financial reporting · 2018-10-17 · it is a matter of great pleasure to present first edition of...

FINANCIAL REPORTINGANALYSIS

(As per the Revised Syllabus of Mumbai Universityfor T.Y.BBI, Semester V, 2018-19)

Prof. Rajiv S. MishraM.Com., MBA, M.Phil., UGC-NET, Ph.D. (Pursuing),Recognised UG Professor by University of Mumbai.Assistant Professor in BBI & Coordinator, M.Com.,

N.E.S. Ratnam College of Arts, Science and Commerce, Bhandup (W), Mumbai - 400 078.

Visiting Faculty at N.G. Acharya, D.K. Marathe, V.K. Menon College, Pragati College,Chandrabham Sharma College, Dnyansadhana College and Vikas College

for M.Com., BBI, BMS, BFM and BAF.

CMA Dr. Kinnarry ThakkarAssociate Professor,

Department of Commerce,University of Mumbai.

Dr. Shraddha Mayuresh BhomeM.Com., M.Phil. (Gold Medalist),

Professional MBA, Ph.D. in Commerce,Pursuing D.Litt. in Commerce.

Assistant Professor and Coordinator (Accounting and Finance),Satish Pradhan Dnyansadhana College,

Thane.

ISO 9001:2008 CERTIFIED

Dr. Ashok D. WaghM.Com., Ph.D.

Principal, B.N.N. College, Bhiwandi andMember, Board of Studies of Accountancy,

University of Mumbai.

Dr. Mrunmayee R. ThatteM.Com., PGDHRM, UCG-NET, Ph.D.

Asst. Prof. K.G. Joshi College of Arts andN.G. Bedekar College of Commerce,

Thane.

© AuthorsNo part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by anymeans, electronic, mechanical, photocopying, recording and/or otherwise without the prior written permission ofthe authors and the publisher.

First Edition : 2018

Published by : Mrs. Meena Pandey for Himalaya Publishing House Pvt. Ltd.,“Ramdoot”, Dr. Bhalerao Marg, Girgaon, Mumbai - 400 004.Phone: 022-23860170, 23863863; Fax: 022-23877178E-mail: [email protected]; Website: www.himpub.com

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Bengaluru : Plot No. 91-33, 2nd Main Road, Seshadripuram, Behind Nataraja Theatre,Bengaluru - 560 020. Phone: 080-41138821; Mobile: 09379847017, 09379847005

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Chennai : New No. 48/2, Old No. 28/2, Ground Floor, Sarangapani Street, T. Nagar,Chennai - 600 012. Mobile: 09380460419

Pune : “Laksha” Apartment, First Floor, No. 527, Mehunpura,Shaniwarpeth (Near Prabhat Theatre), Pune - 411 030.Phone: 020-24496323, 24496333; Mobile: 09370579333

Lucknow : House No. 731, Shekhupura Colony, Near B.D. Convent School, Aliganj,Lucknow - 226 022. Phone: 0522-4012353; Mobile: 09307501549

Ahmedabad : 114, “SHAIL”, 1st Floor, Opp. Madhu Sudan House, C.G. Road, Navrang Pura,Ahmedabad - 380 009. Phone: 079-26560126; Mobile: 09377088847

Ernakulam : 39/176 (New No. 60/251), 1st Floor, Karikkamuri Road, Ernakulam,Kochi - 682 011. Phone: 0484-2378012, 2378016; Mobile: 09387122121

Bhubaneswar : Plot No. 214/1342, Budheswari Colony, Behind Durga Mandap,Bhubaneswar - 751 006. Phone: 0674-2575129; Mobile: 09338746007

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DTP by : Prerana Enterprises, Mumbai.

Printed at : Rose Fine Art, Mumbai. On behalf of HPH.

It is a matter of great pleasure to present First edition of the book “Financial ReportingAnalysis” as per revised syllabus to the students and teachers of Bachelor of Commerce — Bankingand Insurance course started by the University of Mumbai. This book is written on-lines of syllabusinstituted by the University. The book presents the subject matter in a simple and convincing language.

We owe a great many thanks to the people who helped and supported us during the writing ofthis book which includes Principal, Coordinator, and students of K.M. College, DAV, Ratnam College,K.J. Somaiya College, Vivekananda Education Society, Vikas College, R.J. College of the B.Com.,BBI, BMS, BAF and BFM Faculty.

Our deepest thanks to Mr. Manoj Sharma of the Nitin Godiwala College who has given strengthto us always.

We would also thank all of them who have been a part of this book and helped us knowingly orunknowingly. We also extend our heartfelt thanks to our family and well-wishers without whom itwould have been a distant reality.

Authors

PREFACE

SYLLABUSModules at a Glance

Sr. No. ofNo. Modules Lectures

01 Final Accounts of Banking Company 16

02 Final Accounts of Insurance Company 1203 Preparation of Final Accounts of Companies 1204 Cash Flow Analysis and Ethical Behaviour and Implications

for Accountants 1205 Introduction to IFRS 08

Total 60

Sr. No. Modules/Units

1 Final Accounts of Banking CompanyLegal Provisions in Banking Regulation Act, 1949 relating to Accounts.Statutory Reserves including Cash Reserve and Statutory Liquidity Ratio.Bills Purchase and Discounted, Rebate on Bill Discounted.Final Accounts in Prescribed Form.Non-performing Assets and Income from Non-performing Assets.Classification of Advances: Standard, Substandard, Doubtful and ProvisioningRequirement.

2 Final Accounts of Insurance Company

(a) Preparation and Presentation of Corporate Final Accounts for InsuranceCompanies.

(b) Final Accounts in Accordance with Insurance Legislation(c) Study of Accounting Policies from Annual Reports of Listed Insurance

Companies

3 Preparation of Final Accounts of Companies

Relevant Provisions of Companies Act related to Preparation of Final Account(excluding cash flow statement)

Preparation of Financial Statements as per Companies Act. (excluding cash flowstatement)AS 1 in Relation to Final Accounts of Companies(Disclosure of Accounting Policies)Adjustment for –1. Closing Stock2. Depreciation3. Outstanding Expenses and Income4. Prepaid Expenses and Pre Received Income5. Proposed Dividend and Unclaimed Dividend6. Provision for Tax and Advance Tax7. Bill of Exchange (Endorsement, Honour, Dishonour)8. Capital Expenditure included in Revenue Expenditure and vice versa

e.g., Purchase of Furniture included in Purchases9. Unrecorded Sales and Purchases10. Good Sold on Sale or Return Basis11. Managerial Remuneration on Net Profit before Tax12. Transfer to Reserves13. Bad Debt and Provision for Bad Debts14. Calls in Arrears15. Loss by Fire (Partly and fully insured goods)16. Goods Distributed as Free Samples.Any other adjustments as per the prevailing accounting standard.

4 Cash Flow Analysis and Ethical Behaviour and Implications for Accountants

Cash Flow Analysis as per AS 3 (Indirect Method Only)Ethical Behaviour and Implications for AccountantsIntroduction, Meaning of Ethical BehaviourFinancial Reports – Link between Law, Corporate Governance, Corporate SocialResponsibility and Ethics.Importance and Relevance of Ethical Behaviour in Accounting Profession.Implications of Ethical Values for the Principles versus Rule-based Approaches toAccounting StandardsThe Principle-based Approach and EthicsThe Accounting Standard Setting Process and EthicsThe IFAC Code of Ethics for Professional AccountantsContents of Research Report in Ethical Practices

Implications of Unethical Behaviour on Financial ReportsCompany Codes of EthicsThe Increasing Role of Whistle–blowingNeed to Learn Ethics.

5 Introduction to IFRS

IFRS 1 – First Time Adoption of International Financial Reporting StandardsObjective, Scope, Definitions, First IFRS Financial Statements, Recognition andMeasurement, Comparative Information, Explanation of Transition to IFRS,Reconciliations, Interim Financial Reports, Designation of Financial Assets or FinancialLiabilities, Use of Fair Value as Deemed Cost, Use of Deemed Cost, Exceptions toRetrospective Application of other IFRS, Exemptions for Business Combination,Exemptions from other IFRS and Presentation and Disclosure.IFRS 2 – Share-based Payment – Objective, Scope, Definitions, Recognition, EquitySettled Share-based Payment Transactions, Transactions in which Services areReceived, Treatment of Vesting Conditions, Expected Vesting Period, Determiningthe Fair Value of Equity Instruments granted, Modifications of Terms and Conditions,Cancellation, Cash Settled Share-based Payment Transactions, Share-based PaymentTransactions in which the terms of the Arrangement Provide, The Counterpartywith a Choice of Settlement, Share-based Payment Transactions in which theTermsof the Arrangement Provide the Entity with a Choice of Settlement, Share-basedPayment Transactions among Group Entities (2009 Amendments) Disclosure.

Maximum Marks: 75Questions to be set: 05Duration: 2½ Hrs.All Questions are Compulsory Carrying 15 Marks each.

QuestionNo. Particular Marks

Q-1 Objective Questions(A) Sub Questions to be asked 10 and to be answered any 08(B) Sub Questions to be asked 10 and to be answered any 07(*Multiple choice / True or False / Match the columns/Fill in the blanks) 15 Marks

Q-2 Full Length Practical Question 15 MarksOR

Q-2 Full Length Practical Question 15 Marks





Q-5 (A) Theory questions 08 Marks(B) Theory questions 07 MarksOR

Q-2 Short Notes 15 MarksTo be asked 05To be answered 03

Note: Practical question of 15 marks may be divided into two sub questions of 7/8 and10/5Marks. If the topic demands, instead of practical questions, appropriate theory questionmay be asked.

QUESTION PAPER PATTERN

Sr. No. Title Page No.

1. Preparation and Presentation of Banking CompanyFinal Accounts 1 – 71

2. Preparation and Presentation of CorporateFinal Accounts for Insurance Company 72 – 120

3. Preparation and Presentation of Company Final Accounts 121 – 156

4. Cash Flow Statement 157 – 175

5. International Financial Reporting Standard 1 176 – 198

6. International Financial Reporting Standard 2 199 – 224

7. Ethical Behaviour and Implication of Accounts 225 – 239

8. Objective Questions 240 – 258

CONTENTS

Preparation and Presentation of Banking Company Final Accounts 1

Chapter

1 PREPARATION ANDPRESENTATION OF BANKINGCOMPANY FINAL ACCOUNTS

1.1 Introduction

1.2 Meaning of Banking Company

1.3 Principal Provisions of Banking Regulation Act

1.4 Preparation and Presentation of Final Accounts

1.5 Forms of Final Account

1.6 Important Items of the Final Account

1.7 Non-performing Assets

1.8 Illustration

1.1 INTRODUCTION

Some special provisions relating to banking companies were incorporated in the Indian CompaniesAct, 1913, not until 1936, although the said provisions were found to be inadequate to protect theinterest of the depositors. As a result, banking companies are governed by the Banking RegulationAct, 1949, which actually came into force on 16th March 1949. This Act, of course, has beenamended several times. The Companes Act, 1956, however, is also applicable to banking companiessince it is not inconsistent to the provisions of the Banking Regulation Act.

1

2 Financial Reporting Analysis

1.2 MEANING OF BANKING COMPANY

According to Sec.5 of the Banking Regulation Act, 1949, a banking company means the accepting,for the purpose of lending or investment, of deposits of money from the public, repayable on demandor otherwise and withdrawn by cheque, draft, order or otherwise. In short, a banking companymeans and includes any company which carries on the business or which transacts the business ofbanking in India. Therefore, any company which is engaged in trade or manufacture, which acceptsdeposits of money from the public for the purpose of financing its business only, shall not be deemedto carry on the business of banking. No company can use as part of its name any of the words bank,banker or banking other than a banking company and, at the same time, no company can carry onbusiness of banking in India unless and until it uses at least one of such words as part of its name.

Sec. 8 states that a banking company cannot deal directly or indirectly in buying or selling orbanking of goods except of its legitimate banking business.

1.3 PRINCIPAL PROVISIONS OF BANKING REGULATION ACT

Prohibition of Trading (Sec. 8)

According to Sec. 8 of the Banking Regulation Act, a banking company cannot directly orindirectly deal in buying or selling or bartering of goods. But it may, however, buy, sell or barter thetransactions relating to bills of exchange received for collection or negotiation.

Non-banking Assets (Sec. 9)

According to Sec. 9 “A banking company cannot hold any immovable property, howsoeveracquired, except for its own use, for any period exceeding seven years from the date of acquisitionthereof. The company is permitted, within the period of seven years, to deal or trade in any suchproperty for facilitating its disposal”. Of course, the Reserve Bank of India may, in the interest ofdepositors, extend the period of seven years by any period not exceeding five years.

Management (Sec. 10)Sec. 10(a) states that not less than 51% of the total number of members of the Board of

Directors of a banking company shall consist of persons who have special knowledge or practicalexperience in one or more of the following fields:

(a) Accountancy; (b) Agriculture and Rural Economy; (c) Banking; (d) Co-operation;(e) Economics; (f) Finance; (g) Law; (h) Small-scale Industry

The section also states that at least not less than two directors should have special knowledgeor practical experience relating to agriculture and rural economy and co-operation. Sec. 10(b) (1)further states that every banking company shall have one of its directors as Chairman of its Boardof Directors.


Minimum Capital Reserves (Sec. 11)

Sec.11 of the Banking Regulation Act, 1949, provides that no banking company shall commenceor carry on business in India, unless it has minimum paid-up capital and reserve of such aggregatevalue as is noted below:

(a) Foreign Banking Companies

In case of banking company incorporated outside India, its paid-up capital and reserve shall notbe less than 1 lakh in respect of its principal place of business plus 15 lakhs and, if it has a place ofbusiness in Mumbai or Kolkata or in both, 20 lakhs.

It must deposit and keep with the R.B.I. either in cash or in unencumbered approved securities(i) the amount as required above, and (ii) after the expiry of each calendar year, an amount equal to20% of its profits for the year in respect of its Indian business.

(b) Indian Banking Companies

In case of an Indian banking company, the sum of its paid-up capital and reserves shall not beless than the amount stated below:

(i) If it has places of business in more than one State, ` 5 lakhs, and if any such place ofbusiness is in Mumbai or Kolkata or in both, ` 1 lakh in respect of its principal place ofbusiness plus ` 10 lakhs.

(ii) If it has all its places of business in one State, none of which is in Mumbai or Kolkata,` 1 lakh in respect of its principal place of business plus ` 1 lakhs in respect of each of itsother place of business in the same district in which it has its principal place of businessplus ` 25,000 in respect of each place of business elsewhere in the State. No such bankingcompany shall be required to have paid-up capital and reserves exceeding ` 5 lakhs andno such banking company which has only one place of business shall be required to havepaid-up capital and reserves exceeding ` 50,000.

In case of any such banking company which commences business for the first time after 16thSeptember 1962, the amount of its paid-up capital shall not be less than ` 5 lakhs.

(iii) If it has all its places of business in one State, one or more of which are in Mumbai orKolkata, ` 5 lakhs plus ` 25,000 in respect of each place of business outside Mumbai orKolkata. No such banking company shall be required to have paid-up capital and reservesexceeding ` 10 lakhs.

Capital Structure (Sec. 12)

According to Sec.12, no banking company can carry on business in India, unless it satisfies thefollowing conditions:


(a) Its subscribed capital is not less than half of its authorized capital, and its paid-up capital isnot less than half of its subscribed capital.

(b) Its capital consists of ordinary shares only or ordinary or equity shares and such preferencesshares as may have been issued prior to 1st April 1944. This restriction does not apply to abanking company incorporated before 15th January 1937.

(c) The voting right of any shareholder shall not exceed 5% of the total voting right of all theshareholders of the company.

Payment of Commission, Brokerage, etc. (Sec. 13)

According to Sec.13, a banking company is not permitted to pay directly or indirectly by way ofcommission, brokerage, discount or remuneration on issues of its shares in excess of 2½ of thepaidup value of such shares.

Payment of Dividend (Sec. 15)

According to Sec. 15, no banking company shall pay any dividend on its shares until all itscapital expense (including preliminary expenses, organization expenses, share selling commission,brokerage, amount of losses incurred and other items of expenditure not represented by tangibleassets) have been completely written off.

But a Banking Company need not —

(a) write-off depreciation in the value of its investments in approved securities in any casewhere such depreciation has not actually been capitalized or otherwise accounted for aloss;

(b) write-off depreciation in the value of its investments in shares, debentures or bonds (otherthan approved securities) in any case where adequate provision for such depreciation hasbeen made to the satisfaction of the auditor;

(c) write-off bad debts in any case where adequate provisions for such debts has been madeto the satisfaction of the auditors of the banking company.

Reserve Fund/Statutory Reserve (Sec. 17)

According to Sec. 17, every banking company incorporated in India shall, before declaring adividend, transfer a sum equal to 20% of the net profits of each year (as disclosed by its Profit andLoss Account) to a reserve fund. The Central Government may, however, on the recommendationof RBI, exempt it from this requirement for a specified period. The exemption is granted if itsexisting reserve fund together with Share Premium Account is not less than its paid-up capital. If itappropriates any sum from the reserve fund or the share premium account, it shall, within 12 daysfrom the date of such appropriation, report the fact to the Reserve Bank, explaining the circumstancesrelating to such appropriation.


Cash Reserve (Sec. 18)

Under Sec. 18, every banking company (not being a Scheduled Bank) shall, if Indian, maintainin India, by way of a cash reserve in Cash, with itself or in current account with the Reserve Bankor the State Bank of India or any other bank notified by the Central Government in this behalf, a sumequal to at least 3% of its time and demand liabilities in India. The Reserve Bank has the power toregulate the percentage also between 3% and 15% (in case of Scheduled Banks). Besides theabove, they are to maintain a minimum of 25% of its total time and demand liabilities in cash, gold orunencumbered approved securities. But every banking company’s asset in India should not be lessthan 75% of its time and demand liabilities in India at the close of last Friday of every quarter.

Liquidity Norms (Sec. 24)

According to Sec. 24 of the Act, banking companies must maintain sufficient liquid assets inthe normal course of business. The section, states that every banking company has to maintain incash, gold or unencumbered approved securities, an amount not less than 20% of its demand andtime liabilities in India. This percentage may be changed by the RBI from time to time according toeconomic circumstances of the country. This is in addition to the average daily balance maintainedby a bank.

Accounts and Audit (Secs. 29 to 34A)

The above sections of the Banking Regulation Act deals with the accounts at audit. Everybanking company, incorporated in India, at the end of financial year expiring a period of 12 monthsas the Central Government may by notification in the Official Gazette specified, must prepare aBalance Sheet and a Profit and Loss Account as on the last working day of that year or accordingto the Third Schedule or as circumstances permit. At the same time, every banking company, whichis incorporated outside India, is required to prepare a Balance Sheet and also a Profit and LossAccount relating to its branch in India also. We know the Form A of the Third Schedule deals withform of Balance Sheet and Form B of the Third Schedule deals with form of Profit and LossAccount.

1.4 PREPARATION AND PRESENTATION OF FINALACCOUNTS

The final accounts of banking companies include the profit and loss account and the Balancesheet. The financial year ends on 31st March, every year. The Banks also prepare half-yearsaccounts on 30th September, every year. The final accounts must be audited by a person who is dulyqualified under the law. Every banking company must obtain the approval of the RBI regardingappointment of an Auditor. Three copies of the Balance Sheet and Profit and Loss account, togetherwith auditor’s report must be submitted to the RBI within three months from the end of the period.Every banking company must file three copies of the final accounts and auditor’s report with the


Registrar of Companies. These accounts are also presented in the Annual General Meeting for theapproval of the shareholders.

The Banking Companies Rules 1949 also prescribe that the accounts and auditor’s reportshould be published in a newspaper circulating at a place where the banking company has its principaloffice, within six months from the end of the period. The RBI can conduct inspection of the books ofaccounts of the banking company at any time or on receiving direction from the Central Government.

1.5 FORM OF FINAL ACCOUNTS

The formats of preparation of final accounts are given in the third schedule of the BankingRegulation Act. The revised formats are in the vertical form. The formats are given below:

FORM ‘A’

FORM OF BALANCE SHEETBalance Sheet of ________________________ (here enter the name of the Banking

Company) as on 31st March_____ (Year)

Schedule As on 31.3. — As on 31.3. —(Current year) (Previous year)

CAPITAL AND LIABILITIESCapital 1Reserve and Surplus 2Deposits 3Borrowings 4Other Liabilities and Provisions 5

TOTAL ̀̀ASSETSCash and Balances with Reserve 6Bank of IndiaBalance with banks and money at call and short notice 7Investments 8Advances 9Fixed Assets 10Other Assets 11

TOTAL ̀Contingent LiabilitiesBills for Collection 12


SCHEDULE 1 — CAPITALParticulars As on..... As on.....

Current Year Previous Year

I. FOR NATIONALISED BANKSCapital(Fully owned by Central Government)

II. FOR BANKS INCORPORATED OUTSIDE INDIACapital(i) (The amount brought in by banks by way

of start- up capital as prescribed by RBIshould be shown under this head )

(ii) Amount of deposit kept with the RBI underSection 11(2) of the Banking RegulationAct, 1949

TOTAL ̀̀III. FOR OTHER BANKS

Authorised Capital (shares of …. each)Issued Capital (shares of …. each)Subscribed Capital (shares of …. each)Called-up Capital (shares of …. each)Less: Calls UnpaidAdd: Forfeited Shares

TOTAL ̀

SCHEDULE 2 — RESERVES and SURPLUSParticulars As on..... As on.....


I. Statutory Reserves.Opening BalanceAdditions during the yearDeductions during the year

II. Capital ReservesOpening BalanceAdditions during the yearDeductions during the year

III. Share PremiumOpening BalanceAdditions during the yearDeductions during the year


IV. Revenue and other ReservesOpening BalanceAdditions during the yearDeductions during the year

V. Balance in Profit and LossAccount

TOTAL ̀̀(I, II, III, IV and V)

SCHEDULE 3 — DEPOSITSParticulars As on..... As on.....


A. I. Demand Deposits(i) From Banks(ii) From Others

II. Savings Bank DepositsIII. Term Deposits

(i) From Banks(ii) From Others

TOTAL ̀(I, II and III)

B. (i) Deposits of branches in India(ii) Deposits of branches outside India

TOTAL ̀

SCHEDULE 4 — BORROWINGSParticulars As on..... As on.....


I. Borrowing in India(i) Reserve Bank of India(ii) Other Banks(iii) Other Institutions and Agencies

II. Borrowing outside IndiaTOTAL ̀

(I and II)


SCHEDULE 5 — OTHER LIABILITIES AND PROVISIONSParticulars As on..... As on.....


I. Bills PayableII. Inter-office adjustments (net)

III. Interest AccruedIV. Others (including provisions)

TOTAL ̀̀

SCHEDULE 6 — CASH AND BALANCES WITH RESERVE BANK OF INDIAParticulars As on..... As on.....


I. Cash in Hand(including foreign currency notes)

II. Balance with Reserve Bank of India(i) In Current Account(ii) In Other Accounts

TOTAL ̀(I and II)

SCHEDULE 7 — BALANCES WITH BANKS AND MONEY-AT-CALLAND SHORT NOTICE

Particulars As on..... As on.....Current Year Previous Year

I. In India(i) Balance with banks

(a) in Current Accounts(b) in Other Deposit Accounts

(ii) Money-at -call and short notice(a) with Banks(b) with other Institutions

TOTAL ̀II. Outside India

(i) in Current Accounts(ii) in other Deposit Accounts(iii) Money at call and short notice

TOTAL ̀


SCHEDULE 8 – INVESTMENTSParticulars As on..... As on.....


I. Investments in India in(i) Government securities(ii) Other approved securities(iii) Shares(iv) Debentures and Bonds(v) Subsidiaries and/or joint ventures(vi) Others (to be specified)

TOTAL ̀̀II. Investments outside India in

(i) Government securities(Including local authorities)

(ii) Subsidiaries and/or joint ventures abroad(iii) Other investments (to be specified)

TOTAL ̀GRAND TOTAL

(I and II)

SCHEDULE 9 – ADVANCESParticulars As on..... As on.....


A. (i) Bills purchased and discounted(ii) Cash Credits, Overdrafts

and Loans payable on demand(iii) Term Loans

TOTAL ̀B. (i) Secured by tangible assets

(ii) Covered by Bank/Government Guarantees(iii) Unsecured

TOTAL ̀C. I. Advances in India

(i) Priority Sectors(ii) Public Sectors(iii) Banks(iv) Others

TOTAL ̀II. Advances outside India

(i) Due from Banks


(ii) Due from others(a) Bills purchased and discounted(b) Syndicated Loans(c) Others

TOTAL ̀̀GRAND TOTAL

(C. I and II)

SCHEDULE 10 – FIXED ASSETSParticulars As on..... As on.....


I. PremisesAt cost as on 31st March ofthe preceding yearAdditions during the yearDeductions during the yearDepreciation to date

II. Other fixed assets(including Furniture and Fixtures)At cost on 31st March of the preceding yearAdditions during the yearDeductions during the yearDepreciation to date

TOTAL ̀(I and II)

SCHEDULE 11 – OTHER ASSETSParticulars As on..... As on.....


(I) Inter-office adjustments (net)(II) Interest accrued

(III) Tax paid in advance/Tax deducted at source(IV) Stationery and Stamps(V) Non-banking assets acquired in satisfaction of claims

(VI) Others @TOTAL ̀

@ In case there is any unadjusted balance of lossthe same may be shown under thus item withappropriate footnote.


SCHEDULE 12 – CONTINGENT LIABILITIESParticulars As on..... As on.....


(I) Claims against the bank notacknowledged as debts

(II) Liability for partially paid investments(III) Liability on account of outstanding

forward exchange contracts(IV) Guarantees given on behalf of constituents

(a) In India(b) Outside India

(V) Acceptances, endorsements and other obligations(VI) Other items for which the bank is

contingently liableTOTAL ̀̀

FORM ‘B’FORM OF PROFIT AND LOSS ACCOUNT

Profit and Loss Account for the year ended 31st March, …

Schedule No. Current Year Previous Year

I. INCOME:Interest earned 13Other income 14

TOTAL ̀II. EXPENDITURE

Interest expended 15Opening expenses Provisions and 16Contingencies

TOTAL ̀III. PROFIT/LOSS

Net Profit/Loss for the year (I-II)Profit/Loss (+) brought forward

TOTAL ̀(-)IV. APPROPRIATIONS

Transfer to Statutory ReservesTransfer to other ReservesTransfer to Government/Proposed dividendBalance carried over toBalance Sheet

TOTAL ̀


SCHEDULE 13 – INTEREST EARNEDParticulars As on..... As on.....


I. Interest/Discount on advance/billsII. Income on investments

III. Interest on balances with ReserveBank of India and other interbank funds

IV. OthersTOTAL ̀̀

SCHEDULE 14 – OTHER INCOMESParticulars As on..... As on.....


I. Commission, Exchange and BrokerageII. Profits on sale of investments Less:

Loss on sale of investmentsIII. Profit on revaluation of investments

Less: Loss on revaluation of investmentsIV. Profit on sale of land, building and other assets

Less: Loss on sale of land, building and other assetsV. Profit on exchange transactions

Less: Loss on exchange transactionsVI. Income earned by way of dividends etc.

from subsidiaries/companies and/or jointventures abroad/in India.

VII. Miscellaneous IncomeTOTAL ̀

Note: under items II to V Lossfigures may be shown in brackets.

SCHEDULE 15 – INTEREST EXPENDED

Particulars As on..... As on.....Current Year Previous Year

I. Interest on depositsII. Interest on Reserve Bank of India/

interbank borrowingsIII. Others.

TOTAL ̀


SCHEDULE 16 — OPERATING EXPENSESParticulars As on..... As on.....


I. Payments to and provisions for employeesII. Rent, Taxes and Lighting

III. Printing and StationeryIV. Advertisement and PublicityV. Depreciation on Bank’s property

VI. Director’s fees, allowances and expensesVII. Auditor’s fees and expenses

(including branch auditors)VIII. Law Charges

IX. Postages, Telegrams, Telephones, etc.X. Repairs and Maintenance

XI. InsuranceXII. Other expenditure

TOTAL ̀̀

1.6 IMPORTANT ITEMS OF THE FINAL ACCOUNTS

(i) Inter-office adjustments:

The inter-office adjustments balance, if in debt, should be shown under this head. Only netposition of inter-office accounts, inland as well as foreign, should be shown here. For arriving at thenet balance of inter-office adjustment accounts, all connected inter-office accounts should beaggregated and the net balance, if in debit, only should be shown representing mostly items in transitand unadjusted items.

(ii) Rebate on Bills Discounted:

It is also known as Discount Received in Advance, or, Unexpired Discount or, Discount Receivedbut not earned. Its treatment is same as we do in the case of Interest Received in Advance. Thus,If it is given only in the Trial Balance: The same will be shown as a liability and will appear in theliability side of the Balance Sheet.

(i) If it is given in adjustment

In that case, the same is deducted from the Income from Interest and Discount in Profit andLoss Account and the same also will appear in the liability side of the Balance Sheet.


(iii) Money-at-call and Short Notice:

The deposits made by bank with other banks and withdrawable only after giving a notice iscalled money-at-call and short notice. These deposits can be withdrawn by giving 24 hours notice.Money-at-short notice can also be withdrawn with 7 day’s notice.

(iv) Bad Debts and Provision for Bad Debts:

Entries are passed for writing off bad debts and for making provisions for doubtful debts in thebooks of banks. However, these entries should not be reflected in the final account of the bank,because it may damage the reputation of the banks and the confidence of the public may be lost.The Banking Regulation Act, allows banks not to disclose the amount of Bad Debts written off andprovision for bad debts. The amount of provision for doubtful debts is merged with “provisions andcontingencies” while debiting it to profit and loss account. The said amount is deducted from theadvances shown in the balance sheet. It is necessary for banks to disclose the fact about existenceof provision in the statement of Accounting Policies.

1.7 NON-PERFORMING ASSETS

The RBI has issued guidelines for provision for loss on advances or credit facilities granted bythe banks. These guidelines are known as prudential norms. Non-performing Assets (NPA) meansa credit facility in respect of which the interest and or installments has remained past due for aspecified period. Thus a credit facility that ceases to generate income for the bank is termed asNon-performing Asset.

Accordingly any loan facility which is overdue for interest or instalment for a period of 180days is considered as NPA. This period applies for term loan, overdraft as well as other advances.However, for agricultural loans, overdue for two harvest seasons is considered as NPA. With effectfrom March 2004 banks have to classify their assets as NPAs if they fail to recover either a portionof principal or interest within 90 days instead of 180 days applicable earlier.

Classification of Advances:

As per prudential norms the advances of a bank are classified as under:

(i) Standard Assets: The advance which is not NPA is called Performing Asset or StandardAsset. Such an asset does not create any problem to the bank. It does not earn more than normalrisk attached to the business.

(ii) Substandard Assets: The amount of advance which is NPA for a period not exceeding18 months is considered as Substandard Asset. The security available to the bank is inadequate.There is a distinct possibility that the bank will suffer some loss if deficiencies are not correctedimmediately in future.


(iii) Doubtful Asset: The amount of advance which is NPA for a period of exceeding 18months is considered as doubtful asset. This type of an asset is considered as weak because itscollection is considered as highly improbable. For this purpose the unsecured and secured portionsare to be considered separately. The unsecured portion has to be fully provided. Provision is also tobe made against secure portion as per certain percentages.

(iv) Loss Asset: The amount of advance which is identified by the bank or the auditor butwhich is not yet written off. The bank must write it off even though there is remote possibility ofrecovery of certain amount.

Provisioning for Advances: Types of Assets

Standards Substandard Douftful Loss Assets(100%)

SME(0.25%)

Real Estate(1%)

Others(0.40%)

Secured(15%)

Secured(25%)

Up to 1 yrs.

1 to 3 yrs.

Secured(40%)

More than 3 yrs.(100%)

Unsecured(25%)

Unsecured(100%)

Unsecured(100%)

Preparation of Profit and Loss AccountIllustration 1

From the following information, prepare Profit and Loss Account of Yes Bank Ltd., for theyear ended 31-3-2006

`̀ Lakhs

Interest on Loans 25.90Interest on Fixed Deposits 27.50Commission 0.82Rebate on Bills Discounted 4.90Salaries and Allowances 5.40Discount on Bills Discounted (Net) 14.60Interest on Cash Credit 22.30Depreciation on Bank’s Property 4.00Rent and Rates 1.80Interest on Overdraft 15.40


Director’s Fees 0.30Audit Fees 0.50Interest on Saving Deposits 6.80Postage 0.14Printing and Stationery 0.29Sundry Expenses 0.15

Bad debts to be written off amounted to ` 3.80 lakhs. Provision for taxation may be made at35%. Transfer 20% of profits to Statutory Reserve and provide ` 3 lakhs for dividends.

Solution:

Yes Bank Ltd.Profit and Loss Account for the year ended 31-3-06

Particulars Schedule No. ( ̀̀ Lakhs)

(I) INCOME:Interest Earned 13 78.20Other Income 14 0.82

TOTAL ̀ 79.02(II) EXPENDITURE:

Interest Expended 15 34.30Operating Expenses 16 12.58Provisions and Contingencies 13.72

TOTAL ̀ 60.60(III) PROFIT AND LOSS ACCOUNT

Net Profit for the Year 18.42(IV) APPROPRIATIONS:

Statutory Reserve 3.68Proposed Dividend 3.00Balance Carried to 11.74Balance Sheet

TOTAL ̀ 28.42


SCHEDULE 16: OPERATING EXPENSESParticulars ( `̀ Lakhs)

Salaries and Allowances 5.40Rent, Rates 1.80Printing and Stationery 0.29Depreciation 4.00Director’s Fees 0.30Audit Fees 0.50Postage 0.14Sundry Expenses 0.15

Total ̀ 12.58

Working:

Particulars ( ` Lakhs)

(1) Provision and Contingencies:Bad Debts 3.80Provision for Taxation 9.92

13.72(2) Provision for Taxation:

Total Income 79.02Less: (1) Interest Expense – 34.30

(2) Operating Expenses – 12.5846.8832.14

Less: Bad Debts 3.80Profit Before Tax 28.34

Less: Provision for Tax 9.92Profit After Tax 18.42

(3) Rebate on bill discounted is deducted from interest and discount.

Illustration 2

From the following information, prepare Profit and Loss Account of South Bank Ltd. as on31st March 2009:


Particulars `̀ (in ‘000)

Interest and Discounts 3045Income from Investments 115Interest on Balances with R.B.I 820Commission, Exchange and Brokerage 110Profit on Sale of Investments 1225Interest on Deposits Interest to R.B.I. 161Payment to and Provision for Employees 1044Rent, Taxes and Lighting 210Printing and Stationery 180Advertisement and Publicity 95Depreciation 92Directors’ Fees 220Auditors’ Fees 120Law Charges 20Postage, Telegram and Telephones 70Insurance 56Repairs and Maintenance 48

Other Information:

(i) Interest and discount mentioned above is after adjustment for the following:

Particulars ` (in ‘000)

Tax provision for the year 2,20Provision during the year for doubtful debts 1,02Loss on sale of investments 12Rebate on bills discounted 58

(ii) 20% of profit is transferred to Statutory Reserves.

5% of profit is transferred to Revenue Reserve.

Profit brought forward from last year 16,000.


Solution:In the books of South Bank

Profit and Loss AccountFor the year ended 31st March 2009

Particulars Schedule As on 31.3.2009 As on 31.3.2008No. Current Year Previous Year

(in ‘000)

1. IncomeIncome Earned 13 37.32Other Income 14 9.18

Total ̀ 46.502. Expenditure

Interest 15 13.86Operating Expenses 16 23.65Provision and Contingencies 3.80*

Total ̀ 41.313. Profit/Loss

Net Profit for the year 5.19Profit brought forward 0.16

Total ̀ 5.354. Appropriations

Transfer to Statutory Reserve 1.04( 5,19 × 20/100)Transfer to Revenue Reserve 0.26( 5,19 × 5/100)Balance carried over toBalance Sheet 4.05

Total ̀ 5.35

* ` 380 (i.e., 220 + ` 102 + ` 58)SCHEDULE 13 – INTEREST AND DISCOUNT

Particulars As on 31.3.2009 As on 31.3.2008Current Year Previous Year

Interest and Discount 34.37Income on Investment 1.15Interest on RBI deposit 1.80Others Nil

37.32


SCHEDULE 14 – OTHER INCOMEParticulars As on 31.3.2009 As on 31.3.2008


Commission, Exchange 8.20and BrokerageProfit on sale of Investment .98(Net) (1,10 - 12)

9.18

SCHEDULE 15 – INTEREST EXPENDEDParticulars As on 31.3.2009 As on 31.3.2008


Interest paid on deposits 12.25Interest to RBI 1.61

13.86

SCHEDULE 16 – OPERATING EXPENSES


(i) Payment to and provisions for employees 10.44(ii) Rent, Taxes and Lighting 2.10(iii) Printing and Stationery 1.80(iv) Advertisement and Publicity 95(v) Depreciation on Bank’s property 92(vi) Directors’ Fees, Allowances and Expenses 2.20(vii) Auditor’s Expenses 1.20(viii) Law Charges 2.30

(ix) Postage, Telegram and Telephones 70(x) Repairs and Maintenance 48(xi) Insurance 56(xii) Other Expenditure —

23.65


Illustration 3

From the following particulars, prepare the final accounts of Barnali Bank Ltd:Balance Sheet

As on 31st March 2009Particulars Dr. Cr.

Share Capital:1,00,000 Shares of ` 10 each, ̀ 5 paid up 5,00,000Reserve Fund 10,00,000Fixed Deposits 20.00,000Savings Bank Deposits 30,00,000Current Accounts 70,00,000Borrowed from Bank 2,00,000Investments 30,00,000Premises 12,00,000Cash in hand 60,000Cash at bank 28,00,000Money-at - Call and Short notice 3.00,000Interest accrued and paid 2,00,000Salaries 80,000Rent 30,000Profit and Loss Account(1.4.08) 1,60,000Gross Profit for the year 4,50,000Bills Discounted 5,00,000Bills Payable 8,00,000Loans, Advances, Overdrafts 70,00,000and Cash CreditsUnclaimed Dividend 30,000Sundry Creditors 30,000

1,51,70,000 1,51,70,000

The Bank has the bills for ` 14,00,000 as collection from its constituents and also acceptancesand endorsements for them amounting to ` 4,00,000.


Solution:In the Books of Barnali Bank Lt.

Profit and Loss Account for the year ended 31st March 2008Particulars Schedule As on 31.3.2009 As on 31.3.2008

No. Current Year `̀ Previous Year ̀I. Income

Interest Earned 13 4,50,000Other Incomes 14 —

Total ̀ 4,50,000II. Expenditure

Interest Expended 15 2,00,000Operating Expenses 16 1,10,000Provision and Contingencies — Nil

Total ̀ 3,10,000III. Profit/Loss

Net Profit/Loss for the 1,40,000Year (I - II)Profit/Loss brought 1,60,000Forward

Total ̀ 3,00,000IV. Appropriations

Transfer to Statutory 28,000Reserve (20% of Net Profit)Balance carried over to 2,72,000Balance Sheet

Total ̀ 3,00,000

Balance Sheet of Barnali Bank Ltd.As at 31st March 2009

Particulars Schedule As on 31.3.2009 As on 31.3.2008No. Current Year ` Previous Year ̀

Capital and LiabilitiesCapital 1 5,00,000Reserve and Surplus 2 13,00,00Deposits 3 1,20,00,000Borrowings 4 2,00,000Other Liabilities and 5 8,60,000Provisions

Total ̀ 1,48,60,00


AssetsCash and Balance with RBI 6 60,000Balance with other Bank 7 31,00,000and Money- at-call and short noticeInvestments 8 30,00,000Advances 9 75,00,000Fixed Assets 10 12,00,000Other Assets 11 —

Total ̀ 1,48,60,000Contingent Liabilities 12 4,00,000Bills for Collection 10,40,000

SCHEDULE 1: CAPITALParticulars As on 31.3.2009 As on 31.3.2008

Current Year Previous Year` Lakhs ` Lakhs

Authorised Capital:…… Shares of ` 10 eachCalled-up Capital 5,00,0001,00,000 Shares of ̀ 10 each,` 5 paid-up

Total ̀ 5,00,000

SCHEDULE 2: RESERVES and SURPLUS


` Lakhs ` Lakhs

Statutory Reserve: 10,00,000opening BalanceAdd: Transfer from current year’s profit 28,000Capital Reserve —Profit and Loss Account 2,72,000

Total ̀ 13,00,000


SCHEDULE 3: DEPOSITParticulars As on 31.3.2009 As on 31.3.2008

Current Year Previous Year`̀ Lakhs ` Lakhs

Demand Deposits :(1) From Banks 70,0000(2) From Others —Savings Bank DepositsTerm Deposits :(1) From Banks 30,00,000(2) From Others 20,00,000

Total ̀ 1,20,00,000

SCHEDULE 4: BORROWINGSParticulars As on 31.3.2009 As on 31.3.2008


Borrowings in India :(1) RBI —(2) Others —Borrowings outside India 2,00,000

Total ̀ 2,00,000

SCHEDULE 5: OTHER LIABILITIES and PROVISIONSParticulars As on 31.3.2009 As on 31.3.2008


Bills Payable 8,00,000Others (including Provisions) :Sundry Creditors 30,000Unclaimed Dividends 30,000

Total ̀ 8,60,000


SCHEDULE 6: CASH AND BALANCE WITH RBIParticulars As on 31.3.2009 As on 31.3.2008


Cash in hand(including foreign currency notes) 60,000Balances with RBI in :(I) Current Account —(II) Other Accounts —

Total ̀ 60,000

SCHEDULE 7: BALANCE WITH BANK AND MONEY-AT-CALL AND SHORTNOTICE


` Lakhs ` Lakhs

In India 2,80,000(i) Balances with bank

(a) in Current Accounts —(b) in Other Deposit Accounts —

(ii) Money-at-call and Short Notice 3,00,000Outside India —

Total ̀ 5,80,000

SCHEDULE 8: INVESTMENTS


` Lakhs ` Lakhs

Investment in India 30,00,000Investment outside India —

Total ̀ 30,00,000


SCHEDULE 9: ADVANCESParticulars As on 31.3.2009 As on 31.3.2008


Bills Discounted and PurchasedCash Credits, Overdrafts and Loans 5,00,000Payable on demand 70,00,000Term Loans —

Total ̀ 75,00,000

SCHEDULE 10: FIXED ASSETSParticulars As on 31.3.2009 As on 31.3.2008


1. Premises 12,00,0002. Other Fixed Assets —

Total ̀ 12,00,000

SCHEDULE 11: CONTINGENT LIABILITIES


` Lakhs ` Lakhs

Acceptances, Endorsementsand Other Obligations 4,00,000

Total ̀ 4,00,000

SCHEDULE 12: INTEREST EARNEDParticulars As on 31.3.2009 As on 31.3.2008


Interest and Discount Received 4,50,000

Total ̀ 4,50,000


SCHEDULE 13: INTEREST EXPENDEDParticulars As on 31.3.2009 As on 31.3.2008


Interest on Deposits —Interest on RBI/Inter-Bank 2,00,000BorrowingsOthers —

Total ̀ 2,00,000

SCHEDULE 14: OPERATING EXPENSESParticulars As on 31.3.2009 As on 31.3.2008


Payment to and Provision for Employees 80,000Rent, Taxes and Lighting 30,000

Total ̀ 1,10,000

Illustration 4

On 31st march, 2005, the following balances stood in the books of New Bank Ltd. afterpreparing final accounts

Particulars ` ’000

Share Capital 7,000Reserve fund 4,900Fixed Deposit accounts 13,300Saving bank accounts 42,000Current Accounts(credit) 1,12,000Money- at -call and short notice 4,200Investments at costs 42,000Profit and Loss Account (credit 1-4-2004) 2,940Dividend for 2004 700Land and Buildings(after depreciation upto (31-3-2005) 14,890Cash in hand 840Cash with RBI 21,000Loans, overdrafts and Cash Credits 98,000Cash with other banks 18,200Borrowings from other banks 8,800

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