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1. Accounting & Finance for Bankers Final A/cs. Of Banks & Cos. JAIIB-MODULE-D PRESENTATION BY Ravi Ullal 24-o4-2008.

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Presentation on theme: "1. Accounting & Finance for Bankers Final A/cs. Of Banks & Cos. JAIIB-MODULE-D PRESENTATION BY Ravi Ullal 24-o4-2008."— Presentation transcript:

1 1. Accounting & Finance for Bankers Final A/cs. Of Banks & Cos. JAIIB-MODULE-D PRESENTATION BY Ravi Ullal 24-o4-2008

2 2 Topics Partnership accounts Partnership accounts Final accounts of banking companies Final accounts of banking companies Company accounts Company accounts Balance sheet equation Balance sheet equation Accounting in a Computerized environment Accounting in a Computerized environment

3 3 PARTNERSHIP ACCOUNTS Introduction Introduction Definition Definition Partnership deed Partnership deed

4 4 In the absence of partnership deed/if deed is silent Profit sharing ratio –Equal Profit sharing ratio –Equal No interest on capital No interest on capital No interest on drawings No interest on drawings on loan given by partner on loan given by partner No salary /no commission/ no remuneration No salary /no commission/ no remuneration Capital accounts under fluctuating capital method Capital accounts under fluctuating capital method

5 5 Methods of capital accounts Fixed Fixed Capital account-transactions relating to capital Capital account-transactions relating to capital Current account Current account Other transactions such as Interest, profit, goodwill, past profits/losses & adjustments Other transactions such as Interest, profit, goodwill, past profits/losses & adjustments Fluctuating Fluctuating One account- all transactions One account- all transactions

6 6 GOODWILL It’s reputation, super profit earning capacity of a firm It’s reputation, super profit earning capacity of a firm Necessity Necessity change in profit sharing ratio change in profit sharing ratio Admission, retirement, death Admission, retirement, death Sale of business Sale of business Methods: Methods: Average profit Average profit Super profit Super profit capitalization of profit capitalization of profit

7 7 Methods of goodwill Average profit (AP) Super profit (SP) Capitalization of profit AP x Multiplier SP x multiplier SP = AP less NP NP=normal profit (Capitalised value) less Actual Capital Multiplier is given

8 8 GOODWILL IMPORTANT ENTRIES ADMISSION ADMISSION When goodwill is raised and written off When goodwill is raised and written off Debit goodwill and credit old partners capital a/c (old ratio) Debit goodwill and credit old partners capital a/c (old ratio) Debit All partners capital a/c & Debit All partners capital a/c & credit goodwill (new ratio) credit goodwill (new ratio)

9 9 GOODWILL IMPORTANT ENTRIES RETIREMENT RETIREMENT When goodwill is raised and written off When goodwill is raised and written off Debit goodwill and credit old partners capital a/c (old ratio) Debit goodwill and credit old partners capital a/c (old ratio) Debit Continuing partners capital a/c & credit goodwill (new ratio) Debit Continuing partners capital a/c & credit goodwill (new ratio)

10 10 ADMISSION revaluation of assets/ liabilities, revaluation of assets/ liabilities, goodwill, goodwill, capital adjustments, capital adjustments, balance of reserves, balance of reserves, past losses (if any) past losses (if any)

11 11 RETIREMENT As per Act of 1932, retirement by consent, partnership deed provision, at will by giving proper notice As per Act of 1932, retirement by consent, partnership deed provision, at will by giving proper notice Revaluation of assets/ liabilities, goodwill, capital adjustments, balance of reserves, past losses Revaluation of assets/ liabilities, goodwill, capital adjustments, balance of reserves, past losses

12 12 examples Let us say A and B are partners sharing profits equally. They take C as partner with equal share. The position will be as under: Let us say A and B are partners sharing profits equally. They take C as partner with equal share. The position will be as under: PartnersOld RatioNew Ratio Loss(Sacrifice)/ PartnersOld RatioNew Ratio Loss(Sacrifice)/ Gain Gain A1/21/3–1/6 A1/21/3–1/6 B1/21/3–1/6 B1/21/3–1/6 CNil1/3+1/3 CNil1/3+1/3 Sacrificing Ratio = Old ratio (–) New ratio. Sacrificing Ratio = Old ratio (–) New ratio.

13 13 examples Entries to be passed for Goodwill: Entries to be passed for Goodwill: 1.When the new partner pays the goodwill privately: 1.When the new partner pays the goodwill privately: In this case, no entry is passed in the books of account. In this case, no entry is passed in the books of account. 2.When the new partner brings in his share of goodwill and cash brought in as goodwill is retained in the business: 2.When the new partner brings in his share of goodwill and cash brought in as goodwill is retained in the business: (a) Cash/Bank a/cDr. (a) Cash/Bank a/cDr. To Goodwill a/c To Goodwill a/c (b)Goodwill a/cDr. (b)Goodwill a/cDr. To Old partners’ capital a/c To Old partners’ capital a/c (In old profit sharing or sacrificing ratio) (In old profit sharing or sacrificing ratio) 3.If goodwill is brought in by way of cash and is withdrawn by old partners, then in addition to the two entries as above, the following third entry is passed: 3.If goodwill is brought in by way of cash and is withdrawn by old partners, then in addition to the two entries as above, the following third entry is passed: (a) Cash/Bank a/cDr. (a) Cash/Bank a/cDr. To Goodwill a/c To Goodwill a/c (b)Old partners’ capital a/cDr. (b)Old partners’ capital a/cDr. To Cash/bank a/c To Cash/bank a/c

14 14 examples 4.When the new partner does not bring cash for goodwill and goodwill is raised by the old partners and shown as an asset in the balance sheet: 4.When the new partner does not bring cash for goodwill and goodwill is raised by the old partners and shown as an asset in the balance sheet: Goodwill a/cDr. Goodwill a/cDr. To Old partners’ capital a/c To Old partners’ capital a/c (In old profit sharing ratio) (In old profit sharing ratio) 5.When new partner does not bring cash for goodwill but goodwill is raised and written off immediately: 5.When new partner does not bring cash for goodwill but goodwill is raised and written off immediately: (a)Goodwill a/cDr. (a)Goodwill a/cDr. To Old partners’ Capital a/c To Old partners’ Capital a/c (In old profit sharing ratio) (In old profit sharing ratio) (b)All partners’ capital a/cDr.(including new one) (b)All partners’ capital a/cDr.(including new one) To Goodwill a/c To Goodwill a/c (In new profit sharing ratio) (In new profit sharing ratio)

15 15 examples Let us suppose A, B, and C are partners sharing profits and losses in the ratio of 5 : 3 : 2. A retires and B and C agree to continue at the ratio of 3: 2. In this case, the position will be as follows: Let us suppose A, B, and C are partners sharing profits and losses in the ratio of 5 : 3 : 2. A retires and B and C agree to continue at the ratio of 3: 2. In this case, the position will be as follows: Old RatioNew RatioNet Gain/Loss Old RatioNew RatioNet Gain/Loss A5/10Nil— A5/10Nil— B3/103/5+ 3/10 (3/5 – 3/10) B3/103/5+ 3/10 (3/5 – 3/10) C2/102/5+ 2/10 (2/5 – 2/10) C2/102/5+ 2/10 (2/5 – 2/10) Gain ratio will be 3 : 2. Gain ratio will be 3 : 2. (b) Let us now suppose B and C change their ratio to 5 : 3; then the position will be as follows: (b) Let us now suppose B and C change their ratio to 5 : 3; then the position will be as follows: Old RatioNew RatioNet Gain/Loss Old RatioNew RatioNet Gain/Loss A 5/10—(–) 5/10 i.e 1/2 A 5/10—(–) 5/10 i.e 1/2 B 3/105/8+ 13/40 (5/8 – 3/10) B 3/105/8+ 13/40 (5/8 – 3/10) C 2/103/8+ 7/40 (3/8 – 2/10) C 2/103/8+ 7/40 (3/8 – 2/10) Gain ratio will be 13/40 : 7/40 i.e. 13 : 7. Gain ratio will be 13/40 : 7/40 i.e. 13 : 7.

16 16 examples A, B and C are equal partners. C dies. Goodwill on the date of his death is Rs 90,000. Then, C’ s Share 1/3 × Rs 90,000 = Rs 30,000 A, B and C are equal partners. C dies. Goodwill on the date of his death is Rs 90,000. Then, C’ s Share 1/3 × Rs 90,000 = Rs 30,000 The chart below depicts gain of the continuing partners. The chart below depicts gain of the continuing partners. Partners Old Ratio New RatioGain Partners Old Ratio New RatioGain A1/31/2+1/6 A1/31/2+1/6 B1/31/2+1/6 B1/31/2+1/6 C1/3Nil(1/3) C1/3Nil(1/3) Entries if only C’s share of goodwill is raised for above will be: Entries if only C’s share of goodwill is raised for above will be: (a) Goodwill a/c Dr.Rs 30,000 (a) Goodwill a/c Dr.Rs 30,000 To C’s Capital a/cRs 30,000 To C’s Capital a/cRs 30,000 (b) A’s Capital a/cDr.Rs 15,000 (b) A’s Capital a/cDr.Rs 15,000 B’s Capital a/cDr.Rs 15,000 B’s Capital a/cDr.Rs 15,000 To Goodwill a/cRs 30,000 To Goodwill a/cRs 30,000. The ratio in which the continuing partners gain or benefit from the share of the retiring or dead partner is called the Gaining Ratio. Gaining ratio is equal to new ratio minus old ratio.. The ratio in which the continuing partners gain or benefit from the share of the retiring or dead partner is called the Gaining Ratio. Gaining ratio is equal to new ratio minus old ratio. law makes no difference between a sleeping partner and a working partner and the sleeping partner will be equally responsible to the third parties for all acts or omissions of a working partner. law makes no difference between a sleeping partner and a working partner and the sleeping partner will be equally responsible to the third parties for all acts or omissions of a working partner.

17 17 examples A and B share profits in the ratio of 70% and 30% respectively as on 31st December C was admitted as a partner with effect from January 1, 2004 and he brought into business Sundry Debtors Rs 5,000 (subject to 10% provision for bad debts), Creditors Rs 1,600 and Goodwill Rs 4,000. He agreed to maintain his capital at Rs 20,000 for 1/5th share in the profits of the firm. A and B share profits in the ratio of 70% and 30% respectively as on 31st December C was admitted as a partner with effect from January 1, 2004 and he brought into business Sundry Debtors Rs 5,000 (subject to 10% provision for bad debts), Creditors Rs 1,600 and Goodwill Rs 4,000. He agreed to maintain his capital at Rs 20,000 for 1/5th share in the profits of the firm. Creditors Rs 1,600 and Goodwill Rs 4,000 Creditors Rs 1,600 and Goodwill Rs 4,000 Stock increased by Rs 5200, Building(Rs.26000/-) and Truck(Rs ) were increased by 10%, and other assets(Rs.7000) were decreased by Rs 800. A Reserve for doubtful debt was created at 5% on Debtors(Rs.14000/-). It was agreed to adjust the Partners’ Capital in Profit sharing ratio(45:19). Stock increased by Rs 5200, Building(Rs.26000/-) and Truck(Rs ) were increased by 10%, and other assets(Rs.7000) were decreased by Rs 800. A Reserve for doubtful debt was created at 5% on Debtors(Rs.14000/-). It was agreed to adjust the Partners’ Capital in Profit sharing ratio(45:19).

18 18 examples Jan. 2004Sundry debtors a/c Dr.5,000 Jan. 2004Sundry debtors a/c Dr.5,000 Goodwill a/cDr.4,000 Goodwill a/cDr.4,000 Cash a/cDr.13,100 Cash a/cDr.13,100 (balancing figure) (balancing figure) To Creditors a/c1,600 To Creditors a/c1,600 To Provision for bad debt 500 To Provision for bad debt 500 To C’s capital a/c20,000 To C’s capital a/c20,000 (Being various assets brought by C (Being various assets brought by C towards his capital recorded in books) towards his capital recorded in books)

19 19 examples Jan 2004Stock a/cDr.5,200 Jan 2004Stock a/cDr.5,200 Truck a/cDr.1,700 Truck a/cDr.1,700 Building a/cDr. 2,600 Building a/cDr. 2,600 To Revaluation a/c9,500 To Revaluation a/c9,500 (Being increase in value of (Being increase in value of assets recorded) assets recorded) Revaluation a/cDr.1,500 Revaluation a/cDr.1,500 To Others Assets a/c 800 To Others Assets a/c 800 To Provision for Doubtful Debts a/c 700 To Provision for Doubtful Debts a/c 700 (Being decrease in other assets (Being decrease in other assets and provision for doubtful debts recorded) and provision for doubtful debts recorded) Revaluation a/cDr.8,000 Revaluation a/cDr.8,000 (9,500 – 1,500) (9,500 – 1,500) To A’s Capital a/c5,600 To A’s Capital a/c5,600 To B’s Capital a/c2,400 To B’s Capital a/c2,400 (Being profit on revaluation (Being profit on revaluation distributed in old profit sharing ratio) distributed in old profit sharing ratio)

20 20 examples General Reserve a/cDr. 5,400 General Reserve a/cDr. 5,400 To A’s capital a/c3,780 To A’s capital a/c3,780 To B’s capital a/c1,620 To B’s capital a/c1,620 (Being general reserve distributed in (Being general reserve distributed in old profit sharing ratio) old profit sharing ratio) Cash a/cDr2,600 Cash a/cDr2,600 To A’s Capital a/c1,620 To A’s Capital a/c1,620 To B’s Capital a/c 980 To B’s Capital a/c 980 (Being cash brought in by old partners) (Being cash brought in by old partners)

21 21 examples Fill in the blanks: Fill in the blanks: (a)_________ is the value of an established business over and above the value represented by its tangible assets. It is also the value attached to the super profit earning capacity of business arising from its wide connections, reputation and long standing in the business. (a)_________ is the value of an established business over and above the value represented by its tangible assets. It is also the value attached to the super profit earning capacity of business arising from its wide connections, reputation and long standing in the business. (b) _________ of a partner means joining of a new person into an existing partnership as a partner. (b) _________ of a partner means joining of a new person into an existing partnership as a partner. (c)_________ of a partner means that a partner breaks off his relations with all other partners and withdraws himself from the firm. (c)_________ of a partner means that a partner breaks off his relations with all other partners and withdraws himself from the firm. (d) Under the _________ capital method, all the transactions are recorded in the capital account only. (d) Under the _________ capital method, all the transactions are recorded in the capital account only. (e)Under the _________ capital method, two accounts are maintained for each partner, viz., Current Account and Capital Account. (e)Under the _________ capital method, two accounts are maintained for each partner, viz., Current Account and Capital Account.

22 22 examples State whether the following statements are True or False: State whether the following statements are True or False: (a)If the Partnership Deed does not mention any method of maintaining capital accounts then the fixed capital Account Method has to be followed. (a)If the Partnership Deed does not mention any method of maintaining capital accounts then the fixed capital Account Method has to be followed. (b)if the partnership firm is following the Fixed Capital Account Method salary payable to a partner is credited to the partners’ current account. (b)if the partnership firm is following the Fixed Capital Account Method salary payable to a partner is credited to the partners’ current account. (c)drawings made by partners are never entered in the Profit and Loss Appropriation Account. (c)drawings made by partners are never entered in the Profit and Loss Appropriation Account. (d)Old firms must have goodwill account in their books of account. (d)Old firms must have goodwill account in their books of account. (e)While calculating average profit of previous years, loss incurred in one of those years is to be ignored. (e)While calculating average profit of previous years, loss incurred in one of those years is to be ignored. (f)The share which the new partner is entitled to is called the Sacrifice ratio. (f)The share which the new partner is entitled to is called the Sacrifice ratio. (g)adjustment for goodwill can be made privately by the partners without passing any entries in books of account. (g)adjustment for goodwill can be made privately by the partners without passing any entries in books of account. (h)the additional share in the profits by the continuing partners is called Gain Ratio. (h)the additional share in the profits by the continuing partners is called Gain Ratio. (i)The deceased partner cannot be given share in the profits till his death. (i)The deceased partner cannot be given share in the profits till his death.

23 23 examples 11) Prepare the Profit and Loss account of Modern Bank Ltd. for the year ended 31st March, 2003, from the following: 11) Prepare the Profit and Loss account of Modern Bank Ltd. for the year ended 31st March, 2003, from the following: Rs Rs Interest on Fixed Deposits1,62,410 Interest on Fixed Deposits1,62,410 Rebate on Bills discounted29,000 Rebate on Bills discounted29,000 Interest on Loans45,000 Interest on Loans45,000 Commission Charged to Customers62,500 Commission Charged to Customers62,500 Establishment15,000 Establishment15,000 Discount on Bills Discounted89,000 Discount on Bills Discounted89,000 Interest on Cash Credit24,000 Interest on Cash Credit24,000 Amount Charged against Current Accounts71,500 Amount Charged against Current Accounts71,500 Directors’ Fees10,000 Directors’ Fees10,000 Audit Fees20,000 Audit Fees20,000 Postage and Telegram2,000 Postage and Telegram2,000 Printing and Stationery4,000 Printing and Stationery4,000 Rent and Taxes22,500 Rent and Taxes22,500 Interest on Overdrafts71,000 Interest on Overdrafts71,000 Sundry Charges1,500 Sundry Charges1,500 Interest on Savings Bank Deposits57,780 Interest on Savings Bank Deposits57,780

24 24 examples Profit & Loss Account for the year ended 31st March 2003 Profit & Loss Account for the year ended 31st March 2003 Schedule No.Rs Schedule No.Rs I.Income I.Income Interest Earned132,71,500 Interest Earned132,71,500 Other Income14 62,500 Other Income14 62,500 Total3,34,000 Total3,34,000 II.Expenditure II.Expenditure Interest Expended 152,20,190 Interest Expended 152,20,190 Operating Expenses16 75,000 Operating Expenses16 75,000 Provision for Contingencies — Provision for Contingencies — Total2,95,190 Total2,95,190 III.Profit III.Profit Net Profit for the year 38,810 Net Profit for the year 38,810

25 25 examples Schedules to be annexed with Profit and Loss Account Schedules to be annexed with Profit and Loss Account Schedule13: Interest Earned Schedule13: Interest Earned Interest on: Interest on: Loan 45,000 Loan 45,000 Cash Credit 24,000 Cash Credit 24,000 Overdrafts71,0001,40,000 Overdrafts71,0001,40,000 Discount on Bills discounted89,000 Discount on Bills discounted89,000 Less: Rebate on Bill Discounted29,000 60,000 Less: Rebate on Bill Discounted29,000 60,000 Amount charged against current accounts 71,500 Amount charged against current accounts 71,500 2,71,500 2,71,500 Schedule 14: Other Income Schedule 14: Other Income Commission charged to customer 62,500 Commission charged to customer 62,500 Schedule 15: Interest Expended Schedule 15: Interest Expended Interest paid on Interest paid on Fixed Deposits1,62,410 Fixed Deposits1,62,410 Savings Bank Deposits 57,780 Savings Bank Deposits 57,780 2,20,190 2,20,190

26 26 examples Schedule 14: Other Income Schedule 14: Other Income Commission charged to customer 62,500 Commission charged to customer 62,500 Schedule 15: Interest Expended Schedule 15: Interest Expended Interest paid on Interest paid on Fixed Deposits1,62,410 Fixed Deposits1,62,410 Savings Bank Deposits 57,780 Savings Bank Deposits 57,780 2,20,190 2,20,190

27 27 examples Schedule 16: Operating Expenses Schedule 16: Operating Expenses Establishment Expenses 15,000 Establishment Expenses 15,000 Director’s Fees 10,000 Director’s Fees 10,000 Audit Fees 20,000 Audit Fees 20,000 Rent and Taxes 22,500 Rent and Taxes 22,500 Postage and Telegrams 2,000 Postage and Telegrams 2,000 Printing and Stationery 4,000 Printing and Stationery 4,000 Sundry Expenses 1,500 Sundry Expenses 1,500 75,000 75,000

28 28 Joint life policy Premium treated as expenses Premium treated as asset Premium treated as reserves At the end of each year, premium w/o to P & L A/c Each year difference between surrender value and Book value is w/o to P & L A/c difference between SV and BV is w/o to Jt. Policy Reserve A/c receipt of policy amt. Amount received is credited to partners receipt of policy amt. If amount is > SV, the excess is credited to partners receipt of policy amt. Policy amount credited to partners

29 29 Types of partners Active Active Sleeping Sleeping Quasi Quasi nominal nominal

30 30 FINAL ACCOUNTS OF BANKING COMPANIES Definition Definition Requirements –Accounts & audit Requirements –Accounts & audit Third Schedule annexed to BRA Third Schedule annexed to BRA Form A- Balance sheet Form A- Balance sheet Form B- Profit & Loss Account Form B- Profit & Loss Account Audit Audit Submission of accounts- RBI- within 3 months Submission of accounts- RBI- within 3 months Publication of accounts- within 6 months Publication of accounts- within 6 months Auditor-prior approval of RBI for appt/removal Auditor-prior approval of RBI for appt/removal

31 31 Balance sheet-Form A Capital & Liabilities Assets 1.Capital 6.Cash & Bank Bal. RBI 2. Reserves & surplus 7.Balances with Banks & Money at call and SN 3.Deposits8.Investments 4.Borrowings9Advances 5 Other Liabilities & Provisions 10.Fixed Assets 11.Other Assets

32 32 Demand deposits Credit balances in OD and CC Credit balances in OD and CC Deposits payable at call Deposits payable at call Overdue deposits Overdue deposits In-operative current accounts In-operative current accounts Matured time deposits Matured time deposits Matured cash certificates Matured cash certificates Matured certificate of deposits Matured certificate of deposits

33 33 Contingent liabilities Schedule-12 Claims against bank not acknowledged as debts Claims against bank not acknowledged as debts Liability for partly paid shares Liability for partly paid shares Liability on account of outstanding forward exchange contracts Liability on account of outstanding forward exchange contracts Acceptances,endorsement & other obligations Acceptances,endorsement & other obligations Other items for which bank is contingently liable. Other items for which bank is contingently liable.

34 34 PROFIT & LOSS ACCOUNT-FORM B Income Interest Earned Other Income Schedule.13Schedule.14 Expenditure Interest Expended Operating Expenses Provision for contingencies Schedule.15Schedule.16 Profit /Loss Appropriations Transfer to Reserves Proposed dividend Balance carried to Balance sheet

35 35 NOTES TO ACCOUNTS Significant Accounting Policies Schedule.17 Notes forming part of Accounts Schedule.18

36 36 Other Income Profit on exchange transactions Profit on exchange transactions Profit on sale of investments Profit on sale of investments Profit on revaluation of investments Profit on revaluation of investments Profit on sale of fixed assets Profit on sale of fixed assets Letting of locker (income from locker charges ) Letting of locker (income from locker charges ) Misc. income -Godown rent Misc. income -Godown rent

37 37 Ponder over these points Govt. securities shown at book value and diff. between MV and BV is given in the notes Govt. securities shown at book value and diff. between MV and BV is given in the notes If some fixed assets are w/o on revaluation of assets/reduction of capital every B/S after wards should. show the revised figure for next 5 yrs. With the date & amt. revised If some fixed assets are w/o on revaluation of assets/reduction of capital every B/S after wards should. show the revised figure for next 5 yrs. With the date & amt. revised Other fixed assets includes vehicles, furniture and fixtures. Lockers and safe deposit vaults are included in furniture Other fixed assets includes vehicles, furniture and fixtures. Lockers and safe deposit vaults are included in furniture

38 38 Ponder over these points 20% to reserve fund before declaring dividend 20% to reserve fund before declaring dividend Gold is treated as investment Gold is treated as investment Silver is treated as other assets Silver is treated as other assets Income from performing assets is recognized on accrual basis while in r/o non-performing assets it is on cash basis Income from performing assets is recognized on accrual basis while in r/o non-performing assets it is on cash basis In r/o NPA, if income is already recognized, then make provision In r/o NPA, if income is already recognized, then make provision

39 39 ASSET CLASSIFICATION ETC Asset Classification Asset Classification Performing and Performing and non performing ( remain out of order) non performing ( remain out of order) Income Recognition Income Recognition Performing-accrual basis Performing-accrual basis Non performing-cash basis Non performing-cash basis Asset Classification Asset Classification Std-0.40% (revised from 0.25%) Std-0.40% (revised from 0.25%) Sub-Std.<18 months-10% Sub-Std.<18 months-10% Doubtful>18 months-usl-100%-secured.3yrs-50%,>1& 18 months-usl-100%-secured.3yrs-50%,>1&<3- 30%-upto 1year-20% Loss assets-100% Loss assets-100%

40 40 SLR & NON SLR DEPOSITS Held to maturity Available for sale Held for trading Investment should not exceed 25% of total investment Freedom available -no marked to market. Profit on sale treated as cap. Reserve -Marked to market -profit on sale of investment. taken to P&L a/c Marked to market To be sold within 90 days

41 41 COMPANY ACCOUNTS Features of a Joint Stock Company Features of a Joint Stock Company 1.Incorporated association: 1.Incorporated association: A company is a registered body of individuals. According to the Companies Act, 1956, it is compulsory to register a joint stock company. A company is a registered body of individuals. According to the Companies Act, 1956, it is compulsory to register a joint stock company. 2. Artificial person: 2. Artificial person: It is an artificial person created by law. It is different from its members It can enter into contracts, purchase and sell the properties, can sue and be sued upon. Even a member can enter into contract with the company. It is an artificial person created by law. It is different from its members It can enter into contracts, purchase and sell the properties, can sue and be sued upon. Even a member can enter into contract with the company. 3.Perpetual succession: 3.Perpetual succession: A company has a perpetual succession. Death, or insolvency of any shareholder does not affect existence of the company. A company has a perpetual succession. Death, or insolvency of any shareholder does not affect existence of the company. 4. Common seal: 4. Common seal: As the company is an artificial person created by law, it cannot sign its name. So it has a common seal on which the company’s name is engraved. The common seal is treated as company’s signature and is affixed in all important documents and contracts as per the resolutions passed by the Board. As the company is an artificial person created by law, it cannot sign its name. So it has a common seal on which the company’s name is engraved. The common seal is treated as company’s signature and is affixed in all important documents and contracts as per the resolutions passed by the Board. 5. Limited liability: 5. Limited liability: The liability of the members of the joint stock company is limited to the face value of shares held by them. Companies (Amendment) Bill 2003 states that if a company, private or public, fails to enhance its minimum paid up capital ( i.e. One Lakh rupees or Five Lakh rupees, as the case may be) each director or manager or shareholder will have unlimited liability. The liability of the members of the joint stock company is limited to the face value of shares held by them. Companies (Amendment) Bill 2003 states that if a company, private or public, fails to enhance its minimum paid up capital ( i.e. One Lakh rupees or Five Lakh rupees, as the case may be) each director or manager or shareholder will have unlimited liability.

42 42 COMPANY ACCOUNTS 6.Separation of management from ownership: Even though the shareholders are true owners, they do not participate in the management of the company. They elect their representatives known as Board of Directors. 7.Transferability of shares: The shares of a company are freely transferable subject to restrictions placed on transfer of private limited company’s shares. 8.Separate legal status: A company has an independent legal status and as such, the shareholders or the owners are not liable for the acts of the company. 9.Large membership: A A company is owned by a large number of members. In the case of private limited company the minimum number of members is 2 and the maximum is 50. In the case of public limited company, the minimum number of members is 7 and there is no maximum limit on the number of members.

43 43 Types of companies On 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

44 44 SHARE CAPITAL EQUITY EQUITY PREFERENCE PREFERENCE CUMULATIVE CUMULATIVE REDEEMABLE REDEEMABLE PARTICIPATING PARTICIPATING

45 45 SHARE CAPITAL AUTHORISED CAPITAL AUTHORISED CAPITAL ISSUED CAPITAL ISSUED CAPITAL SUBSCRIBED CAPITAL SUBSCRIBED CAPITAL CALLED CAPITAL CALLED CAPITAL PAID UP CAPITAL PAID UP CAPITAL

46 46 ISSUE OF SHARE AT PAR -BANK - SHARE APPLICATION Debited--credited - SHARE CAPITAL Debited--Credited Over subscription -share application -share capital -bank (refund) -share allotment Debited----CreditedCreditedCredited

47 47 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---CreditedCredited

48 48 Issue of shares at premium Share application/ allotment a/c Share capital A/c Share premium A/c Debited---CreditedCredited

49 49 Issue of shares at discount Share allotment A/c Discount on issue of shares A/c Share capital A/c DebitedDebited---Credited

50 50 Forfeiture of shares Share capital A/c Call in arrears A/c Forfeited shares A/c Debited---CreditedCredited

51 51 Re-issue of shares Bank A/c Forfeited shares A/c Share capital A/c Capital reserve A/c DebitedDebited----CreditedCredited

52 52 Issue of Bonus shares Cap. 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 DebitedDebitedDebitedDebitedDebited------credited Equity share capital A/c Debited-credited

53 53 Balance sheet equation LIABILITIESASSETS Capital Fixed assets Reserves Current assets Term Loans Current Liabilities Total Total

54 54 Balance Sheet Equation Assets=Liabilities Assets= Liabilities (+) Capital Liabilities= Assets (-) Capital Capital= Liabilities

55 55 BALANCE SHEET EQUATION Assets = Liabilities Assets = Capital + Liabilities Assets =Net worth + Liabilities Net worth = Capital + Reserves& Surplus Net worth = Assets Less Liabilities

56 56 1. The Assets of a business are Rs and its capital is Rs Its liabilities on that date would be a) Rs b) rs c) Rs d) Rs

57 57 B/s Equation Examples (1) If the net worth of the business is Rs.1100,fixed assets are Rs. 600, current assets Rs.400, investments Rs.300, current liabilities Rs. Nil, what is the amount of claim to outsiders? Rs. 1300l Rs. 1300l Rs. 500 Rs. 500 rs.200 rs.200 Rs. Nil Rs. Nil (2)Identify the wrong pair Outstanding expenses - Personal Account account* Outstanding expenses - Personal Account account* Profit and Loss Account (Dr. balance) – Application of funds Profit and Loss Account (Dr. balance) – Application of funds net worth less reserves & surplus - Balance in P & L Account net worth less reserves & surplus - Balance in P & L Account Balance sheet - Financial position Balance sheet - Financial position

58 58 Computerized accounting Computer language: cobol, foxpro,unix …etc Computer language: cobol, foxpro,unix …etc Analog computers : scientific and mech. Field Analog computers : scientific and mech. Field Digital computers: computerized accounting Digital computers: computerized accounting Data : fact Data : fact Record : group of data Record : group of data Data file: data records Data file: data records

59 59 EXAMPLES 1. Select from the following, a statement which speaks about liabilities of an entity. The liabilities consist of claims of the owners The liabilities consist of claims of the owners The liabilities consist of claims of the owners and outsiders The liabilities consist of claims of the owners and outsiders The liabilities consist of claims of the outsiders The liabilities consist of claims of the outsiders None of the above None of the above

60 60 EXAMPLES ) Sudhir had the following transactions. Use balance sheet equations to show their effect on his assets, liabilities and capital. ) Sudhir had the following transactions. Use balance sheet equations to show their effect on his assets, liabilities and capital. (a)Invested Rs 1,50,000 in cash. (a)Invested Rs 1,50,000 in cash. (b)Purchased securities for cash Rs 10,000 (b)Purchased securities for cash Rs 10,000 (c)Purchased a building for Rs 2,00,000, giving Rs 50,000 in cash and balance by way of a loan from Canara Bank. (c)Purchased a building for Rs 2,00,000, giving Rs 50,000 in cash and balance by way of a loan from Canara Bank. (d)Sold securities costing Rs 2,000 for Rs 3,000. (d)Sold securities costing Rs 2,000 for Rs 3,000. (e)Paid Salaries of Rs 2,000 (e)Paid Salaries of Rs 2,000 (f)Paid interest of Rs 10,000 and paid Rs 10,000 towards Canara Bank Loan (f)Paid interest of Rs 10,000 and paid Rs 10,000 towards Canara Bank Loan (g)Received dividend of Rs 1,000 on securities (g)Received dividend of Rs 1,000 on securities

61 61 EXAMPLES Point out whether the following statements are True or False. Point out whether the following statements are True or False. (a)The balance sheet represents an expansion of the equations as: (a)The balance sheet represents an expansion of the equations as: Assets = Liabilities + Capital. Assets = Liabilities + Capital. (b)Assets – Original Capital = Liabilities. (b)Assets – Original Capital = Liabilities. (c)Rehman has assets of Rs 10,000 and (c)Rehman has assets of Rs 10,000 and liabilities of Rs 5,000. His capital therefore liabilities of Rs 5,000. His capital therefore would be Rs would be Rs (d)Assets will be equal to Capital if there are no (d)Assets will be equal to Capital if there are no liabilities of the business. liabilities of the business. (e)If a firm borrows a sum of money, its capital would be (e)If a firm borrows a sum of money, its capital would be reduced. reduced.

62 62 EXAMPLES 2. If the net worth of the business is Rs.500, fixed assets are Rs. 500, current assets Rs.300, investments Rs.300, current liabilities Rs. Nil, what is the amount of claim to outsiders? Rs. Nil Rs. Nil Rs Rs Rs.500 Rs.500 Rs.600 Rs.600

63 63 EXAMPLES 3. Select from the following a sentence which is wrong a. If assets increase and liabilities do not, the capital will increase b. If assets increase and liabilities also increase by same sum, the capital will remain same c. A reduction in the amount of assets will amount to equivalent reduction in the net worth d. An increase in the amount of assets with no corresponding increase in liabilities will increase the amount of capital

64 64 EXAMPLES 4. The firm sells goods on credit for Rs.50000, the cost of the goods sold is Rs The effect of the transaction is that, the capital of the firm----- a. increases by Rs b. reduces by Rs c. increases by Rs d. reduces by Rs

65 65 EXAMPLES 5. Mr.Ghatge commenced his business on 1st April, 2006 with Capital of Rs.1,00,000. He did good business during the year and earned handsome profit. At the end of 31st March, 2007, his financial position was: Fixed Assets Rs.1, 20,000 and bank balance of Rs and Creditors Rs What was his net profit for the year 05-06? a. Rs b. Rs c. Rs d. None of the above

66 66 EXAMPLES 6. One of the pairs given below is wrong. Select the wrong pair. a. Outstanding expenses - Nominal account b. Profit and Loss Account (Dr. balance) – Application of funds c. Net worth less reserves & surplus - Capital d. Balance sheet - Financial position

67 67 EXAMPLES 7. From the following,find a sentence which is false in respect of partnership a. If the partnership is following the “Fixed Capital Account Method” salary payable to a partner is credited to the partner’s current account b. Drawings made by partners are never entered in the Profit and Loss Appropriation Account. c. In the “Fluctuating Capital Account Method” the balance in the capital account always remains the same d. The capital account of a partner is required to be opened in both the Fixed Capital Account Method and Fluctuating Capital Account Method

68 68 EXAMPLES 8. From the account given below, select the account which is wrongly included in Profit & Loss Appropriation Account at the debit side a. Drawings Account b. Partners Salary Account c. Interest on Loan Account d. Commission to Partners Account

69 69 EXAMPLES 10. A and B are two partners in a firm sharing profits and losses as 2:1. they admitted C as a partner with 25% share in the profits of the firm. Hence, the new profit sharing ratio, after admission of C would be a. 15:15:10 b. 20:10:10 c. 3:1:1 d. None of the above

70 70 EXAMPLES 11. Mr. Q and Mr. R were partners of a firm sharing profit and losses in the ratio of 3:2. They take S into partnership. It was agreed that S will pay Rs.1,00,000 as his share of goodwill which will be retained in business and also bring Rs.3,00,000 as capital for one fourth share in the future profits. The book value of the stock was 41,000 but was to be revalued at Rs.50,000, Accountant has passed following entries, but Mr. Q feels that one of the entry is wrong. Select the wrong entry from the following. a. Debit cash and credit Goodwill for Rs.1,00,000 b. Debit cash and credit S’s Capital for Rs.3,00,000 c. Debit Goodwill for Rs.1,00,000 and credit Q’s Capital by Rs & R’s Capital by Rs. 40,000 d. Debit Stock and credit Profit & Loss Adjustment A/c by Rs.9,000

71 71 EXAMPLES 12. In the books of ABC Enterprises, a partnership firm, when Mr. C, a partner decided to resign from the firm, a revaluation of assets and liabilities was done and Revaluation account was prepared which showed the following position: At the credit side of Revaluation Account, Stock A/c Rs.25000, Premises A/c Rs and Creditors A/c Rs were shown while at debit side of Revaluation Account, Reserve for Doubtful Debts A/c. Rs.15000, A’s Capital A/c.Rs.20000, B’s Capital A/c. Rs.20,000 and C’s Capital A/c. Rs were shown. Accountant has interpreted the Revaluation Account as follows. One of the interpretations by him is incorrect. Select the incorrect sentence. a. Stock is revalued upwardly by Rs b. Creditors are revised upwardly by Rs.8000 c. Premises are revised upwardly by Rs d. A provision on debtors of Rs. 15,000 is made for doubtful debts

72 72 EXAMPLES 13. Read the following four journal entries which are passed to consider revaluation of assets and liabilities at the time of admission of a partner. One of the journal entries is wrong, choose the entry which is wrong. a. For increase in the value of assets-Debit Asset Account and Credit Revaluation Account. b. For decrease in the value of liabilities- Debit Liabilities Account and Credit Revaluation Account. c. For Profit on revaluation of assets and liabilities – Debit Old Partners Capital Account in old profit sharing ratio and Credit Revaluation Account d. For decrease in the value of assets -Debit Revaluation Account and Credit Asset Account

73 73 EXAMPLES 14. In the books of ABC Enterprises, a partnership firm, when Mr. C, a partner decided to resign from the firm, a revaluation of assets and liabilities was done and Revaluation account was prepared which showed the following position: At the credit side of Revaluation Account, Stock A/c Rs.25000, Premises A/c Rs and Creditors A/c Rs were shown while at debit side of Revaluation Account, Reserve for Doubtful Debts A/c. Rs.15000, A’s Capital A/c.Rs.20000, B’s Capital A/c. Rs.20,000 and C’s Capital A/c. Rs were shown. Accountant has interpreted the Revaluation Account as follows. One of the interpretations by him is incorrect. Select the incorrect sentence. a. Stock is revalued upwardly by Rs b. Creditors are revised upwardly by Rs.8000 c. Premises are revised upwardly by Rs d. A provision on debtors of Rs. 15,000 is made for doubtful debts

74 74 EXAMPLES 15. Select the incorrect statement in respect of companies. a. A member of a company can enter into contract with a company b. It is compulsory to register a joint stock company c. If all but one member of a private company becomes insolvent,it affects the existence of the organisation d. Shareholders are not liable for the acts of the company 16. Select the incorrect statement a. Authorized capital is the capital with which the company is registered b. Issued capital is equal to its authorized capital c. Authorized capital, issued capital, subscribed capital, called up capital and paid up capital cannot be same d. The amount which the company has asked its shareholders to pay is called up capital of the company.

75 75 EXAMPLES 17. Following are the journal during the process of application to allotment stage. One of the entries is wrong. Select the wrong entry. a. Debit bank account and credit share application account ( when application money is received) b. Debit share application account and credit share capital account (application transferred to share capital account) c. Debit share capital and credit share allotment account ( for recording allotment money being fallen due ) d. Debit bank account and credit share allotment account ( for receipt of allotment money)

76 76 EXAMPLES 18. Select the incorrect statement in respect of calls in advance a. The company may accept from shareholders, the uncalled amount on shares even before it is fallen due b. The article of association must permit such acceptance of advance call money c. Interest on calls in advance can be paid but the maximum is upto 6% d. The amount of calls in advance is part of the paid up share capital

77 77 EXAMPLES 19. Select the incorrect statement in respect of utilization of share premium a. it is used for the purpose of buy back of shares b. it used for payment of dividend in case of inadequacy of profits c. it is used for writing off preliminary expenses d. it is used for issue of fully paid bonus shares 20. Mr. X was issued 100 shares of Rs.10 each. He failed to pay call money of Rs. 5 per share. The shares were forfeited and re-issued to Mr. Y at Rs.9. When the entry recording the re-issue of shares was passed in all, four accounts were affected. The debit and credit effect of these four accounts is given below. One of the accounts is given wrong effect. Select that account from the following. a. Debit bank account by Rs.900 b. Debit forfeited shares by Rs.500 c. Credit share capital by Rs.1000 d. Credit forfeited shares by Rs.400

78 78 EXAMPLES 21. DT Ltd. issued shares of Rs.10 each at 10 % premium, payable on application Rs.2, on allotment Rs.3 (including premium), on first call Rs.2 and on final call Rs.4. One of the shareholders, applied for 100 shares but fail to pay allotment and first call money. At this stage, the said shares were forfeited. Select the account which was wrongly credited. a. Credit Forfeited shares Account by Rs.200 b. Credit Share allotment Account by Rs.200 c. Credit share premium Account by Rs.100 Credit Share first call Account by Rs.200 Credit Share first call Account by Rs Select the source which is not valid for issue of bonus shares a. Share premium b. Revaluation reserve created by revaluation of fixed assets c. Capital reserve d. Capital redemption reserve

79 79 EXAMPLES 23. The liability side of the balance sheet of ABC International Ltd. is showing following position: Paid up share capital Rs.25 Lakh ( 25,000 shares of Rs.100 each fully paid up)Share premium Rs.5 Lakh, Capital Reserve Rs. 3 Lakh, General Reserve Rs. 15 Lakh and Profit & Loss account Rs. 15 Lakh.It was decided to use minimum free reserve for issue of 1:1 bonus shares.. The accounts and the amount with which the account is debited are given below in sets. One of the set is correct. Select the same. a. Share Premium Account (Rs.5 Lakh), Capital Reserve Account ( Rs. 1 Lakh), General Reserve Account (15 Lakh) & Profit & Loss Account by Rs. 4 Lakh b. Share Premium Account (Rs. Nil Lakh), Capital Reserve Account ( Rs. Nil Lakh), General Reserve Account (10 Lakh) & Profit & Loss Account by Rs. 15 Lakh c. Share Premium Account (Rs.5 Lakh), Capital Reserve Account ( Rs. 3 Lakh), General Reserve Account (15 Lakh) & Profit & Loss Account by Rs. 2 Lakh d. Share Premium Account (Rs.5 Lakh), Capital Reserve Account ( Rs. 1 Lakh), General Reserve Account (4 Lakh) & Profit & Loss Account by Rs. 15 Lakh

80 80 EXAMPLES 24. Select the incorrect statement in case of Share Capital and Reserves and Surplus as shown in the balance sheet. a. Under share capital, the following order is maintained: Authorised capital, issued capital, subscribed capital b. The called up amount per share is indicated and in the amount column total amount i.e. number of shares multiplied by amount called up per share is shown c. The amount of unpaid calls is deducted from (b) above d. The amount of forfeited shares account is shown under Reserves & surplus 25. Select the incorrect statement in respect of form of balance sheet of companies(Liabilities side). a. sinking fund is shown under unsecured loans b. Loans from banks are grouped under the head Secured Loans c. Unclaimed Dividend is grouped under the head current liabilities d. Proposed dividend is grouped under provisions.

81 81 EXAMPLES 26. Select the incorrect statement in respect of form of balance sheet of companies ( Asset side). a. Live Stock is grouped under the head ‘current Asset’ b. Balance of unutilized monies raised by issue is grouped under the head ‘Investments’ c. Interest paid out of capital during construction is grouped under the head ‘Miscellaneous Expenditure’ d. Vehicles are grouped under the head ‘Fixed Asset’

82 82 EXAMPLES 27. One of the accounts is wrongly debited to “Profit and Loss Appropriation A/c” of a company. Name the wrong account debited a. Interim dividend b. Proposed dividend c. Provision for tax d. Capital redemption reserve 28. Select the false statement in respect of assets a.a banking company is allowed to acquire assets for its own use b.a banking company is allowed to grant loans against the security of assets belonging to its customers c.a banking company is allowed to take possession of such assets in case of default committed by the borrower d.a banking company is not allowed to sale the assets against the security of which it has granted loans

83 83 EXAMPLES 29. THE FINANCIAL STATEMENT OF BANK CONSISTS OF SCHEDULES a. 18 SCHEDULES b. 16 SCHEDULES c. 17 SCHEDULES d. 12 SCHEDULES 30. INVESTMENTS, ADVANCES, FIXED ASSETS AND OTHER ASSETS ARE PART OF SCHEDULE NOS.--RESPECTIVELY a. 6,7,8,9 b. 7,8,9,10 c. 8,9,10,11 d. 9,10,11, LIABILITY FOR PARTIALLY PAID INVESTMENTS IN RESPECT OF BANKING COMPANIES IS GROUPED UNDER THE HEAD----- a. INVESTMENTS b. OTHER ASSETS c. OTHER LIABILITIES AND PROVISIONS d. CONTINGENT LIABILITIES

84 84 EXAMPLES 32. One of the items is a misfit in a group namely ‘other income’ of a banking company. Select this item from the following a. INCOME ON INVESTMENTS b. PROFIT ON SALE OF INVESTMENTS c. PROFIT ON REVALUATION OF INVESTMENTS d. PROFIT ON EXCHANGE TRANSACTIONS 33. Depreciation on bank’s property is part of “Operating Expenses”. Some of the items included under this category are listed below. One of the expenses is wrongly included. Identify that item of expense. a. depreciation on motor cars b. depreciation on stationary and stamps c. depreciation on furniture d. depreciation on non-banking assets

85 85 EXAMPLES 34. The provisional requirement for standard asset is----- a. 0.40%(revised) of total outstanding b. 10%(revised) of total outstanding c. 40%(revised) of total outstanding d. 100%(revised) of total outstanding 35. The investment under “held to maturity” should not exceed -----of bank’s total investment. a. 25% b. 75% c. 5% d. None of the above

86 86 EXAMPLES 36. Acceptances, endorsements and guarantees are shown as----- a. other assets b. contingent liabilities c. advances d. other liabilities and provisions 37. Choose the wrong pair from the following. The information given in the pair is pertaining to banking companies a. Reserves & surplus - Share premium b. Time deposits - Matured time deposits c. Borrowings in India - Refinance from NABARD d. Other Liabilities & Provisions - Inter office/branch adjustments(net

87 87 EXAMPLES 38. The name of the accounts with the coverage of various items in building that account is given below. One of the items covered in on of the accounts is wrong. Select this account a. Closing balance of provisions held towards NPA - Opening Balance plus provisions made during the year less write off of bad debts/write back of excess provisions b. Interest Earned - interest on advances plus income on investments plus interest on deposit with RBI plus income earned by way of dividends from subsidiaries plus discount on bills less unexpired discount c. Reserves & surplus - Opening balance plus additions during the year less deductions during the year d. Term deposits - from banks and from Others 39. Identify a pair which is mismatch from the following pairs in respect of Company Accounts Miscellaneous Expenditure – Preliminary Expenses Miscellaneous Expenditure – Preliminary Expenses Contingent Liabilities – footnote to balance sheet Contingent Liabilities – footnote to balance sheet Debentures – Unsecured Loans Debentures – Unsecured Loans Outstanding Expenses – Current Liabilities Outstanding Expenses – Current Liabilities

88 88 EXAMPLES 40. Identify a pair which is mismatch from the following pairs in respect of Company Accounts a. Miscellaneous Expenditure – Preliminary Expenses b. Contingent Liabilities – footnote to balance sheet c. Debentures – Unsecured Loans d. Outstanding Expenses – Current Liabilities

89 89 EXAMPLES 41. While preparing the final accounts of the company, the adjustments [(i) to (iv)] are to be made by passing necessary entries. One of the entries passed is wrong entry. Select the wrong entry.(i) Provide dividend 5% of paid up share capital (Share capital of Rs. 5,00,000 consisting of shares of Rs. 10 each fully paid) (ii) Insurance for unexpired period is Rs.2000 (iii) A provision of Rs. 25,000 is to be made for income tax (iv) a provision of Rs is to be made for doubtful debts a. Debit Dividend by Rs & Credit Bank by Rs b. Prepaid Insurance by Rs.2000 & Insurance by Rs.2000 c. Debit Profit & Loss Account by Rs.25,000 & Credit Provision for Tax by Rs.25,000 d. Debit Profit & Loss by Rs.5,000 & Credit Provision for doubtful debts by Rs.5,000

90 90 EXAMPLES 42. If the partners capital accounts are fixed, where will you record (either debit side or credit side of which account ) the following transactions (i) Salary payable to partner (ii) Fresh capital introduced by a partner (iii) Drawing made by a partner (iv) Share of profit earned by a partner. The effect to one of the journal entries is wrongly given. Identify that account from the following. a. Debit side of partner’s current account b. Credit side of partner’s capital account c. Debit side of partner’s current account d. Credit side of partner’s current account

91 91 Example 43. L,K and P are partners. The following differences as listed at (i) to (iv) have arisen due to misunderstanding. The answer to each point is given at (a) to (d). One of the solutions is incorrect. Identify the wrong solution. (i) L used Rs.25,000 belonging to the firm and made a profit of Rs.4,000. K wants the amount to be given to the firm (ii) P used Rs.10,000 belonging to the firm and suffered a loss of Rs He wants the firm to bear the loss (iii) L & K wishes to appoint S as new partner. P does not agree (iv) L has given loan of Rs. 50,000 to the firm, he wants interest at 6% ( there is no partnership deed) a. K is right.L must pay Rs.29,000 to the firm b. P is right. Firm should bear profit as well as losses. c. P is right. No new partner can be admitted without the consent of all. d. L is right. He is entitled for interest at 6% in the absence of partnership agreement.

92 92 Example 43. A firm earns Rs.10,000 as its normal profits. The rate of normal return being 10%. The assets of the firm amount to Rs.72,000 and liabilities to Rs.24,000. Find out the value of goodwill. a. Rs.52,000 b. Rs.1,00,000 c. Rs.28,000 d. Nil

93 93 Example 44. If the adjustment in the values of assets at the time of the admission of a partner shows a profit, it should be credited to the capital accounts of----- a. The old partners in their new profit-sharing ratio b. All partners in their new profit sharing ratio c. The old partners in their old profit sharing ratio d. None of the above

94 94 Example 45. Choose the correct treatment for premium paid on ‘Joint Life Policy’ when premium paid is treated as an expense. a. Premium amount is debited to P & L account every year and when claim becomes due then to be shared by all partners b. Every year amount debited to Joint Life Policy Account and balance is shown on asset side at surrender value. The difference between surrender value and premium paid is written off to Profit and Loss account c. Joint Life Policy and Joint Life reserve Account are adjusted to bring them down to surrender value of policy. d. None of the above.


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