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JAIIB-Module D

Accounting & Finance for Bankers

Prof.S.D.Bargir

13.4.2006

COMPANY ACCOUNTSFeatures of a Joint stock Company Incorporated association Artificial person Perpetual succession Common seal Limited liability Separation of management from ownership Transferability of shares Separate legal status Large membership

Types of companiesOn the basis of incorporation

On the basis of ownership

On the basis of liability

Chartered company

Private company

Co.limited by shares

Statutory company

Public company

Co. Ltd. by guarantee

Registered company

Government company

Co. with unlimited liability

Foreign company

Holding company

SHARE CAPITAL

EQUITY PREFERENCE

•CUMULATIVE

•REDEEMABLE

•PARTICIPATING

SHARE CAPITAL

AUTHORISED CAPITAL ISSUED CAPITAL SUBSCRIBED CAPITAL CALLED CAPITAL PAID UP CAPITAL

ISSUE OF SHARE AT PAR

-BANK- SHARE APPLICATION

Debited

-

-

credited

-SHARE APPLICATION -SHARE CAPITAL

Debited

--Credited

Over subscription

-share application

-share capital

-bank (refund)

-share allotment

Debited

-

-

-

-

Credited

Credited

Credited

SHARE ALLOTMENT/SHARE CALL

Share allotment a/c

Share capital a/c

Debited

-

-

Credited

Bank a/c Share allotment a/c

Debited

-

-

Credited

Share call a/c

Share capital a/c

Debited

-

-

Credited

Bank a/c

Share call a/c

Debited

-

-

Credited

Calls in arrears a/c

Share allotment a/c

Share call a/c

Debited

-

-

-

Credited

Credited

Issue of shares at premium

Share application/

allotment a/c

Share capital A/c

Share premium A/c

Debited

-

-

-

Credited

Credited

Issue of shares at discount

Share allotment A/c

Discount on issue of shares A/c

Share capital A/c

Debited

Debited

-

-

-

Credited

Forfeiture of shares

Share capital A/c

Call in arrears A/c

Forfeited shares A/c

Debited

-

-

-

Credited

Credited

Re-issue of shares

Bank A/c

Forfeited shares A/c

Share capital A/c

Capital reserve A/c

Debited

Debited

-

-

-

-

Credited

Credited

Issue of Bonus sharesCap. Red. Reserve A/c

Share premium A/c

Capital reserve A/c

Gen Reserve A/c

Profit & Loss A/c

Bonus to shareholders A/c

Debited

Debited

Debited

Debited

Debited

-

-

-

-

-

-

credited

Bonus to shareholders A/c

Equity share capital A/c

Debited -

credited

Schedule VI to Companies ActPart I- form of Balance sheet

1. Share capital

2. Reserves & surplus

3. Secured Loans

4. Unsecured Loans

5. Current Liabilities & Provisions

-current Liabilities

-Provisions

-other provisions

1. Fixed Assets

2. Investments

3. Current Assets, Loans & Advances

a)Current assets

b)Loans & advances

4. Miscellaneous Expenditure ( to the extent not w/o)

5. Profit & Loss Account

Contingent Liabilities

Do not form part of the Balance sheet. Shown by way of foot note

-Claims against the company not acknowledged as debts.

-Uncalled liability on partly paid-up shares.-Arrears of cumulative dividends on Pref. Capital -Estimated amount of contracts remaining to be executed on capital account and not provided for

-Other money for which the company is contingently liable

Profit & Loss Account

Profit & Loss Account

-Shows current years expenses & Income

Profit & Loss Appropriation A/c-shows appropriation profit by way of dividend and transfer to various reserves-Shows excess or short provision in respect of income tax for earlier years

FINAL ACCOUNTS OF BANKING COMPANIES

Definition Requirements –Accounts & audit

• Third Schedule annexed to BRA

• Form A- Balance sheet

• Form B- Profit & Loss Account

• Audit

• Submission of accounts- RBI- within 3 months

• Publication of accounts- within 6 months

Balance sheet-Form ACapital & Liabilities Assets

1.Capital 6.Cash & Bank Balance with RBI

2. Reserves & surplus 7.Balances with Banks & Moneyat call and SN

3.Deposits 8.Investments

4.Borrowings 9Advances

5Other Liabilities & Provisions

10.Fixed Assets

11.Other Assets

Contingent liabilities

Schedule-12 Claims against bank not acknowledged as

debts Liability for partly paid shares Liability on account of outstanding forward

exchange contracts Acceptances ,endorsement & other obligations Other items for which bank is contingently

liable.

PROFIT & LOSS ACCOUNT-FORM B

Income

Interest Earned

Other Income

Schedule.13

Schedule.14

Expenditure

Interest Expended

Operating Expenses

Provision for contingencies

Schedule.15

Schedule.16

Profit /Loss

Appropriations

Transfer to Reserves

Proposed dividend

Balance carried to Balance sheet

NOTES TO ACCOUNTS

Significant Accounting Policies

Schedule.17

Notes forming part of Accounts

Schedule.18

ASSET CLASSIFICATION ETC Asset Classification

• Performing and • non performing ( remain out of order)

Income Recognition• Performing-accrual basis• Non performing-cash basis

Asset Classification• Std-0.25%• Sub-Std.<18 months-10%• Doubtful>18 months-usl-100%-secured.3yrs-

50%,>1&<3-30%-upto 1year-20%• Loss assets-100%

Q.Choose the item which is not part of “ other Income” in case of banking companies.

a. Commission , Exchange and brokerage

b. Income on investments by way of interest and dividends

c. Income earned by way of dividends etc. from subsidiaries, joint ventures abroad/ in India

d. Profit on sale of investments less loss on sale of investments

Q.2: Relate the following items with the various schedules of profit and Loss account (form B)Interest Earned, Interest expended, operating expenses, other Income

a. 13,14,15,16

b. 13,15,16,14

c. 13,15,14,16

d. 13,14,16,15

Q. Which of the following are true-----a. The amount of bad debts and provision for bad debts is charged under the

heading “Provisions and contingencies” in the Profit and Loss Account . In the Balance sheet , the advances are shown after deducting both bad debts and provisions for bad debts

b. If adjustment has to be made after preparation of trial balance in respect of rebate on bills discounted in respect of unearned discount relating to the next period, the amount of such rebate will be deducted from the total discount in the profit and Loss account and will also appear as a liability in the balance sheet.

Q choose the sentence which is not relating to fixed asset of a banking company-----

a. Premises wholly owned by the banking company for the purpose of banking business

b. Other fixed Assets ( including furniture and Fixtures) , Motor Vehiclesc. As regards fixed assets, where sums have been written off on revaluation of

assets , every balance sheet after the first balance sheet subsequent to the revaluation should show the revised figures for a period of five years with the date and amount of revision made.

d. Non banking assets acquired in satisfaction of claims would include immovable properties /tangible assets acquired in satisfaction of claims.

Q: As per section 31 and 32 of the Banking Regulation Act,1949, three copies of Balance sheet and Profit & Loss Account prepared u/s 29 and auditors Report u/s 30 must be submitted to RBI within-----

a. One month from the end of the period to which they refer

b. Six month from the end of the period to which they refer

c. Three month from the end of the period to which they refer

d. Nine month from the end of the period to which they refer

Q. When Depreciation A/c is debited and the Provision for Depreciation A/c is credited,

a. Depreciation is shown on the debit side of P & L A/cb. Asset appears at its original value in the details column of the

Balance Sheetc. Accumulated Provision for depreciation is deducted from the value of

the asset.d. The net value of the Asset is shown in the amount column of the

balance sheet.e. All of the abovef. Asset is shown at its original cost in the Balance SheetQ.: A company purchased a second hand motor car for Rs. 80,000 and

spent Rs. 35,000 on its overhauling. Depreciation is written off @ 10% on the original cost. After two years the car was found unsuitable and sold for Rs. 65,000. What is the amount of loss on sale of car.

a) Rs. 15,000b) Rs. 27,000c) Profit Rs. 1000d) Rs. 50,000

The amount written off as depreciation is invested in outside securities to yield interest, and the interest earned thereon is reinvested.

For example if the cost of machine is Rs. 1,00,000. It is expected to have an economic life of 5 years and the investment yields 6% p.a.

(A reference to the Sinking Fund Table the factor applicable for 5 years at 6% rate is 0.177396. The annual depreciation would be Rs. 1,00,000 x 0.177396 or Rs. 17,739. 60) This amount will become Rs. 1,00,000 in 5 years @ 6% p.a. as under:

First year Depreciation Rs. 17,739.60 Interest at the end of First year on 17,739.60 Rs. 1,064.37 Total investment at the beginning of 2nd year Rs.18,803.97 Second year depreciation Rs. 17,739.60 Interest on 18,803.97 Rs. 1,128.24 Total investment at the end of 2nd year Rs. 37,671.81 Third year depreciation Rs. 17739.60 Interest on 37,671.81 Rs. 2,260.30 Total investment at the end of 3rd year Rs. 57,671.71 Fourth year depreciation Rs. 17,739.60 Interest on 57,671.71 Rs. 3,460.31 Total investment at the end of 4th year Rs. 78,871.62 Fifth year depreciation Rs. 17,739.60 Interest on 78,871.62 Rs. 4,732.30 Total investment at the end of 5th year Rs. 101343.52

The annual depreciation is transferred to Sinking Fund A/c every year:Debit: Depreciation A/c Credit: Sinking Fund A/c (To the extent of the amount

of depreciation is written off, amount is invested in outside securities at the stipulated rate of interest and kept under Sinking Fund Investment A/c.)

Debit: Sinking Fund Investment A/c Credit: Bank A/c• Interest realized from the investments are again utilized and is invested in the Securities and kept under

Sinking Fund Investment A/c. Debit: Bank A/c Credit: Interest on Sinking Fund Investment A/c Debit: Interest on Sinking Fund Investment A/c Credit: Sinking Fund A/c Debit: Sinking Fund Investment A/c Credit: Bank A/c

• In the final year-no fresh investment is made. Only the following entries are made: Debit: Depreciation A/c Credit: Sinking Fund A/c Debit: Bank A/c Credit: Interest on Sinking Fund Investment A/c Debit: Interest on Sinking Fund Investment A/c Credit: Sinking Fund A/c

• For realization of investments Debit: Bank A/c Credit: Sinking Fund Investment A/c If the amount realized is the same as book value of the Sinking Fund Investment, this

account is automatically closed. If the amount realized is more or less, there is a profit or loss on sale of investments, which

is transferred to Sinking Fund A/c. 9. The Asset account is closed by: Debit: Sinking Fund A/c Credit: Asset A/c 10. The Sinking fund account is closed by transferring any balance in it to the P & L A/c.

Partnership Accounts Definition Methods of maintaining capital a/cs

• Fixed capital method

• Fluctuating capital method

Partners Loan A/c• - Int.@ 6%

Interest on Capital, drawings• Based on provision in the agreement

Goodwill & methods of valuationAverage Profit Method

Super Profit Method

Capitalisation of Profit Method

Average profit multiplied by an agreed multiplier

Super profit multiplied by an agreed multiplierSuper Profit =Actual profit less Normal Profit

Normal profit capitalized by applying normal rate of return

Goodwill- Capitalisation of profit Method-Example

Capital = Rs.300000 Actual normal profit (NP)= Rs.120000 Normal rate of Return(NRR) = 10% Capitalisation of Profit= NP /NRR = (120000/10) *100 = Rs.1200000 Goodwill =1200000 less 30000

=Rs.900000

Admission of a partner

Sacrificing ratio= Old ratio less new ratio Treatment of goodwill Revaluation of assets & Liabilities Capital to be brought in by new partner Adjustment-accumulated losses Adjustment- Reserves Adjustment- Capital Accounts of partners

Retirement or Death of a partner

Goodwill Revaluation of Assets & Liabilities New Profit sharing ratio of continuing partner Share of profit till retirement/ death Treatment of accumulated reserve/losses Capital account/current account Loan account

BALANCE SHEET EQUATION

ASSETS = CAPITAL + LIABILITIES LIABILITIES = ASSETS - CAPITAL CAPITAL = ASSETS - LIABLITIES

BALANCE SHEET EQUATION

Assets = Liabilities

Assets = Capital + Liabilities

Assets =Net worth + Liabilities

Net worth = Capital + Reserves& Surplus

Net worth = Assets Less Liabilities

1. The Assets of a business are Rs.500000 and its capital is Rs.115000. Its liabilities on that date would be------

a) Rs.615000b) Rs.385000c) Rs.500000d) Rs. 1150002. A had a capital of Rs.750000. He has also purchased

goods of Rs.150000 on credit from Mr. Saha. The value of total assets of the entity is-----

a) Rs.750000b) Rs.900000c) Rs.600000d) Rs.1050000

Q.Choose the incorrect statement-----a) A firm can be formed with maximum number of 10 persons for carrying

banking businessb) A firm can be formed with maximum number of 20 persons for carrying

other businessc) A firm can be formed with maximum number of 50 persons for carrying

professional servicesd) A private company can be formed with a maximum number of 50 personse) A public company can be formed with a maximum number of 1000

persons

Q.Choose the incorrect statement-----a) Issued capital is that capital which is issued to the public. It cannot exceed

authorised capital.b) Subscribed capital is that part of the issued capital which has been

actually paid by the shareholders.c) Called up capital is that part of the subscribed capital which has been

called from the subscribers.

Q: Analog computers are mostly used for----a) Running accounting softwareb) Running simulation of guided missile systemc) Using in scientific and mechanical fields*d) All of theseQ:Data means----a) Factsb) Observationsc) Assumptionsd) Occurrencese) All of thesef) None of the above Q: Compilation of related data records maintained in some prearranged order is

known as-----a) Data baseb) Data filec) Data martd) Data groupe) All of thesef) None of these