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Corporate Accounting

MEANING OF COMPANY
Company is a voluntary association of persons formed for the purpose of doing business having a distinct name and limited liability. It is a juristic person having a separate legal entity distinct from the members who constitute it, capable of rights and duties of its own and endowed with the potential of perpetual succession. The Companies Act, 1956, states that 'company' includes company formed and registered under the Act or an existing company i.e. a company formed or registered under any of the previous company laws.

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Corporate Accounting

  1. 1. Chanderprabhu Jain College of Higher Studies & School of Law Plot No. OCF, Sector A-8, Narela, New Delhi – 110040 (Affiliated to Guru Gobind Singh Indraprastha University and Approved by Govt of NCT of Delhi & Bar Council of India) Semester: B. Com - IV Semester Name of the Subject: CORPORATE ACCOUNTING Unit-1
  2. 2. MEANING OF COMPANY Company is a voluntary association of persons formed for the purpose of doing business having a distinct name and limited liability. It is a juristic person having a separate legal entity distinct from the members who constitute it, capable of rights and duties of its own and endowed with the potential of perpetual succession. The Companies Act, 1956, states that 'company' includes company formed and registered under the Act or an existing company i.e. a company formed or registered under any of the previous company laws.
  3. 3. FEATURES OF A COMPANY 1. Registration: A company comes into existence only after registration under the Companies Act. But a Statutory Corporation is formed and commence business as notified or stated in the Act and as passed in Legislature. In case of partnership, registration is not compulsory. 2. Voluntary Association: A company is an association of many persons on a voluntary basis. Therefore a company is formed by the choice and consent of the members. 3. Legal Personality: A company is regarded by law as a single person. It has a legal personality. This rule applies even in the case of “One-man Company.”
  4. 4. 4. Contractual Capacity: A shareholder of a company, in its individual capacity, cannot bind the company in any way. The shareholder of a company can enter into contract with the company and can be an employee of the company. 5. Management A company is managed by the Board of Directors, whole time Directors, Managing Directors or Manager. These persons are selected in the manner provided by the Act and the Articles of Association of the company. A shareholder, as such, cannot participate in the management. 6. Permanent Existence The company has perpetual succession. The death or insolvency of a shareholder does not affect its existence. A company comes into end only when it is liquidated according to provision of the Companies Act.
  5. 5. KINDS OF COMPANIES From the point of view of formation, the companies are of three kinds: (1) Chartered Companies Those companies which are incorporated under a special charter by the king or sovereign such as East Indian Company. Such companies are rarely formed now-a-days as trading companies. (2) Statutory Companies These companies are formed by special acts of Legislatures or Parliament. e.g.; the Reserve Bank of India, the Industrial Finance Corporation, Damodar Valley Corporation. (3) Registered Companies Such Companies which are incorporate under the Companies Act, 1956 or were registered under the previous Companies Act.
  6. 6. Form the point of view of liability there are three kinds of Companies (1) Limited Companies In case of such companies, the liability of each member is limited to the extent of a face value of shares held by him. Suppose A takes a share of Rs 10., he remains liable to the extent of that amount. As soon as that amount in paid, he is no more liable. (2) Guarantee Companies The liability of the member of such companies is limited to the amount he has undertaken to contribute to the assets of the company in the event of its wound up. This guaranteed amount is limited to fixed sum which is specified in the memorandum. (3) Unlimited Companies They are nothing but large partnership registered under the Companies Act and the members just like partners have unlimited liability and both share contribution as well as their property are at stake when the company is to be wound up. Such companies are rare these days.
  7. 7. From the point of view of Public investment companies may be of two kinds: (1) Private Companies : A private company means a company which by its articles (a) restricts the right to transfer its shares, if any (b) limits the number of its members to fifty excluding past or present employees of the company who are also members of the company. (c) Prohibits any invitation to the public to subscribe for any shares in our debentures of the company. (2) Public Companies : Public companies are those companies which are not private companies. All the three ABOVE restrictions are not imposed on such companies.
  8. 8. SHARE CAPITAL-ISSUE AND FORFEITURE OF SHARES 1.AUTHORISED CAPITAL is also referred to, at times, as registered capital. This is the total of the share capital which a limited company is allowed (authorized) to issue to its shareholders. It presents the upper boundary for the actually issued share capital (hence also 'nominal capital'). 2.Issued Share Capital is the total of the share capital issued to shareholders. This may be less than the authorized capital. 3.Subscribed Capital is the portion of the issued capital, which has been subscribed by all the investors including the public. This may be less than the issued share capital as there may be capital for which no applications have been received yet ('unsubscribed capital'). 4.Called up Share Capital is the total amount of issued capital for which the shareholders are required to pay. This may be less than the subscribed capital as the company may ask shareholders to pay by installments. 5.Paid up Share Capital is the amount of share capital paid by the shareholders. This may be less than the called up capital .
  9. 9. DIFFERENCE BETWEEN SHARE AND STOCK 1.Stocks are fully paid up whereas shares may be fully paid up or partly paid up. 2.Shares may be issued when a company is incorporated but stock cannot be issued under such circumstances. Only fully paid shares are converted into stock. 3.Stock is convenient method of transferring because it can be issued or transferred in fractional parts whereas shares cannot be divided below the face value of share. 4.Stocks are not numbered whereas shares are serially numbered. 5.Shares are of equal nominal amount value but stocks may be divided into unequal amounts. 6.Shares are always registered and not transferrable by mere delivery but stock may be registered or unregistered and unregistered stock can be transferred by mere delivery.
  10. 10. EXPANSION OF SHARE CAPITAL 1.RIGHTS OR BONUS SHARES : The company may issues fresh shares to the existing shareholders in proportion to the shares held by them. 2.INITIAL PUBLIC OFFER(IPO): The company may make an offer , inviting the general public to subscribe to its shares. 3.PREFERENTIAL ALLOTMENT: A company may make a bulk allotment to an individual, companies, venture capitalists or any other person through a fresh issue of shares. It is known as preferential allotment. Under this method, the entire allotment is made to pre-identified people, who may or may not be existing shareholders at predetermined price. The lock-in-period under this is three years from the date of allotment in case of promoter Contribution. But in case of pre-issue of share capital of an unlisted company, the lock-in-period is one year from the date of commencement of commercial production.
  11. 11. JOURNAL ENTRIES FOR ISSUE OF SHARES (1) On receipt of application money Bank Account Dr To Share Application A/c (Being the application money on....shares..@ Rs.per share) (2) On allotment of shares (a) First of all application money on allotted shares is transferred to shares capital account Share Application Account Dr To Share Capital A/C (Being the application money transferred to Share Capital Account) (b) Those applicants who could not be allotted any share, their application money will be returned. Share Application Account Dr To Bank Account (Being the application money of shares returned)
  12. 12. (3) On the allotment of share, the allotment money becomes due to the company Share Allotment Account Dr. To Share Capital Account Being the Share allotment money due on ....share @ Rs...per share (4) On receipt o allotment money, the entry is Bank Account Dr. To share allotment account. Being the share allotment money is received (5) On making the first call due from shareholders the entry is : Share first call Account Dr. To share capital Account. Being the first call money is due. (6) On receipt of the first call money, the entry is Bank Account Dr. To share first call Account. Being share first call money is received.
  13. 13. Illustration 1 Fashion Fabrics Ltd. issued 100000 shares of Rs. 10 each on 1st April, 2006. The amount payable on these shares was as under: Rs 2 per share on application. Rs 3 per share on allotment. Rs 5 per share on call. Make journal entries in the books of company. Solution: 1. Bank A/c Dr 200000 To Share Application A/c 200000 (Application money received@ Rs 2 per share) 2. Share Application A/c Dr 200000 To Share Capital A/c 200000 (Share application money for 100000 shares transferred to share capital A/c) 3. Share Allotment A/c Dr 300000 To Share Capital A/c… 300000 (Allotment money made due on 100000 shares @ Rs 3/- per share)
  14. 14. 4. Bank A/c Dr 300000 To Share Allotment A/c. 300000 (Allotment money received on 100000 shares @Rs 3 per share.) 5. Share First & Final call A/c. Dr 500000 To Share Capital A/c 500000 (Call money on 1,00,000 shares @ Rs 5 per share made due) 6. Bank A/c Dr 500000 To Share First & Final call A/c. 500000 (Call money received on 1,00,000 shares @ Rs 5 per share) Note : Although shares may be equity shares or preference shares but if the term shares is used it means equity
  15. 15. Issue of shares at premium If a company issues its shares at a price more than its face value, the shares are said to have been issued at Premium. The difference between the issue price and face value or nominal value is called ‘Premium’. If a share of Rs 10 is issued at Rs 12, it is said to have been issued at a premium of Rs 2 per share. The money received as premium is transferred to Securities Premium A/c. The Companies Act has laid down certain restrictions on the utilization of the amount of premium. According to Section 78 of this Act, the amount of premium can be utilized for : (i) Issuing fully-paid bonus shares; (ii) Writing off preliminary expenses, discount on issue of shares, underwriting commission or expenses on issue; (iii) Paying premium on redemption of Preference shares or Debentures. (iv) For purchase of its own shares.
  16. 16. Accounting Treatment of premium on Issue of Shares Following is the accounting treatment of Premium on issue of shares : (a) Securities premium collected with share Application money : If the Securities premium is collected on application and the company has taken decision about the allotment of shares, the following journal entry is made : Share Application A/c. Dr To Securities Premium A/c (The amount of Securities premium received on application of the allotted shares is transferred to Securities Premium A/c) (b) Premium collected with Allotment money or Calls. If the company decides to demand the premium with share Allotment or and share call money, the journal entry made is: Share Allotment A/c Dr Or/and Share Call A/c Dr To Securities Premium A/c (Adjustment of share premium due on……shares @Rs…….per share.)
  17. 17. ISSUE OF SHARES AT DISCOUNT When the issue price of share is less than the face value, shares are said to have been issued at discount. For example if a company issues its shares of Rs 100 each at Rs. 90 each, the shares are said to be issued at discount. The amount of discount is Rs 10 per share (i.e. Rs 100 – Rs 90). Discount on shares is a loss to the company. Section 79 of Companies Act 1956 has laid down certain conditions subject to which a company can issue its shares at a discount. These conditions are as follows : (i) At least one year must have elapsed from the date of commencement of business; (ii) Such shares are of the same class as had already been issued; (iii) The company has sanctioned such issue by passing a resolution in its General meeting and the approval of the court is obtained. (iv) Discount should not be more than 10% of the face value of the share and if the company wants to give discount more than 10%, it will have to obtain the sanction of the Central Government.
  18. 18. Accounting Treatment of Shares Issued at Discount The amount of discount is generally adjusted towards share allotment money and the following journal entry is made: Share Allotment A/c Dr Discount on issue of shares A/c Dr To Share Capital A/c Allotment money due on….shares @Rs ……per share after allowing discount @Rs ……….per share.
  19. 19. FULL, UNDER AND OVER SUBSCRIPTION A company decides to issue number of shares to raise capital. It invites public to buy these shares. Now there may be three situations : 1.Full Subscription Company may receive applications equal to the number of shares company has offered to people. It is called full subscription. In case of full subscription the journal entries will be made as follows : (a) On receipt of application money Bank A/c Dr To Share Application A/c (Application money received for ......... shares) (b) On allotment of shares Share Application A/c Dr To Share Capital A/c (Application money of shares transferred to capital A/c on their allotment)
  20. 20. II. The company does not receive application equal to the number of shares offered for subscription, there may be two situations : (i) under subscription (ii) over subscription (i) Under subscription The issue is said to have been under subscribed when the company receives applications for less number of shares than offered to the public for subscription. In this case company is not to face any problem regarding allotment since every applicant will be allotted all the shares applied for. But the company can proceed with allotment provided the subscription for shares is at least equal to the minimum required number of shares termed as minimum subscription. (ii) Over Subscription When company receives applications for more number of shares than the number of shares offered to the public for subscription it is a case of over subscription. A company cannot allot more shares than what it has offered. In case of over subscription, company has the following options
  21. 21. If the application money received on partially accepted applications is more than the amount required for adjustment towards allotment money, the excess money is refunded. However, if the Articles of the company so authorize, the directors may retain the excess money as calls in advance to be adjusted against the call/calls falling due later on. the entry is made : Share Application A/c Dr To Call-in-advance A/c (The adjustment of excess share application money retained as call-in advance in respect of ... shares).
  22. 22. FORFEITURE OF SHARES If a shareholder fails to pay the due amount of allotment or any call on shares issued by the company, the Board of directors may decide to cancel his/her membership of the company. With the cancellation, the defaulting shareholder also loses the amount paid by him/her on such shares. Thus, when a shareholder is deprived of his/her membership due to non payment of calls, it is known as forfeiture of shares. 1. Forfeiture of shares issued at Par When shares issued at par are forfeited the accounting treatment will be as follows: (i) Debit Share Capital Account with amount called up (whether received or not) per share up to the time of forfeiture. (ii) Credit Share Forfeited A/c. with the amount received up to the time of forfeiture. (iii) Credit ‘Unpaid Calls A/c’ with the amount due on forfeited shares. The
  23. 23. ILLUSTRATION : India infrastructure Ltd. has issued its shares of Rs. 20 each at a discount of Rs 2 per share. Mahima holding 100 shares did not pay final call of Rs 5 per share. Later on the company reissued100 shares of these forfeited shares at (I) Rs. 15 per share. Make journal entries for the forfeiture and reissue of the shares in the books of company. SOLUTION: Share Capital A/c Dr 2000 To Shares Forfeited A/c 1300 To Discount on Issue of Shares A/c 200 To Shares Final Call A/c 500 (Forfeiture of 200 shares issued at discount for non payment of final call) Reissue of shares: Reissued at Rs 15 per share I. (i) Bank A/c Dr 1500 Discount on Issue of Shares A/c Dr 200 Shares Forfeited A/c Dr 300 To Share Capital A/c 2000 (100 shares reissued at Rs 15 per share) (ii) Shares Forfeited A/c Dr 1000 To Capital Reserve A/c 1000 (Balance in share Forfeited A/c of 100 shares reissued transferred to Capital Reserve A/c)
  24. 24. ISSUE OF SHARES FOR CONSIDERATION OTHER THAN CASH Sometimes shares are issued to the promoters of the company in lieu of the services provided by them during the incorporation of the company. The issue price of these shares is normally debited to 'Goodwill A/c’ and journal entry is made as follows : Goodwill A/c Dr To Share Capital A/c In case of purchase of assets like building, machinery, stock of materials, etc. the following journal entry is made : 1. Assets A/c Dr To Vendors/Creditors A/c (Assets purchased) 2. Vendors/Creditors A/c Dr To Share Capital A/c (Issue of shares of Rs…….each fully paid up)
  25. 25. Chanderprabhu Jain College of Higher Studies & School of Law Plot No. OCF, Sector A-8, Narela, New Delhi – 110040 (Affiliated to Guru Gobind Singh Indraprastha University and Approved by Govt of NCT of Delhi & Bar Council of India) Semester: B.Com – IV Semester Name of the Subject: CORPORATE ACCOUNTING Unit-2
  26. 26. What’s Inside ? Learning Objectives hink Corner uiz Corner Trading and profit and loss account Trading account Trading and profit and loss account Net purchases and net sales Capital account 1 2
  27. 27. Learning Objectives Prepare the trading account and calculate the cost of goods sold and gross profit or gross loss. Prepare the trading account with appropriate adjustments for sales and for items affecting the cost of goods sold. Prepare the profit and loss account and calculate the net profit or net loss. Prepare the trading and profit and loss account. After reading this chapter, you will be able to:
  28. 28. Learning Objectives Balance off the capital account at the year end. Draw up the balance sheet and put relevant account balances under appropriate headings. Prepare the final accounts in vertical format. Prepare a profit and loss account for a business in the service sector that is not trading in goods. After reading this chapter, you will be able to:
  29. 29. Flow of preparing final accounts When business transactions occur, we need to enter these transactions into _______. At the end of each month, the accounts need to be _____ to have an overview of the business. At the end of the financial year, the accounts need to be closed to prepare the ___________. A __________ needs to be drawn up before the final accounts are prepared. A _____________ and a ___________________ are prepared to calculate the profit or loss made by the firm. The ______ account needs to be closed by transferring the net profit / loss and the drawings against it. A ___________ can then be drawn up. accounts final accounts trial balance trading account profit and loss account capital balance sheet closed
  30. 30. Trading account and cost of goods sold A trading account is an account in which __________ or ________ is calculated. Gross profit is the excess of ____ over the _______ _________ for the period. Gross loss is the excess of _______________ over ____ for the period. Trading account is a double entry account where the left-hand side is the _________ and the right-hand side is the _________. Gross profit = Sales – Cost of goods sold Gross loss = Cost of goods sold – Sales gross profit gross loss sales goods sold cost of cost of goods sold sales debit side credit side
  31. 31. Trading account and cost of goods sold At the end of a financial year, businesses usually have unsold goods; we call this __________. An annual _________ is usually held at the end of a financial year to ascertain the value of closing stock. Closing stock is carried forward to the next financial year; we call this the ___________. A ____ account is opened to record closing stock and opening stock. Cost of = Opening stock + Purchases – Closing stock goods sold closing stock stocktaking opening stock stock Total stock available Stock remained unsold
  32. 32. Trading account and cost of goods sold The steps for preparing the trading account are as follows: Example 1: Flora Company’s financial year ended on 31 December 20X8. Here is the information extracted from her books: Sales 100,000 Purchases 60,000 Opening stock 8,000 Closing stock 10,000
  33. 33. Trading account and cost of goods sold tep Close the sales account and transfer the credit balance to the trading account. Dec31 Trading 100,000 Dec31 Total for the year 100,000 20X820X8 Sales Sales 100,000 Trading
  34. 34. Trading account and cost of goods sold Dec31 Trading 60,000Dec31 Total for the year60,000 20X820X8 Purchases Sales 100,000 Trading tep Close the purchases account and transfer the debit balance to the trading account. Purchases 60,000
  35. 35. Trading account and cost of goods sold Dec31 Trading 8,000Jan 1 Balance b/f 8,000 20X820X8 Stock tep Calculate the cost of goods sold by transferring the opening and closing stock from the stock account to the trading account. Dec31 Trading 10,000 “ 31 Balance c/f 10,000 18,00018,000 Sales 100,000 Trading Purchases 60,000 Opening stock 8,000 Closing stock 10,000
  36. 36. Trading account and cost of goods sold tep Balance off the trading account and transfer the balance to the profit and loss account. Purchases 60,000 Sales 100,000 Trading Opening stock 8,000 Closing stock 10,000 Gross profit 42,000 110,000110,000 Transferred to the profit and loss account
  37. 37. Trading account and cost of goods sold The accounts would be closed as follows: Example 2: On 31 December 20X7, Panda Company had the following account balances: Sales 70,000 Purchases 80,000 Opening stock 4,000 Closing stock 5,000
  38. 38. Trading account and cost of goods sold Dec31 Trading 70,000 Dec31 Total for the year70,000 20X720X7 Sales Dec31 Trading 80,000Dec31 Total for the year80,000 20X720X7 Purchases Purchases 80,000 Sales 70,000 Trading
  39. 39. Trading account and cost of goods sold Gross loss 9,000 84,00084,000 Transferred to the profit and loss account Opening stock 4,000 Closing stock 5,000 Purchases 80,000 Sales 70,000 Trading Dec31 Trading 4,000Jan 1 Balance b/f 4,000 20X720X7 Stock Dec31 Trading 5,000 “ 31 Balance c/f 5,000 9,0009,000
  40. 40. Adjusted Purchases and Closing Stock • Sometimes the Closing Stock may be given in the Trial Balance itself. This would mean that both the Opening and the Closing Stocks have been adjusted in the Purchases. • In such a situation, the Opening Stock will not appear in Trial Balance. • The Trial Balance will show only the figures of Adjusted Purchases and Closing Stock. • The Adjusted Purchases are in fact the Cost of Goods Sold. • They have been worked out by adding the Opening Stock + Net Purchases + Direct Expenses – Closing Stock. • The Adjusted Purchases are shown on the debit side of “Trading Account”. • In such a situation there is no need to show “Closing Stock in the Trading Account” as it already stands adjusted in Purchases. • It will be shown only on the “Assets side of Balance Sheet”.
  41. 41. Adjusted Purchases and Closing Stock • Outstanding Salaries:- Adjustment Entry: Concerned Expense A/c--------Dr To Outstanding Expenses A/c • The Outstanding Expenses is treated in Final Accounts as follows:-  Added to the concerned expenses in the “Trading and Profit and Loss A/c”.  Shown on the Liabilities side of the Balance Sheet as a separate item under “Current Liabilities”.
  42. 42. Chanderprabhu Jain College of Higher Studies & School of Law Plot No. OCF, Sector A-8, Narela, New Delhi – 110040 (Affiliated to Guru Gobind Singh Indraprastha University and Approved by Govt of NCT of Delhi & Bar Council of India) Semester: B. Com - IV Semester Name of the Subject: CORPORATE ACCOUNTING Unit-3
  43. 43. ACCOUNTING STANDARD - 14 ACCOUNTING FOR AMALGAMATIONS
  44. 44. PURPOSE u Accounting for amalgamations, u Treatment of any resultant goodwill or reserves. It does not deal with acquisition by one company of another company in consideration for payment in cash or by issue of shares.
  45. 45. TYPES OF AMALGAMATIONS u NATURE OF MERGER u NATURE OF PURCHASE
  46. 46. CONDITIONS FOR NATURE OF MERGER All the assets and liabilities are transferred; Shareholders holding not less than 90% of the face value of the equity shares of the transferor company become shareholders of transferee company; The consideration is discharged by the issue of equity shares in the transferee company; The business of the Transferor Company is intended to be carried on; & No adjustment to be made to the book values of the assets and liabilities.
  47. 47. METHODS FOLLOWED NATURE OF MERGER -- Pooling of Interests method NATURE OF PURCHASE -- Purchase method
  48. 48. POOLING OF INTERESTS METHOD u The assets, liabilities and reserves are recorded at their existing carrying amounts. u Uniform set of accounting policies is adopted. u The difference between the share capital issued and the share capital of the transferor company should be adjusted in reserves.
  49. 49. PURCHASE METHOD u The assets & liabilities are recorded either at existing carrying values or by allocating the consideration on the basis of Fair values on the date of amalgamation. u The reserves of the transferor company, other than the statutory reserves, should not be included in the financial statements of the transferee company. Contd...
  50. 50. PURCHASE METHOD CONSIDERATION Securities Cash Other assets In determining the value of the consideration, an assessment is made of the fair value of its elements.
  51. 51. PURCHASE METHOD If Consideration > Net Asset value GOODWILL Consideration < Net Asset value CAPITAL RESERVE
  52. 52. Chanderprabhu Jain College of Higher Studies & School of Law Plot No. OCF, Sector A-8, Narela, New Delhi – 110040 (Affiliated to Guru Gobind Singh Indraprastha University and Approved by Govt of NCT of Delhi & Bar Council of India) Semester: B. Com - IV Semester Name of the Subject: CORPORATE ACCOUNTING Unit-4
  53. 53. ACCOUNTS OF BANKING COMPANIES
  54. 54. DEFINITION Section 5 of banking regulation act defines banking as “the accepting, for the purpose of lending or investment, of deposit of money from the public repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise.
  55. 55. Features of banking company • The borrowing,raising,or taking up of money. • The lending or advancing of money either upon or without security. • The granting and issuing of letters of credit,travellers cheques and circular notes. • The buying and selling of bullion. • The buying and selling of foreign exchange including foreign bank notes. • Contracting for public and private loans negotiating and issuing the same. • Undertaking and executing trust.
  56. 56. Continued . . . . . • The acquisition, constructing, maintenance and alternation of any building or works necessary or convenient for the purpose of the company. • Carrying on and transacting every kind of guarantee and indemnity business. • The collecting and transmitting of money and securities. • Undertaking the administration of estates as executor, trustee or otherwise
  57. 57. General Information • No banking company can carry on business in India unless its subscribed capital is not less than one- half of the authorized capital and its paid up capital is not less than one – half of subs.capital. • A banking company cannot create any charge upon its uncalled capital. • Every banking co.shall transfer a sum equal to 25% of profits to statutory reserve. • A bank can open a branch only at the permission or reserve bank
  58. 58. Accounting System The accounting system of a banking company is different from that of a trading or manufacturing company. A bank has a large number of customers whose acc are to be maintained in such a way so that these should be kept upto date.
  59. 59. Features Of Banking Acc System • Entries in the personal ledgers are made directly from vouchers. • From such entries in personal acc each day summary sheets in total are prepared. • The general ledger’s trial balance is extracted and agreed every day. • A trial balance of detailed personal ledger is prepared periodically and get agreed with general ledger. • Two vouchers are prepared for every transaction not involving cash- debit and credit voucher.
  60. 60. Books Required • Receiving cashier’s counter cash book. • Paying cashier’s counter cash book. • Current accounts ledger. • Loan ledger. • Cash credit ledger. • Investment ledger. • Saving bank accounts ledger. • Recurring deposits accounts ledger. • Bill discounted and purchased ledger.
  61. 61. Principal Books Of Accounts Are: • Cash book: This book gives the summary of the receiving cashier’s counter cash book and paying cashier’s cash book. • General ledger: This ledger contains control acc for subsidiary ledger listed above and acc of expenses and assets not covered by the subsidiary ledger.
  62. 62. Notes And Instruction For Compilation • The formats of balance sheet and profit n loss acc cover all items likely to appear in these statement. • The words ‘current year’ and ‘previous year’ used in the formats are only to indicate the order of presentation and may not appear in acc. • Figures should be rounded off to nearest thousand.
  63. 63. BANKS PREPARE THEIR ACCOUNTS ACCORDING TO BANKING REGULATION ACT, 1949. THE FINAL ACCOUNTSOF BANK ARE IN VERTICAL FORMAT . THE FINAL ACCOUNTS CONSIST OF :- a)PROFIT and LOSS ACCOUNT b)PROFIT and LOSS APPROPRIATION ACCOUNT c)BALANCE SHEET THERE ARE 16 SCHEDULES IN THE FINAL ACCOUNTS OF BANKS.
  64. 64. BALANCE SHEET OF XYZ BANK AS ON 31ST MARCH 2008 PARTICULARS SCHEDULE AMT. NO. Capital 1. Reserves and surplus 2. Deposits 3. Borrowings 4. Other liabilities 5. TOTAL Cash in hand and with RBI 6. Bal. with other banks and money at Call and short notice 7. Investments 8. Advances 9. Fixed assets 10. Other assets 11. TOTAL CONTINGENT LIABILITIES 12.
  65. 65. PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDING 31ST MARCH, 2008. PARTICULARS SCHEDULE NO. AMOUNT INCOMES:- Interest earned 13. Other incomes 14. TOTAL(A) EXPENDITURE:- Interest expanded 15. Operating expenses 16. Provision and contingencies - TOTAL (B) PROFIT (A-B)
  66. 66. PROFIT AND LOSS APPROPRIATION ACCOUNT PARTICULARS AMOUNT Net profit during the year Profit of the last year TOTAL PROFIT AVAILABLE FOR APPROPRIATION Statutory reserve General reserves or other reserves Dividends SURPLUS TO BALANCE SHEET
  67. 67. WORKING NOTES :- CAPITAL ( SCHEDULE NO. 1 ) PARTICULARS Amt. Equity share capital Preference share capital Less:- calls in arrears Add:- calls in advance Add:- share forfeiture
  68. 68. RESERVES AND SURPLUS ( SCHEDULE NO. 2 ) PARTICULARS AMOUNT Statutory Reserve General reserve Capital reserve Investment Fluctuation Reserve Workmen compensation fund Sinking fund Surplus ( P/L app. a/c) Building fund Depreciation fund Tax fund Capital redemption reserve
  69. 69. DEPOSITS ( SCHEDULE NO. 3 ) PARTICULARS AMOUNT Fixed deposits Saving deposits Current account Recurring deposit L/C a/c Other deposits except income tax deposit BORROWING ( SCHEDULE NO. 4 ) PARTICULARS AMOUNT Borrowing from RBI Borrowing from other banks Borrowing in India or outside in India
  70. 70. OTHER LIABILITIES (SCHEDULE NO. 5 ) PARTICULARS AMOUNT Bills payable Outstanding expenses Unpaid dividend Incomes received in advance Interoffice adjustment Reserve for unexpired discount CASH IN HAND AND WITH RBI (SCHEDULE NO. 6 ) PARTICULARS AMOUNT Cash in hand with bank Balance with RBI
  71. 71. BALANCE WITH OTHER BANKS AND MONEY AT CALL AND SHORT NOTICE ( SCHEDULE NO. 7 ) PARTICULARS AMOUNT Balance with other banks Money at call and short notice (short term loan given by bank to its Esteem customers)
  72. 72. INVESTMENTS ( SCHEDULE NO. 8 ) PARTICULARS AMOUNT Government securities Bonds Mutual funds Equity shares of other companies Gold etc. ADVANCES ( SCHEDULE NO. 9 ) PARTICULARS AMOUNT Term loan Bank overdraft Cash credit and bill discount
  73. 73. FIXED ASSETS ( SCHEDULE NO. 10 ) PARTICULARS AMOUNT Premises Furniture Fixtures Equipments Land and building Plant and machinery motor vehicles Computers etc.
  74. 74. OTHER ASSETS ( SCHEDULE NO. 11 ) PARTICULARS AMOUNT Prepaid expenses Silver Non-banking asset Inter branch adjustment Accrued incomes Stamps in hand
  75. 75. CONTINGENT LIABILITIES (SCHEDULE NO. 12 ) PARTICULARS AMOUNT BR/ bills for collection Forward exchange transactions Future contracts Acceptance, endorsement and guarantee Liability for bill rediscounted Disputed liabilities Income tax under appeal Income tax deposits Claims not acknowledged as debt Liability for partly paid investments
  76. 76. INTEREST EARNED ( SCHEDULE NO. 13 ) PARTICULARS AMOUNT Interest on term loan Interest on cash credit Interest on bank overdraft Discount on bill discounted Income on investments Interest in balance with RBI Any other interest income
  77. 77. OTHER INCOMES ( SCHEDULE NO. 14 ) PARTICULARS AMOUNT Draft making charges Commission, exchange and brokerage Locker rents Dividends Profit on exchange transactions Transfer fees and registration fees Profit on sale of fixed assets Less:- loss on sale of fixed assets Profit on sale of investments less:- loss on sale of investments Profit on revaluation of fixes assets or Investments and miscellaneous incomes
  78. 78. INTEREST EXPANDED ( SCHEDULE NO. 15 ) PARTICULARS AMOUNT Interest on fixed deposits Interest on recurring deposits Interest on saving deposits Interest on borrowings from RBI and other banks Interest on any other deposit
  79. 79. OPERATING EXPENSES ( SCHEDULE NO. 16 ) PARTICULARS AMOUNT’ Rent , rates and taxes Insurance , salary , director fee , Management fee , printing and stationary , Audit fee , depreciation , provident fund of employees, general expenses, law charges, Advertisement and publicity , repair and Maintenance , sundry charges etc .
  80. 80. PROVISIONS AND CONTINGENCIES PARTICULARS AMOUNT Bad debts Provision for doubtful debts Provision for tax Provision for contingencies Provision for depreciation Other provisions
  81. 81. Explanation of some terms relating to balance sheet MONEY AT CALL AND SHORT NOTICE :- This item appears on the assets side of a bank balance sheet and represents temporary loans to Bill Brokers and other banks . If the loan is given for one day, it is called ‘money at call’ and if the loan cannot be called back on demand and will require at least a notice of three days for calling back , it is called ‘ money at short notice ’ . It also includes deposits repayable within 10 days or less than 15 days notice lent in the inter bank call money market . The rate of interest on which money is lent fluctuate every day , sometimes very sharply ( more than 30 % ) , depending on the demand and supply of money .
  82. 82. ADVANCES :- Advances appear on the Assets side as fourth head and include loans , cash credits , bank overdrafts and bills discounted and purchased . Banks generally advance money to their customers in the form of loans , cash credits , overdrafts and purchasing and discounting of bills . PROVISIONS IN RESPECT OF DOUBTFUL ADVANCES ARE DEDUCTED FROM ADVANCES TO THE EXTENT NECESSARY AND THE EXCESS PROVISION FOR DOUBTFUL DEBTS IS INCLUDED UNDER “ OTHER LIABILITIES AND PROVISIONS” .
  83. 83. CASH CREDIT :- It is an arrangement by which the customer is granted the right to borrow money from time to time upto a certain limit . Cash credit is usually given on hypothecation or pledge of stock . The bank usually charges a higher bank interest on the actual amount withdrawn than that charged on loan because the bank has to keep the amount allowed as cash credit . OVERDRAFT :- This facility is available to a customer who operates a current account with the bank . This facility is granted to customers who have high goodwill and need for honest dealings .
  84. 84. LOAN :- Loan is advance of fixed amount to a customer to be withdrawn in lump sum by him . Interest is charged on the total amount of the loan agreed to be paid to a customer whether he uses the full amount of the loan or not . So , customers prefer to take cash credit and pay interest at a little higher rate . DISCOUNTING OF BILLS :- Discounting of a bill means making the payment of the bill before the maturity date of the bill . While making payment of the bill , the bank deducts the discount for the unexpired period for the amount of the bill discounted . The bank keeps the bill with it till the maturity date and get its payment for the customer on the due date.
  85. 85. PURCHASING AND DISCOUNTING OF BILLS :- The bank may purchase or discount clean or documentary bills at the current rate of interest . NON-BANKING ASSETS :- A banking company is not allowed to deal directly or indirectly in the purchase or sale or barter of goods except in connection with its legitimate banking business . But a bank can always lend against the security of assets . The bank may have to take possession of the asset given as a security if the loanee fails to repay the loan .
  86. 86. REBATE ON BILLS DISCOUNTED OR UNEXPIRED DISCOUNTS :- This item is like interest received in advance and represents unearned discounts for those bills which will mature after the closing of the financial accounts . JOURNAL ENTERIES FOR REBATE ON BILLS DISCOUNTED . PARTICULARS Dr. AMT Cr. AMT Rebate on bill discounted a/c Dr To discount earned Discount earned a/c Dr To P/L a/c
  87. 87. PARTICULARS Dr. AMT Cr. AMT Bill discounted a/c Dr. To customer To discount earned a/c Discount earned a/c Dr. To P/L a/c To rebate on bill discounted If the date of bill is not given and months of maturity after close of year is given, add 3 days of grace to calculate the bill date .
  88. 88. EXAMPLE Ques . From the following trial balance of Excellent Bank ltd. Prepare the balance sheet and P/L a/c making all the necessary provisions . You are required to provide the following : 1.Provision for taxation Rs 10,00,000 2.Transfer to dividend Equalisation reserve Rs 3,00,000
  89. 89. Trial balance as on 31-3-2008 Particulars amt . Particulars amt . (Rs. ‘000’ ) ( Rs. ‘000’ ) Current deposits 45200 investment in govt. securities 45200 Saving bank deposits 14520 investment in shares 4700 Term deposits 37180 interest accrued on invest. 875 Sundry creditors a/c 1455 loans 43800 Debts due to banks secured by bills purchased and discounted 33100 Investments 12200 furniture , fixtures and Rebate on bills discounted 15 equipment – depreciation 500 Branch adjustment (cr.) 4555 interest paid 1200 Statutory fund 10000 exchange and commission paid 100 Dividend Equalisation fund 2500 payment to employees 2400 Capital 2,00,000 shares of Rs. Directors fees 100 100 each , Rs. 50 per share printing and stationery 400 Paid up 10000 miscellaneous expenses 300 Interest and discount received 5800 furniture and fixture 1000 Exchange and commission 1700 premises 3000 General charges recovered 55 money at call and short notice 1500 P/L A/c bal. as on 1-4-2007 852 property acquired in satisfaction of claims 50 cash in hand 438 cash with banks 6869
  90. 90. Additional information :- Current accounts included Rs . 88 , 00 ,000 ( debit balance ) being overdrafts . One of the accounts Rs. 95,000 including Rs. 7,000 as interest for 2007-2008 is doubtful . During the year , property acquired in 2005 in satisfaction of defaulted debt of Rs. 25,000 was sold for Rs. 18,000 . The amount of Rs. 18,000 was credited to the account no further adjustments having been made . Bills for collection with the bank are of Rs.22,10,000 . Acceptances , endorsements and guarantees of the bank are Rs. 11,68,000 .
  91. 91. Profit and Loss a/c of excellent bank ltd . for the year ended 31st march , 2008 PARTICULARS S.NO. AMOUNT INCOME :- INTEREST EARNED 13 5800 OTHER INCOME 14 1755 TOTAL 7555 EXPENDITURE:-’ INTEREST EXPANDED 15 1300 OPERATING EXPENSES 16 3707 PROVISIONS & CONTINGENCIES 1095 TOTAL 6102 NET PROFIT = 1453
  92. 92. PROFIT AND LOSS APPROPRIATION ACCOUNT PARTICULARS AMT. NET PROFIT 1453 PROFIT OF LAST YEAR 852 TOTAL 2,305 STATUTORY RESERVE ( 25% OF 1453) 363 TRANSFER TO DIV. EQUILI. RESRVE 300 PROPASED DIVIDEND 1000 BALANCE CARRIED TO B/S 642 TOTAL 2305
  93. 93. BALANCE SHEET AS ON 31ST MARCH 2008 PARTICULARS S.NO. AMT CAPITAL 1 10,000 RESERVE AND SURPLUS 2 13805 DEPOSITS 3 105700 BORROWINGS 4 12200 OTHER LIABILITIES AND PROVISIONS 5 7120 TOTAL 148825 CASH AND BANK BALANCE WITH RBI 6 438 BALANCE WITH BANKS AND MONEY AT CALL 7 8369 INVESTMENTS 8 49900 ADVANCES 9 85700 FIXED ASSTS 10 3500 OTHER ASSETS 11 918 TOTAL 148825 CONTINGENT LIABILITIES 3378

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