1. ACCOUNTING AND FINANCE BANKERS J A I I B PAPER-2 MODULE ‘ C ‘By
RAVI ULLAL
CONSULTANT

2. TOPICS BANK RECONCILIATION TRIAL BALANCE CAPITAL & REVENUE EXPENDITURE
INVENTORY VALUATION
BILLS OF EXCHANGE
CONSIGNMENT ACCOUNT
JOINT VENTURE
LEASING & HIRE PURCHASE
NON-TRADING ORGANISATIONS
DEPRECIATION
MODEL QUESTIONS

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

4. BASIC RULES OF ACCOUNTING
-- REAL : DEBIT THE ACCOUNT WHEN WE PURCHASE
AN ASSET & CREDIT WHEN WE SELL OR
DEPRECIATE.
-- PERSONAL : DEBIT THE RECEIVER OF GOODS &
CREDIT THE GIVER OF GOODS.
-- NOMINAL : DEBIT LOSSES & EXPENSES, CREDIT
INCOMES & GAINS.
-- IN A LEDGER, ASSETS OR LOSSES HAVE DEBIT
BALANCE WHILE LIABILITIES OR GAINS HAVE
CREDIT BALANCE.

5. BANK RECONCILIATION STATEMENT
BANK RECONCILIATION( B. R. ) IS BASED ON THE PRINCIPLE OF DOUBLE ENTRY.
CREDIT THE GIVER AND DEBIT THE RECEIVER
B. R. SHOWS CAUSES OF DIFFERENCES BETWEEN CASH BOOK AND PASS BOOK BALANCE
DEBIT BALANCE AS PER CASH BOOK IS CREDIT BALANCE AS PER PASS BOOK = POSITIVE BALANCE
CREDIT BALANCE IN CASH BOOK IS DEBIT BALANCE IN PASS BOOK = NEGATIVE BALANCE/OVERDRAFT
WHETHER WE START WITH CASH OR PASS BOOK RECONCILIATION ENTRIES WILL REMAIN SAME AS PER PRINCIPLES

6. BANK RECONCILIATION STATEMENT
CAUSES OF DIFFERENCES TREATMENT
CASH/PASS BOOK
DT CR. .
CHEQUES ISSUED BUT NOT PRESENTED √
CHEQUES DEPOSITED BUT NOT COLLECTED √
BANK CHARGES √
INTEREST ON SAVINGS BANK √
INTEREST ON LOAN √
AMOUNT PAID BY BANK AS PER √
STANDING INSTRUCTIONS
. DIRECT PAYMENTS MADE BY CUSTOMERS √
. DISHONOUR OF CHEQUES RECEIVED √

7. BANK RECONCILIATION STATEMENT
CAUSES OF DIFFERENCES TREATMENT
CASH/PASS BOOK
DT CR.
. PAYMENTS SIDE OF CASH BOOK
UNDERCAST √
. DEPOSIT SIDE OF CASH BOOK
OVERCAST √
. CHEQUE ISSUED BUT NOT TAKEN
IN BANK COLUMN √
. DEBIT BALANCE X BROUGHT
FORWARD AS CREDIT BALANCE X
. CHEQUE ISSUED BUT RECORDED
TWICE √

8. BANK RECONCILIATION STATEMENT
IMPORTANT : WHETHER WE ARE RECONCILING PASS BOOK OR CASH
BOOK , EACH OF THE RECTIFICATION ENTRIES WILL
APPEAR ON THE SAME SIDE . ADDITION OR SUBRACTION
OF ENTRIES FROM THE OPENING OR GIVEN BALANCE
DEPENDS UPON WHICH SIDE OF THE LEDGER THEY ARE
CAST OR TO BE CAST. THUS WHAT WE SIMPLY NEED TO
KNOW IS WHETHER EACH FIGURE GIVEN IN THE
PROBLEM IS A DEBIT OR CREDIT ENTRY. I WILL EXPLAIN
WITH THE HELP OF A PROBLEM LATER.

9. BANK RECONCILIATION STATEMENT
SIMPLY PUT, IF AN ENTRY IS ALREADY THERE BUT EITHER
THE WHOLE OR PART IT HAS TO BE RECTIFIED THEN THAT
PORTION IS POSTED ON THE OPPOSITE SIDE OF THE
ORIGINAL ENTRY.

10. BANK RECONCILIATION STATEMENT
ADVANTAGES OF BANK RECONCILIATION
. VERIFICATION OF ACCURACY OF ENTRIES
. TIMELY CORRECTIVE ACTION
. PREVENTS FRAUDS
. CONTROL TOOL FOR MANAGEMENT

11. TRIAL BALANCE DEFINITION IT IS A STATEMENT SHOWING CREDIT AND DEBIT
BALANCES FROM THE LEDGER.
HELPS ARITHMETICAL ACCURACY AND FACILITATES
FINAL ACCOUNTS.

12. TRIAL BALANCE BASIC PRINCIPLE :
SINCE IT IS DOUBLE ENTRY BOOK-KEEPING, HENCE,
ASSETS AND EXPENSES ARE DEBIT BALANCES
LIABILITIES AND INCOMES ARE CREDIT BALANCES
. IN CASE OF ARITHMETICAL INACCURACY IDENTIFY
CLERICAL/PRINCIPLE ERRORS AND RECTIFY

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

14. TRIAL BALANCE -- ERRORS OF COMMISSION
--- FIGURE POSTED ON THE WRONG SIDE OR WITH
WRONG AMOUNT
-- COMPENSATING ERRORS
--- ONE ERROR BALANCES ANOTHER ERROR
. B) ERRORS OF PRINCIPLE
-- ERRORS IN CONTRAVENTION OF ACCOUNTING
PRINCIPLES

15. TRIAL BALANCE RECTIFICATION OF ERRORS IS A SERIES OF STEPS:
PASS THE CORRECT ENTRY
COMPARE THE WRONG ENTRY WITH THE CORRECT ONE
PASS THE RECTIFICATION ENTRY
IF TRIAL BALANCE DOES NOT TALLY THEN DIFFERENCE IS TRANSFERRED TO SUSPENCE ACCOUNT

16. TRIAL BALANCE TYPICAL TRIAL BALANCE N A M E DEBIT CREDIT CAPITAL X
DRAWINGS X
PURCHASES X
SALES X
EXPENSES X
DEBTORS(CUSTOMRES) X
CREDITORS(SUPPLIERS) X
CASH X
SALES RETURN X

17. TRIAL BALANCE TYPICAL ERRORS: -- CLERICAL:
A) SALARY PAID 1000/- BUT POSTED AS 10, 000/-.
RECTIFICATION: CREDIT SALARY WITH 9000/-.
B) SALARY PAID 1000/- BUT POSTED IN RENT A/C.
RECTIFICATION: DEBIT SALARY AND CREDIT RENT WITH
1000/-.
C) GOODS WORTH 100/- SOLD TO VIJAY WRONGLY
RECORDED IN PURCHASE REGISTER.
RECTIFICATION: CREDIT SALES AND PURCHASE A/Cs
WITH 100/- EACH AND DEBIT VIJAY WITH 200/-.

18. TRIAL BALANCE AFTER TRIAL BALANCE IS PREPARED ONE FINDS
. D) SALES OF 500/- POSTED AS 5000/- WHILE RENT PAID 500/- POSTED AS 5000/-.
. RECTIFICATION: DEBIT SALES WITH 4500/-, CREDIT SUSPENCE WITH 4500/-, CREDIT RENT WITH 4500/-,
DEBIT SUSPENCE WITH 4500/-.
E) SALARY PAID AS 1000/- BUT POSTED AS 10,000/- IN RENT A/C.
RECTIFICATION: DEBIT SALARY WITH 1000/- SUSPENCE WITH 9000/-; CREDIT RENT WITH 10000/-
F) A PURCHASER’S DEBIT BALANCE OF 9000/- HAS NOT BEEN TAKEN.
RECTIFICATION: DEBIT DEBTORS, CREDIT SUSPENCE TO THE EXTENT OF 9000/-.

19. CAPITAL AND REVENUE EXPENDITURE
BASIC PRINCIPLE:
. ALL EXPENSES AND RECEIPTS OF REVENUE NATURE
ARE TAKEN TO TRADING AND PROFIT & LOSS
ACCOUNT
. ALL EXPENDITURES AND RECEIPTS OF CAPITAL
NATURE ARE TAKEN TO BALANCE SHEET

20. CAPITAL AND REVENUE EXPENDITURE
REVENUE RECEIPTS/PAYMENTS :
. ARE SMALLER IN SIZE(RELATIVELY)
. ARE RECURRING IN NATURE
. THE BENEFITS ARE OVER A SHORTER PERIOD (1 YEAR)
. THE PURPOSE IS TO RUN THE BUSINESS ON A DAY TO
DAY BASIS
. MAINTAIN ASSETS IN WORKING CONDITION

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

22. CAPITAL AND REVENUE EXPENDITURE
THERE ARE CERTAIN EXPENDITURES WHICH ARE
OTHERWISE REVENUE IN NATURE BUT SOMETIMES
UNUSUALLY LARGE AND WHOSE BENEFIT TO THE
ORGANISATION MAY ACCRUE AFTER FEW YEARS.THESE
MAY BE TREATED AS DEFERRED REVENUE EXPENDITURE ,
CARRIED TO THE BALANCE SHEET , AND WRITTEN OFF TO
THE PROFIT & LOSS ACCOUNT OVER A PERIOD OF TIME.

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

24. CAPITAL & REVENUE EXPENDITURE
EXAMPLES OF EACH TYPE OF CLASSIFICATION:
CAPITAL NATURE:
-- PURCHASE OF ASSETS SUCH AS BUILDING,
MACHINERY, VEHICLES.
-- EXPENDITURE IN PURCHASE /SETTING UP OF
CAPITAL GOODS/ASSETS
-- EXCESS OF SALE PRICE OF ASSET OVER ITS COST
PRICE
-- FUNDS RAISED THRU BANKS/INSTITUTIONS
-- FUNDS RAISED THRU ISSUE OF SHARES, &
DEBENTURES

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

26. CAPITAL AND REVENUE EXPENDITURE
DEFERRED REVENUE EXPENDITURE:
LARGE ADVERTISING EXPENDITURE FOR(SAY) LAUNCH OF A PRODUCT
EXPENDITURE FOR RAISING OF FUNDS INCLUDING
PREPARATION OF PROJECT REPORT
INITIAL EXPENSES FOR SETTING UP OF A COMPANY

27. INVENTORY VALUATION
VALUATION OF STOCKS IS IMPORTANT FROM THE POINT OF INCOME DETERMINATION.
THE DANGER COULD BE OF EITHER OVERVALUATION OR UNDERVALUATION OF STOCKS RESULTING IN OVERSTATING OR UNDERSTATING OF PROFITS.
METHODS OF VALUATION:
-- FIFO
-- LIFO
-- AVERAGE OR WEIGHTED AVERAGE COST METHOD
-- BASE STOCK METHOD
-- ADJUSTED SELLING PRICE METHOD

28. INVENTORY VALUATION
UNDER FIFO GOODS ISSUED TO PRODUCTION IS VALUED AT THE EARLIEST PRICE WHEREAS THE CLOSING STOCK IS AT THE LATEST PRICE.
UNDER LIFO GOODS ISSUED TO PRODUCTION IS VALUED AT THE LATEST PRICE WHEREAS THE CLOSING PRICE IS AT THE EARLIEST PRICE.
UNDER WEIGHTED AVERAGE COST METHOD ARITHMETIC MEAN OF TOTAL PRICE BY TOTAL QUANTITY RECEIVED IS TAKEN FOR VALUATION.

29. INVENTORY VALUATION
ADJUSTING SELLING PRICE METHOD IS GENERALLY USED BY SMALL BUSINESSMEN WHO ARE UNABLE TO DIFFERENTIATE VARIOUS COSTS.
HENCE THEY VALUE THE STOCKS AT SELLING PRICE AND THEN REDUCE ITS VALUE TO THE EXTENT OF ESTIMATED GROSS MARGIN.

30. INVENTORY VALUATION
BASE STOCK METHOD IS SIMILAR TO LIFO. CLOSING STOCK IS ALWAYS AT COST AT THE BEGINNING OF BUSINESS. IN TIMES OF INFLATION VERY LOW VALUE OF STOCK MAKES FOR EXCELLENT ACCOUNTING.
IT HOWEVER REQUIRES A MINIMUM STOCK TO BE
MAINTAINED.
PRESENTLY ACCOUNTING STANDARDS PERMIT FIFO(HISTORICAL PRICE) OR WEIGHTED AVERAGE COST METHOD.
VALUE OF STOCK CAN BE ASCERTAINED BY PERIODIC(PHYSICAL VERIFICATION) OR PERPETUAL INVENTORY ( MAINTAINENCE OF STOCK REGISTER).

31. INVENTORY VALUATION
CHARACTERISTICS OF DIFFERENT METHODS OF INVENTORY VALUATION
FIFO :
-- IN RISING MARKET FIFO RESULTS IN HIGHER
PROFITS LOCKING UP OF SCARCE W. C.
-- GOODS ARE SOLD AT CURRENT HIGHER PRICES
WHILE COST OF GOODS REFLECTS LOWER THAN
CURRENT COSTS
-- IN FALLING MARKET FIFO RESULTS IN LOWER
PROFITS .

32. INVENTORY VALUATION -- LIFO :
-- IN FALLING MARKET THE EFFECT IS THE SAME AS
THAT OF FIFO IN RISING MARKET
-- IN RISING MARKET THE EFFECT IS SAME AS THAT
OF FIFO IN FALLING MARKET.

33. INVENTORY VALUATION
IN THIS CHAPTER IT IS IMPORTANT TO DISCUSS THE VARIOUS ACCOUNTING CONVENTIONS
CONSERVATISM CONCEPT: RECOGNITION OF INCREASES IN EARNINGS REQUIRES BETTER EVIDENCE THAN DOES RECOGNITION OF DECREASES THAT IS EXPENSES
REALISATION CONCEPT: RECOGNITION OF AMOUNT OF REVENUE THAT HAS CERTAINTY OF REALISATION
MATCHING CONCEPT: RECOGNITION OF REVENUES AND EXPENSES FOR A CERTAIN EVENT.

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

35. BILLS OF EXCHANGE BILL OF EXCHANGE IS THE VEHICLE FOR CREDIT
TRANSACTIONS IN BUSINESS; HAS 3 PARTIES:
DRAWER – WHO MAKES THE BILL/ CREDITOR;
DRAWEE – ON WHOM THE BILL IS DRAWN;
PAYEE WHO RECEIVES THE MONEY;
SOMETIMES DRAWER & PAYEE ARE THE SAME.
ACCEPTANCE TO PAY BY THE DRAWEE IS ESSENTIAL. .

36. BILLS OF EXCHANGE . PROMISSORY NOTE IS SIMILAR ; HAS ONLY 2 PARTIES
BUT SIGNED BY DEBTOR; NOTING NECESSARY.
. ACCOMODATION BILL : THERE IS NO TRANSACTION;
THE BILL IS DISCOUNTED TO RAISE MONEYS FOR
BOTH PARTIES, WHO SHARE THE AMOUNT.

37. BILLS OF EXCHANGE TYPICAL ENTRIES:
. THE ENTRIES IN THE BOOKS OF DRAWER ‘A’ ARE:
DIRECT BILL TRANSACTION
BILLS RECEIVABLE a/c DR.
TO DRAWEE ‘B’
. CASH a/c DR.
TO BILLS RECEIVABLE
( BILL IS MET ON DUE DATE)

38. BILLS OF EXCHANGE BILL ENDORSED TO C . C’s a/c DR. TO BILLS RECEIVABLE
( NO ENTRY WHEN BILL IS MET)
BILL SENT FOR COLLECTION
BANK FOR BILL COLLECTION a/c DR.
CASH a/c DR.
TO BANK FOR BILL COLLECTION
( BILL SENT FOR COLLECTION IS MET) .

39. BILLS OF EXCHANGE IN CASE OF DISCOUNTING CASH a/c DR. DISCOUNT a/c DR.
TO BILLS RECEIVABLE
( NO ENTRY WHEN BILL IS MET)
THE ENTRIES IN THE BOOKS OF DRAWEE ‘B’:
.. A’s a/c DR.
TO BILLS PAYABLE
. BILLS PAYABLE a/c DR.
TO CASH
( BILL IS PAID)

40. BILLS OF EXCHANGE THERE ARE CASES WHEN BILLS ARE DISHONOURED.
IN THAT CASE THE ENTRIES ARE AS FOLLOWS:
IN A’s BOOKS:
BILL DIRECTLY SENT FOR PAYMENT
B’s A/C DR.
TO BILLS RECEIVABLE
TO CASH
( CASH IS THE NOTING CHARGE)
DISHONOUR OF DISCOUNTED BILL
. BILLS RECEIVABLE A/C DR.
NOTING CHARGES A/C DR.
(CASH (notary charges) IS PAID TO THE BANK)

41. BILLS OF EXCHANGE -- B’s a/c DR. TO BILLS RECEIVABLE TO NOTING CHARGES
(BILL RETURNED TO ‘A’)
DISHONOUR OF BILL SENT BY BANK FOR PAYMENT
BILL RECEIVABLE a/c DR.
NOTING CHARGE a/c DR.
TO CASH
TO BANK FOR BILL COLLECTION
( DISHONOUR OF BILL FOR COLLECTION)
. B’s a/c DR.
(BILL RETURNED TO B)

42. BILLS OF EXCHANGE DISHONOUR OF ENDORSED BILL
. BILLS RECEIVABLE a/c DR.
NOTING CHARGES a/c DR.
TO C
B’s a/c DR.
TO BILLS RECEIVABLE
TO NOTING CHARGES
(BILL RETURNED TO B)

43. CONSIGNMENT ACCOUNT
WHEN OWNER SENDS GOODS TO HIS AGENT FOR THE PURPOSE OF SELLING THEN IT IS CALLED CONSIGNMENT.
IT IS DIFFERENT FROM SALE IN THAT THE CONSIGNEE CANNOT DISPOSE OFF THE GOODS ACCORDING TO HIS CHOICE; DOES NOT RECEIVE ANY RISK FROM THE CONSIGNOR; CAN RETURN THE GOODS IF NOT MARKETABLE.

44. CONSIGNMENT ACCOUNT IN CONSIGNMENT ACCOUNTING THERE ARE 3 ACCOUNTS:
CONSIGNMENT ACCOUNT; WHICH SHOWS GOODS/STOCK AT COST INCLUDING EXPENSES INCURRED IN SENDING THE GOODS.
CONSIGNEE ACCOUNT; WHICH IS NET OF HIS SELLING PRICE AND THE NON-RECURRING OR DIRECT EXPENSES INCURRED BY HIM.
GOODS SENT ON CONSIGNMENT ACCOUNT.

45. CONSIGNMENT ACCOUNT
A TYPICAL CONSIGNMENT ACCOUNT WILL APPEAR AS FOLLOWS:
DR CR
To goods sent on by consignee
consignment (goods sold by
(invoice value) consignee)
To bank by closing stock
(all expenses incurred by
Consignor in transporting)
To consignee
Consignee in selling)
To profit & loss a/c

46. CONSIGNMENT ACCOUNT NOTES:
CLOSING STOCK IS VALUED AT COST/INVOICE PRICE + PROPORTIONATE AMOUNT OF COST INCURRED BY CONSIGNOR IN TRANSPORTING.
IF GOODS ARE LOST IN TRANSIT THE SAME METHOD OF COSTING IS APPLIED AND THAT AMOUNT IS CREDITED TO THE CONSIGNMENT ACCOUNT.
NOMINAL LOSSES ARE PROPORTIONATELY CHARGED TO ALL STOCK WHETHER SOLD OR NOT. ABNORMAL LOSS IS DIRECTLY CHARGED TO P&L A/C.
APART FROM FIXED RATE OF COMMISSION ON THE GOODS SOLD AN ADDITION ‘ DEL CREDERE’ COMMISSION IS PAID TO THE CONSIGNEE FOR ENCOURAGING SALES ON CREDIT BASIS.
HOWEVER THE INHERENT RISKS REMAIN WITH THE CONSIGNEE.

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

48. JOINT VENTURE THERE ARE 3 ACCOUNTS:
-- JOINT BANK WHICH SHOWS EACH CO-VENTURER’S
INVESTMENT;
-- CO-VENTURER’S ACCOUNT
-- JOINT VENTURE INTO WHICH THE FINAL
PROFIT/LOSS IS TRANSFERRED.

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

50. LEASING AND HIRE PURCHASE
FINANCIAL LEASE IS THE MOST POPULAR, LONG TERM IN NATURE, GENERALLY USEFUL FOR PLANT AND MACHINERY.
OTHER TYPES ARE OPERATING AND SERVICE LEASES.
LESSOR RECEIVES LEASE RENTALS, CLAIMS
DEPRECIATION.
LESSEE CHARGES THE LEASE RENTALS PAID TO THE P & L ACCOUNT.

51. LEASING AND HIRE PURCHASE
THE LESSOR BREAKS UP THE RENTALS RECEIVED
INTO FINANCE INCOME AND ANNUAL LEASE CHARGE.
FINANCE INCOME = TOTAL RENTALS OVER THE
LEASE PERIOD + RESIDUAL VALUE OF LEASED ASSET
-- COST OF LEASED ASSET ( FAIR VALUE ).

52. LEASING AND HIRE PURCHASE
USE SUM OF DIGITS METHOD TO FIND ANNUAL FINANCE INCOME.
ANNUAL LEASE CHARGE = ANNUAL LEASE RENT – ANNUAL FINANCE INCOME.
ANNUAL LEASE CHARGE = STATUTORY DEPRECIATION + LEASE EQUALISATION CHARGE.
LEASE EQUALISATION CHARGE IS DEDUCTED FROM THE LEASE RENTALS OR THE PROFIT & LOSS ACCOUNT.

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

54. LEASING & HIRE PURCHASE
NOTES:
FINANCE INCOME IS THE PERCEIVED RETURN ON LEASED ASSET.
LEASE EQUALISATION CHARGE IS THE EXCESS OF LEASE RENT AFTER DUE WEIGHTAGE IS GIVEN TO THE RETURN ON THE LEASED ASSET AND THE EXTENT OF DEPRECIATION CHARGED.
THIS AMOUNT IS CARRIED FORWARD IN THE BALANCE SHEET TO BE CHARGED AGAINST THE WRITTEN DOWN VALUE OF THE ASSET.

55. LEASING AND HIRE PURCHASE
Explanation
The concept of lease equalisation account is an equaliser between the capital recovery inherent in lease rentals and the depreciation chargeable as per Companies Act.
The objective of the lessor is to write-off an amount equal to the capital recovery inherent in lease rentals, so as to leave in the revenue statement only the financing charges

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

57. LEASING AND HIRE PURCHASE
A TYPICAL LEASE TRANSACTION IN THE BOOKS OF THE LESSOR:
Bank a/c dr.
to lease rent
(lease rent received)
Lease rent a/c dr.
to P & L a/c
(lease rent transferred to profit)
Depreciation a/c dr.
to asset
(annual depreciation
Of the asset)
P & L a/c dr.
to depreciation
(depn. Charged to P & L a/c) (scroll down)
if annual lease charge>depn.
Lease equalisation a/c dr.
to lease terminal adj.
P & L a/c dr.
to lease equalisation
if annual lease charge<depn
Lease terminal adj. a/c dr.
to lease equalisation charge.
. P & L a/c dr.
to other expenses
(all other expenses debited) .

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

59. LEASING AND HIRE PURCHASE
A TYPICAL TRANSACTION IN THE BOOKS OF THE HIRER:
Asset a/c dr.
to vendor
(purchase of asset on H P basis-
to the extent of the amount agreed)
. Vendor a/c dr.
to bank
(down payment/instalment)
. Depreciation a/c dr.
to asset
(depn. Of asset)
. P & L a/c dr.
to depreciation scroll down
(depn. Charged to P & L)\
. P & L a/c dr.
to expenses
(any other expenses charged to P & L)
IN THE BOOKS OF LESSEE:
. Hirer a/c dr.
to sales
(sale of asset on H P basis)
Bank a/c dr.
to hirer
(instalment received)

60. NON-TRADING ORGANISATIONS
NON-TRADING ORGANISATIONS ARE NON PROFIT MAKING BODIES, RENDERING SERVICES TO PUBLIC, COLLECTING MONEYS BY WAY OF MEMBERSHIP FEES, SUBSCRIPTIONS, DONATIONS. HOWEVER TO PREVENT MISUSE OF FUNDS, ACCOUNTS ARE MAINTAINED.
RECEIPTS & PAYMENTS STATEMENT CONTAINS REAL
ACCOUNTS, ACTUAL RECEIPTS AND PAYMENTS, BOTH CAPITAL AND REVENUE ITEMS.
. INCOME & EXPENDITURE STATEMENT CONTAINS
NOMINAL ACCOUNTS, OF REVENUE ITEMS OF INCOME & EXPENSES FOR A FIXED PERIOD.

61. NON-TRADING ORGANISATIONS
A TYPICAL WAY OF CONVERTING RECEIPTS & PAYMENTS STATEMENT INTO INCOME & EXPENDITURE STATEMENT IS TAKE THE RECEIPTS/PAYMENTS OF THE CURRENT YEAR SUBTRACT THE OPENING BALANCE OF THE CURRENT YEAR AND ADD THE CLOSING BALANCE ( IF ANY ).
THE CLOSING BALANCES WILL CONSTITUTE THE BALANCE SHEET.

62. DEPRECIATION
DEPRECIATION IS A CHARGE ON PROFITS, TO ACCOUNT FOR THE FALL IN THE VALUE( NOTIONAL OR OTHERWISE ) OF AN ASSET DURING THE PERIOD OF USE.
DEPRECIATION OR WRITING OFF OF A CERTAIN PORTION OF AN ASSET ON AN ANNUAL BASIS IS A PRUDENT WAY OF SAVINGS FOR REPLACEMENT OF THE ASSET AFTER ITS USEFUL LIFE IS OVER.
SINCE DEPRECIATION IS AN OPERATING COST AND THEREFORE TAX DEDUCTIBLE, EACH YEAR THE SAVING IS TO THE EXTENT OF (TAX RATE)* ANNUAL DEPRECIATION.

63. DEPRECIATION DEPRECIATION CAN ALSO BE LOOKED IN A DIFFERENT WAY.
DEPRECIATION IS AN ACCOUNTING PROCESS FOR THE GRADUAL CONVERSION OF THE CAPITALIZED COST OF FIXED(TANGIBLE) ASSETS INTO EXPENSE.
SIMILARLY, INTANGIBLE ASSETS ARE CONVERTED INTO EXPENSE BY AMORTISATION.
WHILE ASSETS SUCH AS NATURAL RESOURCES ARE CONVERTED BY PROCESS CALLED DEPLETION.

64. DEPRECIATION WHAT CAUSES DEPRECIATION ? SIMPLY WEAR AND TEAR MISHAPS
OBSOLESCENCE
PASSAGE OF TIME
FALL IN VALUE

65. DEPRECIATION
IN ORDER TO CALCULATE DEPRECIATION THERE ARE BASIC ISSUES TO BE ASCERTAINED :
-- ESTIMATED USEFUL LIFE OF THE ASSET(YEARS).
-- THE RESIDUAL VALUE OF THE ASSET.
-- METHOD TO BE USED FOR PROVIDING
DEPRECIATION.

66. DEPRECIATION METHODS OF DEPRECIATION :
. STRAIGHT LINE METHOD. EQUAL FRACTION OF THE NET COST(COST OF THE ASSET LESS THE RESIDUAL VALUE) IS CHARGED EACH YEAR.
WRITTEN DOWN VALUE METHOD. EQUAL PERCENTAGE OF THE WRITTEN DOWN VALUE IN THE BOOKS OF THE COMPANY IS CHARGED EACH YEAR.
SINKING FUND METHOD. IT IS STRAIGHT LINE METHOD BUT THE DEPRECIATION CHARGED OR A PORTION OF IT IS KEPT AS A RESERVE, INVESTED IN MARKETABLE SECURITIES. THE FUND GROWS INTO REPLACEMENT VALUE OF THE ASSET.

67. FINAL LEG THANK YOU VERY MUCH FOR YOUR
PATIENCE; I TRUST IT WAS USEFUL.
BEFORE WE DISPERSE LET US GO
THRU’ A SET OF QUESTIONS WITH
MULTIPLE CHOICE ANSWERS,WHICH
WILL COVER THOSE ASPECTS OF ACCOUNTING THAT MAY NOT BEEN TOUCHED UPON.

68. E N D
ANY QUERIES MAY BE ADDRESSED TO