
10.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 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.
11.Winding up of company: Winding up can be (a) voluntary (b) Compulsory by court (c) through court
supervision.
Registration of Charge
1. When to be registered: Under section 77 of the Companies Act, 2013, a charge other than created by
way of pledge or lien, by a company is required to be registered with Registrar of Companies (ROC).
2. 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.
3. Satisfaction: When loan is repaid, particulars of satisfaction of charge should be filed with ROC , within
30 days of the satisfaction of charge.
4. 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.
5. 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.
6. Period for filing particulars: Particulars of charge are required to be filed within 30 days of creation of charge.
7. 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 the Central Government.
8. 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.
9. 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.
10.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.
Hindu Undivided Family (HUF) : HUF is neither a legal person nor a natural person. It is not created by
agreement_ It is not incorporated under any Act. It is from a common ancestor and membership is by birth
or adoption.
 The eldest member of family is the Karta and others are co parceners. Daughter can also be karta.
 Seniormost member continues to be Karta even when he/she lives outside India.
 Operational authority to operate the account is with Karta
 Karts can appoint any other coparcener or third party to conduct business of HUF and/or operate the
account.
 Co parcener can not stop payment of the cheque unless he is authorized to operate the account.
 Karta is personally liable.
 The liability of a co parcener is limited up to his share in the firm. He is not liable personally.
 HUF can not be partner as per Supreme Court Judgement.
TRUST ACCOUNTS
Bank accounts of Trust
Documents for opening bank account
a) certified true copy of the trust deed,
b) in case of a public trust a copy of the registration and certificate from Charity Commission, and
c) an undertaking from the trust on appropriate adhesive stamped paper to indemnify the bank
against proceeds, actionable claims etc.
Operations in account: The account shall be operated jointly, if the number of trustee is two or more. OR
as per mandate through Resolution given by the Trustees, if the Trust deed provides for that.
Insolvency of a trustee: It will not affect the trust property, as the creditors of the trustee cannot
have recourse to the property of the trust.
Transfer of funds from trust account: Bank should not allow any trustee to transfer funds from
trust account to his own account without making proper inquiry. The funds lying in a trust account
can not be utilised for payment of debts of the trustee. Hence right of set-off in such circumstances
cannot be exercised by the bank.
Loans: Loan can be granted if it is for the purpose of the trust. Trustee is authorised to borrow as per
the trust deed.
Death of trustee: In case of death of single trustee cheques dated up to his date, would be paid. In case of
death of one of joint trustees, the provisions as contained in the Trust Deed would be followed.
SOCIETIES AND CLUBS

Bank accounts
While opening account of a society or a club, the banks should obtain following documents:
a copy of registration certificate.
b copy of rules and regulations (bye-laws).
c copy of resolution passed by the Managing Committee regarding opening and conduct of the
account which should specify the names of persons authorised to operate the account.
Loans - While giving loans, it should be ensured that the purpose of loan is consistent with the objects of the
institution, the amount of loan is within borrowing capacity and the resolution for the loan has been passed by
the managing body.
Death of the authorised persons - In the event of death of the person authorised to operate the account, the
operation should be stopped till another office bearer is authorised for the same.
COOPERATIVE SOCIETIES
They can open account with co-operative banks and commercial banks by permission from Registrar of
Co-operative Societies.The bank can open accounts of unregistered clubs/institutions, societies,
associations, schools after satisfaction about the reputation, responsibilities and standing of the office-
bearers of such bodies.No lending should generally be made to such unregistered bodies. On death,
resignation of the authorised office bearer, bank should stop operations till nomination of another.
Cheques payable to such bodies even if endorsed, should not be collected for personal accounts of the
office bearers.Cheques drawn by such bodies favouring self or cash, should be paid after obtaining
confirmatory endorsement by authorised person/s of such bodies. This endorsement has double effect;
one for authorising the presenter to collect the cash and the other that the withdrawal is within
constitutional limits.Where there is change in the office bearerfs the same account can continue. Obtain a
certified true copy of the resolution.
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 challans 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 credit to 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.
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
(intestate).
 In the eyes of law, executors and administrators, unlike trustees are treated as one person. On opening a
bank account, therefore, executors/administrators can authorise 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.
Mandate and Power of Attorney
 When an account holder authorises another person through a simple letter of authority, it is called mandate.
On the other hand, power of attorney is executed on stamped paper and may cover any other transactions
besides opening/operation of an account. Bank generally accept mandates.
 The account holder can revoke mandate or power of attorney any time even if it is stated to be irrevocable.
 Any cheque signed by the agent and presented after cancellation of authority shall not be paid.
 Power of attorney or mandate is revoked by death, insanity, insolvency of the Principal. Any cheque signed by
the principal or agent presented after the death, insanity or insolvency of the principal will not be paid.
 In case Cheque issued by the agent is presented for payment after his death, insanity or insolvency, the
same can be paid so long as the principal is alive provided the cheque is otherwise in order and is dated
prior to the date of death or insanity of the agent.
 Agent cannot delegate authority to a third part
OPERATIONAL ASPECTS OF LOAN ACCOUNTS

Advances granted by commercial banks take various forms such as cash credit, overdrafts, purchase or
discounting of bills, term loans, etc. Apart from fund based facilities, banks also provide non-fund based
facilities. Types of Loan products:
1. The loan portfolio can be classified into Retail loans and Commercial loans.
2. Retail loans are for the individual customers like - vehicle loans, home loans, education loans,
credit cards, personal loans, loans for purchase of consumer durables, small business loans etc.
These loans are usually for small amounts.
3 . Commercial loans ar e f or comparatively larger amounts and r equire more
prof essional attention f or assessment and monitor ing due to t he uniqueness of each
such loan. T ypes of facilities:
1. Funded facilities: When there is actual outlay of funds by the bank e.g. Term loan, cash credit,
overdraft, demand loan, bills purchased and bills discounted etc
2. Non-funded Credit Facilities: When bank is not required to disburse funds immediately. For example
— Letter of Credit, Bank Guarantee etc. However, a non-funded facility may subsequently become a
funded facility due to devolvement or invocation.
3. Term loans: When Commercial loans are given for purchase of fixed assets, these are term loans. Term
loans are repayable in instalments spread over a period of time after the moratorium period wherever
applicable. The amount of instalment and periodicity of repayment is fixed. The instalment may be uniform
throughout the life of the loan, or may differ from instalment to instalment. The instalment can be fixed in
two ways — firstly, instalment is only for Principal amount and entire amount of interest is payable
separately by the borrower. In the second method, 'equated monthly instalments'-are fixed which includes
both principal and interest amount. Term loan is disbursed in limited instalments and cheque books are not
issued.
4. Working Capital loans are given for day to day requirements and are are payable on demand. The
cash credit facility is generally granted against the security of stocks of goods, bills/book debts
representing genuine sales - all belonging to the borrower.
5. Demand Loans: An advance of a fixed amount repayable on demand. The repayment of demand
loans may be either in one lump sum or by instalments.
6. Bills Purchased and Discounted: Demand Bills are purchased and Usance Bills are discounted.
Banks purchase/discount only bonafide trade bills and not accommodation bills.
Security in a loan: The security created from bank's finance or against which credit is provided by the
bank is called Primary security. A collateral security is additional security. Besides security, banks obtain
personal guarantee from a third party for payment of dues in the event of default by the borrower.
Characteristics of a good security: marketability, easy ascertainability of value, stability of value, and
transferability. Methods of Creation of Charge: Mortgage, pledge, hypothecation, assignment, or set-off.
Mortgage: Mainly of two types. Registered Mortgage - effected by a registered instrument called the
'Mortgage Deed' signed by the mortgagor. Equitable mortgage — created by a deposit of title deeds to
the bank with intent to create security thereof.
Pledge : Bailment or delivery of goods by the borrower to the lending bank to secure a loan. The
ownership of the goods remains with the pledger but possession is with bank.
Hypothecation: Neither ownership nor possession is transferred to the bank. The borrower periodically
submits statements regarding quantity and value of hypothecated assets (stocks, debtors, etc.) to the
bank on the basis of which the drawing power is calculated.
Assignment: Transfer of an existing or future debt, in favour of another person. Assignment is created on
actionable claims such as book debts and life insurance policies.
Set-off : statutory right of a creditor to adjust, wholly or partly, the debit balance in the debtor's account against
any credit balance lying in another account of the debtor. For the purpose of set-off, all the branches of a bank
are treated as one single entity. The right of set-off can be exercised in respect of time-barred debts also.
Banker's General Lien: Right of bank to retain goods and securities of borrower till bank's dues are paid.
Lien is a statutory right and does not require any separate agreement.
Negative Lien: Undertaking given by the borrower to the bank that he will not sell or create any charge
over his immovable and moveable properties without the prior permission of the bank.
Margin: Margin is the contribution by owners for purchase of asset. Margin depends upon the risk
perception, type of security, volatility in value etc.
Type of charge: Fixed Charge: created on some specific assets in favour of the bank. A floating charge
is an equitable charge on the assets, present as well as future. A floating charge becomes a fixed charge
when money becomes repayable and the bank takes necessary steps for the enforcement of the
security.
Priority sector: Main sectors, included in the priority sector are — (a) Agricultural finance; (b) Micro and small
enterprises including retail trade; (c) Housing finance; (d) Educational loans; (e) Export credit: not treated as
priority sector for domestic banks but export credit by foreign banks is treated as finance to priority sector; (f)
Other priority sector including micro credit. RBI sets the targets and sub-targets under priority sector lending for
domestic and foreign banks operating in India.
Base Rate system of interest on advances
1. The Base Rate system has replaced the BPLR system with effect from July 1, 2010.
2. Banks may determine their actual lending rates on loans and advances with reference to the Base Rate.
3. All categories of loans should be priced only with reference to the Base Rate.
4. Base Rate is the minimum rate below which banks will not lend to any borrower except in the case of (a)
DRI advances (b) loans to banks' own employees (c) loans to banks' depositors against their own
deposits.
5. Calculation of Base Rate: Base Rate shall include all those elements of the lending rates that are
common across all categories of borrowers like (a)cost of funds (b) Unallocatable Overhead Cost
(c) negative carry for SLR and CRR (d) Average Return on Net Worth.
6. Objective of Base Rate:(i) Enhancing transparency in lending rates of banks (ii) Enabling better
assessment of transmission of monetary policy.
7. Banks may choose any benchmark to arrive at the Base Rate for a specific tenor that may be
disclosed transparently.
8. Banks are required to review the Base Rate at least once in a quarter with the approval of the Board
or the Asset Liability Management Committees (ALCOs)
Penal rate of interest: Bank to decide penal rate of interest. For loans to borrowers under priority sector,
no penal interest should be charged for loans up to Rs 25,000. Penal interest may be levied for reasons
such as default in repayment, non-submission of financial statements, etc.
Operational Process of Loans

1. Receipt of loan application: The request is generally in a standard format of the bank. The applications
are entered in a Loan Applications Received Register. Required documents also submitted with
application.
2. Assessment of viability and credit worthiness: The degree of scrutiny depends largely on the amount
of the loan. Following parameters are generally considered to ensure that it is technically feasible,
economically viable and commercially acceptable:
1. Experience, competence and profile of the promoters of the unit.
2. Performance of the unit in comparison to its peers.
3. Conduct of its accounts with the existing lenders, if any.
4. Technical feasibility of the proposed unit.

5. Availability of inputs for production and commercial viability of the proposed business.
6. Ratio analysis to check unit's growth, its financial position, liquidity and the stake of promoters.
7. Guarantees and collateral securities offered.
8. Unit's capability to achieve the projected cash flows.
9. CIBIL Report, RBI List of defaulters, Credit report from other banks.
10. Locational restrictions, Govt, policy about particular industry, etc.
3. Sanction: Loan is sanctioned within powers delegated to concerned officials. If proposal is found to be
acceptable, appraisal note along with necessary supporting papers is put up to sanctioning authority with
recommendations. Detailed terms and conditions are written in the sanction letter which are
communicated to applicant and his consent sought.
4.Disbursement: Documents prescribed by the bank are obtained and charges are created. Bank's
charge is noted with Registrar of Companies, Transport Authority, insurance company, land records
authority, etc. and then the loan is released.
5. Monitoring and Supervision: Monitoring is done through inspection, review of conduct of account
Inspections: Pupose of inspection
2. 1. To ensure that the amount disbursed has been utilised for purposes for which the loan was sanctioned
To ensure that the borrower has not availed of finance from any other lender without bank's permission_
3. To check that the borrower has not acquired/disposed off any asset without bank's consent.
4. To ensure that the borrower has not availed of finance against unpaid stocks.
5. To cross-check the figures declared in the stock statements with the books and physical verification of
stocks.
6. To check that the unit has been working at the projected levels.
7. To check that there is a regular turnover of stocks and the unit does not carry any obsolete, unusable
stocks. Review of the conduct of the account: By scrutinising the stock statements and other relevant
financial data periodically and analyzing it.
Assessment of Working Capital limits
RBI has liberalized guidelines for assessment of working capital. Mainly three methods are adopted —
Turnover method; Permissible Bank Finance method; Cash Budget Method. For large loans, banks follow the
method of MPBF based on CMA (Credit Monitoring Arrangement) formats. CMA formats consist of the
following forms:
FORM I - Particulars of the existing limits from the Banking System/Financial Institutions
FORM II - Operating Statement
FORM III - Analysis of Balance Sheet Part A - Balance Sheet Spread - Analytical and Comparative
Ratios.
FORM IV.- Comparative statement of current assets and current liabilities
FORM V - Assessment of Maximum Permissible Bank Finance for Working Capital
FORM VI - Funds Flow Statement
Accounting aspects of Loan Products
Term Loans:
At the time of disbursement: Debit the customer's loan account and credit - Cash account, if the disbursement
is by way of cash, or Customer's current account or Third party account, or draft/pay order account, for direct
payment to the supplier from whom the customer has purchased the asset financed.
At the time of repayment: Debit cash or Debit deposit account of customer or Debit clearing account and
credit loan account of the customer.
Operating Manual for Loans and advances
The Operations Manual of a bank is intended to provide guidelines to the operating staff on various matters
including eligibility criteria for various loan products, appraisal method, margin, repayment period, processing
fees, interest rate, penal interest, requirement of collateral security, personal guarantee, steps for creation of
charge and documentation; insurance of primary and collateral security, procedure for disbursal of loan amount,
monitoring and follow-up. The operational guidelines are based primarily on (a) General principles of credit; (b)
Bank's loan policy; (c) RBI guidelines; (d) legal aspects. The operating guidelines differs from bank to bank
depending upon its risk appetite, products offered, appraisal forms and methods, terms and conditions, type of
documents, prudential exposure norms for individuals/groups as well as for industry segments.
Instructions for lending against various types of securities
Advance Against Goods
1. The goods offered for security should not be perishable articles, should be easily marketable, prices
easily ascertainable and prices should be relatively stable and should not,fluctuate widely.
2. Advances should be allowed only against fully paid stocks.
3. The goods given as security should be the ones in which borrower normally deals.
4. Advance against goods should not be allowed for hoarding of goods for speculative purpose.
5. The goods should normally be not more than six months old.

6. Suitable margin should be kept on the value of the goods as a cushion against fall in prices and drawing
power calculated accordingly. The margin may vary from customer to customer and stock to stock
depending on nature of stocks and creditworthiness of borrower. Generally margin is between 25%
to 30%. In case of commodities coming under the purview of Selective Credit Control, the margins
are kept as per directives received from RBI.
7. Valuation should be done on Cost Price or Market Price whichever is lower, or Invoice Price or
Market Price whichever is lower.
8. Marketability of the goods should be checked with reference to turnover of goods. The movement in the
stocks should not be confined to only a few items but the entire stocks should move smoothly._A healthy
turnover in the stocks is indicative of their ready marketability. Slow movement of stocks in an account may
be due to — (a) Goods are not easily marketable; (b) Goods may be of an inferior quality; (c) overvaluation
d) hoard the goods for speculative purpose; (e) deterioration in quality and quantity; f) obsolete or out
of fashion goods.
9. Name plate that 'Goods pledged/hypothecated to...... ...... Bank' should be affixed to the main entrance of
the godown.
10. Goods pledged/hypothecated to bank should be fully covered against fire and burglary risks. Insurance
must be for full marketable value of the goods pledged/hypothecated to the bank to avoid application of
'Average Clause'. If goods are underinsured, in case of loss insurance company will pay claim
proportionately. The insurance policy should have 'Bank Clause'.
11. Godowns in a Pledge Account: In case of pledge, bank as a bailee is bound to take as much care of the
goods bailed to him as a man of ordinary prudence would, under similar circumstances, take for his own
goods of the same bulk, quality and value of the goods bailed. Therefore, Godown should have direct or
independent access. When the godown/compound is not owned by the borrower(s), the landlord should
give a letter that they will provide free access to godown and have no interest in the goods lying in the
godown.
12. Stock Statements in Hypothecation Accounts: It will be submitted weekly, fortnightly or monthly duly signed
by borrower or his authorized representative. Valuation of goods shown in Stock Statement should be
checked. Bank should also obtain their sales during the period to enable the bank to check up whether the
sale proceeds have been credited to their account. The value of stocks shown in the borrower's Balance
Sheet should be compared with that shown in the Stock Statement as at the date of the Balance Sheet.
Advances Against Warehouse Receipts:

1. Advances may be made against security of Warehouse Receipts issued by Central and State
Government Warehouses or Warehouse Receipts issued by Private Agencies approved by Head
Office.
2. Margin: Same as for commodities covered by the relative Warehouse Receipts.
3. No advance to be made against Warehouse Receipt indicating stocks of foodgrains marked as
Grade II, Ill and IV. Only Grade I stocks to be accepted.
4. Warehouse Receipts should be of recent dates. The stocks lying in the Warehouse for long periods
should not be taken as security.
5. Warehouse Receipts issued in the names of the borrowers only should be accepted.
6. No advance against a Non-negotiable Warehouse Receipts.
7. The Warehouse Receipt should be got endorsed by the borrower in favour of the bank.
8. A letter addressed to the Warehousing Corporation by the borrower notifying pledge of Warehouse
Receipt to the bank and of bank's lien on the stocks should be obtained.
9. The bank should send notice to Warehousing Corporation, regarding pledge of Warehouse Receipt to the
bank.
10. It should be ensured that stocks are insured by the Warehouseman for the full cost price or market
value whichever is higher.
Loan against Gold Jewellery
1. Banks are prohibited from granting any advance against bullion/primary gold. However, loan can be made
against specially minted gold coins provided the weight of the coin(s) does not exceed 50 grams per
customer.
2. The purpose of the loan should be approved, and non- speculative.
3. The ownership of the gold ornaments to be verified before accepting them for pledge.
4. Gold ornaments should be assessed by approved assessors. Loans are given only on the basis of gold
content of ornaments. As per RBI, gold jewellery accepted as security/collateral will have to be valued at
the average of the closing price of 22 carat gold for the preceding 30 days as quoted by the Indian Bullion
and Jewellers Association Ltd. If the gold is of purity less than 22 carats, the bank should translate the
collateral into 22 carat and value the exact grams of the collateral.
5. Loan to Value (LTV) Ratio: Loans (including bullet repayment loans) sanctioned by banks against
pledge of gold ornaments and jewellery for non-agricultural purposes should not exceed 75 per cent

of the value of gold ornaments and jewellery.
Education Loan Scheme
1. Prepared by IBA on the recommendations of a group headed by Shri R.J.Kamath.
2. The scheme could be adopted by all scheduled commercial banks.
3. Eligible Courses would include School education including plus 2 stage; Graduation & Post
Graduation courses, professional courses, computer certificate courses etc.
4. Student Eligibility: Should be an Indian national and should have secured admission to professional /
technical courses through entrance test/selection process or secured admission to foreign university
/ institutions. If admission on management quota seat, not eligible for loan.
5. Expenses for Loan: Fee payable to college / school / hostel; Examination I library / laboratory fee; Purchase
of books / equipments / instruments / uniforms; Caution deposit / building fund / refundable deposit; Travel
expenses / passage money for studies abroad; Purchase of computers essential for completion of the
course; Other expense to complete the course like study tours, project work.
6. Maximum loan: No ceiling now.
7. Margin: Upto Rs.4 Iakh: No margin; More than 4 Iakh: Studies in India: 5%; Studies abroad: 15%
8. • Security: Upto Rs.4 lakh: Co obligation of parent; No security or Third party Guarantee. Loan more than
Rs 4 Iakh but up to Rs 7.5 lakh: Co obligation of parent and third party guarantee. Loan above Rs.7.5 lakh:
Co obligation of parent and collateral security of suitable value and/or third party along with the assignment
of future income of the student for payment of instalments.
9. Interest Rate: Linked to base rate. Simple interest during moratorium period. Interest concession of
1-2 per cent may be provided for loanees if the interest is serviced during the study period when
repayment holiday is specified for interest / repayment
10. Repayments: Moratorium period plus 10 to 15 years; For loans upto Rs 7.5 lakhs: upto 10 years; For
loans above Rs 7.5 lakhs: upto 15 years; Moratorium: Course period + 1 year from completion of
studies or 6 months after getting job, whichever is earlier. The accrued interest during the repayment
holiday period should be added to the principal and repayment in EMI fixed.
11. The joint borrower should normally be parent(s)/guardian of the student borrower. In case of a
married person, joint borrower can be either spouse or the parent(s)/parents-in-law.
12. Interest Subvention is available on the entire interest charged during moratorium period provided
annual parental/family income does not exceed Rs.4.50 lakhs.
Home Loans
Eligibility: Individuals or groups of individuals including co-operative societies, to purchase/construct the
dwelling unit or for repairs, to the damaged dwelling unit. Banks should not grant loans in respect of
properties which fall in the category of unauthorised colonies unless and until they have been regularised
Valuation of properties: The property against which the home loan is to be provided should be valued by
the approved valuer of the bank. Charges on account of stamp duty, registration and other
documentation charges should not be included in the cost of the housing property to be financed.
Maximum Loan to Value (LTV) ratio: Upto Rs 20 Lakh: 90 %; Above Rs 20 lakh & upto Rs75 lakh: 80%;
Above Rs 75 Iakh; 75%
Security: The property should be charged to the bank by way of equitable mortgage/registered
mortgage. There should be clear and unencumbered title to the property.
Repayment: The repayment is by EMIs.
Foreclosure Charges/Prepayment Penalty: No foreclosure charges/prepayment penalties should be
charged on floating rate home loans sanctioned to individual borrowers.
Vehicle Loans
Purpose of Auto loan: The loan can be sanctioned by the branch for the purchase of new Cars/used cars,
Multi
Utility Vehicles (MUVs) and Semi Utility Vehicles (SUVs) or two wheelers
Eligibility:People engaged in trade, commerce and business, professionals, proprietary/partnership
firms,
companiesland individuals (singly or jointly). The age of the individual should not be more than 65 years.
Loan tenure: Maximum 84 months.
Maximum Loan to Value Ratio (LTV): Generally 80% of 'on road price' of the car
Pre Payment penalty: Pre-payment penalty is waived.
Security: Branch should verify the original RC book for noting down the charges in favour of the Bank.
Insurance: The vehicle purchased is to be kept comprehensively insured for the market value or at least 10%
above the loan amount outstanding, whichever is higher, and the Bank's interest as a hypothecatee should be
noted in the Certificate of insurance and Insurance policy.

OPERATIONAL ASPECTS OF CBS ENVIRONMENT
CBS
1. Banks are categorised as non-computerised banks, partially computerised banks or fully
computerised banks depending on the level of computerisation.
2. Core Banking Solutions (CBS) means the platform where communication technology and information
technology are merged to suit core banking needs. 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.
Functions performed by CBS: (a) Opening new accounts; (b) Recording of transactions; (c)Passbook
maintenance, (d) Interest calculations on loans and deposits; (e) Processing cash deposits and withdrawals;
(f) Processing payments and cheques; (g) Maintaining records of all the transactions; (h) Customer
relationship management activities; (i) Managing customer accounts.
Prime features and advantages of CBS
1. CBS facilitates banking operations like ATMs, Electronic fund Transfers, mobile/intemet banking etc.
2. CBS helps in making branch clearings faster.
3. CBS has resulted in improved housekeeping and prevention of income leakages.
4. CBS has made Inter branch reconciliations faster and accurate.
5. CBS makes the bank's operations simpler and cost effective.
6. Customers can conduct financial transactions from any branch or through net banking, ATM, phone-
banking, instead of visiting their home branches
7. CBS helps in saving time and inconvenience.
8. Branch staff has more time for focusing on serving the customers which improves the quality and
efficiency of customer services.
9. In CBS, customers of a bank can be uniquely identified by their account number across
branches. Why CBS is needed by banks?
1. To enhance efficiency and effectiveness
2. To increase customer satisfaction and convenience
3. To enhance bank's competitiveness
4. To simplify processes for the staff
5. To make available more time for branch staff to focus on sales and marketing
6. To meet the compliance requirements
7. To meet the intense competition
8. To meet the demands of customers who have become more demanding and less loyal.
Flow of Transactions in CBS

1. The user has to log in to the system with his user id and password at the branch.
2. Once the user logs in, he will get access to the different modules for doing the transactions.
3. When the user logs in and does a transaction, the transaction will go through a maker checker functionality.
4. In case of maker checker functionality when a teller or user (Clerical/Cashier level) initiates a
transaction, the transaction has to be authorised by a supervisory official if the transaction exceeds
the authority of the teller who initiates the transaction.
5. When transactions hits the host, the system will validate the transaction and debit or credit the particular
account and a message is sent back to the user at the branch as to whether the transaction is complete or
not.
6. The system validates the account number, balance in the account, authority of the teller who does
the transaction, authority of the officer who authorises the transaction, and other validations.
Accounting transactions in CBS
Transaction: Debit account of customer A and credits Customer B for Rs 1,000.
Instead of debiting and crediting accounts straight away, the system posts the transactions through an
intermediary account called the balancing account as given below:
Debit account of customer A Rs 1,000; credit Balancing Account Rs '1,000 Debit Balancing Account Rs 1,000;
credit account of customer B Rs 1,000
In case of batch transactions, if there is one debit for Rs 10,000 and credit to 10 different accounts for Rs
1,000/-each, following transaction will be done:
Debit account of customer Rs 10,000; credit Balancing Account Rs 10,000
Debit Balancing Account (10 times @ Rs 1,000) and credit individual accounts Rs 1,000
Core banking solutions work on two levels of software.
The first level software deals with transactions put through at the branches.
The second level software deals with postings in the General Ledger.

The interface for the postings between the two levels is what is known as 'GLIF' (General Ledger Interface
File).
Begin of the Day and End of the Day Operations
BOO- Branch Level: It is done to begin the day's transaction. This is done befOre the day's operations start.
After the BOD, the users will be given access to the full module so that they can do transactions. Day start-up
Activities of a computer system should be carried out either by the Branch Manager or System Administrator
and entered in the register maintained for this purpose. It should not be carried out prior to the banking hours.
All the security checks should be performed as per guidelines from Head Office. Banking date should be is
verified daily.
EOD- Branch Level: While EOD is done at the central data centre for the bank as a whole, the branch has
to do the EOD checks to find out whether any transactions are pending to be authorised. Once the EOD at
the branch is done, the users at the branch will not get access to any of the modules for doing
transactions but will get access to certain limited modules such as account enquiry.
EOD- Central Data Centre Level:
1. EOD operations at CDC start time is so fixed that all branches complete the day's transaction
before that time. Normally it is 10 PM daily.
2. The branches will be cut off from the Host before start of EOD to ensure that branches do not do
any Transaction after start of EOD at Central Level.
3. During EOD day's backup is taken. Data for the entire Bank is stored at CDC (Central Data
Centre) level and all updating and back up is to be made at CDC level.
4. When EOD is completed, the start of day (SOD) process is done at the CDC level.
5. The SOD process takes care all the reposting of ATM transactions, which happened during EOD
process was running.
6. Once SOD process is completed, branches will be able to get access to the system. The EOD/
SOD process is done for all the branches at one consolidated stretch.
Operational aspects for Password Control
Problems in maintaining the integrity of the Password:
1. Users,donot understand the importance of the-password. They disclose it to others, write down at
some place, or use easy passwords and do not change their passwords at regular intervals.
2. Passwords are not changed/deleted on the transfer/retirement of the operator/officer in the
Master Record of the System Software.
3. In Certain cases multiple passwords are required to be entered.
4. Staff disclose Passwords to others very frequently for the convenience of work.
5. Sometimes, System Software does not store password in the encrypted form.
Steps to be taken to ensure the integrity of the password:
Passwords secrecy should be maintained by Branch Manager, System Administrator, Users, and
Authorised Persons.
The crifical passwords, for accepting sensitive jgbs like entering operating systems, taking back-ups,
monitoring disk space creating/editing Master Records should be known only to Branch Manager or
System Administrator.' The Operating System Password should be under Dual Control of Branch Manager
and System Administrator in a sealed cover and opened in the presence of at least two persons. It should
be changed at once on being opened.
TRANSACTION CONTROL
1. Date should be authorised either by Branch Manager or System Administrator.
2. There should be control in the software so that entries pertaining to current date only would be accepted.
3. There should not be any provision to feed back dated or future dated entries.
4. In the case of non-usage of terminals, terminals should be logged-off.
5. Only for the physically present users the requisite terminal/user account should be enabled.
6. Special batch reports should be printed, checked, authenticated and duly filed.
PERSONNEL CONTROLS
1. There should be segregation of duties among the bank employees.
2. Authorization for amounts entered by the operators should be clearly defined and documented.
3. The job rotation should be carried out at regular intervals.

DAY END ACTIVITIES
1. Day end activities are carried out by either the Branch Manager or System
administrator. 2_ Supplementary activities should be checked and special users
should be deleted.
3. Functions (performed centrally) to be completed at the day end:
1. Minimum balances calculated.
2. Products calculated for Current Account (Debit balances) .
3. Mandatory reports generated.
4. Fall back procedures activated.
5. Day end back up taken.
6. Recording of entries in back-up register.
7. Recording in Log Books.
8. Filing of reports.
9. Shutting down of complete computer system.
4. The data back-ups taken should be in safe custody.
5. Server Room should be properly locked and the keys are kept only with authorised person.
6. Documents generated at Day End - (a) Access log; (b) Supplementary; (c) Audit Trail; (d)
Transaction number for each transaction entered.
7. After business hours of the bank, the following functions are performed (a) Supplementary Report is
printed either by Branch Manager or System Administrators and filed; (b) Cash Denomination Report is
printed and filed; (c) Vouchers are tallied and signed either by Branch Manager or System Administrator.
PARAMETER/ MASTER FILE
1. At the first stage of implementation of computerisation of the Branch, in a Parameter/Master File,
all relevant information related to a particular account like Rate of Interest, Penal Interest,
Commission Rates, Operation Limits in case of loans, Nature of operation of account, should be
fed and stored.
2. The Parameter/Master File if accessible to the operators should only be in read-only format so
that unauthorized modifications cannot be done.
3. If any alterations are to be made in the Parameter/Master File, printouts of the file prior to the
changes and after the changes should be taken and kept in safe custody of Branch-Manager.
4. Authorised personnel will mark all the Bank Holidays into the software in the beginning of the
Financial Year.
5. Operation limits and authorisation levels for the operators and supervisors should be clearly
defined.
6. The parameters for Interest and Bank Charges should be defined in accordance with the relevant
rates and guidelines. The file is updated as and when changes are announced.
7. Printouts of parameter file are taken out before and after changes are given effect and
documented.
8 . The safe custody of the printouts should be with the Branch Manager and alterations are entered
into "Parameter Register".
LOGICAL ACCESS CONTROL
1. Available security features be implemented. A security officer should be appointed who would
ensure that available features have been implemented.
2. There should be a prOcess in place for granting access levels. Users should have only the
minimum access level needed to do their job. Users' access should be restricted to specific
applications, menus within applications, files, and servers. Access levels should be periodically
reviewed by the internal auditor. Procedures should be implemented to limit access to
workstations after normal working hours.
3. Maintenance should be restricted to a minimum number of persons and it should be properly
approved.
4. The password file should be encrypted.
5. Modem access should be protected by a secure system and Modem numbers should be changed
periodically.
SECURITY CONTROL IN CBS - CHECK POINTS
1. Only authorised, accurate and complete data are made available for processing.
2. In case of interruption due to power, mechanical or processing failures, the system restarts
without distorting the completion of the entries and records.
3. The system should prevent unauthorised amendments to the programmes.
4. The "access controls" assigned to the staff-working match with the responsibilities as per Manual.
5. Segregation of duties while granting system access to users
6. Changes made in the parameters or user levels should be authenticated.
7. Charges calculated manually for accounts when function is not regulated through parameters
should be properly accounted for and authorised.
8. All modules in the software have been implemented.
9. Exceptional transaction reports are being authorised and verified on a daily basis by the officials
concerned.
10. Account master and balance cannot be modified/amended/altered except by the authorised personnel.
11. All the general ledger accounts codes authorised by Head Office are existing in the system.
12. Balance in general ledger tallies with the balance in subsidiary book.
13. Important passwords, like database administrator and branch manager's password are kept in
sealed cover with branch manager.
14. The bank takes daily and monthly backups.
• 15. Daily backup should be taken in 6 sets, one for each weekday and 12 sets for each month end.
16. The backup media is stored in fireproof cabinet and the off-site backups are preserved for emergency,
17. Anti-virus software of latest version is installed in servers/PCs of branches to prevent data corruption.
18. Access to the computer room is restricted to authorised persons only.
Role and Responsibilities of the Bank under CBS

The bank should have:
1. Data processing and data interface under various systems.
2. Data integrity and data security.
3. Business Continuity Plans and Disaster Recovery Plans.
4. Accounting manual and critical accounting entries (including month-end and year-end)
5. Controls and recording of various e-banking and Internet banking products.
6. Manual processing of key transactions.
7. MIS reports being generated and the periodicity thereof.
8. Hard copies being generated and the periodicity thereof.
9. Process of generating information related to various disclosures in the financial statements and
the involvement of the IT systems.
10. Major exception reports and the process of generation thereof.
11. Major IT related issues such as, data/system corruption, system break-down, etc., having bearing
on the preparation and presentation of financial statements.
12. Significant observations of internal auditors, concurrent auditors, system auditors, RBI inspection
and internal inspection, etc., related to computerised accounting and overall IT systems.
13. Customer complaints related to mistakes in transactions (interest application; balances, etc.).
14. To ensure that the technology deployed is being operated in a safe, secure, sound and efficient
manner and as
per the process flow submitted by the bank banks are required to get a System Audit done by a firm of
Chartered Accountants. The scope of the System audit would include evaluation of the hardware
structure, operating systems and critical applications, security and controls in place, including access
controls on key applications, disaster recovery plans, training of personnel managing systems and
applications, documentation, etc.
BACK OFFICE FUNCTIONS/HANDLING UNRECONCILED ENTRIES IN BANKS

Role of Back Office:
1. Back office consists of administration .and support personnel.
2. Back offices carry out various functions to support the front office activities.
3. In specialised functions like Treasury operations and Forex, the back offices perform the mainstream
role of directly supporting the trading room or front office by controlling confirmations and settlement
transactions.
4. With the introduction of computerisation in the banks, 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.
5. 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.
6. One of the important functions of the back office is to reconcile the accounting entries specially
the inter office entries:
Functions performed by the Back Office

1. Book keeping and accounting: transaction processing, maintenance of General Ledger and other
books of account, balancing of branch accounts, reconciliation of entries and sub-systems,
preparation of financial statements.

2. Deposits: calculation and posting of interest, service charges, reminders for renewals of term
deposits, nature of operation of account - single/jointly etc.
3. Loans: processing loan proposals or any aspect of loan servicing, NPA management, calculation
of EMIs, calculation and posting of interest, penal interest, processing fee, commission and
prepayment charges, operational Limits, risk management etc.
4. Regulatory Compliance: identifying KYC gaps, customer grievance redressal system etc.
5. e- banking: handling transactions through internet, mobile banking or ATMs, card based payments etc.
6. Other functions: clearing, collection, remittances etc.
Reconciliation Function in Banks
1. Reconciliation of accounts for payments involving intermediaries
2. Reconciliation of accounts with correspondent banks
3. Reconciliation of bank accounts with RBI and other banks and institutions
4. Reconciliation of intra branch entries and sub-systems
5. Reconciliation of inter branch/office entries
Reconciliation of Accounts for Payment Transactions Involving Intermediaries

1. The use of Electronic/Online Payment modes for payments to merchants for goods and services like
bill payments, online shopping, generally involves the use of intermediaries like aggregators and
payment gateway service providers. In arrangements involving such intermediaries, the payments made
by customers (for settlement of e-commerce/m-commerce/bill payment transactions), are first credited to
the accounts of these intermediaries and then transferred by these intermediaries to the accounts of the
merchants in final settlement of the obligations of the paying customers.
2. Any delay in the transfer of the funds by the intermediaries to the merchants account will entail
risks to the customers and the merchants and also impact the payment system.
3. To ensure that the payments made by customers are remitted by the intermediaries to the
accounts of the merchants without delay, RBI guidelines for opening and operation of accounts
and settlement of payments for electronic payment transactions involving intermediaries should be
followed.
4. Further, management of ATMs is being assigned by banks to vendors who collect the amount
from bank and load the same in the ATMs as well as collect the amount deposited by customers
from ATMs and depositing with the bank.
5. Banks normally centralize the process of monitoring ATM balances and monitor balance as per
the books and balances as per ATM machines (commonly termed as Switch balance) and their
reconciliation and ensures timely adjustment of reconciliation entries.
Reconciliation of Accounts with Correspondent Banks

For settlement of foreign exchange transactions, banks normally maintain accounts with their overseas
branches/correspondents which are called Nostro accounts. Banks are required to reconcile the entries that
have passed over an account with an correspondent bank against those that are passed internally in the
books of the bank to a Nostro account. After reconciliation, the unmatched items in both accounts represent
entries that have not been responded to or have been responded differently in either the books of the bank
or its correspondent.
Reconciliation of Bank Accounts with RBI and Balances with RBI
Banks maintain a current account and other accounts with RBI to facilitate transactions relating to CRR,
Repo and Reverse Repo, clearing/RIGS, currency chest transactions through select branches. These
branches having account with RBI, should reconcile the balances in these accounts. The maker checker
concept is used for preparation of the reconciliation statement. Following items appearing in the
reconciliation statements need closer attention: - (a) cash transactions remaining unresponded; (b)
revenue items requiring adjustments/write-offs; (c) old outstanding balances remaining unadjusted for a
significant period.
In case of purchase and sale of security transactions, the banks periodically reconcile the security
balance in the banks book vis-a-vis the balance in the custodian account (i.e., Subsidiary General
Ledger or Demat account). As per RBI, investment balances as per bank's book should be reconciled
at quarterly intervals with the balances in the Public Debt Office's books.
Balances With Other Institutions and Banks Other than RBI

Accounts may be maintained for the purpose of clearing/collection, investments, money at call and short
notice. The process adopted for reconciliation of balance with RBI is adopted for reconciling the balances
with banks other than RBI. No debit for charges or credit for interest should remain outstanding and all
revenue should be accounted for in the same year. No cheque sent or received in clearing should remain
outstanding. Any cheque returned unpaid should be accounted for on the same day on which they were
sent in clearing or on the following day. All bills or outstanding cheques sent for collection and
outstanding as on the closing date should have been credited subsequently.
Reconciliation
4 of Inter Branch Entries
Balancing of Books/Reconciliation of control and subsidiary records
Balancing of the books of account means that the primary books of account have been tallied and the
general ledger is balanced. At a particular point of time, the balance shown in a particular control account
in the GL of the branch and the total of balances in all the folios of the subsidiary ledgers, pertaining
to that control account, should be same. In the manual system of recording, balancing was an acute
problem for branches having a large number of accounts. With computerisation, the original entry in
the account is automatically posted in all the books and balances derived and therefore no problem
of balancing.
Sundry/ Suspense account: The problem relating to reconciliation in suspense and sundry accounts has
not been resolved by computerization. Suspense account is used to temporarily record certain items like —
(a) Amounts the precise nature thereof which is yet to be determined or pending transfer thereof to the
appropriate head of account; (b) Debit balances arising from payment of interest warrants/dividend warrants
pending reconciliation of amounts deposited by a company; (c) Losses caused due to frauds and awaiting
adjustment. If entries in suspense account are not reconciled quickly, there may be frauds by passing
debit entries in the account and siphoning off the amount. Details of old outstanding entries in suspense
account, along with narrations, should be prepared periodically and decision on each entry is taken
including provision/write off for old outstanding items. Outstanding entries in 'Sundry Deposits' or
'Sundries Account' should also be reconciled quickly. However, probability of fraud in such credit entries
is relatively less.
Reconciliation of Inter Branch Entries
Origination/Response(Reversal) of Inter Office Transactions
Inter office transactions generally originate at branches. The major types of transactions, which result
in Inter Office debit or credit entry, are:
1. Issue of remittance instruments like drafts on other branches;
2. Payment of remittance instruments like drafts drawn by other branches;
3. Payment to/receipts from other branches of the proceeds of instruments received/sent for
collection/ realisation/clearing.
4. Transactions through NEFT, ECS and RIGS
5. ATM transactions of the customer either at ATMs linked with other branches or with merchant
establishments. 6., Transactions through payment gateways of ATM, etch
7. Payment of instruments like gift cheques/banker's cheques/interest warrants/dividend warrants/
repurchase warrants/refund warrants/travelers cheques, etc., which are paid by the branch on behalf of
other branches.
8. Deposits and withdrawal of money by branches from the currency chest maintained by another
branch.
9. Cash sent to/received from other branches.
10. Head office interest receivable and payable by the branches.
11. Profit/loss transferred by the branch to head office.
12. Government receipts and payments handled by the branch either as the nodal branch or as an
agent of the nodal branch.
13. Internet based transactions other than inter account transfers with the same branch.
14. Credit card related transactions of the customers.
15. Payments made under- LCs of other branches
16. Nostro Accounts of Indian branches maintained with overseas branches of the bank. 17.
Operations by the authorised branches on the bank's NOSTRO accounts.
If the balance in the Inter Office account is a debit balance it appears on the assets side of the balance Sheet
of the branch, and if it is credit balance, it appears on the liability side. For the bank as a whole, the
transactions which remain unmatched/unreconciled, appear as inter office adjustments balance in the balance
sheet of the bank under the head, 'Other Assets' if in debit, and under the head, 'Other Liabilities and
Provisions' if in credit
Reconciliation of Inter - Office Transactions
A debit/credit Inter Office transaction, originated at one branch, should result in a corresponding credit/
debit transaction (reversal entry) in the inter Office account at the other branch. There may be a time
lag in some transactions like drafts issued. Every entry in the Inter Office account should be reconciled
with a corresponding entry in the account at another branch/office of the bank. The unreconciled inter-
office entries indicate errors or may also be indicator of the fraud.
RBI guidelines on inter office reconciliation
1. Banks should reconcile the entries outstanding in their inter branch accounts within a period of six
months.
2. Banks should 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). While arriving at the net amount of inter-
branch transactions for inclusion in the balance sheet, the aggregate amount of Blocked Account
should be excluded and only the amount representing the remaining credit entries should be netted
against debit entries.
3. Any adjustment from the Blocked Account should be permitted only with the authorisation of two
officials, one of whom should be from outside the branch concerned, if the amount exceeds a particular
amount.
3. Beginning April 1, 1999, banks should maintain category-wise (head-wise) accounts for various types of
transactions put through inter-branch accounts so that the netting can be done category-wise. Banks
should make 100% provision against the net debit balance in the inter-branch account in respect of
entries outstanding for more than six months. Banks should arrive. at the category-wise position of
unreconciled entries outstanding in the inter-branch accounts for more than six months as on March
31. While making provision, the credit balance in the Blocked Account should also be taken into
account and the net debit in one category is not setoff against net credit in another category.
4. Banks should segregate inter-branch transactions relating to demand drafts from other inter-
branch transactions.
5. Banks should introduce the system of segregating DD transactions, with reconciliation at weekly
intervals and close monitoring of large amounts.
6. Banks should restrict originating debits to head office account to cash/funds transfer, purchase of
securities/capital assets, withdrawals from Provident Fund, advances to inspection and other staff
members..
Reconciliation set up and process at the banks
1. The reconciliation work of inter Office accounts is normally centralised at the reconciliation department.
When banks are working under CBS, banks have centralised this reconciliation work at the IT
department at HO.
2. The inter-branch accounts are normally sub-divided into segments or specific areas, e.g., 'Drafts
paid/payable', 'inter-branch remittances', 'H.O. A/c' etc.
3. Each branch has to send a daily statement of Inter Office account to the Central Reconciliation
Department(CRD). If there is no transaction in this account, a NIL statement has to be sent by the
branch. Based on these daily statements, the computer system matches the originating entries with the
responding (reversal) entries for a particular day/period. If there remain any unreconciled entries, it could
be due to - Nature of the entry i.e. there is a time lag involved in some entries like the draft issued entries;
mistakes in one or more of the daily statements sent by the branches; frauds like payment of a forged
draft.
4. The system will generate the report of unreconciled entries for any particular day or period in any format,
age wise, amount wise, branch wise, category wise etc. as per the requirements of the Reconciliation
Deptt. All the unreconciled entries in the statement generated by the system have to be examined.
Banks may adopt various approaches for corrective action in this regard. Some of these are given
below:
5. Application of the concept of A-B-C analysis to reconciliation of inter- office entries, e.g., segregation of
bulk transactions, high value items, cash and other items that are vulnerable to frauds; Prescribing a
procedure for action to be taken by the head office regarding any entries (particularly debit entries) not
being responded by the branch concerned within a reasonable time. Special procedures to expedite
clearance of the arrears, particularly in respect of large-value entries; Special emphasis on any reversal
entries indicating the possibility of irregular payments or-frauds; a well defined system of follow-up with
branches regarding outstanding entries till they are cleared/reconciled; Introduction of the system to restrict
originating debits to head office account to cash/funds transfer, purchase of securities/capital assets,
withdrawals from Provident Fund, advances to inspection and other staff members.

TEST YOUR SELF
PRACTICE TEST PAPERS

(BASED ON IIBF TEST PATTERN)
ACCOUNTING AND FINANCE FOR BANKERS

(JAIIB PAPER - 2)

PRACTICE TEST PAPER NO. 1 ( TEST YOUR SELF )
01 Which of the following would be considered as a source of funds for a business firm engaged in
manufacturing? a Increase in an asset, b Increase in liability, c decrease in liability,
d none of the above
02 An error has occurred in the real accounts of a firm. Which of the following will be affected by this?
a Balance sheet, b Profit and loss account, c Profit and loss appropriation account, d all
the above
03 The cash book of a firm has been showing an overdraft balance of Rs.12800 but it is observed that a
cash deposit of Rs.1200 has not been credited by the bank in the overdraft account. What will be the
balance in the pass book? a) 11600, b) 14000, c) 10400, d) 15200
04 What is the amount of gross profit when net loss is Rs.2000, operating expenses Rs.12000 and sales
Rs.48000?
a) Rs.12000, b) Rs.11000, c) Rs.10000, d) Rs.9000
05 A company came out with a public issue of 2,50,000 shares of Rs.100 each and receives applications
for 3 lac shares. X had applied for 200 shares in the company. On a pro-rata basis, how many shares will
be get?
a) 167 shares, b) 240 shares, c) 200 shares, d) none of the above
6. 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
7 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
8 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
9 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 5th year?
a Rs.40000, b Rs.35000, c Rs.38000, d Rs.36000
10 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 reserve including premium? a Rs.1000, b R s . 4 0 0 0 , c Rs.5000, d
Rs.10000
11 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
12 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 15t and 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
13 Which of the following is the most appropriate formula for working out 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
14 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
15 Minor repairs are carried to building during the last one year. The expenses would be debited to:
a cash account, b creditors' account, c repair account, d building account
16 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
17 As per accounting equation what would be the amount of liabilities of 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
18 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 Rs.3480, c Rs.3320,
d Rs.3240
19 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
20 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
21 Interest suspense is classified as : a nominal account, b personal account, c
real account, d none of the above
22 At times, the errors are detected after preparation of the trial balance. 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
23 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 R s . 4 0 0 0 0 , d Rs.60000
24 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
25 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, b debit purchase account and credit suspense
c debit creditor's account and credit purchase, d debit purchase and credit cash account
26 The amount of total assets of a firm is Rs.5 lac and the liabilities are 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 above
27 In the written down value method, the amount of depreciation is calculated 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
28 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
29 In the above problem, the freight on machine would be debited to which account?
a cash account, b freight account, c purchase account, d machine account
30 Rebate on bills of exchange, in the books of the drawer would be treated as:
a nominal account, b real account, c personal account, d No where
31 The pass book of a firm shows overdraft of Rs.5100. The firm had issued 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
32 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
33 A firm earns profits of Rs.12000. Its partners had drawn Rs.8000 during 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
34 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 R s . 2 0 0 0 , c Rs.1800,
d Rs.1700
35 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
36 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 Purchase account, d No entry is
required
37 Preliminary expenses incurred by a firm is an example of : a revenue expenditure, b deferred
revenue expenditure, c capital expenditure, d fictitious assets
38 Expenses incurred by a firm in manufacturing of goods are to be classified as: a revenue
expenditure, b deferred revenue expenditure, c Capital expenditure, d fictitious assets
39 A consignment account is in the nature of: a Personal account, b Nominal account,
c Real account, d Intangible asset
40 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
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
42 Goods sent on consignment is in the nature of:
a real account, b personal account, c nominal account, d none of the above
43 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
44 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
45 If the trade discount appears in the trial balance, in the final accounts 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
46 A firm's profit is 25% of the cost price. How much it would be of sales: a 2 5 % , b 2 0 % , c15%, d
10%
47 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
48 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
49 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
50 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
51 The promoter of a business is treated as a creditor of the business accordingly which of the following
concepts of accounting?
a Entity concept, b Money measurement concept, c Dual concept, d Cost concept
52 A firm debited the amount of wages of Rs.1000 paid on account of installation of equipment, to the
wages account. How it can be rectified?
a Debit machinery & credit cash, b Debit cash and credit wages, c Debit machinery & credit
wages d Debit wages and credit cash
53 In the books of a firm, the opening stocks are Rs.2 lac, net purchased Rs.19 lac, direct expenses
Rs.3 lac, closing stock Rs.4 lac and sales Rs.28 lac. What will be amount of gross profit
a Rs.8 lac, b Rs.7 lac, c Rs.6 lac, d Rs.5 lac
54 An sum of Rs.10000 has been debited to repairs account wrongly instead of the machinery account.
The total of debit side of trial balance comes to Rs.199000.What would be the correct total after
rectification:
a Rs.2 lac, b Rs.1.80 lac, c Rs.2.09 lac, d There will be no change
55 A firm starts business with a capital of Rs.90000 in cash and purchases machinery on credit for
Rs.10000. The accounting equation would be as:
a Rs.1 lac = Rs.90000 + 10000, b Rs.10000 = 1 lac – 90000, c Rs.90000 1 lac - 10000
d Rs. 1 lac = 1 lac + 0
56 The closing stock of a firm is nil, the sales Rs. 2.98 lac, the opening stock Rs.0.36 lac, purchases
Rs.1.56 lac and cost of goods sold Rs.2.12 lac. What will be the amount of gross profit? A) 0.86 lac b)
0.84 lac c) 0.80 lac d) 0.78 lac
57. A firm has debited Rs.2000 to purchase account though it related to office expenses. The net profit of
the firm is Rs.60300 presently. What it should be ? a) Rs.62300 b) Rs.58300 c) Rs.60300
d) Rs.64300
58. A machinery has been purchased for Rs.2 lac with expected life of 3 years. Its scrap value at the
end of 3rd year is anticipated at Rs.20000. What is the amount of depreciation under SLM?
a) Rs.60000 b) Rs.66667 c) Rs.73333 d) Rs.56000
59.A firm purchased machinery on April 01, 2001 for Rs.2 lac and sold it for Rs.1.20 lac on Oct 01, 2003.
If depreciation is at 10% and annual closing is March. What is the profit or loss on sale of machinery?
a) Profit Rs.0.30 lac, b) Loss Rs.050 lac, c) Profit Rs.0.50 lac, d) Loss Rs.0.30 lac
60 A firm raised a loan from a nationalized bank. Such loan account would be classified under
which of the following accounts? a) Personal account, b) Nominal account, c) Real Account,
d) Real tangible account
61 A firm has received advance from one of its customers for purchase of finished goods.
Which of the following it is ? a) Personal account and an asset, b) Real account and a liability, c)
Personal account and a liability d) Real account and an asset
62 Which of the following purposes is served by preparation of trial balance by a business
organisation? a location of errors of principle, b location of errors of omission, c location
of clerical errors d all the above
63 A company issued capital and Mr. A subscribed 1500 shares of Rs.10 each by paying Rs.2.50 on
application and Rs.3 on allotment but failed to pay the balance amount. What will be the increase in the
amount of capital reserve on account of his non.- payment after forfeiture of shares?
a Rs. 6750, b Rs. 8250, c Rs. 7750, d Rs. 5550
64 A firm had purchases of Rs.2 lac and sales of Rs.2.50 lac net of returns: The returns inward are
R5.0.10 lac and returns outward Rs.0.15 lac. What would be the amount of gross profit of the
firm? a Rs.50000, b Rs. 50000, c Rs.45000, d None of the above
65 The overdraft balance in a bank pass book is Rs.10200. Firm had issued a cheque of Rs.4800
which has not been presented so far for payment. What would be balance as per cash book of the
firm? a Rs.15000, b Rs.5400, c Rs. 10200, d Rs. 4800
66. 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
67.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
68.In the terminology of books being maintained by a business firm, the term principal books refers to:
a) cash book, b) journals, c) ledgers, d) all the above,
69.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
70. 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

ANSWER
1 B 2 A 3 B 4 C 5 A
6 B 7 C 8 C 9 C 10 C
11 B 12 D 13 C 14 A 15 E
16 B 17 A 18 D 19 C 20 A
21 B 22 D 23 C 24 C 25 B
26 A 27 B 28 C 29 D 30 A
31 C 32 D 33 A 34 A 35 D
36 C 37 B 38 A 39 B 40 C
41 B 42 A 43 D 44 A 45 A
46 B 47 C 48 A 49 A 50 A
51 A 52 C 53 A 54 D 55 A
56 A 57 C 58 A 59 D 60 A
61 C 62 C 63 B 64 A 65 A
66 B 67 C 68 C 69 B 70 A

1 . Cash of Rs.2000 has been received by a firm from Mr. A, the debtor but it has been credited to
account of Mr. C, a creditor. How this entry would be rectified? A) Debit Cash and credit A b) Credit
Cash and Debit C c) Credit cash and debit A, d) Debit C and Credit A
2 Find out the amount of marketing expenses of a firm which have been paid for Rs.20000 for the current
year, these are outstanding for Rs.3000 for the current year, expenses worth Rs.2500 have been incurred
for the previous year and an advance of Rs.1100 has been given for the next year. The firm follows the
cash system of accounting: Rs.23600, b) Rs.24400, c) Rs.28300, d) Rs.20400,
3 The books of a firm reflect that the returns inward have been added short by Rs.1980. Presently its
gross profit is Rs.38200. What it should be? A Rs.38200, b Rs.40180, c Rs.38220, d Rs.37640
4 The debit side trial balance of a firm is showing a balance of Rs.619800 but in the discount
column of cash book the discounted given by the firm has been over-added by Rs.200. What should be
debit side trial balance ? a Rs.619600, b R s . 6 2 0 0 0 0 , c Rs.620200, d Rs.619400
5 Cash book of a firm has been showing overdraft of Rs.4200 but it is observed that the bank has.
debited commission of Rs.186. The balance as per pass book should be:
a Rs.4014, b R s . 4 3 8 6 , c Rs.4200, d None of the above
6 A firm failed to charge depreciation rectification of this error would result in:
a increase in loss, b increase in profit, c reduction in profit, d a and c
7. 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
8.Which of the following will be treated as a correct accounting equation: a) Assets = capital +
liabilities, b) Assets = liabilities, c) Liabilities = Capital + assets, d) Assets = equity – liabilities
9. Income received in advance is written on the liability side of the balance sheet:
a) true, b) false, c) incomplete statement, d) none of the above
10 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
11 The excess of credit side of an account over the debit side of the same account shows:
a) credit balance, b) debit balance, c) overdraft balance, d) any of the above
12 A balance sheet is defined as:
a: Statement, prepared with a view to measure the exact financial position of a business on a certain
fixed date,
b: Statement for the particular year, c Any of the above, d None of the above
13 Purchase of machinery by a firm for cash would result in: a increase in the assets, bincrease
in the liabilities, c decrease in the assets, dthere will be no change in the total amount of assets
14 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
15 What is the time period during which the shares can be issued at a discount after permission of
Central Govt.:
a 2 months, b 3 months, c 4 months, d 6 months
16 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
17 Which of the following account will always have a debit balance:
a real accounts, b personal accounts, c nominal accounts, d all the above
18 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
19 Accrued income is: a an asset, b a liability, c income, d none of
the above
20 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
21. 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
22. In the above problem, what is the profit or loss on sale of the machinery?
a) Profit Rs.5250, b) Loss Rs.5750, c) Profit Rs.5750, d) Loss Rs. 5250
23 In the same problem, what is the written down value as on December 31, 2002?
a) Rs.37000, b) Rs.37500, c) Rs.38000, d) Rs/38500
2 4 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
25 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.
26 The pass book of a firm shows overdraft of Rs.10000. It is observed 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?
a Rs.8400 cr, b Rs.8500 cr, cRs.8400 dr, d Rs.8200 cr
27 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, bCredit balance would be reduced by Rs.700
c balance would be increased by Rs.700, d there would be no effect
28 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
29 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
30 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
31 The cost of acquiring a table for Rs.3500 was debited by a firm to the purchase account. What is the
journal entry for rectification?

a Debit cash credit furniture account, b debit furniture account credit cash, c debit
furniture credit purchase account, d debit purchase and credit cash account
32. A firm purchased machinery of Rs.4 lac. For the first year it charged depreciation @ 20%
amounting to Rs.80000. On which of the following methods, the above amount of Rs.80000
might have been calculated:
a) Straight line method, b) Written down value method, c) Any of the above methods, d) None of
the above
33. Sales of a firm are Rs.3 lac, the net loss Rs.8000 and gross profit Rs.30000. What is the amount of
operating expenses? a) Rs.30000, b) Rs.8000, c) Rs.22000, d) Rs.38000
34 Opening stock is Rs.18000, purchases Rs.78000, cost of goods sold Rs.106000 and sales
Rs.149000? What is the extent of other manufacturing expenses in this problem?
a) Rs.10500, b) Rs.10700, c) Rs.11000, d) Rs.10000
35 What is the amount of gross profit when opening stock is Rs.18000, purchases Rs.78000,
cost of goods sold Rs.106000 and sales Rs.149000?
a) Rs.44000, b) Rs.43000 loss, c) Rs.42000, d ) R s . 4 3 0 0 0
36 The pass book of a firm has been showing a debit balance of Rs.15110 and it is observed
that bank has debited Rs.1440. What will be the balance as per cash book?
a) Rs.13670 cr, b) Rs.15540 cr, c) Rs.16540 dr, d) Rs.14540 cr
37 A firm has posted an entry of Rs.12000 to sundry creditor while it related to sundry debtors.
The total of debit and credit side of the trial balance is Rs.612000. What it should be after
rectification:
a) Rs.600000, b ) R s . 6 2 4 0 0 0 , c) Rs.588000, d) none of the above
38 A firm sold goods worth Rs.9000 to one Mr. X but the entry could not be posted to his account. The total of debit side of
the trial balance is presently Rs.490500. What it should be?
a Rs.490500, b) Rs.499500, c) Rs.481500, d) None of the above
39 A company issued shares and called Rs.3 with application and Rs.7 as allotment money. Allotment
money was not received for 5000 shares which were reissued at a discount of Rs.1 after forfeiture.
What will be amount of capital reserve on account of
forfeiture? a Rs.5000, b Rs.15000, c Rs.10000, d No change
40 What is the cost of goods sold of a firm if its opening stock is Rs.1 lac, net purchases Rs.9.50 lac, direct
expenses Rs.1.50 lac, closing stocks Rs.2 lac and sales Rs.14 lac? a Rs.5 lac, b Rs.8 lac, c Rs.10 lac, d
Rs.12 lac
41 Managing Director of a company is entitled for a commission of 5%. The profit after the commission is
1.90 lac. What is amount of profit? a Rs.180500, b Rs.210000, c Rs.181500, d Rs. 20 00 0 0
42 The sales book of a firm was overcast by Rs.3000. The total of debit side of trial balance has been
showing Rs. 105400. What it should be ?
a Rs.102400, b Rs.108400, c Rs.105400, d Rs.111400
43The cash 000k of a firm is showing a debit balance with the bank of Rs.4320. It is observed that bank has
credited a dividend amount of Rs.1020 to the account. In order to reconcile the cash
book with the pass book, the amount of dividend: should be added, b) should be deducted,
c) no need to take into consideration, d) none of the above
44 A firm purchased 2"d hand machinery on July 01, 1999 for Rs.180000 and spent Rs.20000 on repairs
and installation. On June 30, 2002 the machinery was sold for Rs.136000. Compute depreciation for the
year 2002 if the annual closing is Dec 31St and depreciation method is WDV at 10%.
a) Rs.7695, b) Rs.8805, c). Rs.7805, d) Rs.8215
45 In the above problem, what is the profit or loss on sale of the machinery?
a) Profit Rs.2630, b) Loss Rs.2731, c) Profit Rs.2710, d) Loss Rs.2612
46 A firm purchased machinery worth Rs.46000 and spent Rs.3000 on installation. Its expected useful life
is 5 years and scrap value Rs.9000. What Drill be amount of annual depreciation?
a) Rs.7500, b ) R s . 8 0 0 0 , c) Rs.9000, d) Rs.10000
47 What will be the written down value of the machinery at the end of 2nd year in the above case?
a) Rs.33000, b) Rs.35000, C) Rs.37000, d ) R s . 4 1 0 0 0
48 A firm acquired the patent rights of a product for business purpose. Such expenditure would be treated
as:
a Revenue expenditure, b Deferred revenue expenditure, c capital expenditure, d fictitious assets
49 Freight paid on machinery brought to the factory premises, would be classified as which of the
following kinds of expenditure? a Revenue expenditure, b Deferred expenditure, c Capital
expenditure, d Any of the above
50 A sum of Rs.1100 has been posted in the depreciation account but is not posted to the furniture
account. The total of debit side of trial balance is Rs.241100. What it should be:
a Rs.240000, b R s . 2 4 2 2 0 0 , c Rs.238900, d R s . 2 4 3 3 0 0
51 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
52 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 5 0 0 0 , c 3 0 0 0 , d 900
53 As per the dual concept of accounting, the transactions arc recorded on the basis of:
a double entry system, b cash system, c mercantile system, d single entry system
54 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
55 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
56 A firm has a dealership for textile machinery. It sells machinery worth Rs.5.50 lac but credits the
same to the sales account. In order to rectify the error, what should be the correct entry? a Debit
cash / credit sales, b Debit machinery I Credit cash, c Debit sales / credit machinery d no
adjustment needed
57 A firm earned net profits of Rs.102200. Its manager gets 5% commission after charging such
commission. What is the amount of commission, the manager would receive? a 4 7 7 2 , b 5110,
c 4766,d 4760
58 The closing stocks of goods are recorded in which of the following books of a firm?
a trading & manufacturing account, b manufacturing account and profit & loss account,
c trading account and balance sheet, d profit & loss account and balance sheet
59 A firm has incurred substantial expenditure on the marketing of a new product. In the books of the firm, how
this would be classified? a) Revenue expenditure, b) Deferred revenue expenditure capital expenditure,
c) pre-paid expenditure
60 A firm incurred Rs.3220 during a year on purchase/use of stationery. In which of the
following, this expenditure would be classified:
a) personal account, b) real account, c) nominal account, d) contingent account
61.The liabilities of a business firm are Rs.8240. According to accounting equation, what is the amount of
promoter's equity if the assets are Rs.42630? a) 34390 b) 42630 c) 50870 d) 8240
62 A company issued 1 lac shares of Rs.10 each (payable Rs.4 with application, Rs.2 on allotment and
Rs.4 as first and final call). It received the application money for all the shares but did not get the
allotment money on 6000 shares and additionally allotment money and final call money on 2000 shares.
What is the amount of calls in arrears? Rs.24000, b) Rs.16000, c) Rs.32000, d) Rs.48000
63 A firm sold a machinery for Rs.18000 at the end of 3`d year of its purchase, while its expected useful
life was 5 years. If its original purchase price was Rs.40000 and its scrap value was expected at Rs.4000,
what is the profit or loss on sale of the machinery? A) Profit of Rs.3600, b) Loss of Rs.400,
c) Profit of Rs.18000, d) Loss of Rs.2000
64 A company issued fully paid up shares of Rs.10 each at a premium of Rs.2 to the vendor of plant and
machinery worth 360000. What is the no. of shares that has been allotted to the vendor? a) 36000,
b) 18000, c) 30000, d) Cannot be issued
65 A firm while checking its bank account statement found that bank has credited interest amount to
Rs.240 to its current account. The balance in its pass book was Rs.9000. What should be the
balance as per cash book: a R s . 9 0 0 0 , b Rs.9240, c Rs.8760, d Rs.8520
66 In the trial balance of a company, a sum of Rs.2460 has been appearing as interest accrued but not
received. It will be recorded in a profit and loss account, b trading and manufacturing account,
c balance sheet as asset, d balance sheet as a liability
67 A firm has in its books, sundry debtors amounting to Rs.2 lac. The amount of bad and doubtful debts is
Rs.16000. What will be amount of provisions, if the firm is required to make provision @ 5% of the

debtors: a 10000, b 2 6 0 0 0 , c 10800, d 9200,
68 The overdraft balance in the cash book of a firm is Rs.23600. A debtor of the firm deposits directly in
the bank an amount of Rs.3200, which bank credits in the personal account of a partner_ What is the
balance as per pass book of the firm? a 2 6 8 0 0 , b 20400, c 23600, d 30000
69 What is the nature of balance in the overdraft account in the cash book of a firm and also the pass
book? a credit balance in tnu cash book and credit balance in the pass book, b) debit balance in the
cash book and debit balance in the pass book c) debit balance in the cash book and credit balance in the
pass book d) credit balance in the cash book and debit balance in the pass book
70 Which of the following can be categorized as a real account in the books of a firm? a) marketing
expenses, b) deferred revenue expenses, c) sundry debtors, d) credit balance in the bank
account
ANSWER
1 D 2 A 3 C 4 A 5 B
6 C 7 C 8 A 9 A 10 D
11 A 12 A 13 D 14 B 15 A
16 C 17 A 18 A 19 A 20 C
21 D 22 D 23 D 24 C 25 A
26 A 27 D 28 C 29 C 30 C
31 C 32 C 33 D 34 D 35 D
36 A 37 B 38 B 39 C 40 C
41 D 42 C 43 A 44 A 45 B
46 B 47 A 48 E 49 C 50 A
51 C 52 D 53 A 54 B 55 B
56 D 57 A 58 C 59 B 60 C
61 A 62 A 63 A 64 C 65 C
66 C 67 A 68 C 69 D 70 B

01 A company forfeits 2000 shares of Rs.10 each due to non-payment of 2nd call @ Rs.2. The amount
already received is Rs.3 on application, Rs.3 as allotment, Rs.2 as first call. How much amount will
be debited to share capital account:
a Rs.2000, b Rs.8000, c Rs.10000, d none of the above
02 Which of the following provisions of Companies Act 1956 are not correct:
a Section 209 - companies to maintain certain books of account, b Section 210 —
preparation of final accounts, c Section 211 — balance sheet should exhibit true and fair view of
state of affair of the company
d Part II — Schedule VI prescribes the format for preparation of profit
and loss account.
03 At the end of one year, a sum of Rs.10000 at 6% rate of interest when compounded half yearly
becomes:
a 10600, b 10609, c 10613, d 10616
04 For a capital budgeting expenditure, the net present value of a projectat 18% is Rs.15 lac negative,
at 10%, it is Rs.12 lac positive and at 14%, it is ZERO. The internal rate of return from the project is
a) 18%, as there is deficit, b) 14%, as it is Zero, c) 10% as there is surplus, d) none of the above
05 Expenses necessary to produce goods or service organisation can be classified as:
a outflow of assets, b decrease in assets, c increase in liabilities, d all the above
06 X has been investing Rs.5000 every year at year end, at 5% for 5 years. How much he will get at the
end of 5 years (hint calculate the future value of an ordinary annuity):

a 26778.20, b 27278.90, c 27628.15, d 28342.25
07 Which of the following statement is correct regarding single entry system: a it is a system in
which only one entry is made, b it is a system where the principles of double entry are not being
followed, c it is a system that takes into account only cash transactions, d none of the above
08 A machinery is purchased for a total price of Rs.1 lac with expected useful life of 5 years. What is the
amount of depreciation at double declining balance method for calculation of depreciation, in the 2"d
year: a Rs.20000, b Rs.24000, c Rs.30000, d Rs.40000
(Hint-Rate of depreciation at double rate is 40%. Depreciation is calculated on the balance value of
the assets in the beginning of 2nd year i.e. on Rs.60000)
09 A car is purchased for Rs.310000 with a scrap value of Rs.60000 at the end of 5 years' useful life
during Sept 2008. What is the written down value as on Mar 31, 2009 (which is closing date of
financial year). a 3 1 0 0 0 0 , b 260000 c 250000, d 200000
10 The amount of undercasting of credit side of bank column of the cash book will be deducted from the
overdraft as per: a cash book, b pass book, c both the books, d none of the above
11 A firm had written off a sum of Rs.5000 as bad debt. However, in the following year a sum of
Rs.3500 was received as recovery. What will be the impact of this recovery :
a reduce the debtors by that amount, b increase the debtors by that amount, c increase
the profits by that amount, dincrease the liability by double the amount
12 If a two-sided error has taken place, it will be corrected: a By debiting the Suspense account
b. By correcting the posting c by passing a journal entry, d none of the above
13 After preparation of trial balance it is observed that the goods amounting to Rs.10000
sold to Ashok & Sons were posted as Rs.1000 to their account. The rectification entry will be:
a suspense account debit to Ashok & Sons Rs.9000, b Ashok & sons debit to sales
account Rs.9000 c sales account debit to suspense account Rs.10000, d Ashok & sons
debit to suspense account Rs.9000
14 When a company issues shares and the calls amount in instalments i.e. application money, allotment
money, call money, the amount of single call :
a should not be less than 25% of the face value, bshould not be less than 20% of the face
value c should not be more than 25% of the face value, d should not be more than 20% of
the face value
15 The shares of Rs.100 each, are issued at 10% discount and are forfeited for non payment of call
money of Rs.20 each. Which of the following journal entry will not be correct:
a forfeited shares account-credit Rs.60, b discount on issue of shares — cr Rs.10
c share capital account debit Rs.100, d share 1st and final call — debit Rs.30
16 What adjustment entry will be passed for the goods taken by the promoter out of the goods
purchased for the business:
a purchase account debit to credit the drawing account, b capital account debit to credit
the purchase account, c drawing account debit to credit the purchase a/c, dpurchase
account debit to credit the capital account
17 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
18 Spot rate is 1 US $ = 48.10 and 2 months forward is available at 1 US = 48.50.
a Forward is at a premium, bForward is at a discount, c Spot is at a premium,
d Spot is at a discount
19 Which of the following does not match:
a purchase of machinery for sale — revenue expenditure
b advertisement expenses — deferred revenue expenses, c payment of wages to labourer —
revenue expenditure, d purchase of goods for trade — capital expenditure
20 If there is overdraft with the bank, the bank column of the cash book will show:
a a credit balance, b a debit balance, c either a debit balance or a credit balance, d
neither a debit balance or a credit balance
21 The trial balance in which the total of debit side and total of credit side of each ledger account is taken
into account is called: a main trial balance, b net trial balance, c trial balance,
d gross trial balance
22 The pricing method under which the price is determined by subtracting an appropriate gross mark up
from the sale price, to an unrelated 3rd party, with the appropriate gross margin being determined by
examining the conditions, under which the goods are sold and comparing the said transaction to
other 3rd party transaction, is called:
a comparable uncontrolled price method, b cost plus method, c re-safe price method, d
non-traditional method
23 A firm has been following the practice of not charging annual depreciation. At the time of sale of assets,
it shows the difference between sale price and original cost as gain or loss in the year of sale. Which
accounting concept is being violated.
a consistency concept, b conservatism concept, c money value concept, d
periodicity concept
24 Which of the following is correct formula for calculation of future value of an annuity due (beginning of
period). a C x {(1+r)"-1/r}, b C x {(1+r )" -1/r} x (1+r), c C / {(1+r) ° -1/r}x (1 +r), d C
n
x {(i+r ) -1/r} / (1+r)
25 X is to receive Rs.5000 at beginning of every year for 5 years at 5%. How much amount he is required
to invest now (Hint : calculate the present value of annuity due). a 23630.50, b 22729.60,
c 21942.15, d 21308.75
26 When a firm makes payment to another firm by way of a cheque, the bank debits the same, after a
time lag when cheque is presented. In the meantime, if cash book balance is to be reconciled with
the pass-book balance, in the balance of cash book, the amount of cheque:
a is added if the firm has a current account, b is deducted if the firm has a current account, c is
added if the firm has a overdraft account, d is added in all circumstances
27 Balance in cash book of a firm is Rs.9500. It is noticed that (a) the payment side of the cash book is
undercast by Rs.200 (b) a cheque of Rs.5000 issued by the firm is not entered in the bank column of the
cash book but bank has paid it. The balance in the pass-book should be:
a 9500, b 9300, c 4300, d 4500
28 A firm purchased new machinery for Rs.3.20 lac. It is to charge
depreciation @ 6%, 5% and 4% for 1st, 2"d and 3`d year respectively. At the end of 3rd year, its written
down value will be:
a 269500, b 271940, c 274400, d 275900
29 A firm paid cartage of Rs.200 on account of transportation of newly purchased machinery to the
cartage account. It will affect which of the following accounts?
a cartage account, b machinery account, c cash account, d cartage and
machinery accounts
30 Which of the following transactions will result in increase in asset and increase in liability?
a Payment made to Creditors in cash, b Goodwill account written off, c Issue of Bonus
shares d Machinery purchased on credit
31 When there is favourable balance as per cash book, and the cheque issued but
not presented, to reach the balance in pass book, for this amount would be:
a added, bdeducted, c not given any weightage, d none of the above
32 The depreciation has been charged and it has been debited to fixed asset account. It is an:
a error of omission, b error of commission, c error of principle, d compensating
error
33 A bond has face value of Rs.100 and coupon of 10%. Its remaining maturity period is 6 years. At 11%
YTM, its market value is:
a 96.10, b 95.95, c 95.80, d 94.90
34 The liabilities that are repayable only when business will be terminated are
called:
a fixed liabilities, b long term liabilities, c contingent liabilities, d current liabilities
35 For a given difference between YTM and coupon rate of a bond:
a shorter the maturity, greater will be change in price with change in YTM
b longer the maturity, greater will be change in price with change in YTM
c longer the maturity, shorter will be change in price with change in YTM , d no change
36 A bond with a face value of Rs.100 has a maturity period of 5 years. If the YTM decreases to 9%,
what will be the change in the price: a increase 3.9%, b decrease 3.9%, c increase
2.7%, d decrease 2.7%
Problem: Bond-A with a face value of Rs.100 has a coupon of 12% with 6 years' maturity. At YTM
of 10%, its market value is Rs.108.70.
Bond-B with a face value of Rs.100, coupon of 12% with a 6 years' maturity carries value of
Rs.73.40 for YTM of 20%.
37 If YTM increases by 20%, the market price of Bond-A will change to:
a 110, b 106, c 100, d 98.40
(Hint: 12 PVIFA (12%,6) + 100 PVIF (12%, 6)
38 Adjustment entry for bad debts is:
a Bad Debts Dr. to P & A/c or, b Provision for bad & doubtful a/c Dr. to Bad Debts, c
Bad Debts Dr. to Debtors Cr, d P & L A/c Dr. to Bad Debts Cr.
39 On a bond, the investor is subject to interest rate risk on account of (a) re-investment of annual
interest (b) capital loss on account of change in the value of bond due to increase in market interest

rates.
a only (a), b only (b), c a and b both, d none of these
40 If duration of a bond is 5 years, which of the following statement would be true:.
a its payable after 5 years, b interest rate risk will disappear on the bond, if the holding of bond is
for 5 years
c no change in value of bond will take place within 5 years, d change in price of bond within 5
years will not affect the investor.
41 Which of the following expenses by a firm cannot be taken as part of capital expenditure:
a: land & building, b plant and machinery, c technical know-how, d none of the above
42 The appraisal method for capital expenditure, under which it is examined, how much period the
invested funds will come back as cash inflow is called:
a: pay-back method, b rate of return method, c net present value method, d internal rate of
return
43 A firm has taken term loan from the bank for construction of building. It will: a increase
the asset and increase the liability, b increase the asset and decrease the liability, c increase
one asset and decrease another asset, d decrease one asset and decrease one liability
44: The process under which the future value of present cash flows is determined is called:
a: discounting, b compounding, c net present value, d internal rate of return
45 Which of the following is an error of omission.
a wages account debited although services of labour used for building construction
b goods purchased for cash from XYZ and their account credited
c sale of goods made to ABC, but not entered.
d an entry of Rs.927 posted as Rs.972.
46: Which of the following is not a source of finance for capital expenditure project:
a: bank cash credit and trade creditors, b: bank term loan and subsidy from govt, c:
institutional term loan and promoters' equity, d: long term unsecured loans and debentures
Problem: A company invested Rs.5 lac in a project in the year 2000. The pro'ect earns the profits as
under:
Project-A Project-B Discount Factor 01 5%
Investment 5,00,000 5,00,000
1 sear profit Nil 30000 0.95238
2" year profit 60000 50000 0.90703
r year profit 80000 160000 0.86384
4''' year profit 120000 170000 . 0.82270
5m year profit 120000 110000 0.78353' -
61h year profit 110000 20000 0.74622
7rh year profit 90000 Nil 0.71068
Total profit 580000 540000
47 Based on the above information, what is the payback period of Project-A

a 5 years, b 5 years and 2.5 months, c 6 years and 1.33 months, d 6
years and 8.12 months
48 Based on the payback period, what is the payback period of Project-B
a 4 years and 7.63 months, b 4 years and 9.12 months, c 5 years and 2 months
d 5 years and 4.33 month
49 Based on the above information, which project is preferable for investment and why:
a Project A with higher payback period, b Project A with lower payback period, c
Project B with higher payback period, d Project B with lower payback period
50 In the above case, what is the accounting rate of return of Project A:
a 28%, b 31%, c 33%, d 35%
51 In the above case, what is the accounting rate of return of Project B:
a 28%, b 31%, c 33%, d 35%
52 Based on the accounting rate of return, which project is preferable for investment and why:
a Project A with higher accounting rate of return, b Project A with lower accounting rate of return
c Project B with higher accounting rate of return, d Project B with lower accounting rate of return
53 X wants Rs.340000 to replace his car after 5 years. He wants to save and invest in equal monthly
instalments at 12% p.a. How much money will be deposited every month.
a 4136.80, b 4163.20, c 4182.20, d 4203.40
54 X has been saving Rs.2000 at 10%p.a. compounded annually. What will be amount at the end of 3 rd
year. a 6 5 4 0 , b 6620, c 6690, d 6710

55 The depreciation is calculated as:
a original cost / percentage rate of depreciation, b original cost / no. of years of useful life, c
original cost / total life of the asset, d invoice price / total life of the asset
56 if scrap value of the machinery is given, the amount of depreciation is worked out as:
a original cost / percentage rate of depreciation, b original cost I no. of years of useful life
c original cost — scrap value I no. of years of useful life, d invoice price — scrap value / total life of the
asset
57 The scrap value of a machinery with original cost of Rs.1 lac is estimated at Rs.10000. Its useful life is 6 years.
The depreciated value at the end of 41h year is:
a 30000, b 35000, c 40000, d 45000
58 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
59 On a particular amount, the simple interest is Rs.306 for 2 years and the compound interest is 450 for 3 years.
What is the principal amount.
a 3750, b 3775, c 3820, d 3860
60 X had borrowed Rs.65600 at 5% interest for 2 years to be payable in 2 annual instalment. What is the amount
of annual instalment. a 3 3 4 5 0 , b 33980, c 34890, d 35280
61 Spot exchange rate is 1 Euro = $ 1.40 and swap rate (called forward points) is 0.0105. Calculate 90 days
interest differential assuming 360 days in a year – a 4% b 3.50%, c 3.25%, d 3 %
62 Accounting system which is associated with the need of the business owners to keep record of their
transactions, property etc, dues they owe and debts others owe them, is :
a financial accounting, b steward accounting, c cost accounting, d management
accounting
63 Accounting system which is used ascertaining the costs with a view to control them and also
make assessment of profitability and efficiency of the business, is :
a human resources accounting, b social responsibility accounting, c cost accounting,
d management accounting
64 As per accounting standard No.22, the aggregate of current tax and deferred tax charged or credited
to the statement of profit and loss for the period, is called:
a taxable income or loss, b tax expenses, c deferred tax, d accounting income
65 A cheque issued by a firm is recorded on side of the ____:
a payment, cash book, b receipt, cash book, c payment, journal, d receipt,
journal
66 The price at which two unrelated and non-desperate parties would agree to a transactions is called:
a cost pricing, b transfer pricing, c opportunity pricing, d arm's length pricing
67 Firm-A sells goods on credit as well cash. For goods worth Rs.50000 the payment is yet to be
received although goods were supplied, two months earlier to closing of the financial year.
a if it is not accounted for in the books it will have no effect and no
accounting practice will be violated.
b if it is accounted for, the profit will be increased without any reason
to do so.
c if it is accounted for, the profit position will be true and fair. d No accounting practice will be
violated by not doing so.
68 A firm sells goods worth Rs.50000 to M/s XYZ in cash. in this case, which two accounts are
involved:
a cash account and XYZ account, b XYZ account and goods account, c
goods account and cash account, d incomplete information
69 A firm sells goods worth Rs.50000 to M/s XYZ in cash. In this case, while crediting the account,
the following principle will be followed:
a credit the giver, bcredit the receiver, c credit what comes in, d credit what goes
out
70 A persons owes some amount to the firm, is called of the firm:
a debtor, b creditor, c customer, d lender
71 Balance as per pass-book is Rs.23000 in the overdraft account as on Sep 30, 2008. It is observed
that (a) a cheque of Rs.3000 deposited by the firm has been received by the bank as dishonoured. (b)
bank has debited Rs.50 as cheque returning charges (c) bank has dishonoured a cheque of Rs.1000
by mistake, which the firm had issued to make payment. The balance as per cash book should be:
a 20950, b 21000, c 24050, d 25050
72 Which of the following statement is not correct in the context of
bank reconciliation statement:
a cheque issued by a firm is first recorded in the cash book, b cheque deposited by a firm is
first recorded in the pass-book, c direct deposit by a customer of a firm, in bank
account, is credited by the bank
d direct debit by the bank is later on credited by the firm to bank
account in its books.
73 A company had issued share with face value of Rs.100 + premium of Rs.200. On certain shares, the
application money and allotment money of Rs.40 each has been received but due to non-receipt of 1 st call
money, few shares have been forfeited. Which of the following statement is correct:
a debit to share capital Rs.100 per share to be made, b debit to share capital Rs.300 per share
to be made c debit to share capital Rs.80 per share to be made, d debit to share application at
Rs.100 to be made
74 The shareholders of a company have a fixed liability to pay, in case of liquidation of the company.
It is called:
a company limited by shares, b company limited by guarantee, c company with limited
liability
d company with unlimited liability
75 For making adjustment in respect of closing stocks, which of the following is debited:
a purchase account, b trading account, c closing stocks, d balance sheet
asset side
76 For which of the following, an adjustment entry will not be required:
a salary of Rs. 3000, paid in advance, b commission due Rs.1000, but not received, c
commission payable Rs.300 during the year, paid, d rent due Rs.2000 but not paid.
77 All the material information relating to business transactions is required to be given by a company
in its balance, due to which of the following: a accounting period concept, bfull disclosure
concept, c materiality concept, d all the above
78 If commission is received in advance and adjustment entry is passed, which of the following will
not be true:
a it will reduce the commission income, b it will reduce the profit, c it will reduce the net
worth
d it will be shown on the asset side of the balance sheet at income received in advance.
79 Which among the following accounting standards deal with inventory valuation:
a AS -2, b AS- 4, c AS -9, d AS 11
80 When a bill is drawn by a party on the other party which of the following accounts is credited :
a bills receivable account, b debtor's account, c creditor's account, d bills payable account
81 If trade discount allowed appears in the trial balance, it will be finally adjusted as :
a debit entry in the profit and loss account, b debit entry in trading and manufacturing account
c asset in the balance sheet, d deduction from sales in the trading account
82 When a firm withdraws money from bank, in the cash book, the amount of withdrawal is:
a credited, b debited, c no change, d none of the above
83 When a bill is endorsed by the drawer in favour of another party, the drawee is required to debit which of the
following accounts :
a bills receivable account, b bills payable account, G no entry is needed, d endorsee's
account
84 When loss of stock takes place due to theft or fire etc. it is called:
a total loss, b normal loss, c contingent loss, d abnormal loss
85 A sum of Rs.2500 has been spent by a firm to replace the worn-out parts of the machinery. This will be treated as:
a revenue expenditure, b capital expenditure, c deferred revenue expenditure, d intangible asset
86 All receipts and payment made in cash, including cheques are recorded in:
a balance sheet, b income and expenditure account, c receipt and payment account, d
profit and loss account
87 Which of the following kinds of accounts are recorded in the ledger:
a real accounts, b nominal accounts, c all kinds of accounts, d personal
accounts
88 The balance in the pass book is Rs.54000 and it is observed that bank received Rs.2000 through
NEFT and also remitted Rs.13000 through NEFT, as per standing instruction. What is the balance
as per cash book:
a 43000, b 65000, c 54000, d 39000
89 If the proprietor has made certain drawings, the profit will be calculated as under:
a amount of drawings will be added back to the capital to find out the profit
b amount of drawings will'be reduced from the capital to find out the amount of profit
c the amount of drawings has already been accounted for and cash reduced to that extent
d none of the above
90 Accounts and auditors' report of a banking company is required to be published (a) in a newspaper
circulating in the place where the banking company is having its principal office (b) it is to be
published within 6 months of close of its financial year (c) this is requirement of Rule 15 of Banking
Regulation (Companies) Rules. a a to c all correct, b only a and c correct,
c only b and c correct, d only a and b correct
91 The balance in the cash book is Rs.30000 overdraft. It is observed that a cheque of Rs.2000 has
been debited twice by the bank. Further the bank credited Rs.3500 to the account of the firm by
mistake, while this amount was to be credited to personal account of the partner. What is the balance
in the pass book:
a35500 credit balance, b 28500 debit balance, c 31500 credit balance, d 28500
credit balance
92 The finance manager of a company receives 10% commission- on the profit after charging commission.
The profit of the company are Rs.3.30 lac. What will be amount of commission of the manager:
a Rs.33000, b Rs.30000, c Rs.27767, d Rs.25987
93 Pre-operative expenses are shown by a company as:
a expenditure in the trading account, b expenditure in the profit loss account, c asset in
the balance sheet, d liability in the balance sheet
94 A company comes out with an equity share issue having face value of Rs.10 and charges total Rs.30
for the share. The amount will be credited to:
a entire amount to the share capital account, b entire amount to the share premium account
c Rs.10 to share capital and Rs.20 to share premium a/c, d Rs.20 to share capital and
Rs.10 to share premium a/c
95 Which of the following accounting standards do not match in the context of banking companies'
accounts: a AS-21 : consolidated statements, b AS-17 : Segment reporting, c AS-18 :
Related party disclosure, d AS-15 : payment of compensation to employees
96 In the income and expenditure account, transactions relating to are included:
a current year only, b previous year only, c subsequent year only, d current,
previous and subsequent years
97 When the drawee pays the amount of the bill before its due date it is called:
a endorsing the bill, b honouring the bill, c retirement of the bill, d none of the
above
98 When a bill is paid before due date and the drawer gives some allowance to the drawee, this is called:
a discount on the bill, b retirement of the bill at a discount, c rebate, d any of the above
99The books of a firm are closed but it is found that a purchase of Rs.1000 from Atma Ram Sons has
been passed through the sale book for Rs.100. What is the rectification entry, after preparing the trial
balance. a sales account debit Rs.900 to Atma Ram Sons, b purchase account debit
Rs.900 to Atma Ram Sons c sales account debit Rs.100, purchase account debit Rs.1000 to
Atma Ram Sons Rs.1100 d sales account debit Rs.1000, purchase account debit Rs.100 to
Atma Ram Sons Rs.1100
100 For which of the following, an adjustment entry will be required: a expenses paid but not due,
b expenses paid which were due, c income received which was due, d all the above
101 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
102 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
103 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
a sales return book records return of goods to the customers, b sales 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
105 When the credit side of the cash book is undercast, it has the same effect as overcasting 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
106 The bank reconciliation statement is prepared to reconcile the following:
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.
a when subscription is made by the bank, there is a debit entry in the pass 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.
d none of the above
108 Bank charges of Rs.100 have been recorded twice in the cash book. 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
109 Which of the following statement does not match in the context of trial 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.
110 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, bnet trial balance, c gross trial balance, d any of the above
111 Expenses incurred on wages paid to a labourer of the factory, have been 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
112 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, donly balance sheet
113 Firm XYZ purchased goods worth Rs.20000 from P & Company and these have been routed through
sales book as Rs.10000. The rectification 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
114 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
115 Find out, which expenditure is wrongly classified:
a purchase of goods — revenue expenditure, b purchase of machinery — capital expenditure,
c payment of technical fee for selection of machinery for a project - revenue expenditure, d none
116 A firm incurred substantial marketing expenses to expand their market reach. This will be
classified as:
a revenue expenditure, b deferred revenue expenditure, c capital expenditure, d any of the above
117 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
118 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.
119 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
120 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

ANSWER - PRACTICE PAPER NO. : 3
01 C 02 D 03 B 04 B 05 D 06 c
07 b 08 b 09 b 10 b 11 c 12 c
13 d 14 c 15 d 16 c 17 a 18 a
19 d 20 a 21 d 22 c 23 d 24 b
25 b 26 a 27 c 28 c 29 d 30 d
31 a 32 c 33 c 34 a 35 b 36 a
37 c 38 d 39 c 40 b 41 d 42 a
43 a 44 b 45 c 46 a 47 c 48 a
49 d 50 c 51 b 52 a 53 b 54 b
55 b 56 c 57 c 58 c 59 a 60 d
61 d 62 b 63 c 64 b 65 a 66 d
67 c 68 c 69 d 70 a 71 a 72 b
73 a 74 b 75 c 76 c 77 b 78 d
79 a 80 b 81 d 82 a 83 c 84 d
85 a 86 c 87 c 88 a 89 a 90 a
91 b 92 b 93 c 94 c 95 d 96 A
97 c 98 c 99 c 100 a 101 a 102 b
103 c 104 a 105 c 106 a 107 c 108 b
109 b 110 c 111 d 112 b 113 d 114 d
115 c 116 b 117 c 118 b 119 b 120 b

01 If a company issues share at a premium, the amount of premium is credited to which of the
following accounts: a capital reserve account, b share capital account,
c share premium account, d a or c
02 A company has issued certain shares giving an option to shareholders that in case there is no
profit in a particular year, the dividend for that year shall be paid, in future, when the company has
adequate profit. Such share is called: a cumulative equity share, b redeemable
shares, c participating preference share, d cumulative preference share
03 When the application money is received from the shareholders, the next instalment due is called
______ due. Which account is debited in that situation to credit to share capital account:
a allotment, share allotment account, bcapital, share application account, callotment,
share application account, d amount due, share application account
04 When a company receives some amount as calls in advance. It (can / cannot) pay interest which
can be maximum : a cannot pay, b can pay, 6%, c can pay, bank rate, d
can pay, 13PLR of 5 top banks
05 Shares issued by a company to its staff for consideration other than cash are called:
a rights shares b shares, c employees' stock option scheme, d sweat equity
06 Which among the following is not part of fixed assets in case of balance sheet of a company:
a goodwill b land preference and building, c railway siding d none of the above
07 A 8% bond with a f ace value of Rs.10000 is quoted in the market at Rs.8000. W hat is
the current yield on the bond: a 8% , b 12.5%, c 10%, d 8.5%
08 Which of the following statements is correct statement:
a where the required rate of return is equal to the coupon rate, the
value of the bond is equal to its par value.
b where the required rate of return is > to the coupon rate, the value
of the bond is < its par value.
c where the required rate of return is < to the coupon rate, the value
of the bond is > its par value. d all the above
09 If a firm receives advance against purchase of goods from a
customer, it does not take this to income or sale, due to which of the following concept:
a realization concept b revenue recognition concept, c conservation concept, d going
concern concept
10 The depreciation method in which the depreciation is calculated on the principle that the asset loses
an equal amount of value every year: a written down value method, b sum of years method,
c doubt declining balance method d straight line method
11 Which of the following event / transaction shall not be recorded in the accounting books of a
company:
A compensation paid to a worker by the company for injury during duty hours
B adverse effect of performance of the company due to ill health of the managing director
C write off of account of a trade debtor who died after meeting an accident D all the above
12 A machinery is purchased for Rs.4 lac. Its rate of annual depreciation is 20% under written down
value method. Its depreciated value at the end of 2nd year would be:
a Rs.2.56 lac, b Rs.2.04 lac, c Rs.2.40 lac, d Rs.1.60 lac
13 When the accounting standards are not followed by a business (a) the auditors qualify their audit
reports (b), if auditors do not qualify their audit reports they are guilty of professional misconduct (c)
the management is held responsible. a a to c all correct, b a and c are correct, c a
and b are correct, d b and c are correct
14 Which of the following is not matched in terms classification of various assets:
a patents and trademarks — intangible assets, b goodwill — fictitious assets (due to which also
part of intangible asset), c an intangible assets should be identifiable and distinguished from
goodwill as per AS 26 d none of the above
15 The accounting equation "Assets = capital + liability", is due to application of which of the following
accounting concept: a business entity concept, b money measurement concept, c
realization concept, d dual aspect concept
16 A no. of notes are appended to the balance sheet by companies which include information such as
contingent liabilities, market value of investments etc. This is due to compliance of which of the
following accounting concepts: a business entity concept, bmoney measurement concept,
c realization concept, d accounting of full disclosure concept
17 The principal of conservatism in accounting concepts stands for:
a Anticipate no profits and provide for all possible losses, b conserve all the financial resources,
c use the resources of the organization very carefully, d Do not overstate the assets or liabilities
18 A firm records the income and expenditure when it is actually received and incurred. The firm is
following which of the following accounting system:
a accrual system, b hybrid system, cmercantile system, d a and c both
19 Complete the following accounting equation (assets Rs.110000 - liabilities Rs. = capital
Rs.80000:
a Rs.190000, b Rs.110000, c Rs.80000, d Rs.30000
20 Which of the following are not properly matched in terms of classification of accounts:
a machinery — real account, b Ramesh (buyer of goods from the firm on credit) — personal
account, c bank account — real account, d salary paid — nominal account
21 The preparation of trial balance and final accounts with a view to ascertain the profit or loss made
during a particular period and the financial position of the business on a particular date is called:
a recording of transactions, b classifying the transactions, c summarizing the
transactions d all the above
22 Which of the features of the journal and ledger given as under is not correct:
a journal is book of original entry, b journal is a book of analytical record, c ledger is a book
of secondary record, d process of recording the transaction in ledger is called posting
23 Nominal accounts relate to (a) incomes (b) expenses (c) assets (d) liabilities:
a a to d all, b a and b only, c b and c only, d a and c only
24 The journal entries are posted in the ledger: a in order of their category, b in order of their
dates, c in order of their importance, d as per discretion of the firm
25 Which of the following accounts is called valuation account or contra account (a) provision for
depreciation account (b) provision for doubtful debts account (c) stock reserve account (d) reserves and
surpluses account:
a atodall, b a, b and c only, c a, c and d only, d b, c and d only
26 A double columnar cash book has two columns on each side (which one is false):
a one column is meant for cash and another for discount
b the discount column on the debit side represents the discount allowed
c the cash column on the credit side represents cash received
d the discount column on the credit side means the discount allowed and cash column on the debit side
means cash received
27 In a business firm, the chief cashier hands over some cash to the
petty cashier who submits the account of petty cash after a fixed time interval. This system is called
(which is most appropriate): a petty cash system, b petty cash book system,
c imprest system of petty cash book d advance system of petty cash book
28 Which of the following matches: a purchase book — both credit and cash purchases are
recorded, b sales book — both credit and cash purchases are recorded, c purchase book
— only cash purchases are recorded, d sales book only credit purchases are recorded
29 When there is one debit and several credits equal the debit amount OR there is one credit and several
debits to match the amount of credit, this is called:
a simple journal entry, b multiple journal entry, c compound journal entry, d aggregated journal
entry
30 (a) when goods are purchased, the 'purchases account' is used (b) when goods are sold, the
'sales account' is used (c) when goods are returned by the customers of the firm, the 'returns outward' is
used (d) when the goods are returned by the firm to its suppliers, the 'purchase returns' is used. Which is
correct: a atodall, b- b, c and d, c a, b and d, d a, b and c
31 Returns of goods from the customers of the firm shbuld be credited to and debited to
a customer account, sales returns, b sales account, sales returns, c customer
account, sales account, d sales returns, customer account
32 An entry on the left side of a nominal account represents:
a income or expenditure, b only income, c income or gain, d expense or loss
33 Which of the following is true:
a balance of real account, personal account and nominal account are carried over to the next
accounting period
b debit side of the cash book is called payment and credit side is called receipt
c discount allowed by the creditor is recorded on the payment side of the cash book
d a person who owes a firm some amount is called debtor.
34 Process of transfer of an entry from the journal to ledger is called:
a posting, b journalizing, c summarizing, d recording
35 If cash is deposited in the bank, in a three column cash book, it will be recorded on:
a payment side of the cash book, b receipt side of the cash book, c both sides of the
cash book d it will not be recorded as it represents a contra entry
36 Cash which is not due as income of the business is not credited to income under system and cash
received whether due or not is taken as income of the business under system:
a accrual, accrual, b accrual, cash, c cash, accrual, d cash, cash
37 A firm charges depreciation of Rs.10000 for the first two years on an assets. In the 3 rd year it charges
Rs.5000 and in the 4th year Rs.8500. This is considered undesirable because of application of:
a convention of conservatism, b convention of consistency, c convention of materiality,
d convention of full disclosure
38 While recording a transaction, when it is not clear whether it is on cash basis or on credit basis, what
would be done:
a it will be taken as a cash transaction, b it will be taken as a credit transaction
c it will not be recorded as it will create confusion, d it will be recorded after talking to the originator
39 A cash book is of different types such as (a) simple cash book (b) double column cash book (c) three
column cash book a a to c all, b only a and b, c only a and c, d only b
and c
40 Bank paid some interest to the party. Firm deposited one cheque with the bank. The entry in respect
of these two would be made first by and respectively: a bank, bank, b bank, firm,
c firm, firm, d firm, bank
41 The bank pass book shows a balance of Rs.30000. Its comparison with the cash book shows that
bank has debited a sum of Rs.100 as incidental charges and a cheque of Rs.2000 issued by the firm has
not been paid by the bank so far. The balance as per cash book is : a 32100, b 31900, c
2 7 9 0 0 , d 28100
42 The comparison between bank pass book and cash book shows that bank debited a cheque of
Rs.3000 to firm's account while the cheque related to some other firm's account. A cheque of Rs.2000
deposited with the bank has not been credited so far. The balance in firm's Overdraft account as per cash
book is Rs.40000. The balance in the pass book would be Rs.
a 45000, b 41000, c 39000, d 35000
43 (a) Credit balance of the pass book means it is a deposit account
(b) credit balance of the cash book means it is an overdraft account (c) debit balance of the pass book
means it is an overdraft account (d) debit balance of the cash book means it is an overdraft account:
a a to d are correct, b a to c only correct, c a, c and d only correct, d b to c only correct
44 When balance in the cash book is the starting point, the cheque deposited and not credited by the
bank are__: a a d d e d , b deducted, c not changed, d none of the above
45 is the statement showing debit and credit balance taken
from ledger including cash and bank balances as on a particular date:
a reconciliation, btrial balance, c profit and loss account, d balance sheet
46 Posting of correct amount has been made but on the wrong side. This is an error of
a omission, b commission, cprinciple, d compensating error
47 Name which of the following errors are not error of commission:
a wrong amount has been posted, b correct amount has been posted on the wrong side of
the account c a mistake has been made while balancing the ledger account, d a sale of
goods has been made for Rs.500, but not entered in sale journal
48 One sided error has been located before preparing the trial
balance, it can be rectified by: a changing the balance of trial balance, b increasing
the balance in the individual account c decreasing the balance in the individual account,
d correcting the posting in the concerned account
49 A firm finds that during the last month of the year an amount of Rs.3500 received as cash from
XYZ has been posted as Rs.5300 to their account. The entry will be rectified:
a no journal entry if the correction is to be made before trial balance, b debit XYZ account and
credit suspense account if trial balance has been made, c debit XYZ account and credit suspense
account if trial balance has been made, d all the above
50 At the end of each financial year all accounts of and_ are transferred to trading and profit & loss
account, called closing entries:
a assets, liabilities, b income, liabilities, c expenses, assets, d income, expenses
51 An expenditure which helps in generating revenue for more than one year is called _
expenditure and an expenditure which generates the revenue in the same year is called
expenditure: a revenue, capital, b capital, revenue, c capital, capital, d revenue, revenue
52 Which of the following expenses is not a deferred revenue expenditure:
a huge advertisement expenses to promote a new product, b expenses incurred on raising
capital through public issue by a company, c purchase of machinery on credit from supplier,
d expenses for formation and registration of a company
53 A firm had purchased few items at different prices of Rs.50, Rs.60, Rs.70, Rs.80 and Rs.90. What is
the rate of valuation of the goods as per average cost method:
a Rs.70, being the middle item, b Rs.70 being the average of all items, c Rs.50
being the base item to be purchased, d Rs.90 being the last item to be purchased
54 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. What would be amount of calls in arrears?
a Rs.16000, b Rs.18000, c Rs.24000, d Rs.40000
55 Which of the following parties in a bill of exchange do match:
a drawer — the person who orders the other person to make payment, b payee — the person who
is to make payment, c drawee — the person who is to receive the payment as per order of the
drawer, d none of the above
56 X draws a bill of exchange on V for Rs.5000 payable 60 days after date of the bill. He discounts the bill
with his bank and pays discount of Rs.50. What will be the journal entry:
a debit Y, credit bank and discount, b debit bank and discount, credit bills receivable, cdebit bills
receivable, credit bank and discount, d debit bills receivable & discount, credit bank
57 Which of the following statements is not true:
a amount of bill is received by the payee, b drawee is the maker of a bill of exchange, c
acceptance by the drawee is compulsory in usance bill, d before acceptance of a bill, the drawee
is not liable on the bill
58 If closing balance appears on the debit side of an account, it is said to have a : a credit balance
only b debit balance only c credit balance or debit balance d none of these is correct
59 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. In this problem, what would be the amount that would be credited to capital
reserve after forfeiture? a Rs.16000, b R s . 2 4 0 0 0 , c Rs.40000, d Rs. 4000
60 While making the posting, the staff-of a firm credited the personal account of the partner instead of
the account of the firm. This would be called: a error of principle, b error of omission, c
compensating error and error of commission d none of the above
61 After allotment of shares by a company when the allotment money is made due, it is debited to which
of the following accounts:
a share capital account, b share application account, c share allotment account, d bank account
62 The provisions regarding issue of shares at a discount are contained as per :
a Section 56 of Companies Act 1956, b Section 79 of Companies Act 1956,
c Section 90 of Companies Act 1956, d Section 125 of Companies Act 1956
63 The closing stock given in the trial balance is transferred to which of the following accounts:
a trading account, b profit and loss account, c manufacturing account, d balance
sheet
64 A firm paid cartage of Rs.200 on account of transportation of newly purchased machinery to the
cartage account. The error in the problem, would be called:
a error of principle, b error of commission, c error of omission, d compensating
error
65 While posting the transaction, the Accounts clerk of a firm posted an entry of Rs.9957 to an account
as Rs.9597. This will be known as: a error of omission, b error of commission, c
error of principal, d compensating error
66 If a company decides to forfeit the partly paid share, the amount will be debited to which of the
following:
a share forfeiture account, b share capital account, c calls in arrear account, d share application
account
67 If there is loss to the goods, which of the following statement is correct in case of hire purchase and
instalment sale:
a loss to be borne by the seller in hire purchase and by the buyer in case of instalment sale
b loss to be borne by the buyer in hire purchase and by the seller in case of instalment sale
c loss to be borne by A the seller in hire purchase and by the seller in case of instalment sale
d loss to be borne by the buyer in hire purchase and by the buyer in case of instalment sale
68 firm purchases old machinery for Rs.3 lac and incurs Rs. 500 on its transportation, Rs.4500 on installation and
Rs.15000 on its repair. Its expected useful life is estimated for 5 years and scrap value Rs.20000. In this problem,
what will be the WDV at the end of 3'd year:
a Rs.140000, b Rs.150000, c Rs.160000, d Rs.180000
69 A firm purchases old machinery for Rs.3 lac and incurs Rs. 500 on its transportation, Rs.4500 on installation and
Rs.15000 on its repair. Its expected useful life is estimated for 5 years and scrap value Rs.20000. What will be
amount of annual depreciation on SLM basis:
a Rs.40000, b Rs.50000, c Rs.60000, d Rs.80000
70 A firm purchases old machinery for Rs.3 lac and incurs Rs. 500 on its transportation, Rs.4500 on installation and
Rs.15000 on its repair. Its expected useful life is estimated for 5 years and scrap value Rs.20000. What is the
amount that would be taken for calculation of amount of depreciation:
a Rs. 3.20 lac, b Rs.3.00 lac, c Rs.2.95 lac, d Rs.2.80 lac
71 The balance as per cash book of a firm is Rs.60000 and it is observed that bank has not credited the amount
of Rs.5000 deposited as cash. Bank has credited Rs.30 as commission refund. What is the balance as per pass book.
a 65030, b 55030, c 54970, d 60000
72 What is the amount of commission that the sales manager would get @ 10% of net profits after
charging such commission, if the net profits are Rs.2.20 lac?
a Rs.200, b Rs.2000, c Rs.2200, d Rs.20000
73 If the machinery is sold for Rs.150000 at the end of 3'd year, what will be the profit or loss on sale of
this machine?
a Profit Rs.10000, b Profit Rs.20000, c Loss Rs.20000, d No profit no loss
74 The pass book of the firm has been showing debit balance of Rs.75000. It is observed that the bank
has not debited a cheque of Rs.1000 issued by the firm and has debited Rs.300 on account of
interest. What is the balance as per cash book.
a 75700 Dr, b 76300 Dr, c 76300 Cr, d 75700 Cr
75 The bank account pass book of XYZ has been showing a balance of Rs.30200. One of the debtors of
the firm has deposited Rs.3000 directly in the account of the firm which bank has credited to the
account of one of the partners. What is the balance as per cash book ?
a Rs.30200, b Rs.27200, c Rs.33200, d Rs.26800
76 Depreciation is the result of (a) wear and tear due to use (b) fall in market price (c) obsolescence (d)
passage of time: a a to d all, b a to c only, c b to d only, d a, b and only
77 An asset is purchased for Rs.4 lac on 1.10.2005 and its' rate of depredation is 10% at diminishing
value. Its amount of depreciation during the year and written down value at March 31, 2008 would
be: a 38000, 342000, b 35900, 325900, c 34200, 307800, d none of the above
78 A bills payable account is account and bills receivable account is account:
a real, real, b personal, personal, c real, personal, d personal, real
79 A computer and its related equipment is purchased for Rs.50000 with 3 years' expected useful life and Rs.2000 as
salvage value. On this, depreciation is charged on sum-of-the year's digit method. Amount of depreciation in the first
year would be: a Rs.16000, b Rs.24000, c Rs.8000, d Rs.16667
80 The depreciation is calculated on the basis of (original cost / depreciated value) in case of (straight line
method / written down value method). Which of the following does match:
a original cost, written down value method, b depreciated cost, straight line method, c depreciated cost,
both the methods, d original cost, straight line method
81 The promoter brings capital of Rs.10000 out of which he purchases furniture worth Rs.2000. The
balance sheet of the firm will show:
a capital at Rs.8000 & furniture at Rs.2000, b capital at Rs.10000 & furniture at Rs.2000, c
capital at Rs.10000 & furniture at Rs.2000 & cash Rs.8000, d capital at Rs.8000 & furniture at Rs.2000 &
cash Rs.10000
82 Which of the following error will be disclosed by the trial balance:
a Omitting to post an amount from a subsidiary book, b Omitting to post the totals of subsidiary books into
the ledger
c Omission in writing the cash book balance in the trial balance, d all the above
83 In the sharing ratio of respective parties, which is not correctly matched:
a proprietorship firm — entire profit belongs to promoter, b partnership firm — in all cases, the profit
of partners is equal, c company members share profit in the form of dividend, d none of the above
84 Which of the following'accounts will definitely show debit balance:
a machinery purchased, b discount allowed, c goods purchased, d all the
above
85 A company came out with a public issue of 1 lac shares of Rs.10 each payable Rs.4 as
application money, Rs.4 as allotment money and Rs.2 as 1st and final call. The company has
received applications for 2 lac shares. If the company decides to forfeit the partly paid shares, the
amount that will be transferred to capital reserve account would be : a Rs.4000, b
Rs.8000, c Rs.32000, d Rs.40000
86 A company came out with a public issue of 1 lac shares of Rs.10 each payable Rs.4 as application
money, Rs.4 as allotment money and Rs.2 as 15t and final call. The company has received applications for
2 lac shares. How much amount would be credited to the share capital account : a Rs. 1 lac, b
Rs. 4 lac, c Rs.8 lac, d Rs.10 lac
87 Which of the following account in the books of a firm, will not record credit balance: a partners'
capital account, b current account with the bank, c sales account, d commission
received
88 Which of the following are advantages of accounting in a computerized environment:
a costly computer stationery & hardware, b computer virus , c error-free accounting, d qualified staff
required
89 Banks prepare their balance sheet as per provisions of Section _ of Banking Regulation Act in the
format laid down by RBI as per Form ___: a 29, Form I, b 30, Form A, c 29, Form A, d 29, Form B
90 As per Rule 15 of Banking Regulating (Companies) Rules, banks have to publish their balance sheet
and profit and loss account in newspaper/s within _ months from end of the period to
which they relate: a) 1 news paper, 3 months, b) 2 newspapers, 6 months, c) 2 news
papers, 3 months, d) 1 news paper, 6 months
91 Which of the following can be treated as indirect expense:
a personal expenses of the proprietor, b selling expenses,c carriage inward d all the above
92 Which of the following items in a bank balance sheet is not placed under 'other assets"
a inter-office adjustments (net), b interest accrued, c stationery and stamps d investment in
subsidiaries

93 Which of the following statements regarding bank deposit is not correct:
a interest paid on deposits which is accrued and not due, is not be
shown in other liabilities
b matured time deposits are to treated demand deposits'
c deposits under special deposit schemes to be shown under term deposit even when they mature
d deposit from banks including deposits from those banks even that
have no presence in India.
94 In bank balance in Schedule 9, the advances are shown in the following heads (a) bills discounted and
purchased (b) cash credit, overdrafts and loans payable on demand (d) term loans (d) other loans: a
only a to o b only b to d, conly a, c and dd a to d all
95 The series of fixed payments paid or received by a persons at specified frequency over a fixed
period of time are called:
a instalments, b annuities, c maturity payments, d sinking funds
96 Which of the following formula for calculation of compounded interest is not matched:
a P (1+r) = for calculation of annual compounding, b P {1 + (r/4)} 4 = for calculation of quarterly
2
compounding, c P {1 + (r4)} = for calculation of half-yearly compounding, d P {1 + (r14)} 12 =
for calculation of weekly compounding
97 A person invests some money in bonds on which interest would be received by him on half-yearly
basis at the end of each 6th month. Such payment can be said to be:
a at the end annuity, b at the beginning annuity, c ordinary annuity, d sinking
annuity
98 To ensure that a company is following the Accounting Standards in India, is the duty of which of the
following: a Company management, b Company Secretary, c Auditors of the company
d all the above
99 A firm has been changing its depreciation policy after every 2-3 years. It is violating, which of the
following concept:
a conservation concept, b consistency concept, c accounting period concept, d
historical cost concept
100 Which of the following is not correct in connection with a bond:
a a bond is a negotiable promissory note, b rate of interest on a bond is fixed and called coupon
rate c bond is redeemable any time, d expected cash flow from bond include interest payments plus
the repayment of principal
101 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
102 Which of the following is a correct statement:
a conversion of future value into present value, at a given discount rate, 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
103 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
104 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%
105 On the basis of Internal Rate of Return, under what situation a project should be taken up for
investment:
a when IRR = market interest rate, bwhen IRR < capital cost, c when IRR >
capital cost, d when IRR = capital cost
106 In which of the following methods of depreciation, the amount of depreciation remains same
throughout the life of the asset:
a machine hour method, b written down value method, c straight line method, d
diminishing balances method
107 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
108 The depreciation under sum of year's digit (SYD) is calculated with the help of which of the following:
a (written down value — salvage value) x (remaining useful life I sum
of year's digit )
b (original cost — salvage value) x (sum of year's digit I 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 )
109 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
110 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.
111 Which of the following accounting concept is observed at reporting stage and not at the recording
stage:
a money measurement concept, b cost concept, c consistency concept, d dual aspect concept
112 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
113 Prepaid expenses and outstanding expenses are taken into account 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
114 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
115 Which two accounts in the following financial transactions do not match: arent 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.
116 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
117 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
118 Which of the following is a rule for debit and credit in case of a real account:
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
119 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
120 Which of the following is not a method of preparation of trial balances:
a totals method, b balances method, c totals and balances method, d none of the above
ANSWER - PRACTICE PAPER NO. :4

01 c 02 d 03 a 04 B 05 d 06 d
07 c 08 d 09 b 10 d 11 b 12 a
13 a 14 d 15 d 16 d 17 a 18 c
19 d 20 c 21 c 22 b 23 b 24 b
25 b 26 d 27 c 28 d 29 c 30 c
31 a 32 d 33 c 34 a 35 c 36 b
37 b 38 a 39 a 40 b 41 d 42 a
43 b 44 b 45 b 46 b 47 d 48 d
49 d 50 d 51 b 52 c 53 b 54 a
55 a 56 b 57 b 58 a 59 b 60 c
61 c 62 b 63 d 64 a 65 b 66 b
67 a 68 a 69 c 70 b 71 b 72 d
73 a 74 d 75 a 76 a 77 c 78 b
79 b 80 d 81 c 82 d 83 b 84 d
85 c 86 b 87 b 88 c 89 c 90 b
91 b 92 d 93 c 94 a 95 b 96 d
97 c 98 c 99 b 100 c 101 d 102 d
103 b 104 d 105 c 106 c 107 a 108 d
109 a 110 b 111 c 112 b 113 b 114 c
115 b 116 c 117 a 118 b 119 a 120 d

01 Which of the following items are shown in the other liabilities in the balance sheet (a) unexpired
discount (b) outstanding charges like rent (c) deposits of staff like security deposit (d) margin deposits:
a atocall atodall, c a, b and d onlyd b to d all
02 A joint stock company's features include (a) artificial person (b) perpetual succession (c)
limited liability (d) common seal
a atocall b atodall, c a, b and d only d to d all
03 Classification of companies can be (i) on the basis of incorporation (ii) on the basis of ownership
(iii) on the basis of liability. These companies may be (a) public company (b) company limited with shares
(c) subsidiary company (d) foreign company. Which of the following does not match.
a ii b iii c iv d i
04 A company had come out with a public issue of 20000 shares of Rs.10 each payable Rs.2 with
application and balance on allotment. The called up capital of the company is Rs.:
a 200000 b 160000, c 40000 d 4000
05 The shares that can be purchased by an employee at a predetermined price at the time of a public
issue is called: a rights shares, b preference shares, c employees' stock option
scheme, d sweat equity
06 A joint stock company prepares its balance sheet as per Part , Schedule of Companies Act 1956:
a A, IV b I, VI, c I, IV d V, V
07 To make provision on bad debts, which of the following journal entry is correct:
a debit the profit & loss account and credit the bad debt account
b debit the profit and loss account and credit provision on bad debts account
c debit the provision account and credit the bad debt account
d debit the provision account and credit the account of individual customer
08 When the future cash flow from a project is discounted, the project can be accepted if:
a the net present value is zero or negative, b the net present value is negative
c the net present value is zero or positive, d the net present value is more than one only
09 Internal rate of return (IRR) is the ______ rate at which the net present value of the cash flows
from a project is ____________________
a return rate, less than one, b discount rate, more than one ' c discount
rate, zero d discount rate, less than one
10 The estimated value of an asset at which it can be disposed of after a given no. of years of
useful life is called:
a depreciated value, b written down value, c salvage or residual value, d
net value
11 A fixed asset is purchased for Rs.1 lac with expected useful life of 5 years. its depreciated value at
the end of 3rd year will be Rs._. If it is sold for Rs.45000, the firm will make profit I loss of Rs.
a Rs.60000, loss, Rs.15000, b Rs.40000, profit, Rs.5000, c Rs.40000, loss,
Rs.5000, d Rs.60000, profit, Rs.15000
12 Business transactions are recorded on the basis of certain set of rules and criteria, which are
called: a double entry book keeping, b single entry book keeping, c accounting standards,
d any of the above
13 Which of the following accounting standard prescribed by ICAI in India does not match the description:
a AS 17 — segment reporting, bAS 26 — Intangible assets, c AS 09 — Revenue Recognition
d AS 01 — cash flow statement
14 The accounting method in which the profit represents the excess of receipts over the expenditure:
a cash method, b accrual method, c single entry method, d none of the above
15 Which among the following is not a correct statement:
a In India the accounting standards are issued by Accounting Standard Board under ICAI, b
Compliance with accounting standards is the duty of Auditor, c Single entry system is a scientific
method of accounting d accounting standard 6 relates to depreciation accounting
16 Health of the proprietor which affects the business activity and hence the profit is not recorded in the
books due to which of the following:
a business entity concept, b money measurement concept, c realization concept, d going concern
concept
17 When a business earns profits, these are shown in the balance sheet as:
a capital, b reserves and surplus, c cash in hand, d cash at bank
18 Name the accounts involved in the following transaction i.e. the firm has purchased machinery from XYZ, for
cash: a cash & XYZ, b XYZ and machinery, c cash and machinery, d cash, XYZ and
machinery
19 Which of the following is a correct statement regarding a cash book (a) it is book of original entry (b) it is
subsidiary book and a ledger account also (c) it records all cash transactions (d) the fundamental rule that
each entry should be first recorded in the book of prime entry and then posted applies to cash book also:
a a to d all correct, b a, b and c are correct, b, c and d are correct, d a, b and d
are correct
20 The accounting cycle of business transactions follows the following order:
a summarising - recording — classifying, b classifying summarizing- recording, c
recording classifying – summarizing, d none of the above
21 When two sides of an account are equalized by putting the difference on the side where
amount is short, the process is called:
a balancing, b jou ma lising, c posting, d a or c
22 The debit balance of an account may represent either an asset or an expense. Which of the following is
not correct in connection with the debit balance:
a cash account – assets, b rent account – expense, c pre-paid expenses – asset,
d pre-operative expenses – expense
23 The accounts showing transactions with persons like customers, suppliers, banks, owners etc. are
categorized as personal account. Which of the following is not a sub-category of such accounts:
a natural personal account, b artificial personal account, c representative personal
account d real personal account
24 Which of the following accounts is not a real account: a machinery, b land, c b a n k , d c a s h
25 A firm has incurred huge expenditure on advertisement the benefit of which would be available for few
years. It debits its profit and loss account for a part of the amount while the other part is not debited.
These two parts would be classified as:
a both nominal accounts, b first as real account, 2nd personal account, c first
nominal account, 2" representative personal account, d both personal accounts
26 Which of the rule for debit or credit of account is properly matched out of the following:
a personal account — debit the giver, b real account — debit what goes out, c nominal account
— credit all income or gains, d none of the above
27 Debit in real account means (a) the value of the asset whose account is being debited has
increased (b) the value of the asset whose account is being debited has decreased (c) business has
acquired more of that asset (d) business has sold that asset:
a a or c only, b b or c only, c a or d only, d cord only
28 A nominal account has been debited which signifies that (a) there has been some expense (b) there
has been some loss (c) some income has diminished (d) some profit has diminished:
a atodall, b a, b and c only, c b and c only, d a and d only
29 Which of the following statement is true with regard to debit or credit to cash book:
a debit side of the cash book is called payments side, b credit side of the cash book is called
receipt side
c credit side is payment and debit side is receipts, d debit side is payment and credit side is
receipts
30 The left hand side of an account is calledand right hand side entry is called _______:
a debit, credit, b credit, debit, c both credit, d both debit
31 Which of the following is not correct:
a cash is a real account, b bank account is a personal account, c journal is a book of
original as well as secondary entry, d short description of a transaction is called narration
32 Name of the account book where the individual records of expenses, assets and persons are
maintained is called:
a cash book, b journal, c ledger, d all the above
33 Wages paid to Mohan, the peon is to be credited toand cash received from a debtor being payment of goods
sold would
be debited to :
a Mohan, debtor, b cash, debtor, c cash, cash, d Mohan, cash
34 A business firm can adopt an accounting procedure which it has to follow later on also due to which of
the following accounting concepts:
a convention of conservatism, b convention of consistency, c convention of materiality
d convention of full disclosure
35 The double entry accounting system (a) keeps a complete record of business transactions (b) it ensures
arithmetical accuracy (c) balance sheet can be prepared at the end of year only by using this system (d) system being
scientific, eliminates the commission of fraud.
a a to d all, b only a, b and c, c only b, c and d, d a, b and c only
36 The accrual system of income recognition makes distinction between:
a cash received and cash not received, b cash paid and cash not paid, c cash received and right to
receive the cash, d cash actually received and cash yet to be received
37 Machinery account has been showing a balance of Rs.2.70 lac. An entry of Rs.0.30 lac is made on right side of this
account. This will (increase / decrease) the balance which would be a decrease, Rs.3.00 lac,
b increase, Rs.3.00 lac, c decrease, Rs.2.40 lac, d increase, Rs.2.40 lac
38 The balance of cash book and the balance as per pass book of the bank are required to be
reconciled because of, which of the following reasons (which is not true):
a some entries are recorded in the pass book first and cash book later on
b some entries are recorded in the pass book later and cash book first
c some entries are recorded either in the pass book or the cash book with delay
d some entries are recorded in both the books, before date of reconciliation
39 A cheque is issued by a firm but not presented, while the other cheque drawn in its favour, is
deposited by the firm with the bank.In the first case the entry will be first made by the in
its books and for the 211d case, entry will be first made by the a bank, firm, b
firm, bank, c bank, bank, d firm, firm
40 For the purpose of reconciliation statement, if there is positive balance, it appears on _ side of in
the cash book and ____side in the pass book: a debit, credit, b credit, debit, c
debit, debit, d credit, credit
41 When pass book has a higher balance than the cash book and account is a current account
with the bank, this may be on account of:
a cheque issued by the firm and not paid by the bank
b bank might have credited some amount to firm's account without information to the firm
c some customer of the firm might have deposited some amount in
the account without information to the firm d all the above
42 (a) credit balance as per cash book means overdraft (b) direct deposit by a firm's debtor in the bank
is first recorded by the bank (c) debit of bank charges by the bank reduce the balance-In-thecontext of
reconciliation, which of these is correct: a atodall, b a and b only, c b and c
only, d a and c only
43 Bank reconciliation statement is : a ledger account, b part of the cash book, c a-
statement showing difference between the balance in the pass, d book and cash book, d a
statement of position of balance of two books
44 The receipt side of the cash book is overcast by Rs.100 and the overdraft as per pass book is the
starting point. The amount of Rs.100 will be: a added, b reduced, c
kept unaltered, dnone of the above
45 In gross trial balance, which of the following is taken (a) total of debit columns of each ledger
account (b) total of credit columns of each ledger account (c) total of receipt of cash book (d) total of
payment of cash book: a a to d all, b only a and b, c only c and d, d only a
and c

46 Trial balance remains untallied due to errors. Various types of errors can be (a) error of omission
(b) error of commission (c) errors of principal (d) intentional errors:
a a, b and c only, b a, c and d only, c b, c and d only, d atodall
47 XYZ had purchased certain goods from ABC firm but these were not recorded in the purchase
journal. This is error of . It will (affect / not affect) the trial balance: .
a omission, affect, b compensating, not affect, c principle, affect, domission, not
affect
48 An error that nullifies the wrong effect of another error is called
a omission, b commission, c principle, d compensating error
49 Goods purchased from Ramesh Kumar have been recorded in the sales register.
a no rectification is required, b rectification can be done by making the correct, c
rectification can be made by passing a journal entry debiting the sale account by Rs.500 and
debiting the purchase account by Rs.500 and crediting the Ramesh Kumar account by Rs.1000, d
rectification can be made by passing a journal entry debiting the
sale account by Rs.1000 and crediting the purchase account by Rs.500 and crediting the Ramesh Kumar
account by Rs.500
50 A purchase of Rs.6800 has been made by the firm but the amount has been posted to creditor's
account for Rs.6000. For rectification, the journal entry would be:
a debit creditor and credit purchase account Rs.800, b debit purchase account and credit
suspense account Rs.800
c debit suspense account and credit creditor's account Rs.800, d debit creditor's account and
credit suspense account Rs.800
51 Which of the following is not true:
a wrong balance of an account affect the trial balance, b closing stock does not appear in
the trial balance, c trial balance is prepared after preparation of the final account, d
sales are shown on the credit side of the trial balance
52 (a) a recurring expense which is to be made frequently is called a revenue expense (b) a non-
recurring expense is a capital expense (c) purchase of motor cars from the manufacturer by a dealer is a
revenue expense (d) purchase of machinery by a manufacturing firm for its use is a capital expense.
a a to d all correct, b a, b and c are correct, c b, c and d are correct, d a, c and d are correct
53 Which of the following expenses and their type does not match:
a cost of replacement of defective part of a machinery — Revenue Expense
b professional fee paid in connection with acquisition of a leasehold
premises — capital expenditure
c traveling expenses incurred by the Chief Executive of a company
in connection with purchase of costly equipment — capital expenses
d purchase of machinery for sale — capital expenses
54 A sum of Rs.3000 paid to Mr. A against acceptance was debited to account of Mr. B. The rectification
can be done by :
a debit to the cash account, b debit to A's account, c debit to B's account, d
none of the above
55 The profits represent excess of receipts over the payment, as per which of the following accounting
methods:
a accrual method, b cash method, c mercantile method, d all the above
money, Rs.4 as allotment money and Rs.2 as 1st and final call. The company has received applications for
2 lac shares. If 1SI and final call money is not received on 4000 shares, what will be amount of share
capital forfeited?
a Rs. 4000, b Rs.40000, c Rs.20000, d Rs.8000
57 A party draws a bill of exchange in Delhi payable in Bangalore by a foreigner and no sale or purchase
has actually taken place. Such bills are called:
a documentary bills, b foreign bills, c accommodation bills, d usance bills
58 A bill has been received by a drawee X from drawer Y and has been dishonoured and noted. What
journal entries will be passed: in the books of the drawee:
a debit bills receivable, credit Y and noting charges, b debit bills payable, credit noting
charges & Y
c debit bills payable & noting charges, credit Y, d debit Y & noting charges, credit bills
payable
59 The book in which all particulars relating to bills accepted are recorded is called Bills
(receivable/payable) book and the entry is posted to the debit of respective (debtor / creditor)
a payable, creditor, b payable, debtor, c receivable, creditor, d
receivable, debtor
60 Which of the following statements best explains the relationship between Journal & Ledger?
a First recording in Journal and then posting to ledger completes the
double entry of the transaction.
b Journal is the book of original entry where as the ledger is the book of second entry.
c The Journal is the book for analytical record and the Ledger is the book for chronological record.
d The process of recording in the Journal is called posting, the process of recording in the ledger is
called journalising.
money, Rs.4 as allotment money and Rs.2 as lst and final call. The company has received applications for
2 lac shares. In the problem, which account would be debited and which account would be credited:
a debit bank account and credit share application account, b debit cash account and credit
share capital account, c debit bank and credit share allotment, d debit share
application and credit share capital
62 Which of the following transactions will increase as and also decrease an asset?
a Stores purchased on credit, b Stores purchased on cash, c Payment of a
Promissory Note with cash, d Declaration of Dividend
63 The general reserve at the time of amalgamation of firms is transferred to:
a revaluation account, b account of the new firm after amalgamation, c capital
account of partners, d written off to write off goodwill etc.
money, Rs.4 as allotment money and Rs.2 as 1 st and final call. The company has received
applications for 2 lac shares. By what amount, the bank account would be credited:
a Rs. 4 lac, b Rs.8 lac, c Rs.10 lac, d nil
65 An invoice of Rs. 560 is entered in the sales book as Rs. 650/-. The correct total of the debit side of the
trial balance is Rs. 21240. Assuming no other error, what is the total of the credit side of the trial
balance? a 2 1 2 4 0 , b21150, c 21330, d None of these
66 The rule 'credit the giver' would be applicable in which of the following transactions:
a purchase of goods on credit from Mr. X, b introduction of capital by the promoter, c
salary payable but outstanding, d all the above
67 A purchase of Rs. 251 from Ramesh & Co. has been entered in the purchase book as 215. Debit side
of the trial balance is 17364. Assuming no other error, what should be the total of the credit column
of the trial balance?
a 17364, b 17400, c 17328, d None of these
68 Stock does not include
a Goods in the hands of an agent, b Goods out on approval (on sale or return), c
Goods sold awaiting delivery to the buyer, d Goods (Meant for re-sale)
69 What is the amount of Operating Expenses when: Sales — Rs. 14900, Gross Profit — Rs. 3300 and
Net Loss — Rs. 500 a 2 8 0 0 , b 3800, c 11100, d 11600
70 Depreciation is appearing in the trial balance of a company. While making final accounts, it should be
shown in:
a The Profit & Loan A/c, b The balance sheet as a deduction from the asset concerned, c
The profit and loss account and balance sheet, d . The Profit & Loan a/c or Balance Sheet.
71 An entry of Rs. 500 was wrongly posted to wages A/c instead of Machinery Account, as wages are to
be capitalised. It is an error of: a Commission, b Omission, c Principle, d Clerical
72 The provision for bad and doubtful debts at the time of dissolution of a firm is transferred to which of the
following accounts: a realisation account, b capital account of partners equally, c
capital account of partners in their sharing ratios d debtors' accounts
73 A firm purchased machinery worth Rs.230000 and spend Rs.15000 on its installation. Its expected
useful life is 5 years when its scrap value will be Rs.45000. What is the amount annual depreciation?
a 30000, b 35000, c 40000, d 45000
74 Which is a Source of Funds?
a Increase in Liability, b Decrease in Liability, c Purchase of Asset, d None of these
75 Wages paid to labour have been credited to wages account. It is an: a error of omission,
b error of commission, c error of principle, d compensating error
76 (Cost price of assets — scrap value) / no. of years of estimated life of the asset. This method of
depreciation calculation is : a written down value method, b annuity method,
c depletion method, d straight line method
77 Which of the following accounting entry is passed at the end of the first year in case of sinking fund
method: a debit depreciation, credit sinking fund investment, b debit sinking fund investment,
credit bank account c both a and b, d only a
78 An asset is purchased for Rs.2 lac. Its depreciated value is Rs.1 lac at the end of 5th year at 10%.
The depreciation in this case has been charged at under method:
a depreciated value, straight line method, b original cost, straight line method, c original
cost, written down value method, d depreciated value, written down value method
79 Full amount of depreciation is not provided to the debit of profit and loss account in which of the
following methods of epreciation:
a straight line method, b written down value method, c sinking fund method, d it
has be provided in case of all method
80 Group A (a) cost of a fixed asset (b) residual value (c) depreciation cost (d) estimated life. Group 13
(i) cost less residual value (ii) purchase price excluding any other type of expenses (iii) value on estimated
date of disposal (iv) no. of years the asset is expected to be in use. Which of the following is not matched:
a ii, b iii, c I, d iv
81 In a balance sheet, which of the following equations, is not correct:
a assets = total claims called equities, b assets = liabilities + capital, c liabilities =
assets - capital
d Capital = assets + liabilities
82 The promoter brings capital of Rs.20000 out of which he purchases furniture worth Rs.2000 &
machinery of Rs.3000. The balance sheet of the firm will show:
A capital at Rs.20000 & furniture at Rs.2000, Machinery Rs.3000 and cash Rs.20000.
B capital at Rs.15000 & furniture at Rs.2000, Machinery Rs.3000 and cash Rs.20000.
C capital at Rs.20000 & furniture at Rs.2000, Machinery Rs.3000 and cash Rs.20000.
D capital at Rs.15000 & furniture at Rs.2000, Machinery Rs.3000 and cash Rs.15000.
83 Owner's equity is equal to: a capital + debentures + long term liabilities, b capital +
reserves, c fixed assets + capital, d fixed assets + capital + reserves
84 Prepaid Insurance Account is:- a An expense, b A Revenue, c An Asset,
d A liability
85 The profit or loss disclosed by the accounts of a company is :- a Transferred to share Capital
Alc, b Shown in the column of "Current liabilities & Provisions", c Shown in the column of
"Reserves & Surplus" under a separate head, d Transferred to General Reserve,
e Transferred to "Dividends payable" account
86 An insurance company admitted claim of a firm for Rs.4000 against the loss of goods worth Rs.1000D.
The abnormal loss of Rs.6000 would be debited to which of the following:
a insurance receivable account, b trading account, c profit and loss account, d
company's paid up account, if it is a company, otherwise capital account
87 Which of the following errors is revealed by the trial balance?
a Wrong amount entered in the book of original entry, b Wrong amount entered in the
ledger account
c Complete omission of an entry from the book of original entry, d All of the above
88 Which of the following does not match in the context of computer based accounting:
a accounting performed by computer: computerized accounting
b the instructions written by the programmer for running the computer - programming
c To guard against loss of data, regular copy is made called duplicate record
d instructions written in the form of a computer program that destroy the information in the computer –
virus
89 Balance sheet and profit and loss account prepared by a bank (a) are submitted to RBI by banks
(b) within 6 months from close of the financial year (c) in three copies (d) alongwith auditor's report. Which
of these is correct statement: a atodall a to c only, cb to d only d a, c and d only
90 Form B (under provisions of Banking Regulation Act) is used by banks to:
a send report of CRR, b send details of SLR investments, c prepare profit and loss
account d report unclaimed deposits
91 Provisions made for loan accounts are placed under which of the following item:
a reserves & surplus, b other liabilities, c contingencies and provisions, a other
liabilities and provisions
92 : Banks have different types of capital. What is the proper order:
a authorized, subscribed, issued, paid-up, b authorized, issued, subscribed, paid-up, c
authorized, paid-up, issued, subscribed, d authorized, paid-up, subscribed, issued
93 Contingency liabilities in a bank balance sheet include (a) claims against the bank not
acknowledged as debt (b) liability for partly paid investments (c) guarantees given on behalf of the
customers (d) liability on account of outstanding forward exchange contracts. aa to c only b b
to d only, c a and d only d a to d all
94 Difference on account of incomplete recording of transactions between two branches is called
. Its balance is
a inter-office balance,•credit, b inter-office adjustment, debit or credit, c inter-office
balance, debit d inter-office adjustment, debit
95 A person purchased a lap top for Rs.30000 by raising a loan from the bank at 12% on simple rate of
interest, payable in 2 years as weekly payment. The total amount of interest would be Rs._ and the weekly
instalment would be Rs___: a 7200, Rs.357.60, b 3600, Rs.357.60, c 7200, Rs.715.20, d
3600, Rs.715.20
96 When. the balance as per the cash book is starting point, in the reconciliation, the amount of
cheques issued and not presented are : a subtracted, b a d d e d , c either added or subtracted,
d none of the above
97 Which among the following is not correct in the context of annuity:
a term of annuity — total time during which regular payments are made
b payment period — the regular time periods during which payments
are made
c ordinary annuity — where payments are made at the end of the
period d annuity date — when payments are made at the end of the period
98 A person wants to have Rs.2 lac annually for 20 years by investing the amount in an annuity with
interest rate of 5%. He will have to invest:
a Rs.24 lac, b Rs.2492440, c Rs.2429000, d Rs.25 lac
99 A sinking fund can be created for using it for (a) pay a loan in lump sum (b) to redeem a bond (c) to
buy new machinery (d) to replace a worn out equipment:
a a to d all, b a, b and c only, c a, c and d only, d b, c and d only
100 When the required rate of return is (less than I more than) the coupon rate, the discount on the
bond as maturity approaches: a more than, increases, b less than, increase, c less than, constant, d
more than, declines
101. 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 1100
102 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
103 In the case of loan obtained from the bank, the amount repayable is represented by the value and
the amount taken represents the value: a present, future, b future, present, c
present, present, d future, future
104 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
105 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
106 Amount = Principal (1+r)n is the formula for calculation of: a simple interest, b floating
interest, c compound interest, d annuity
107 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
108 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 and period to half the principal
c if 72 is divided by the rate of interest, it will provide the period to double the principal
d if 72 is divided by the period, it will provide the rate of interest, to half the principal
109 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
110 Mr.Satish has decided to invest Rs.7500 every year for the next 3 years 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
111 Which of the following statement is correct:
a present value of annuity due is lower than the present value of ordinary 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.
112 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.
113 Which of the following statements is correct in the context of interest rate:
a compound interest is cheaper than the simple interest, b less frequent is the period of
compounding, higher is the amount of interest, c frequent the period of compounding, higher is
the amount of interest, d the effective rate is always less than the given annual compound rate.
114 When a bond matures, its maturity value is known as:- a maturity value, b
redemption value, c face value, d coupon value
115 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
116 Which of the following best matches the description of a zero coupon 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 interest payment, d any of the above
117 On which of the following instruments only interest is paid and the instrument has no maturity period:
a annuity, bperpetual bond, c negotiable bond, d zero coupon bond
118 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
119 When a firm is not been able to locate the difference in the totals of trial 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
substantial balance, d the difference will be adjusted to the capital account
120 Interest rate elasticity is calculated as under:
a %age change in maturity value of bond in period t / % change in the 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
ANSWER - PRACTICE PAPER NO. : 5

01 b 02 b 03 c 04 c 05 c 06 b
07 b 08 c 09 c 10 c 11 b 12 c
13 d 14 a 15 c 16 b 17 b 18 c
19 b 20 c 21 a 22 d 23 d 24 c
25 c 26 c 27 a 28 a 29 c 30 a
31 c 32 c 33 c 34 b 35 d 36 c
37 c 38 d 39 d 40 a 41 d 42 a
43 c 44 a 45 a 46 a 47 d 48 d
49 c 50 c 51 c 52 a 53 d 54 d
55 b 56 b 57 c 58 c 59 a 60 b
61 a 62 b 63 c 64 d 65 c 66 d
67 b 68 c 69 b 70 b 71 c 72 a
73 c 74 a 75 b 76 d 77 c 78 b
79 c 80 a 81 d 82 a 83 b 84 c
85 c 86 c 87 b 88 c 89 b 90 c
91 d 92 b 93 d 94 b 95 a 96 b
97 d 98 b 99 a 100 d 101 a 102 c
103 b 104 d 105 c 106 c 107 a 108 c
109 c 110 a 111 b 112 b 113 c 114 b
115 b 116 c 117 b 118 c 119 B 120 b

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JAIIB MADE SIMPLE

ACCOUNTING AND FINANCE FOR BANKERS

(A Very useful book for Day to Day Banking and all

Place: Mumbai SANJAY KUMAR TRIVEDY

Compiled by Sanjay Kumar Trivedy & Team RSTC, Mumbai 1|Page

TOPIC PAGE NO.

1. ABOUT JAIIB EXAMINATION …………………….……03-05

2. MODULE : A ( B. MATHEMATICS & FINANCE)….…06-23

3. MODULE : (BOOK KEEING & ACCOUNTANCY ) .... 24-54

4. MODULE : C ( FINAL ACCOUNTS ) ............................. 55-79

5. MODULE : D ( BANKING OPERATIONS ) ........ 80-122

6. PRACTICE TEST PAPERS .......................................123-156

Compiled by Sanjay Kumar Trivedy & Team RSTC, Mumbai 2|Page

MEDIUM OF EXAMINATION : Either in Hindi or English

Cut-off Date of Guidelines / Important Developments for Examinations

B. MULTIPLE CHOICE – ( Each Questions 01 Marks )– PROBLEMS & SOLUTIONS (18-20QUES)

QUESTIONS MODELS : TYPES OF QUESTIONS

Compiled by Sanjay Kumar Trivedy & Team RSTC, Mumbai 3|Page

Type – C : MULTIPLE CHOICE – APPLIED THEORY – QUES. & ANS

DURATION OF EXAMINATION : The duration of the examination will be of 2 hours.

“CLASS OF PASS” CRITERIA

Examination DATE TIME SUBJECTS

ONLINE - Will be given in the admit

(Examination Eligible for Members Only)

Sr. No. Name of the Exam Attempts Fee (Rs)

1 JAIIB First Block of 2 attempts 2736

Second Block of 2 attempts 2736

Compiled by Sanjay Kumar Trivedy & Team RSTC, Mumbai 5|Page

Foreign Exchange Arithmetic :Fundamentals of Foreign Exchange; Forex Markets;

Compiled by Sanjay Kumar Trivedy & Team RSTC, Mumbai 6|Page

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

PV =10000 * [(1-(1+0.05)51* (1+0.05) =10000 * 4.33 * 1.05 = 100000 * 4.5459 = Rs.45459

(1+i)" -1 (F=Future value of an annuity)

Compiled by Sanjay Kumar Trivedy & Team RSTC, Mumbai 11 | P a g e

BONDS AND DEBENTURES

Test your self

6.There are two bonds with the following features:

Compiled by Sanjay Kumar Trivedy & Team RSTC, Mumbai 13 | P a g e

CONVENTIONAL METHODS - PAYBACK METHOD ,

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

DISCOUNTED CASH FLOW METHODS

Compiled by Sanjay Kumar Trivedy & Team RSTC, Mumbai 14 | P a g e

Compiled by Sanjay Kumar Trivedy & Team RSTC, Mumbai 15 | P a g e

Test your self

Depreciation fund Kept as fund and usedwhen asset is to be replaced. It is invested

Compiled by Sanjay Kumar Trivedy & Team RSTC, Mumbai 17 | P a g e

Straight Line Method or fixed instalment method

FOREIGN EXCHANGE ARITHMETIC

Direct Rates Indirect Rates

SPOT TRANSACTIONS & FORWARD TRANSACTIONS

Date of Contract Delivery Date / settlement Rate to be used

Premium or discount on forward transactions

Test your self

Compiled by Sanjay Kumar Trivedy & Team RSTC, Mumbai 23 | P a g e

Basic Accountancy Procedures : Concepts of Accountancy; Going Concern Entity;

Bank Reconciliation Statement : Need for Bank Reconciliation; Causes of Differences;

Capital and Revenue Expenditure : Expenditure; Distinction between Capital and

Compiled by Sanjay Kumar Trivedy & Team RSTC, Mumbai 24 | P a g e

VARIOUS KINDS OF ACCOUNTING

BASIC ACCOUNTING CONCEPTS

INDIAN ACCOUNTING STANDARDS

No. Title of the accounting Date from which mandatory

Compiled by Sanjay Kumar Trivedy & Team RSTC, Mumbai 28 | P a g e