ACCOUNTING & FINANCE FOR BANKERS-JAIIB-MODULE D PRESENTATION BY S.D.BARGIR Joint Director-IIBF

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

Partnership Accounts Introduction Definition Partnership deed

In the absence of partnership deed/if deed is silent Profit sharing ratio –Equal No interest on capital No interest on drawings interest@6% on loan given by partner No salary /no commission/ no remuneration Capital accounts under fluctuating capital method

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

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

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

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

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

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 If amount is > SV, the excess is credited to partners Policy amount credited to partners

Types of partners Active Sleeping Quasi nominal

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 Auditor-prior approval of RBI for appt/removal

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.Deposits 8.Investments 4.Borrowings 9Advances 5 Other Liabilities & Provisions 10.Fixed Assets 11.Other Assets

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

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

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

Ponder over these points 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 Other fixed assets includes vehicles, furniture and fixtures. Lockers and safe deposit vaults are included in furniture

Ponder over these points 20% to reserve fund before declaring dividend Gold is treated as investment 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 In r/o NPA, if income is already recognized, then make provision

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

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

COMPANY ACCOUNTS Features 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 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

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 Over subscription -share application -BANK - SHARE APPLICATION Debited - credited SHARE APPLICATION SHARE CAPITAL Credited Over subscription -share application -share capital -bank (refund) -share allotment

SHARE ALLOTMENT/SHARE CALL Share allotment a/c Share capital a/c Debited - Credited Bank a/c Share call a/c Calls in arrears a/c

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

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

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

Re-issue of shares Bank A/c Forfeited shares A/c Share capital A/c Capital reserve A/c Debited - Credited

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 Debited - credited Equity share capital A/c

Balance sheet equation LIABILITIES ASSETS Capital 300.00 Fixed assets 700.00 Reserves 200.00 Current assets Term Loans Current Liabilities Total 1000.00

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

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 1. The Assets of a business are Rs.500000 and its capital is Rs.115000. Its liabilities on that date would be------ Rs.615000 Rs.385000 Rs.500000 Rs. 115000 2. 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----- Rs.750000 Rs.900000 Rs.600000 Rs.1050000

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. 500 Rs.200* Rs. Nil (2) Identify the wrong pair Outstanding expenses - Personal Account account* Profit and Loss Account (Dr. balance) – Application of funds Net worth less reserves & surplus - Balance in P & L Account* Balance sheet - Financial position

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

Computerized accounting Computer language- Cobol, FoxPro, Unix ….. Analog computers- scientific/ mechanical field Digital computers- computerized accounting Data- fact Record- group of data File- data record

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